Supreme Court Observations: Rent-a-Center v. Jackson, Impact on Arbitration

Guest Commentary

Donald Falk & Archis Parasharami, Mayer Brown LLP

Some parties—usually employees, or consumers represented by class-action lawyers—refuse to arbitrate disputes in accordance with their agreements and instead force the other party to ask a court to compel arbitration.  The resisting consumer or employee often argues that the arbitration agreement is unenforceable because it was imposed by a business with superior bargaining power and contains provisions that are so unfair as to be unconscionable.  Although the vast majority of these arguments are considered by courts, some arbitration agreements call for an arbitrator to decide whether the arbitration agreement is valid and enforceable—including whether the agreement is unconscionable.  In Rent-A-Center, West, Inc. v. Jackson, No. 09-497 (June 21, 2010), the Supreme Court clarified how and when such provisions may be enforced.

In an opinion by Justice Scalia, the Court held by a 5-4 margin that a provision delegating to the arbitrator the determination of the enforceability of the arbitration agreement may be enforced if the text of the agreement makes the delegation in clear and unmistakable terms.  In such circumstances, a court may not decide whether either the entire contract or the arbitration agreement as a whole is unconscionable.  Rather, the arbitrator must decide this challenge to his own authority unless the resisting party contends, and shows, that the delegation of this issue to the arbitrator is itself unconscionable.

The Rent-A-Center decision applies federal arbitration law correctly because it reaffirms the obligation of courts to enforce arbitration agreements according to the intentions of the parties as reflected in the agreement’s terms, even in the face of contrary state policy or judicial sensibilities.  That principle applies even when a party contends that the arbitration agreement is so unfair that it would not be enforced under generally applicable principles of contract law, and thus falls within the explicit exception to Section 2 of the Federal Arbitration Act, which generally mandates enforcing arbitration agreements. 

But Rent-A-Center does not completely eliminate the courts’ role in determining these issues, even when the contract expressly reserves them for the arbitrator.  The Court made clear that an enforceability challenge still must be decided by a court in certain circumstances:    

If the challenge is directed only at the enforceability of the arbitration provision, the court decides the issue unless it has been clearly and unmistakably delegated to the arbitrator.

Even then, if the party specifically challenges the enforceability of the clause delegating authority to the arbitrator, then the court may decide that narrow issue even if the delegation appears in clear and unmistakable terms. 

Under Rent-A-Center, it seems clear that a judge, not an arbitrator, could decide whether the delegation was unconscionable because it effectively blocked access to a fair resolution of the issue by imposing excessive fees, requiring travel to a distant forum, or specifying an arbitrator biased against the objecting party.  Although Justice Stevens’s dissenting opinion chided the majority for establishing a new pleading rule, there is little question that the decision effectively sets out a road map for parties wishing to have enforceability determined by a court despite an express delegation clause. 

For that reason, and because most businesses prefer to have gateway issues decided by a court, the Rent-A-Center decision is likely to have limited practical effect.