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Rent-A-Center v. Jackson: Delegation of Unconscionability Challenges to Arbitrators

Commercial Litigation Alert Brian A. Howie

A recent decision from the United States Supreme Court (the "Court") confirms that, when it comes to challenging the enforceability of arbitration agreements in court, precision is critical. In Rent-A-Center v. Jackson, No. 09-497 (decided June 21, 2010), the Court resolved the question of whether a district court may decide a claim that an arbitration agreement is unconscionable, where the agreement in question expressly delegates that decision to the arbitrator. The Court's answer? It depends on what is being challenged as unconscionable. If the entire agreement is challenged, then the arbitrator decides the unconscionability question; however, if only the specific provision delegating enforceability questions to the arbitrator is challenged, then the court decides the unconscionability question.

Jackson, a former employee of Rent-A-Center, filed an employment discrimination claim in a Nevada federal court against his former employer. Rent-A-Center moved to compel arbitration based on the fact that Jackson had signed, as a condition of his employment, a Mutual Agreement to Arbitrate Claims ("Arbitration Agreement") which provided for arbitration of all disputes arising out of Jackson's employment with Rent-A-Center. One specific clause within the Arbitration Agreement (the "delegation provision") provided that the arbitrator, and not a court, had exclusive authority to resolve any dispute over the enforceability of "all or any part of" the Arbitration Agreement. Jackson argued that the Arbitration Agreement was unenforceable because it was unconscionable under Nevada law. The district court interpreted that argument as a challenge to the Arbitration Agreement as a whole and, relying on prior Supreme Court precedent, ruled that such challenges were to be decided by the arbitrator. The Ninth Circuit reversed the ruling on that issue.

The Supreme Court reversed in a 5-4 ruling. The majority noted that Section 2 of the Federal Arbitration Act ("FAA") puts arbitration agreements on equal footing with other contracts and requires courts to enforce them according to their terms. Such agreements may, like other contracts, be invalidated by generally applicable contract defenses. The Court went on to explain that there are two types of validity challenges under Section 2 of the FAA - those specifically aimed at the enforceability of the agreement to arbitrate and those challenging the contract as a whole. Based on the Court's prior decisions (starting with Prima Paint Corp. v. Flood & Conklin Manufacturing), only the first type of challenge (to the agreement to arbitrate) is to be decided by the court; the second type of challenge (to the contract as a whole or to a different provision in the contract) is to be decided by the arbitrator. The basis for this distinction is that Section 2 makes arbitration provisions severable from the remainder of a contract; thus, a challenge to the contract as a whole or to a different provision in the contract (other than the arbitration agreement) "does not prevent a court from enforcing a specific agreement to arbitrate."

The Court determined that Rent-A-Center sought to enforce the delegation provision and that Jackson's unconscionability challenge was not specifically to that provision but was, instead, a more generalized challenge to the Arbitration Agreement as a whole. Thus, the unconscionability question was to be decided by the arbitrator. The Court acknowledged that in the Prima Paint line of decisions, the agreement to arbitrate always had been part of a larger contract; here, the "underlying contract is itself an arbitration agreement." That factual distinction was irrelevant, the Court explained, because the severability rule does not depend on the substance of the remainder of the contract. Section 2 operates on the specific written provision to settle (through arbitration) a controversy that the party seeks to enforce. Unless that specific provision is challenged, the court must treat it as valid under Section 2.

The Court's ruling in Rent-A-Center is significant for two reasons. First, the decision confirms that arbitration agreements can assign gateway questions of enforceability to the arbitrator. The Court clearly indicated that such delegation provisions can be enforced, although if a delegation provision is specifically challenged as unenforceable, the Court will resolve that challenge before compelling the parties to arbitrate. Second, the decision makes clear that precision in challenging an arbitration agreement is critical. After Rent-A-Center, it is not enough simply to claim that the "agreement to arbitrate" is unenforceable. A party opposing arbitration must challenge the precise "agreement to arbitrate" that is sought to be enforced. Thus, it is critical that a party opposing arbitration take great care in crafting its opposition, in order to avoid the same fate as Jackson suffered in this case.

Any persons with questions about the Rent-A-Center decision or about provisions of existing arbitration agreements should contact their local Quarles and Brady attorney.

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