The following contribution to our arbitration symposium is by Thomas Carbonneau, the Orlando Distinguished Professor and Faculty Director Arbitration Institute, Penn State Law. Professor Carbonneau holds degrees from Bowdoin College, Oxford University, University of Virginia, and Columbia University. He has taught arbitration law at McGill law faculty in Montreal, Queen Mary in London, and Hamline University, and he is the author of twenty books and eighty law review articles.
Rent-A-Center v. Jackson (2010) ("RAC") represents the Court's initial interpretation of a party delegation of jurisdictional authority to arbitrators under First Options v. Kaplan (1995). The specific question presented to the Court was whether a court or the arbitrator would determine if the arbitral clause was unconscionable and, therefore, unenforceable. The contract clearly ascribed such authority to the arbitrator: It provided that "[t]he Arbitrator, and not any federal, state, or local court or agency, should have exclusive authority to resolve any dispute relating to the interpretation, applicability, enforceability or formation of this Agreement including but not limited to any claim that all or any part of this Agreement is void or voidable." The plaintiff, however, alleged that the arbitral clause was oppressive on a number of grounds "“ e.g., for reason of the fee-splitting provision, the process of discovery, or the lack of mutuality "“ and, therefore, was unconscionable as a whole.
The arbitral clause was quite detailed and reflected the various rules elaborated in the case law. The claim of oppression applied generally to the arbitral clause; it was not specifically directed at the jurisdiction delegation. Referring to the reasoning in Prima Paint Corp. v. Flood & Conklin (1967), the Court asserted that separability immunized the jurisdictional clause from being attacked on the basis of the plaintiff's general claim of unconscionability. In effect, the majority contended that a second separability doctrine existed, applied in particular to the arbitration clause, and distanced the jurisdictional delegation from other parts of the arbitral clause:
"[U]nless Jackson challenged the delegation provision specifically, we must treat it as valid under [FAA] §2, and must enforce it under [FAA] §§3 and 4, leaving any challenge to the validity of the Agreement as a whole for the arbitrator."
The parties had agreed, clearly and unmistakably, to delegate the question of the existence and impact of the contract deficiency to the arbitrator.
At first blush, the result in RAC unambiguously favors arbitration and supports the linchpin principle of contract freedom in arbitration. The holding sustains the parties' right of jurisdictional delegation first articulated in Kaplan. The plaintiff's mistaken strategy, however, is exceedingly unlikely to be repeated by those parties who follow in his footsteps. In the grand scheme of things, the pleading error is undeniably a "one-off" event. The effect of discovering a second separability rule in American arbitration law will be as short-lived as it was circumstantial and opportunistic. Next time, Jackson's successor will contend that the scent of unconscionability permeates the entire content of the arbitral clause, including (perhaps especially) the delegation of jurisdictional authority to the arbitrator.
Kaplan, as qualified by RAC, may stand for the proposition that makeshift kompetenz-kompetenz has run amok in U.S. arbitration law because it requires court intervention at the outset of the process on a de novo review basis. According to RAC, once a party claims that the jurisdictional delegation is unconscionable, the court intervenes to assess the contractual propriety of the parties' jurisdictional agreement and the arbitrator's investiture on jurisdiction. The threshold stage of the arbitration, then, becomes a very crowded and busy place. It is not a haven for unobstructed recourse to arbitration. The adversarial fight begins in earnest at the very doorstep of the arbitral sanctuary. The court's determination will probably yield an appeal, further delaying the work of the arbitrators, and the review standard that applies should be de novo because the ruling does not relate to the merits. The Kaplan hospitable review standard (unique to U.S. law) only applies to jurisdictional determinations made by the arbitrator. The stage is completely occupied by courts that are addressing a contract formation issue at the very inception of the process and determining how it affects the arbitrator's decisional authority before that authority ever vests.
The RAC addendum, therefore, only favors the independence and autonomy of arbitration in an immediate sense and in the particular circumstances of the originating case. It exhibits the dangers of bootstrapping the articulation of doctrine. It does not muffle the steady beat of judicial litigation about arbitration, but rather amplifies it. It echoes the rationale of Stolt-Nielsen S.A. v. AnimalFeeds Int'l Corp. (2010) (decided during the same Term) by enhancing the prospect of judicial intervention in arbitration and making the arbitral solution itself a litigious morass. Finally, it speaks to the desperate need to revamp and modernize the FAA and convert it into a proper national law on arbitration.