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Jackson v. Rent-A-Center West, Inc.: Who Gets to Decide Whether an Arbitration Agreement is Unconscionable when the Parties Clearly and Unmistakably Say the Arbitrators Decide Arbitrability?

September 23rd, 2009 Arbitrability, Unconscionability, United States Court of Appeals for the Ninth Circuit 4 Comments » By Philip J. Loree Jr.

I.            Introduction

We have explained in prior posts the First Options/AT&T Technologies rule that arbitrators get to decide arbitrability when the parties clearly and unmistakably so agree.  (See, e.g., here and here.)  That’s all well and good, but what happens when:  (a)  two parties sign an arbitration agreement which says, among other things, that the arbitrators shall decide any claim, including any claim concerning the applicability, formation or enforceability of the arbitration agreement; and (b) despite that clear and unmistakable agreement to arbitrate arbitrability, one of the parties challenges the arbitration agreement in court on unconscionability grounds?      

That is, for all practical purposes, what happened in Jackson v. Rent-A-Center West, Inc., ___ F.3d ___, slip op. (9th Cir. Sept. 9, 2009) (here).  And the United States Court of Appeals for the Ninth Circuit ruled 2-1 that the court gets to decide the question. 

II.            Background

Rent-A-Center arose out of a stand-alone arbitration agreement signed by  an  employer and the employee. The agreement expressly included discrimination claims among those that were arbitrable.  The agreement also expressly delegated arbitrability questions to the arbitrators: 

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.

The employee brought suit in the United States District Court for the District of Nevada,  alleging race discrimination and retaliation under 42 U.S.C. § 1981.  The Employer moved to dismiss, contending that the parties agreed to arbitrate the employee’s claims.  The employee opposed the motion on the ground that the stand-alone arbitration agreement was unconscionable under state law.  He said that it was substantively unconscionable because it was one-sided as far as the claims coverage and discovery provisions were concerned, and required the parties to share equally the arbitrator’s fee.  He said it was procedurally unconscionable because the contract was a take-it-or-leave-it condition of employment.  The employer argued that the parties had clearly and unmistakably agreed to arbitrate arbitrability, and that the arbitrator must decide the unconscionability issue.

The District Court agreed with the employer, holding that the agreement “’clearly and unmistakenly provides the arbitrator with the exclusive authority to decide whether the Agreement to Arbitrate is enforceable’” and that “’the question of arbitrability is for the arbitrator.’”  Slip op. at 4 (quoting District Court).  The District Court also held that, even were it to decide the merits of the unconscionability challenge, the employee had not shown that the agreement was substantively unconscionable. 

III.            The Ninth Circuit’s Decision

On appeal the Ninth Circuit reversed, and remanded to the District Court to determine whether the coverage and discovery provisions of the agreement were substantively unconscionable.  On the threshold issue of who gets to decide unconscionability, the Court held that “where, as here, 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.”  Slip op. at 11.  The Court said that the employee’s unconscionability challenge concerned not what the arbitration agreement said, but whether he assented to it in the first place:     

Jackson does not dispute that the language of the Agreement clearly assigns the arbitrability determination to the arbitrator. What he does dispute, however, is that he meaningfully agreed to the terms of the form Agreement to Arbitrate, which he contends is procedurally and substantively unconscionable.  Jackson argues that, in light of the parties’ unequal bargaining power, the fact that the Agreement was presented as a non-negotiable condition of his employment, and the absence of any meaningful opportunity to modify the terms of the Agreement, he did not meaningfully assent to the Agreement.

Slip op. at 7-8.  (quotations omitted). 

Noting that the employer argued that the court should limit its inquiry to the language of the contract when determining whether the parties clearly and unmistakably agreed to arbitrate arbitrability, the Court said that was not what the Supreme Court had in mind in First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938 (1995):   

First Options indicates that the presumption—that courts determine whether parties agreed to arbitrate—can only be overcome with “clear and unmistakable evidence” of such an intent. It did not suggest, however, that where arbitration provisions—unlike other contractual provisions—are concerned, clear contractual language is enforceable per se.  Rather, the Court stated that ‘[w]hen deciding whether the parties agreed to arbitrate a certain matter (including arbitrability), courts generally . . . should apply ordinary state-law principles that govern the formation of contracts.”  The Court explained that “[j]ust as the arbitrability of the merits of a dispute depends upon whether the parties agreed to arbitrate that dispute, so the question ‘who has the primary power to decide arbitrability’ turns upon what the parties agreed about that matter.” First Options, then, directs that as a threshold matter the court must decide—by applying “ordinary state-law principles”—whether the parties agreed to arbitrate arbitrability.

