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Who Decides Whether an Arbitration Agreement Is Unconscionable?

By Manjit S. Gill

The Supreme Court is due to hear oral argument on April 26, 2010, in Jackson v. Rent-a-Center West, Inc.[1] Jackson addresses the question of who determines whether an arbitration agreement is unconscionable when the agreement itself clearly charges arbitrators with the responsibility to resolve that question.


The plaintiff, Jackson, was an employee of defendant Rent-A-Center West, Inc. Jackson sued his employer in federal court, alleging racial discrimination. His employer moved to dismiss and compel arbitration, relying on the arbitration agreement signed by plaintiff when he first started working for defendant. The agreement specifically listed claims for discrimination in the categories of matters subject to arbitration. The agreement further provided as follows:


The Arbitrator, and not any federal, state, or local court or agency, shall have exclusive authority to resolve any dispute relating to the interpretation, applicability, enforceability or formation of this Agreement including, but not limited to any claim that all or any part of this Agreement is void or voidable.


As the employee wanted to pursue this matter in court, he understandably responded to the motion to compel arbitration by arguing that the arbitration agreement was unconscionable substantively (because of provisions on discovery and the payment of the arbitrator’s fee) and procedurally (because he argued this arbitration agreement was contained in a standard form, non-negotiable contract).


The district court granted the employer's motion to dismiss the lawsuit and compel arbitration, finding that the arbitration agreement "clearly and unmistakenly provides the arbitrator with the exclusive authority to decide whether the Agreement to Arbitrate is enforceable" and further held that "the question of arbitrability is for the arbitrator."


The Ninth Circuit reversed on appeal. The Ninth Circuit's analysis was twofold. First, the court looked both at the Supreme Court's decision in Buckeye Check Cashing, Inc. v. Cardegna[2] and its own precedent in Nagrampa v. MailCoups, Inc.,[3] and concluded that when a party is only challenging the validity of the arbitration agreement, but not otherwise challenging the contract itself, it is the province of the court to resolve issues regarding the arbitration agreement's enforceability. Because arbitration is itself a matter of contract, the Ninth Circuit held that an unconscionability challenge to the agreement to arbitrate (a challenge to the enforceability of the agreement as a matter of contract) is not to be decided by the arbitrator.


Second, the court rejected the employer's argument that the arbitrator should decide unconscionability-based challenges, because the agreement itself provides for the arbitrators to make such decisions. The employer relied on the Supreme Court's decision in First Options of Chicago, Inc. v. Kaplan,[4] in which the Court held that "[c]ourts should not assume that the parties agreed to arbitrate arbitrability unless there is 'clea[r] and unmistakabl[e] evidence that they did so.'"[5] However, the Ninth Circuit interpreted First Options as not automatically placing a rubber stamp of approval on all agreements that assign responsibility for resolution of challenges to arbitrability to the arbitrators themselves. Instead, the Ninth Circuit insisted that ordinary contract law principles of interpretation must be followed to determine if the parties truly agreed for arbitrators to make that determination when the issue is unconscionability, and that issue must at the first instance be resolved by the courts.


The Ninth Circuit further distinguished decisions from a number of other circuits that enforced arbitration agreements that assigned the question of arbitrability to the arbitrator by holding that in those cases, the parties to the agreements were of equal bargaining power and there was no question that there was a meaningful arbitration agreement in place.[6]


What should we expect from the Supreme Court? It is by no means a certainty that the Supreme Court will reflexively affirm the Ninth Circuit, particularly given the arguable conflict between the Ninth Circuit's decision and decisions from a number of other circuits, and the Ninth Circuit's ruling being heavily reliant on its interpretation of the reach of a number of Supreme Court decisions.


If we are expecting a pro-business ruling, we can await the eventual reversal of the Ninth Circuit's decision, followed by a marked uptick in arbitration agreements from a number of companies stating expressly and unequivocally that challenges to arbitrability will be resolved by the arbitrators themselves. Or, alternatively, we may expect a middle ground, in which the Court will further break down the range of potential challenges to an arbitration agreement and leave some for the courts to resolve, while carving out another set for arbitrators to continue to resolve. Until then, we shall await further word from the Supreme Court.



Keywords: alternative dispute resolution, ADR, arbitration agreement, Jackson v. Rent-a-Center


Manjit S. Gill is an attorney Christopher & Weisberg P.A. in Fort Lauderdale, Florida.


This article appears in the Winter 2010 issue of Conflict Management, from the Alternative Dispute Resolution Committee.



 

Endnotes


  1. ___ F.3d ___, slip op. (9th Cir. Sept. 9, 2009), petition for cert. granted, Jan. 15, 2010 (No. 09-497).
  2. 546 U.S. 440, 446 (2006).
  3. 469 F.3d 1257, 1264 (9th Cir. 2006) (en banc).
  4. 514 U.S. 938 (1995).
  5. Id. at 944, quoting AT&T Techs, Inc. v. Comm’ns Workers, 475 U.S. 643, 649 (1986).
  6. See, e.g., Terminix Int’l Co., LP v. Palmer Ranch Ltd. P’ship, 432 F.3d 1327, 1333 (11th Cir. 2005); Contec Corp. v. Remote Solution Co., 398 F.3d 205, 208, 210–11 (2d Cir. 2005); Apollo Computer, Inc. v. Berg, 886 F.2d 469, 472–74 (1st Cir. 1989).

 
  • April 8, 2010 – Arbitration in consumer, employment, nursing home and similar contracts remains and abuse that has gotten way out of hand. What works in a commercial setting for parties of equal bargaining power does not work when unsophisticated individuals are pitted against sophisticated repeat players who make the rules ahead of time. Since the Supreme Court has been deaf to these concerns, legislation needs to remove these classes of contracts from arbitration.

 

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