Appealed from the United States Court of Appeals for the Ninth Circuit (Sept. 9, 2009)
Oral argument: Apr. 26, 2010
ARBITRATION, FEDERAL ARBITRATION ACT, ARBITRABILITY, UNCONSCIONABILITY, UNCONSCIONABLE
Respondent Antonio Jackson was an employee of Petitioner Rent-A-Center West, Inc. (“RAC”). Jackson sued RAC, alleging racial discrimination. Because Jackson had signed an arbitration clause as part of his employment contract, RAC asked the court to refer the case to arbitration. Jackson, however, argued the employment contract was unconscionable and therefore invalid. The arbitration clause contains a provision that only an arbitrator can decide validity. Jackson argues that a court must decide the validity of the arbitration clause before requiring arbitration. RAC argues that the parties agreed in the contract to submit this question to arbitration. The Ninth Circuit held that, when a party attacks the validity of an arbitration clause because of unconscionability, a court must decide its validity. The Supreme Court’s decision will influence how arbitration clauses will function in the future and the degree of court involvement in arbitration agreements.
Is the district court required in all cases to determine claims that an arbitration agreement subject to the Federal Arbitration Act ("FAA") is unconscionable, even when the parties to the contract have clearly and unmistakably assigned this "gateway" issue to the arbitrator for decision?
Can a party be bound by an arbitration clause to arbitrate, rather than litigate, the validity of the arbitration clause?
Respondent Antonio Jackson was an employee of Petitioner Rent-A-Center West, Inc. (“RAC”). See Jackson v. Rent-A-Center West, Inc., 581 F.3d 912, 914 (9th Cir. 2009). While employed by RAC, Jackson was repeatedly passed over for promotion until he complained to his store manager and human resources. See Jackson v. Rent-A-Center West, Inc., 2007 U.S. Dist. LEXIS 99067, 2 (D. Nev. June 6, 2007). Two months after obtaining a promotion, RAC fired Jackson. See id. Jackson filed a complaint under 42 U.S.C. § 1981 in the United States District Court for the District of Nevada, alleging racial discrimination and retaliation. See Jackson, 581 F.3d at 914.
Jackson’s employment contract with RAC contained an arbitration clause requiring arbitration of all disputes. See Jackson, 581 F.3d at 914. The arbitration clause specifically provides that only an arbitrator has the authority to resolve, among other things, questions “relating to . . . any claim that all or any part of [the] Agreement is void or voidable.” See id. Based on this language, RAC argues that only an arbitrator can decide whether the arbitration agreement is valid and subsequently how the dispute should be settled. See id. Jackson argues that the arbitration agreement was substantively unconscionable because the content of the agreement was one sided. See id. He also argues that it was procedurally unconscionable because he had not had an opportunity to fully bargain and negotiate his employment contract. See id. at 914, 917. Because of the unequal bargaining power and his lack of assent, Jackson claims that the arbitration clause is unenforceable. See id. at 914.
The district court dismissed Jackson’s complaint in favor of arbitration. See Jackson, 581 F.3d at 915. The court reasoned that an arbitrator had to settle the dispute and that Jackson could not prove the arbitration clause was unconscionable. See id. In order to establish unconscionability Jackson would have had to prove both substantive and procedural unconscionability. See id. at 919–20. Because the court held that Jackson did not prove substantive unconscionability, i.e. one-sidedness of the contract, the court rejected Jacksons’ claim. See id. Jackson appealed this decision to the United States Court of Appeals for the Ninth Circuit. See id.