Slip op. at 8-9  (quoting First Options, 514 U.S. at 943 & 944 (emphasis added by Ninth Circuit)) (citations omitted). 

On the merits, the Court noted that Nevada law required that a person challenging an agreement on unconscionability grounds must demonstrate both substantive and procedural unconscionability.  While there was apparently no dispute that the agreement was procedurally unconscionable – it was nonnegotiable – the District Court considered and rejected only one of the employee’s three arguments for substantive unconscionability:  that the agreement was substantively unconscionable because it required the parties to share arbitration costs equally.  While the Ninth Circuit affirmed this finding, it remanded to the District Court to determine whether the agreement was unconscionable because its (a) claims coverage and (b) discovery provisions were one-sided.  Slip op. at 11-12.

The dissent (Hall, J.) said that “what we have.  .  .  is an arbitration agreement more favorable than most and unconscionability allegations that are thinner than most.”  Slip op. at 14.   According to the dissent, “the majority’s opinion will send this case (not to mention all those run-of-the-mill ones) to a mini-trial in the district court to determine an agreement’s validity based on just the bare allegation of unconscionability, even when the contract language “clearly and unmistakably” chooses a different forum for that question.”  Slip op. at 15 (emphasis in original).  This said the dissent “makes it difficult to understand what the Supreme Court meant when it said that, although the general rule gives the threshold question of arbitrability to courts, parties may provide for the arbitrator to decide the question instead if they do so clearly and unmistakably.”  Slip op. at 15 (citation and quotation omitted). 

The dissent concluded that the majority expanded the role of the district court beyond what was envisioned in First Options:  “[T]o the extent the district court has a role to play here, it should certainly be a more limited one than the majority envisions, perhaps permitting courts to remain attuned to well-supported claims of unconscionability or the potential that arbitration might be illusory, while still resolving any doubts as to what the parties agreed in favor of arbitration.”  Slip op. at 16-17 (citations and quotations omitted; emphasis in original). 

IV.            Analysis

There is logic to the rule adopted by the majority in that unconscionability is a state law defense that goes to the enforceability of an agreement.  When a party challenges the enforceability of an arbitration agreement, the court ordinarily decides it – unless the parties clearly and unmistakably agree otherwise.  And while the parties clearly and unmistakably agreed to arbitrate arbitrability,  that agreement was – as is often the case – simply a component of the rest of the arbitration agreement.  If the entire arbitration agreement is unenforceable because of unconscionability, then so too must be the agreement to arbitrate arbitrability. 

The problem with the majority’s logic is that it does not distinguish between the enforceability of the clear and unmistakable agreement to arbitrate arbitrability and the enforceability of the parties’ agreement to arbitrate all other disputes.  The Rent-A-Center parties envisioned that a dispute concerning the enforceability of their agreement to arbitrate all other disputes would be decided by the arbitrators.  That is what the parties’ agreement said, and the United States Supreme Court has said that parties can enter into such agreements, provided they are clear and unmistakable. 

We think courts would better advance the purposes of the Federal Arbitration Act by engaging in a severability analysis of sorts when confronting questions like the one in Rent-A-Center.   When parties agree not only to arbitrate the merits of controversies unrelated to the arbitration clause, but also clearly and unmistakably agree to arbitrate arbitrability, the latter agreement is tantamount to an arbitration agreement within an arbitration agreement.  One agreement concerns who decides disputes concerning the existence, formation or enforceability of the other agreement.  And the other agreement concerns the parties’ obligation to arbitrate all other disputes.  Each should be analyzed separately under Federal Arbitration Act Section 2. 

