Supreme Court Holds Arbitrator, Not Court, Decides Whether Arbitration Agreement Is Unconscionable Based on Terms of Arbitration Agreement

Supreme Court Holds Arbitrator, Not Court, Decides Whether Arbitration Agreement Is Unconscionable Based on Terms of Arbitration Agreement

In Rent-A-Center, West, Inc. v. Jackson, decided on June 21, 2010, the Supreme Court held that the arbitrator, not the court, decides whether an arbitration agreement is unconscionable where the agreement explicitly assigns that decision to the arbitrator. Under the facts of the case, the plaintiff, Antonio Jackson, had signed an arbitration agreement with his employer, Rent-A-Center, West, Inc., as a condition of his employment. The agreement provided for arbitration of all “past, present or future” claims arising out of the employment relationship. It also provided that the arbitrator would have exclusive authority to resolve any dispute relating to the interpretation, applicability, enforceability, or formation of the agreement, including claims that all or any part of the agreement was void or voidable.

Subsequent to the termination of his employment, Jackson filed an employment discrimination suit against his former employer in the United States District Court for the District of Nevada. Upon motion by the employer, the district court dismissed the proceedings and compelled arbitration pursuant to the clear and unmistakable language in the agreement between the parties. Specifically, the district court found that the agreement provided the arbitrator with the exclusive authority to decide whether the agreement was enforceable. The Ninth Circuit reversed, finding that where “a party challenges an arbitration agreement as unconscionable, and thus asserts that he could not meaningfully assent to the agreement, the threshold question of unconscionability is for the court.”

The Supreme Court reversed the Ninth Circuit’s decision. As an initial matter, the Supreme Court found that the Federal Arbitration Act (FAA) reflects the fundamental principle that arbitration is a matter of contract. Therefore, the Court reasoned that arbitration agreements should be treated as all other contracts and the FAA requires courts to enforce them according to their terms, only invalidating them by “generally applicable contract defenses, such as fraud, duress, or unconscionability.” Reviewing the agreement before it, the Court found several provisions requiring arbitration to settle any controversies between the parties. The Court specifically looked at the provision requiring arbitration of all “past, present or future” claims arising out of the employment relationship between the parties, and the provision providing the arbitrator with exclusive authority to resolve any disputes relating to the enforceability of the agreement. Finding that parties can agree to arbitrate questions of arbitrability, the Court reasoned that an arbitration agreement is not different from other contracts and the additional agreement regarding such “gateway issues” is valid under the FAA “save upon such grounds as exist at law or in equity for the revocation of any contract.”

Additionally, the Court reasoned that the arbitration provision is severable from the remainder of the contract, regardless of the type or manner of the underlying contract. As such, unless a party challenges the validity of the arbitration provision itself, the question is one for the arbitrator, not the courts to decide. Accordingly, the Court stated, “. . . we nonetheless require the basis of the challenge to be directed specifically to the agreement to arbitrate before the court will intervene.” Because Jackson did not specifically challenge the arbitration provision, the Court ruled that it must be treated as valid pursuant to the FAA, and as such, must enforce it thereby leaving any challenge as to the validity of the agreement as a whole for the arbitrator.

Rent-A-Center is a good reminder that courts will generally follow the terms of an arbitration agreement regarding whether a court or the arbitrator has the authority to arbitrate specific provisions in the contract and other issues. Employers should keep this in mind when drafting and entering into arbitration agreements with employees.