Supreme Court Issues Key Ruling on Mandatory Arbitration and Arbitrator Authority

July 8, 2010

In Rent-A-Center, W., Inc. v. Jackson (June 21, 2010), the U.S. Supreme Court held that when an agreement covered by the Federal Arbitration Act (FAA) delegates the authority to determine the arbitrability of the agreement to the arbitrator, claims that challenge the enforceability and validity of an agreement as a whole will be determined by the arbitrator. Only claims that specifically challenge the enforcement of the delegation provision will be considered by a court.

Background

As a condition of his employment, Antonio Jackson signed an arbitration agreement with Rent-A-Center, West, Inc. ("Rent-A-Center"), which contained a delegation provision expressly providing that the arbitrator would have exclusive authority to resolve any dispute about the enforceability of the arbitration agreement. When Jackson filed an employment discrimination suit against Rent-A-Center, Rent-A-Center filed a motion under the FAA to dismiss or stay the proceedings and to compel arbitration. Jackson opposed the motion on the ground that the arbitration agreement was unconscionable under Nevada law.

The District Court found that the arbitration agreement had delegated the question of determining unconscionability of the arbitration agreement to the arbitrator and granted Rent-A-Center’s motion to dismiss and motion to compel arbitration. On appeal, the 9th Circuit reversed in part and held that the District Court should have decided whether the agreement was unconscionable before deciding the motion to compel arbitration.

Supreme Court Opinion

The Supreme Court reversed the 9th Circuit, holding 5-4 that where an arbitration agreement delegates to an arbitrator authority to determine the enforceability of the agreement, only a specific challenge to the delegation provision itself may be resolved by a court. However, a challenge to the enforceability of the agreement as a whole (e.g., that it is “unconscionable”) must be resolved by the arbitrator.

Writing for the majority, Justice Antonin Scalia found that Rent-A-Center is entitled to have an arbitrator consider Jackson’s claim that an arbitration agreement is unconscionable, because Jackson did not specifically challenge the delegation of “gateway” issues to the arbitrator. Because Jackson failed to challenge the delegation provision specifically, the majority concluded that the delegation provision must be treated as valid, and accordingly, any challenge to the validity of the agreement as a whole must be left for the arbitrator. Chief Justice John Roberts and Justices Anthony Kennedy, Clarence Thomas and Samuel Alito joined in the majority opinion.

Dissenting, Justice John Paul Stevens asserted that questions of arbitrability may be resolved by an arbitrator where parties to a contract have clearly and unmistakably shown their intent for the arbitrator to do so. Jackson’s claim that the agreement was unconscionable “undermines any suggestion that he ‘clearly’ and ‘unmistakably’ agreed to submit questions of arbitrability to the arbitrator,” Stevens wrote. Justices Ruth Bader Ginsburg, Stephen Breyer and Sonia Sotomayor joined in the dissent.

Implications

This decision will be important in employment, consumer and arbitration law. Most challenges to the enforceability of an arbitration agreement apply to the entire agreement, and not only to the specific delegation provision. The Rent-A-Center decision will limit the number of challenges to arbitration agreements that will be heard in court. As a result, more cases will be decided by arbitrators rather than the courts.

In light of Rent-A-Center, companies that want their disputes resolved in arbitration versus court should include delegation provisions in their arbitration agreements to ensure that questions relating to the enforcement or validity of the arbitration agreement will be resolved by arbitrators.

For additional information or assistance in drafting or updating mandatory arbitration agreements, please contact the authors or any other member of the McGuireWoods Labor & Employment team.

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