Determining the fairness of forced arbitration provisions
Below, Aaron Tang of Stanford Law School previews Rent-a-Center v. Jackson (09-497), in which the Court will hear oral arguments on Monday, April 26. Check the Rent-a-Center SCOTUSwiki page for additional updates.
In recent years, arbitration clauses that require parties to submit disputes arising out of a contract to an arbitrator for resolution, rather than to a court of law, have become increasingly prevalent: a 2007 study found that more than three-quarters of contracts between corporations and consumers contained mandatory arbitration provisions, and employment contracts commonly contain agreements to arbitrate as well. In many scenarios, one party to a contract lacks substantial bargaining power to negotiate the arbitration provision. As a result, if disputes later arise, the parties often disagree about whether the arbitration clause should be enforceable or whether the disputes should instead be resolved in court.
Tomorrow, in Rent-A-Center v. Jackson (No. 09-497), the Court will hear oral argument on the question whether judges retain discretion to invalidate an arbitration agreement because it is unconscionable, even when the parties to the contract have clearly delegated this gateway determination to the exclusive discretion of an arbitrator.
In 2004, petitioner Rent-A-Center and respondent Antonio Jackson entered into an employment contract. The contract included an arbitration provision which specifically delegated to an arbitrator, "and not any federal, state, or local court or agency," the exclusive authority "to resolve any dispute relating to the interpretation, applicability, enforceability or formation of this Agreement." That authority, the clause continued, extended to "any claim that all or any part of this Agreement is void or voidable."
In 2007, Jackson "“ who is African American "“ filed a lawsuit against Rent-A-Center in federal district court, alleging that he had been the victim of racial discrimination and retaliation. Rent-A-Center filed a motion to dismiss the proceedings and compel arbitration under Section 4 of the Federal Arbitration Act ("FAA"), arguing that the arbitration provision in Jackson's contract clearly and unmistakably vested the arbitrator with the sole authority to decide the agreement's enforceability, consistent with the Supreme Court's holdings in AT&T Technologies v. Communications Workers of America (1986) and First Options of Chicago v. Kaplan (1995). The district court agreed and dismissed the case, rejecting Jackson's argument that the arbitration agreement was procedurally and substantively unconscionable and that its enforceability should be a matter for the court "“ rather than the arbitrator "“ to decide in the first instance.
On appeal, a divided panel of the Ninth Circuit reversed. It reasoned that because "arbitration is itself a matter of contract," "a compulsory submission to arbitration cannot precede judicial determination that the . . . agreement does in fact create such a duty.'"
Rent-A-Center filed a petition for certiorari in which it asserted "“ among other things "“ that the Ninth Circuit's holding conflicted not only with decisions from three circuits (the First, Eighth, and Eleventh) that allow arbitration provisions to require the arbitration of arbitrability, but also with the Court's decisions in AT&T and First Options. The Court granted certiorari on January 15, 2010.
In its opening brief on the merits, Rent-A-Center begins by emphasizing that, in enacting the FAA in 1925, Congress intended to establish what the Court has described as a "liberal federal policy favoring arbitration agreements." Moreover, it continues, the central purpose of the FAA (as the Court has also recognized) is to enforce arbitration agreements in accordance with their terms.
Rent-A-Center then turns to the text of the FAA. Section 2 of the FAA provides that an agreement to arbitrate "shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract," while Section 4 requires federal courts to order arbitration "in the manner provided for in [the arbitration] agreement" as long as the court is "satisfied that the making of the agreement for arbitration or the failure to comply therewith is not in issue." Pursuant to these two sections, as interpreted by the Court in AT&T and First Options, an arbitration agreement must be honored when the parties "clearly and unmistakably" agree to delegate the issue of arbitrability to the arbitrator. Because there is no dispute that such clear and unmistakable delegation has occurred here, the arbitrator "“ not a court "“ should decide whether the agreement is enforceable.
Jackson responds with two principal arguments. First, he disputes Rent-A-Center's analysis of the text of the FAA, arguing instead that the plain text of Section 2 demands the very judicial inquiry into enforceability that the delegation clause attempts to preclude. Noting that Section 2 only requires arbitration agreements to be enforced as written, "save upon such grounds as exist at law or in equity for the revocation of any contract," Jackson points out that Rent-A-Center's approach would require courts to enforce arbitration clauses even when the requirements created by Section 2 are not satisfied. For example, he posits, even if one party were forced to enter into the arbitration agreement at gunpoint, under Rent-A-Center's construction the court would have to defer to the arbitrator to determine the contract's enforceability so long as the language of the agreement is "clear and unmistakable."
Second, Jackson counters Rent-A-Center's interpretation of Supreme Court precedent by distinguishing between challenges to the scope of arbitration agreements and challenges to the enforceability and validity of arbitration agreements. AT&T and First Options, he contends, suggest only that challenges to the scope of arbitration agreements may, by clear and unmistakable language, be delegated to arbitrators. By contrast, Jackson points to other cases, most notably Buckeye Check Cashing v. Cardegna (2006) and Mitsubishi Motors v. Soler Chrysler Plymouth (1985), in which the Court has held that determinations regarding the validity and enforceability of arbitration agreements under Section 2 of the FAA are for the courts, rather than the arbitrator, to decide.
In its reply brief, Rent-A-Center clarifies that the question presented by this case is not whether unconscionable arbitration agreements are unenforceable (conceding that of course they should be), but rather who gets to make that determination. Nothing in the text of Section 2 suggests that courts (rather than arbitrators) should determine whether there are grounds "at law or in equity for the revocation of any contract," and the Court's prior holdings suggest that a clear and unmistakable delegation of that authority to arbitrators should settle the matter. Moreover, if Jackson's position "“ that Section 2 of the FAA requires courts to always examine the validity of arbitration agreements "“ is to be taken seriously, then the Supreme Court's holdings in AT&T and First Options "wither to nothing."