The Ninth Circuit analyzed the case under the Federal Arbitration Act (“FAA”). The FAA provides that arbitration clauses are valid unless a reason at law or equity exists for which a contract can be revoked. See Jackson, 581 F.3d at 915; 9 U.S.C. § 2. The court thus considered the question whether a court or an arbitrator would have to find such a reason. See Jackson, 581 F.3d at 915. The court focused on a provision of the FAA which states that a court can only compel arbitration or enforce an arbitration clause in a contract when the making of the contract is not an issue. See 9 U.S.C. § 4; Jackson, 581 F.3d at 915–16. Ultimately, the court therefore decided that, where a party explicitly challenges an arbitration clause as unconscionable, a court and not an arbitrator must first decide whether the arbitration clause is valid. See Jackson, 581 F.3d at 916, 920. According to the court, this even applies when the arbitration clause itself delegates this question to the arbitrator. See id. at 919. RAC maintains that this should be a question for the arbitrator and therefore petitions the Supreme Court to reverse this ruling and enforce the arbitration clause. See Brief for Petitioner, Rent-A-Center, Inc. at 1.
Petitioner Rent-A-Center West, Inc. (“RAC”) contends that a court does not have the power to prevent an arbitrator from deciding on the arbitrability of a dispute when both parties explicitly agreed to submit that question to arbitration. See Brief for Petitioner, Rent-A-Center, Inc. at 11–14. RAC claims that this would violate the FAA. See id. at 11–12. On the other hand, Respondent Antonio Jackson claims that the FAA requires that arbitration agreements conform to state contract laws before they are enforced. See Brief for Respondent, Antonio Jackson at 6–7. For Jackson, FAA Section 2 requires that a court decide this preliminary question and take into account more than just the plain language of the arbitration clause. See id. at 6–9.
According to Jackson, a decision in favor of Rent-A-Center could hurt the credibility of the arbitration system in the United States. See Brief for Respondent at 8–9. If RAC prevails, the stronger party could easily coerce the weaker party into accepting an arbitration clause. See id. at 7–8. Jackson worries that this could lead to an impossible situation where efforts to escape arbitration would themselves require arbitration. See id. at 12. Jackson also contends that in the worst case, even forged arbitration clauses would result in cases going exclusively to arbitrators, if the language of the clause is clear enough. See id. at 12–13. According to Jackson, a decision in favor of RAC would erode the public’s faith in the legitimacy of the arbitration process as a “fair and just alternative” to the court system. See id. at 9. As Jackson explains, courts help ensure that arbitration is fair by striking down unconscionable provisions in arbitration agreements, such as provisions that impose prohibitive costs on one party or give one party the exclusive power to choose the arbitrator. See id. at 37–39. Jackson claims that such judicial oversight is necessary because arbitrators have a financial incentive to rule against challenges to the validity of an arbitration agreement—no arbitration agreement means no fees for the arbitrator. See id. at 50.
Also, while district courts have the opportunity to review arbitrators’ decisions, Jackson maintains that such post-arbitration review does not provide enough protection for employees. See id. at 47. Because the arbitration process is often expensive and time-consuming, Jackson claims that requiring employees to go through arbitration before allowing them to challenge the arbitration agreement would deter most employees from bringing any claims against their employers at all. See id. at 45–46. Moreover, district courts are able to overturn arbitrators’ decisions under only very narrow circumstances, for example, where an arbitration award “was procured by corruption, fraud, or undue means.” See id. at 47–48 (citing 9 U.S.C. §10).
According to RAC, a decision for Jackson would render the FAA meaningless and render many contracts made in reliance of judicial deference to arbitration agreements uncertain. See Brief for Petitioner at 12–13. Even if the parties explicitly agreed to have validity determined by an arbitrator, the mere claim that an arbitration clause is unconscionable or invalid would automatically invalidate an agreement to arbitrate validity. See id. at 12–13, 27. RAC fears that this would create a hurdle for arbitration clauses that does not exist in Nevada contract law. See id. at 30–31. Nevada law generally follows the objective approach, which means only the terms that are objectively in a written agreement, signed by the parties, matter. See id. Under Jackson’s approach, suddenly one party’s subjective impression would matter more than the objective formation of the contract or arbitration agreement. See id. RAC is concerned that this could destroy arbitration and require frequent interlocutory action by courts. See id. at 36.