What the court did in Rent-A-Center was assume that, if any part of the arbitration agreement was unenforceable for any reason, then the entire arbitration agreement – including the clear and unmistakable agreement to arbitrate arbitrability – must fail.  Perhaps ironically, the Court found support for this analysis in the Prima Paint/Buckeye Check Cashing line of cases that hold that an enforceability challenge directed at the contract as a whole – as opposed to the arbitration agreement specifically – must be decided by the arbitrators rather than the court.  Because the challenge here was to a stand-alone arbitration agreement that included a clear and unmistakable agreement to arbitrate arbitrability, the Court simply assumed that Federal Arbitration Act Section 2 required the Court to decide it.  But doing so was inconsistent with the parties’ clearly expressed intent that the arbitrators would decide arbitrability questions, at least arbitrability questions that did not concern the enforceability of the parties’ agreement to arbitrate arbitrability. 

The Court should have limited its inquiry to whether the parties’ agreement to arbitrate arbitrability was substantively unconscionable.  If not, then the Court should have directed that the arbitrators decide the question whether the remainder of the arbitration clause was substantively unconscionable.  Had the Court looked at the problem from that perspective, we believe it would have concluded that the unconscionability defense did not apply to the parties’ clear and unmistakable agreement to arbitrate, and that, accordingly, the arbitrators had to decide whether the challenge to the remainder of the arbitration clause had merit.  

In Rent-A-Center the unconscionability challenge was not directed at the parties’ agreement to arbitrate arbitrability.  Under applicable Nevada law, the employee had to demonstrate both procedural and substantive unconscionability.  Procedural unconcionability addresses the question whether the agreement was a take-it-or leave it proposition — whether the employee basically had no choice but to agree to it as written — while substantive unconscionability addresses whether there are provisions in the contract that are unfair.  Substantive unconscionability is a “no-harm, no foul” requirement; the law may be concerned about enforcing adhesion contracts, but only when they are unfair.

The Court said that a question of the employee’s assent to the arbitration agreement was presented “in light of the parties’ unequal bargaining power, the fact that the Agreement was presented as a non-negotiable condition of his employment, and the absence of any meaningful opportunity to modify the terms of the Agreement.  .  .  . “   Slip op. at 7-8.  Yet  these considerations — if true — merely establish procedural unconscionability, which means the contract was one of adhesion.  But in the absence of a showing that the agreement contains substantively unconscionable terms, that adhesion contract – including the parties’ clear and unmistakable agreement to arbitrate arbitrability —  is fully enforceable under Nevada law.  Thus, the Court’s assumption that these considerations undermined the enforceability of the agreement to arbitrate arbitrability — or even the remainder of the arbitration agreement — was not well grounded. 

Instead, the Court should have considered whether the agreement to arbitrate arbitrability was in and of itself unconscionable.  In Rent-A-Center the substantive unconscionability issue boiled down to this:  were the claims-covered clause and discovery provisions one-sided?   But even if the answer to that question were “yes,” that does not mean the clear and unmistakable agreement to arbitrate arbitrability was unconscionable.   The claims coverage and discovery provisions are not essential elements of the agreement to arbitrate arbitrability, and their alleged unconscionability should therefore not have been treated as undermining the enforceability of that agreement.  

So we think the Court should have enforced the agreement to arbitrate arbitrability by committing to the arbitrators the question whether the parties’ agreement to arbitrate all other claims was unconscionable because it was allegedly one-sided.  Had it done so, it would have given full force and effect to the parties’ clearly expressed intentions, the pro-enforcement policies of Federal Arbitration Act Section 2, and the letter and spirit of First Options.

         

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4 Responses to “Jackson v. Rent-A-Center West, Inc.: Who Gets to Decide Whether an Arbitration Agreement is Unconscionable when the Parties Clearly and Unmistakably Say the Arbitrators Decide Arbitrability?”

  1. […] (9th Cir. Sept. 9, 2009), petition for cert. granted Jan. 15, 2010 (No. 09-497).  (Prior post here)  As reported in Disputing, on January 15, 2010, the United States Supreme Court agreed to hear […]

  2. […] in Rent-a-Center, and will be hearing argument on April 26, 2010.  (See our prior posts here and […]

  3. […] and unmistakably agree to submit arbitrability questions to arbitration.  (See our prior posts here, here and here.)   Granite Rock, which arises under Section 301 of the Labor Management Relations […]

  4. […] unmistakably agree that arbitrators decide arbitrability questions.  (Rent-a-Center is discussed here, here, here and […]