As promised (or maybe threatened), today I want to discuss one of the two new decisions from the United States Supreme Court dealing with arbitration. Although I had intended to address both, I think that Granite Rock Co. v. International Broth. of Teamsters, 2010 WL 2518518 (June 24, 2010), which deals with arbitration in a collective-bargaining agreement, deserves more attention than I’m prepared to give it at this point.
And if you missed it, yesterday I wrote about two recent decisions from the Supreme Court of Appeals of West Virginia that focus on the trial court’s scope of review of an arbitration agreement.
While arbitration provisions have long been incorporated in, for instance, brokerage contracts and mobile phone contracts, the provisions are found increasingly in other documents, such as employment agreements. As the following decision makes clear, regardless of your area(s) of specialization and whether you represents plaintiffs or defendants, you need to know about arbitration.
In Rent-A-Center, West, Inc. v. Jackson, 2010 WL 2471058 (June 21, 2010), the agreement to arbitrate was separate from the employment agreement and required the plaintiff, Jackson, to agree to its terms as a condition of employment. It also provided that the arbitrator, and not any court or agency, "shall 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."
Jackson filed an employment discrimination suit against Rent-A-Center, which RAC moved to dismiss or stay, and to compel arbitration. Jackson opposed the motion and claimed that the arbitration agreement was unenforceable because it was unconscionable. RAC asserted that the court could not address Jackson’s unconscionability claim, which would have to be heard by an arbitrator under the terms of the agreement.
The United States District Court for the District of Nevada ruled that Jackson had to arbitrate his claims because the agreement gave the arbitrator exclusive authority to determine whether the agreement was enforceable and because Jackson challenged the validity of the agreement as a whole.
The Ninth Circuit Court of Appeals affirmed in part, reversed in part, and remanded the case. It reversed on the issue of who had the authority to decide whether the agreement was enforceable, but affirmed the district court’s conclusion that a specific provision of the arbitration agreement that required fee-splitting was not substantively unconscionable, and remanded the case.
RAC appealed to the Supreme Court, seeking to enforce the agreement’s provision that the arbitrator had exclusive authority to determine any disputes related to the agreement.
In a 5-4 opinion by Justice Scalia, he identified the issue as whether the provision that delegated authority for resolving disputes to the arbitrator (the "delegation provision") was valid under § 2 of the Federal Arbitration Act. Section 2 provides that a written arbitration in a contract "shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract."
There are two types of challenges to the validity of an arbitration provision under § 2. One challenges the validity of the agreement to arbitrate, while the other challenges the underlying contract as a whole. The type of challenge is critical because it determines whether a court or an arbitrator considers the challenge.
The Court found that Jackson had challenged the validity of the arbitration agreement as a whole, as he had not mentioned the delegation provision in his opposition to RAC’s motion to compel arbitration. In other words, Jackson did not identify any particular provision of the arbitration agreement that he objected to, including the delegation provision, but asserted that the entire agreement was substantively unconscionable. Such a challenge had to be addressed to the arbitrator rather than a court. However, the Court suggested that if "Jackson [had] challenged the delegation provision by arguing that these common procedures [fee-splitting and limitations on discovery] as applied to the delegation provision rendered that provision unconscionable, the challenge should have been considered by the court." (Emphasis in original.)
Jackson may have sensed he was in trouble and raised the issue in his brief to the Court that the delegation provision itself was substantively unconscionable "because the quid pro quo he was supposed to receive for it — that ‘in exchange for initially allowing an arbitrator to decide certain gateway questions,’ he would receive ‘plenary post-arbitration judicial review’ — was eliminated by the Court’s subsequent holding in Hall Street Associates, L.L.C. v. Mattel, Inc. 552 U.S. 576, 128 S.Ct. 1396, 170 L.Ed.2d 254 (2008), that the nonplenary grounds for judicial review in § 10 of the FAA are exclusive." But the Court found that he waited too long to raise the objection and refused to consider it. Thus, the Court reversed the Ninth Circuit and held that the delegation provision was valid under the FAA.
Justice Stevens wrote a dissent in which Justices Ginsburg, Breyer and Sotomayor joined, in which he found that because the issue of whether the arbitration agreement is unconscionable could be separated from the merits of the underlying employment discrimination claim, such a "gateway" (or threshold) matter should have been determined by the court.
For some additional analysis, here is Victoria Pynchon’s post from her Settle It Now Negotiation Blog, in which she describes the opinion as "hyper-technical decision–dodging," and links to other sources that predict that the decision will require even more plaintiffs to arbitrate their claims and thereby limit or eliminate their access to courts.