The following contribution to our arbitration symposium comes from Steven C. Bennett, a partner at Jones Day in New York City whose practice focuses on domestic and international commercial litigation and arbitration. The views expressed are solely those of the author and should not be attributed to the author's firm or its clients.
In Rent-A-Center, West, Inc. v. Jackson (2010), the Court considered whether a general attack on the unconscionability of an arbitration agreement sufficed to render a delegation to an arbitrator of the power to determine arbitrability (including the unconscionability of the arbitration agreement as a whole). The Court held that it did not. This ruling may open up an avenue for institutions to insulate arbitration provisions from immediate judicial review, and thus enhance the reliability of the choice of arbitration as a means of dispute resolution.
The dispute arose out of an employment relationship, wherein the plaintiff (Jackson) had signed an agreement, as a condition of employment, requiring that he arbitrate any "past, present or future disputes" arising out of his relationship with the employer. The arbitration agreement, moreover, stated that the arbitrator would have "exclusive authority to resolve any dispute relating to" the "enforceability" of the arbitration agreement, including "any claim that all or any part of this Agreement is void or voidable."
The employee did not attack the delegation of "authority" to the arbitrator to resolve disputes concerning enforceability of the arbitration agreement. Rather, the employee attacked the entire arbitration agreement as unconscionable, as a "one-sided" agreement, with inadequate discovery processes and an unfair fee-splitting system. The employee, moreover, admitted that the arbitration agreement contained "clear and unmistakable" language reflecting an intent to "arbitrate arbitrability issues," rather than presenting them to a court for consideration. These essential admissions, the Court held, rendered the delegation to the arbitrator valid, and precluded immediate court review of the arbitrability issue.
The majority noted the well-worn principle that "arbitration is a matter of contract," and that the Federal Arbitration Act requires courts to "enforce [arbitration agreements] according to their terms." The Court, moreover, has previously "recognized that parties can agree to arbitrate "gateway' questions of "arbitrability,' such as whether the parties have agreed to arbitrate or whether their agreement covers a particular controversy." Thus, "[a]n agreement to arbitrate a gateway issue is simply an additional, antecedent agreement the party seeking arbitration asks the federal court to enforce." The "one caveat" to this principle is that "courts should not assume that the parties agreed to arbitrate arbitrability unless there is clear and unmistakable evidence that they did so." The majority further noted the rule, first established in Prima Paint Corp. v. Flood & Conklin Mfg. Co. (1967), that a challenge to the "validity of the agreement to arbitrate" is generally for a court to resolve, whereas a challenge to "the contract as a whole" is generally for an arbitrator to decide. For these purposes, the arbitration agreement is viewed as "severable" from the remainder of the contract; thus "a party's challenge to another provision of the contract, or to the contract as a whole, does not prevent a court from enforcing a specific agreement to arbitrate."
In Rent-A-Center, the Court noted that "the underlying contract is itself an arbitration agreement." On the view that the employee "challenged only the validity of the contract as a whole," rather than the delegation of authority to the arbitrator to resolve arbitrability questions in particular, the Court held that the Prima Paint severability rule precluded judicial review of the unconscionability claim, and consigned review of that issue to the arbitrator. The Court also rejected the view that this question presented an issue of state law, and noted that the employee's contention that the delegation of authority to the arbitrator to decide arbitrability was itself unconscionable came "too late" to be considered by the Court.
The dissent in Rent-A-Center, including Justice Breyer, the author of the First Options opinion on arbitrability issues, disputed the majority view that the arbitration agreement was the "underlying agreement" at issue. The majority concluded that "the subject matter of the agreement is exclusively arbitration makes all the difference in the Prima Paint analysis." The dissent, although suggesting that the Prima Paint severability rule was "fantastic" and "likely erroneous" even when first announced (in 1967), nevertheless recognized that the rule had been followed "numerous times" in subsequent opinions of the Court. See id. at 2785 n.8. In short, the dissent noted, "Prima Paint and its progeny allow a court to pluck from a potentially invalid contract a potentially valid arbitration agreement." The dissent suggested that the Rent-A-Center application of the rule "adds a new layer of severability"”something akin to Russian nesting dolls[.]" Thus, "[c]ourts may now pluck from a potentially invalid arbitration agreement even narrower provisions that refer particular arbitrability disputes to an arbitrator." The dissent criticized this "infinite severability rule" as providing that "[a] claim that an entire arbitration agreement is invalid will not go to the court unless the party challenges the particular sentences that delegate such claims to the arbitrator," suggesting that this extension of the rule requires "even more fantastic reasoning" than in Prima Paint itself.
The full implications of the Rent-A-Center opinion have yet to reveal themselves. The case, in some regards, was unique. Unlike many arbitration agreements, incorporated into a larger contract, the agreement in this case was free-standing (thus subject, in the Court's view, to the Prima Paint analysis regarding the arbitration agreement as a whole). One can imagine that similar agreements exist, however, and that some institutions will change their practices to adopt similar agreements in the future. Further, the Rent-A-Center rule might easily apply to agreements to arbitrate existing disputes (versus general agreements to arbitrate future disputes), which often consist of nothing but an arbitration agreement (much as in the Rent-A-Center case).
Further, the clause in the case was remarkable for its breadth of coverage. The employee had no room for argument that the parties had failed to grant a "clear and unmistakable" delegation of authority to the arbitrator to decide arbitrability issues. Again, one can imagine similar agreements in other contexts (and future drafting to conform to the opinion), but there may be room for further nuance in opinions from the courts as to what constitutes a "clear and unmistakable" delegation.
Finally, the circumstances posited by the dissent in Rent-A-Center may arise in other cases. Where parties simultaneously sign two contracts, one substantive, and the other addressing the question of dispute resolution via arbitration (with a delegation to the arbitrator of authority to decide arbitrability issues) the question may arise whether the arbitration agreement may be treated as part of, or connected to, the larger substantive contract, for Prima Paint severability purposes. In that event, the "Russian dolls" problem, or "infinite severability," criticized by the dissent, might be avoided.
The Rent-A-Center decision, moreover, arises in the context of a vigorous public debate on the question whether arbitration is somehow unfair to employees, consumers and other individuals seeking to enforce their rights against larger institutions. Proposals to adopt an "Arbitration Fairness Act," modifying the FAA to permit individuals to opt out of arbitration agreements, have been introduced in Congress. The Rent-A-Center decision may contribute to the arguments of civil rights groups in favor of such legislation.