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The United States Supreme Court recently ruled in Rent-A-Center, West, Inc. v. Jackson, 561 US ___ (2010), that, when an agreement delegates the authority to determine the arbitrability of the agreement to the arbitrator, claims which challenge the enforceability and validity of an agreement as a whole will be determined by the arbitrator, while claims which specifically challenge the enforcement of the delegation provision will be considered by the district court.  

The ruling will impact international and domestic arbitrations and parties both litigating and drafting arbitration agreements.

The decision is significant because it advances the pro-arbitration line adopted by the United States Supreme Court in recent years.  

Companies which have arbitration agreements and wish to delegate the maximum amount of authority to the arbitrator should consider revising their arbitration language to avail themselves of the Rent-A-Center ruling.

Background

Rent-A-Center, West, Inc. v. Jackson concerned an arbitration agreement, signed by respondent Jackson, as a condition of his employment.  Jackson challenged the arbitration agreement in the US District Court for the District of Nevada on the ground that it was unconscionable.  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. The US Court of Appeals for the Ninth 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. 

The United States Supreme Court agreed to consider whether, under the Federal Arbitration Act (FAA), 9 U.S.C. §1 et seq., a district court may decide a claim that an arbitration agreement is unconscionable when the agreement explicitly assigns that decision to the arbitrator.

Two provisions of the Rent-A-Center arbitration agreement were relevant to the Supreme Court’s decision.  The first provision provided for arbitration of all “past, present or future” disputes arising out of Jackson’s employment.  The second provision, labeled the “delegation provision” by the Court, provided  that: “The Arbitrator . . . shall have exclusive authority to resolve any dispute relating to the interpretation, applicability, enforceability, or formation of [the] Agreement including, but not limited to any claim that all or part of [the] Agreement is void or voidable.”

The Court noted that there are two types of challenges to the validity of an arbitration agreement under the FAA.  First, a party may challenge the validity of the agreement to arbitrate.  Second, a party may challenge the contract as a whole.  The Court said that the first type of challenge is “relevant to a court’s determination whether the arbitration agreement at issue is enforceable.”  When the arbitration agreement contains a delegation clause, however, challenges to the entire arbitration agreement are decided by the arbitrator. Accordingly, the arbitrator will decide a claim for fraud in the inducement of an entire contract, whereas the courts will decide a claim for fraud in the inducement of the agreement to arbitrate.

Arbitrator should decide unconscionability

The Supreme Court reversed the Ninth Circuit and held that the gateway question of unconscionability was for the arbitrator to decide.  In a 5-4 decision, the Court held that,under the FAA, the district court is to decide a challenge to the enforcement of an agreement to arbitrate when that agreement includes a provision that the arbitrator will determine the enforceability of the agreement.  However, the arbitrator is to consider any challenge to the enforcement of the agreement as a whole.  In this case, because Jackson had challenged the agreement to arbitrate as a whole as unconscionable, the question of unconscionability was for the arbitrator to decide.

Challenge to a specific provision?

The Court emphasized that only challenges that specifically contest the validity of the so-called delegation provision are relevant to a court’s determination of the enforceability of an arbitration agreement.  Had the employee raised a challenge to the validity of the “precise agreement to arbitrate at issue,” the court would have been obligated to consider the challenge.  In contrast, an arbitrator decides challenges to the entire arbitration agreement. 

In this case, however, Jackson contested the validity of the arbitration agreement as a whole. The Court succinctly analyzed Jackson’s arguments and determined that he “opposed the motion to compel [arbitration] on the ground that the entire arbitration agreement, including the delegation clause, was unconscionable.”  Because Jackson contested the validity of the entire arbitration agreement and not the delegation provision specifically, the Court treated the arbitration agreement and the delegation clause as valid under the FAA.  Consequently the challenge to the validity of the agreement in its entirety was left for the arbitrator.

Significance and impact

Rent-A-Center presents another pro-arbitration decision by the current Supreme Court.  Because most challenges to the enforceability or validity of an agreement will apply to the entire agreement, and not only to the specific arbitration provision, the Rent-A-Center decision will limit the number of challenges to arbitration agreements which will be heard in federal court when a delegation provision is present.  As a result, more cases will be decided by arbitrators rather than the courts.  The burgeoning use of arbitration clauses suggests this decision will be important in employment, consumer and arbitration law.

The Rent-A-Center decision also may galvanize Congress to pass the Arbitration Fairness Act, which seeks to ensure that agreements to arbitrate were entered into voluntarily and not as a result of the potential imbalances in bargaining power to compel arbitration.

Rent-A-Center also will affect the manner in which companies draft future arbitration provisions.  Companies that want their disputes to be resolved in arbitration 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.