Sometimes When You Win, You Really Lose — Rent-a-Center v. Jackson

Third Quarter 2010Newsletters California Update Employment Law

Last month, the U.S. Supreme Court issued its decision in Rent-a-Center v. Jackson. The justices split 5-4 (with Scalia, Roberts, Kennedy, Thomas, and Alito in the majority). The opinion reversed a Ninth Circuit decision holding that issues regarding the unconscionability of arbitration agreements must be decided by the courts, even if the agreement specifically delegates those decisions to the arbitrator. In doing so, the Court distinguishes between challenges to the validity of the agreement as a whole and challenges to the validity of the arbitration provision. The distinction goes back to the Court's 1967 decision in Prima Paint v. Flood & Conklin Mfg. Co. In the Rent-a-Center decision, the Court ruled that arbitrators decide challenges to the validity of the agreement as a whole, but courts decide challenges to the validity of the arbitration provision.

This distinction may be easier to articulate than to apply. In Rent-a-Center, for example, the agreement at issue was an agreement to arbitrate. Where that occurs, how do you distinguish between attacks on the agreement as a whole and attacks on the arbitration provision? According to the majority opinion, the focus is on the provision delegating exclusive authority to resolve disputes relating to the agreement's enforceability to the arbitrator. The Court held that challenges to this "delegation provision" are within the exclusive purview of the courts. Challenges to the entire agreement, or to other provisions, can be decided by the arbitrator where the agreement so provides.

Justice Stevens wrote a dissent, joined by Justices Ginsburg, Breyer, and Sotomayor. The dissent argues that questions regarding the validity of arbitration agreements are decided by the courts unless (1) the parties have clearly and unmistakably demonstrated their intent that the arbitrator decide such issues; or (2) the validity of the arbitration provision depends entirely on the validity of the contract as a whole. Applying the first of these exceptions, Stevens argues that a claim that the arbitration agreement is unconscionable precludes any determination that there was a clear, unmistakable agreement to submit such issues to the arbitrator.

The dissent also accuses the majority of adopting a rule that is not supported by precedent, was not argued by either of the litigants and is unworkable. According to Justice Stevens, "a general revocation challenge to a standalone arbitration agreement is, invariably, a challenge to the 'making' of the arbitration agreement itself... and therefore, under Prima Paint, must be decided by the court." Instead, he argues, the Court "adds a new layer of severability – something akin to Russian nesting dolls – into the mix: Courts may now pluck from a potentially invalid arbitration agreement even narrower provisions that refer particular arbitrability disputes to an arbitrator."

The impact of this decision remains to be seen. There is certainly greater incentive now for employers drafting arbitration provisions to include language that delegates disputes regarding the validity of the agreement to the arbitrator. But is it just a matter of time before Congress "overrules" this decision?

To the extent the Rent-a-Center decision is a victory for employers, it will be shortlived if it leads to greater support for the Arbitration Fairness Act (HR 120, S. 931), which would ban mandatory pre-dispute employment arbitration agreements. That legislation already includes language objecting that "a series of United States Supreme Court decisions have changed the meaning of the [Federal Arbitration] Act so that it now extends to disputes between parties of greatly disparate economic power, such as consumer disputes and employment disputes...." Proponents of this legislation have wasted no time in using the Rent-a-Center decision to support their campaign against mandatory predispute arbitration.

In addition, the Supreme Court has another Ninth Circuit arbitration decision before it: AT&T Mobility v. Concepcion. In that case, AT&T Mobility argued that the Federal Arbitration Act preempts California state laws regarding the unconscionability of arbitration agreements. That decision, although many months away, could also have a profound impact on the enforceability of mandatory arbitration agreements in the employment context. Between the pending Supreme Court case and the pending legislation, the law in this area remains fluid.