Tuesday’s Argument: Buckeye Check Cashing, Inc. v. John Cardegna, et al.
on Nov 27, 2005 at 11:22 am
On Tuesday the Court will hear the case of Buckeye Check Cashing, Inc. v. John Cardegna, et al., No. 04-1264. This case presents the question whether the Federal Arbitration Act allows a party to avoid arbitration by claiming that the underlying contract containing an arbitration clause (but not the arbitration clause itself) is void for illegality.
Petitioner argues that if the arbitration clause is itself valid, then the arbitrator determines the legality of the underlying contract, a result compelled by the Courtâ€™s decision in Prima Paint Corp. v. Flood & Conklin Manufacturing, Co. and the federal policy of favoring arbitration. Respondents contend that neither Congress nor the Court intended to preempt state courts from adjudicating the threshold issue of whether there has been a contract at all.
Christopher Landau will argue for the petitioner. F. Paul Bland Jr. will argue for the respondents.
The opinion of the Florida Supreme Court is available here.
The brief for petitioner is available here.
The brief for respondents is available here.
Buckeye is a check-cashing business, which means that to receive cash today, say $100 a week before payday, I would write a check for some larger amount to be cashed at some later date. Respondents here, plaintiffs below, allege that this practice amounts to the lending of money and that the interest rates implicit to these transactions were usurious – usually over 300% annually, while Florida law deems any rate over 45% to be a third-degree felony. Petitioner and its amici appear to challenge this characterization on several grounds, noting first of all that this is a highly regulated industry and that Buckeye was a business in good standing. Further, most of its business amounted to “short-term, small-dollar” transactions; petitioner contends that it was merely charging a service fee, one consistent with the risky nature of the service provided – which is a service, because many people live paycheck to paycheck and have poor credit (respondentâ€™s amicus, the AARP, counters that these “fringe lenders” take advantage of this under-served population). At any rate, petitioners insist that it is undisputed that each of the many many times that the plaintiffs entered into a transaction with Buckeye they separately initialed a broad arbitration provision that provided for binding mandatory arbitration of the “validity, enforceability, or scope of the Arbitration Provision or the entire Agreement.”
Respondents brought this class action in a Florida trial court, which denied Buckeyeâ€™s motion to stay the proceedings pending arbitration. This decision was reversed by the state intermediate appellate court, which was in turn reversed by a divided Florida Supreme Court.
The majority distinguished Prima Paint by noting that the contract at issue there was “voidable” rather than “void.” This is to say that in Prima Paint the legality of the contract was not at issue; the only issue was whether there was “fraud in the inducement” into an otherwise legal contact. Here, because the legality of the contract is at issue and the contract, if found to be illegal, would be void, the court held that it would not “breathe life” into an illegal contract. The majority also distinguished an Eleventh Circuit decision that reached the opposite conclusion by noting that that decision explicitly rested on federal law, while this case is a matter of state law.
In a concurring opinion, Justice Bell disagreed with the majority that its decision in this case rests on state rather than federal law. He contended instead that the conflicting federal appellate cases were wrongly decided. Specifically, Justice Bell argued that those decisions would make arbitration clauses into “super clauses,” which is to say that, even if, as respondents allege, every other clause in this contract is void as illegal and thus unenforceable, the courts would still need to enforce the arbitration clause.
Justice Cantero dissented. At the heart of his argument is that both the majority and concurrence have confused procedure and substance. Whether the contract in question is usurious will be decided under Florida law; the question is who will make that determination. Justice Cantero answers that it is the arbitrator, as determined by federal law. Neither Prima Paint nor the FAA makes a distinction between voidable and void contracts, and the logic of Prima Paint and the FAA do not support it. The FAA favors arbitration and was meant to counter courtsâ€™ “jealous[y]” of their role as “guardian[s] of legal issues”; what is the problem with an arbitrator finding the contract void if not some suspicion of arbitrators? As for Prima Paint, it stands for the broad principle that arbitration agreements are to be treated separately from the underlying contract, and separate treatment does not confer “super” status. Since there is no dispute as to whether the plaintiffs assented to the arbitration clause nor whether it governs the claims at issue, the state-law question of legality must be decided by an arbitrator.