The Equal Employment Advisory Council (“EEAC”) is also concerned that a decision in favor of Jackson would destroy the benefits of arbitration and require parties to litigate the question of whether they need to litigate. See Brief of Amicus Curiae Equal Employment Advisory Council (“EEAC”) in Support of Petitioner at 6–7. The EEAC also worries that every single arbitration case might have to be scrutinized by courts and that arbitration would no longer be favored over litigation. See id. at 19–20. This in turn would destroy the benefits of quick, efficient, and less costly arbitration. See id. at 20–21. Another amicus stressed that such a decision would simply make unconscionability an unwarranted exception to the FAA and the general preference for arbitration. See Brief of Amicus Curiae Chamber of Commerce of the United States of America in Support of Petitioner at 3–4.
The Supreme Court’s decision regarding whether a district court must decide any unconscionability challenge to an arbitration agreement before sending the parties to arbitration is centered upon analysis of §2 of the Federal Arbitration Act (“FAA”). See 9 U.S.C. §2. FAA §2 states that an arbitration agreement shall be “valid, irrevocable, and enforceable save upon grounds as exist at law or equity for the revocation of any contract.” See Brief for Respondent, Antonio Jackson at 11 (quoting 9 U.S.C. §2). In this case, Respondent Antonio Jackson argues that FAA §2 prevents parties from agreeing to arbitrate unconscionability challenges to the arbitration agreement. See id. at 10. Instead, Jackson claims that district courts must resolve any unconscionability challenge to an arbitration agreement before enforcing the agreement because an unconscionability claim constitutes “grounds as exist at law” under FAA §2. See id. However, Petitioner Rent-A-Center, West Inc. (“RAC”) claims that, where the parties to an arbitration agreement have expressly agreed to arbitrate enforceability of the contract, that agreement should be honored. See Brief for Petitioner, Rent-A-Center, West Inc. at 12.
Should courts allow parties to agree to arbitrate unconscionability challenges to an arbitration agreement?
According to Jackson, a district court must determine whether an arbitration agreement satisfies §2 of the FAA before the agreement to arbitrate can be enforced. See Brief for Respondent at 11. Jackson claims that one of the basic requirements that §2 sets out is that an arbitration agreement must not be void based upon state contract law claims. See id. Because a claim of unconscionability implicates this requirement, Jackson argues that a district court must therefore decide upon an unconscionability claim before sending the parties to arbitration. See id.
Furthermore, Jackson finds support for his argument in §4 of the FAA, which states: that, “if the making of the arbitration agreement or the failure, neglect or refusal to perform the same be in issue, the court shall proceed summarily to the trial thereof.” See Brief for Respondent at 16 (citing 9 U.S.C. §4). As Jackson explains, the Court has held that a contract defense, such as fraud, which is brought against an arbitration agreement constitutes a challenge to “the making of the arbitration agreement” under §4 of the FAA. See id. at 19 (citing Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395 (1967)). Jackson reasons that, because unconscionability is also a contract defense, an unconscionability claim would also implicate §4 of the FAA and necessarily require district court review before enforcement of the arbitration agreement. See id. at 20.
Finally, Jackson analogizes the treatment of arbitration agreements with the treatment of forum-selection clauses (a type of contract provision in which parties agree to litigate in a specified forum). See Brief for Respondent at 31. According to Jackson, the Court has held that, when a forum-selection clause is challenged, a non-forum court must first determine the validity of the clause before allowing the parties to proceed to the specified forum. See id. at 31–32. Jackson argues that district courts should similarly decide challenges to the validity of an arbitration agreement before enforcing such an agreement. See id. at 34. Otherwise, Jackson maintains that the Court would render arbitration agreements more easily enforceable than other types of contract provisions. See id.
