Thursday, July 8, 2010


Late last month the U.S. Supreme Court handed down a 5-4 decision in the matter of Rent-A-Center, West, Inc. v. Jackson, No. 09-497. Scalia writes for the majority in reversing the 9th Circuit Court of Appeals. The 9th Circuit had overruled, in part, the District Court’s refusal to grant the Defendant’s Motion to Compel arbitration. The usual cast of supporting characters joined Scalia’s majority. Ginsberg, Breyer and Sotomayer joined Steven’s strong dissent. The Consumer Law and Policy Blog announced that the opinion “dealt a major blow to consumers.” So what is all the fuss about?

Generally speaking (for blog purposes), challenges to an arbitration provision are delegated to the Court’s while challenges to the enforceability of the arbitration provision based upon the formation of the contract serving as the repository of the arbitration agreement is reserved for the arbitrator – if explicitly agreed to by the parties. This “basic” demarcation got pretty blurry in Rent-A-Center because the arbitration provision and the contract were one in the same. Scalia’s somewhat incredible conclusion that this unique situation makes no difference is deemed “simply wrong” by the dissent. Scalia’s majority concluded that since 1) the Plaintiff challenged nothing but the contract as a whole, and 2) the arbitration had text delegating this “agreement to arbitrate” threshold issue to the arbitrator in “clear and unmistakable” terms, the Plaintiff had to bring the issue to the arbitrator.

The opinion’s logic is detached from reality and its self-justification is a bit disingenuous when it professes its result to be both obvious and inescapable. For example, the majority again holds that a provision within a contract assigning litigation to an arbitrator (selected by the defendant) is enforceable even if the plaintiff’s execution of the contract was induced by fraud unless the arbitrator hailed aboard the fraudulent vessel concludes -- in effect -- that his employment was fraudulently induced by his or her indirect employer. Although it is a bit unclear, Scalia seems to declare that the plaintiff must specifically allege that, in certain circumstances, the delegation clause within the arbitration provision itself was invalid before the court can evaluate that type of claim. The minority castigates the majority’s reasoning as “fantastic” and characterizes it as “Russian nesting dolls.”

But not all is lost for those challenging an arbitration agreement. For example, claims challenging the conscionability of the delegation clause itself – procedural and substantive – are still reserved for the courts, and so too are challenges to the agreement to arbitrate as a whole in the absence of a “clear and unmistakable delegation provision.” And the Court does not address the situation where the arbitration provision itself contains conflicting “access to court” provisions. Nor does it address the situation where an arbitrator (being paid handsomely) refuses to decide “gateway issues” purportedly delegated to him until the end of the arbitration hearing on the merits. And what about those situations where the party moving to compel arbitration has breached the delegation clause during the arbitration by refusing to litigate certain claims?

Furthermore, Scalia seems to leave open the door to a challenge to whether or not an agreement “was ever concluded” (as opposed to a “validity” challenge to the contract as a whole.) So now ask yourself – if, as both Scalia and the dissent claim, the enforceability of an arbitration agreement is a matter of contract law – can a contract induced by fraud ever “be concluded?” Doesn’t there need to be a meeting of the minds before an “agreement” exists or a contract is formed, and therefore “concluded”? The greatest fiction of all set out in Scalia’s opinion may be this assertion that arbitration analysis is based on contract law. This claim would have more credence but for the absurd yet necessary presumption that a consumer signing a commercial adhesion contract with an arbitration provision would have any ability to comprehend what he or she was actually agreeing to in light of the state of the law reflected in the Rent-A-Center majority and dissenting opinion. In many instances there is nothing wrong with arbitration, but the assumption that consumers understand what they are agreeing to when five Supreme Court Justices disagree with four Supreme Court Justices on the issue seems pretty alien to contract law.

How a delegation clause resting within an invalid arbitration provision could be binding is the new mystery created by Rent-A-Center. But it is merely a evolution of the original mystery: how an arbitration provision within a fraudulently induced contract could be binding so as to send the fraud issue to the arbitrator. So, at the end of this new day, it seems that: 1) Challenges to the validity/unconscionability/legally binding status “of a written agreement to arbitrate” these gateway issues goes to the court in the absence of an explicit delegation of gateway issues; 2) Challenges to the contract as a whole as to whether or not it was “concluded” goes to the court; 3) Challenges to the validity of the delegation clause goes to the court; 4) Challenges to the validity of the “contract as a whole” goes to the arbitrator only if there is a valid delegation provision.

In sum, and to use Scalia’s words – simply be sure to direct your challenge to the arbitration provision, at least in part, “specifically to the agreement to arbitrate” validity and enforceability issues.

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