On Monday, the United States Supreme Court issued another important decision regarding contractual agreements to arbitrate, holding that an arbitrator, not a court, should decide whether the parties' agreement to arbitrate is enforceable, whenever the parties have delegated that question to the arbitrator. Under this ruling, a court may consider the validity of an agreement -- even when challenged as "unconscionable" under state law -- only when a party narrowly challenges the delegation clause and not the entire agreement. Rent-A-Center, West, Inc. v. Jackson, No. 09-497 (June 21, 2010). The 5-4 decision, delivered by Justice Antonin Scalia, precludes one line of challenges to arbitration agreements that had been permitted by some courts, including the Ninth Circuit.
Challenge To The "Entire" Agreement
The Supreme Court reasoned that if an agreement delegates the decision of enforceability to an arbitrator, then the arbitrator, not the court, should decide that question. Importantly, the Court construed the plaintiff's challenge under Section 2 of the Federal Arbitration Act ("FAA") as a challenge to the validity of the "entire agreement" at issue since he complained of the "unconscionability" of the agreement to arbitrate – and did not limit his challenge only to the specific clause that delegated to the arbitrator the enforceability determination. The Court qualified its holding, stating that if a plaintiff specifically challenges a clause such as the "delegation clause" -- and does not challenge the "entire agreement" -- then, under the FAA, a court, and not an arbitrator, should rule upon that dispute. The Court's opinion left unanswered, however, in what circumstances a lower court could ever appropriately identify a challenge as directed at a delegation clause only, particularly when the charge is that the contract is "unconscionable." The upshot of this opinion is that it will be harder for those who wish to challenge agreements to arbitrate to frame a complaint that could properly be heard in court under the FAA.
Drafting Arbitration Agreements
The agreement at issue in Rent-A-Center contained a delegation clause that specifically granted to the arbitrator the "exclusive authority" to resolve any dispute relating to the enforceability of the employment agreement, including any claim that all or part of the agreement was void or voidable. That clause was both further-reaching and more specific than clauses typically granting an arbitrator the authority to resolve "all disputes" arising out of the agreement. Thus, drafters of agreements containing arbitration provisions should consider tailoring a delegation clause like that in Rent-A-Center to encourage a prompt, efficient resolution of challenges to agreements to arbitrate. Drafters also should consider indicating that the agreement to arbitrate is governed by the FAA, which, according to the Supreme Court, establishes the two types of challenges (clause-specific and to the "entire agreement") that, in turn, determine whether a court or arbitrator will decide a threshold enforceability question.
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