On September 23, 2009 we reported on the Ninth Circuit’s decision in Jackson v. Rent-A-Center West, Inc., ___ F.3d ___, slip op. (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 Rent-a-Center West’s appeal. (Disputing post here)
As we discussed nearly four months ago Rent-A-Center concerns an important “who” question that arises in unconscionability cases: When the parties clearly and unmistakably agree that the arbitrators will decide arbitrability questions, who gets to decide whether the arbitration clause is unenforceable on unconscionability grounds?
We think the question answers itself. But the Ninth Circuit, in a 2-1 decision, held that the court decides the unconscionability question irrespective of the parties clearly expressed intent to the contrary. We argued that the Ninth Circuit should have applied a severability analysis of sorts, and referred the unconscionability question to the arbitrators. The “Analysis” section of our prior post is reprinted in pertinent part below:
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.
. . . .
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.
We shall keep readers apprised of developments as and when they occur. It will be interesting to see how the United States Supreme Court decides this case.
Tags: Federal Arbitration Act, Jackson v. Rent-a-Center, Ninth Circuit, Section 2, severability, Unconscionability, United States Supreme Court
Phil,
Great analysis of this ongoing topic. We’ll look to you for updates as now two arbitration cases work their way through SCOTUS.
Thanks,
Don
Thanks, Don!
This one should prove pretty interesting. My suspicion is that a majority of the Court will vote for a reversal.
Given that Justice Stephen G. Breyer authored First Options, and given that the Ninth Circuit’s rationale would, if adopted by the Supreme Court, render First Options meaningless in a great number of cases that it was probably intended to govern, I would not be surprised if Justice Breyer were to join his more conservative colleagues in voting for a reversal. But one never knows….
Phil
Phil — Thanks for this analysis, I really liked your analysis that when the parties 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.” Sets out how to look at the issue very clearly. I hope Justice Breyer reads this.
Dan,
Thanks for your very kind comments and support.
Justice Breyer is a brilliant man and a strong supporter of arbitration. I would be honored if one of Justice Breyer’s clerks read this, let alone the Justice himself (or for that matter any member of the Court or any of their clerks)!
This is an exciting Term for arbitration — Keep your eyes on Stolt-Nielsen, this case and Granite Rock.
Phil
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