Petitionerâ€™s argument generally follows that of Justice Cantero. In fact, petitioners label this case “straightforward” and the length of their brief reflects this (though they do have numerous amici, including the U.S. Chamber of Commerce). Petitioners add that there is no federalism problem here because state contract law will be applied by the arbitrator; all that is overridden is state severability law and that was already done by Prima Paint. Further, petitioners and its amici emphasize the negative policy implications should the decision of the Florida Supreme Court be upheld. At the heart of their concern is that all agreements to arbitrate would be “emasculated” because it would be easy for plaintiffs to couch their challenges to arbitration contracts in terms of “public policy” (a phrase the Florida Supreme Court uses), and the Chamber of Commerce adduces some evidence that such a trend is already in existence. If arbitration were only to occur after a court has held a contract legal, then there will not be much for arbitrators to do. As petitionerâ€™s amici add, the availability of arbitration is a boon to the economy in general and citizens such as plaintiffs in particular because it allows businesses to offer goods and services, especially low-value and high-volume services, at a lower cost than they would if they had to factor in the cost of the risk of litigation in courts.
Respondentsâ€™ arguments echo that of the majority opinion, with some important amplifications (some of which, petitioner claims, come too late). First, respondents defend the majorityâ€™s state versus federal law distinction on the basis of the plain language of 9 U.S.C. 3 and 9 U.S.C. 4, both of which refer to cases brought in federal court, not state court. Respondents also note that Prima Paint interpreted these two provisions and hence it is appropriate to consider what petitioner is requesting as an extension of Prima Paint to 9 U.S.C. 2, which does apply to state court proceedings. Section two, however, only applies to arbitration provisions “in … a contract,” and, according to respondent, the threshold question here is whether there is a contract. Whether or not there is a contract is a matter of contract law, a traditional area of state concern of the sort that the Court heavily presumes Congress did not intend to abrogate. Respondents counter petitionerâ€™s policy concerns by arguing that it is likely to be rare for plaintiffs to have a colorable claim that an entire contract is criminal, a point that respondents emphasize throughout – would an agreement to arbitrate a contract to sell drugs be enforceable? In so maintaining, respondents are arguably narrowing the Florida Supreme Courtâ€™s holding – which does refer to “public policy” – which at least suggests more avenues of attack by plaintiffs looking to avoid arbitration.
This issue of criminality also goes to an interesting framing battle. Petitioner and its amici are at pains to emphasize that this is an ordinary business transaction and that respondents are trying to get out of their agreement to arbitrate in the same way Prima Paint tried to evade an agreement to arbitrate a dispute. If this is true, then it looks as if the floodgates of litigation would be opened should petitioner lose. Respondents turn around and note that they have a colorable claim that petitioner committed a felony; this is thus no ordinary business or employment dispute and the floodgates will not open.
Some final tendentious observations on the elephant in the room. The petitioner seems correct that anything but a narrow reading of Prima Paint favors them and there is no doubt that, should they prevail, this would further the policy of imposing a consistent national policy favoring arbitration. That said, much has changed since 1967 when Prima Paint was decided – Prima Paint was, after all, a case involving a dispute between two businesses in which one accused the other of hiding its true financial condition. Since then, the Court has held that many more types of claims – including employment discrimination claims – may be subject to binding arbitration. Even more importantly, the Court has held that the FAA and its policies favoring arbitration preempt state law. Thus, the severability holding of Prima Paint already applies to a far larger number of agreements than it did in 1967, and, in particular, it “crowds out” much more state court adjudication of disputes, which is what raises the federalism concerns here. Assuming that the Court is not going to overturn either Prima Paint or its holding that the FAA preempts state law (as forty Attorney Generals who filed an amicus brief for respondents have urged), then what the Florida Supreme Court has in effect done is create a plausible federalist firebreak to the expanding scope of the FAA, one that leaves at least one aspect of state contract law and state court adjudication vital and relevant. By “plausible” I mean that the application of Prima Paint is not compelled in this case, and this limit is hardly an ad hoc creation of anti-arbitration hostility. The principle that criminal contracts are void ab initio is not only venerable and clearly administrable, as respondentsâ€™ law professor amici note, but also must be crafted in response to a host of concerns other than arbitration – given the relevance to all contracts, it is thus unlikely that state lawmakers or judges are going to manipulate their void for criminality statutes and doctrine in order to undermine the federal goal of favoring arbitration.