RAC concedes that generally, a district court would determine a claim of unconscionability before enforcing an arbitration agreement if the agreement did not include any provisions on the issue. See Brief for Petitioner at 22. However, RAC argues that district courts are not required to determine the “gateway” question of whether an arbitration agreement is valid where the parties have clearly given arbitrators the power to resolve this question. See id. at 21. As RAC explains, the Court held in AT&T that, “[u]nless the parties clearly and unmistakably provided otherwise, the question of whether the parties agreed to arbitrate is to be decided by the court, not the arbitrator.” See id. at 23 (citing AT&T Technologies, Inc. v. Communications Workers, 475 U.S. 643 (1986)). RAC argues that AT&T thus establishes that parties have the power to give arbitrators the authority to determine the validity of arbitration agreements so long as the parties clearly and unmistakably agree to do so. See id.
Moreover, RAC explains that the Court held in First Options that district courts should apply state contract law principles to determine whether parties have clearly and unmistakably agreed to give an arbitrator authority to determine enforceability issues. See Brief for Petitioner at 23 (citing First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938 (1995)). In this case, applicable state contract law requires courts to consider whether parties have objectively assented to form a contract when determining whether a contract has indeed been formed. See id. at 31. For example, the parties’ signatures on a written agreement would be considered objective assent, but the parties’ intentions when signing the agreement would be considered subjective, not objective assent. See id. Applying this standard, RAC asserts that the lower courts in this case have already determined that the language of the arbitration agreement would give the arbitrator authority to decide unconscionability challenges. See id. at 24. Thus, because Jackson has signed the arbitration agreement and does not dispute the agreement’s language, RAC maintains that Jackson has clearly and unmistakably agreed to give arbitrators the authority to determine any unconscionability challenges, regardless of whether Jackson “meaningfully assented” when he signed the agreement. See id. at 24, 32.
Finally, RAC points out that several circuits have enforced agreements granting arbitrators power to determine the validity of the arbitration agreement, even where a party has challenged the agreement with an unconscionability claim. See Brief for Petitioner at 27. According to RAC, the First, Eighth, and Eleventh Circuit Courts of Appeals have all decided contrary to the Ninth Circuit’s decision in this case. See id. at 27–28.
Are arbitrators capable of deciding unconscionability claims?
Jackson argues that giving arbitrators the authority to decide unconscionability challenges to arbitration agreements will “endanger the legitimacy of arbitration.” See Brief for Respondent at 35. However, RAC argues that arbitrators are fully capable of deciding unconscionability challenges to an arbitration agreement. See Brief for Petitioner at 34. First, RAC points out that the Court has repeatedly ruled against a presumption that “parties . . . will be unable or unwilling to retain competent, conscientious, and impartial arbitrators.” Id. at 37. Moreover, RAC maintains that, if one were to accept Jackson’s argument, then arbitrators could not be trusted to make any definitive determination because arbitrators would have a financial interest in prolonging arbitration. See id. at 35. Similarly, RAC reasons that arbitrators could not be trusted to make rulings during the arbitration process on the scope of discovery and admissibility of witnesses, because arbitrators would always rule in favor of making the process more complex and thus, more time-consuming. See id. at 36. RAC further argues that if one were to accept this characterization of arbitrators, then courts would be forced to frequently intervene upon the arbitration process, thus destroying the purpose of arbitration, which is to provide a speedier and less costly alternative to litigation. See id. at 36.
In this case, the Supreme Court will decide whether district courts must, in all cases, decide upon an unconscionability challenge to an arbitration agreement before enforcing the arbitration agreement. Respondent Antonio Jackson argues that district courts must determine any unconscionability claim because §2 of the Federal Arbitration Act requires that a court rule upon the validity of an arbitration agreement before enforcing the agreement. However, Petitioner Rent-A-Center, West, Inc. claims that parties are able to grant arbitrators the authority to determine the validity of an arbitration agreement. Accordingly, RAC argues that, because the language of the arbitration agreement in this case grants the arbitrator such authority, the arbitrator should decide the unconscionability claim here. The Supreme Court’s decision will affect the permissible scope of arbitration agreements and the degree to which a court may become involved.
Edited by: James McConnell
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