In Rent-A-Center v. Jackson, the Supreme Court held that, under the Federal Arbitration Act (“FAA”), 9 U.S.C. §§ 1 - 16, a district court may not decide a claim that an arbitration agreement is unconscionable when the agreement explicitly assigns that decision to an arbitrator. Rent-A-Center does permit a district court to decide a narrower claim challenging that explicit assignment.
In prior FAA decisions, the Court has held that arbitrators determine challenges to the validity of contracts containing agreements to arbitrate, but courts determine challenges specific to the validity of arbitration agreements within a contract. See, e.g., Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 403-404 (1967). That division follows from the fundamental FAA rule that “an arbitration provision is severable from the remainder of the contract.” Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 445 (2006). In Rent-A-Center, the Court considered how those rules apply to discrete arbitration provisions within a stand-alone agreement to arbitrate. The Court concluded that an arbitration agreement containing its own arbitration provisions — here, a provision to arbitrate disputes over the enforceability of the broader arbitration agreement — should be treated like any other contract containing an arbitration agreement: a court should decide challenges specific to the validity of the discrete arbitration provisions and an arbitrator should decide challenges to the validity of the stand-alone agreement to arbitrate.
The Court indicated that its ruling did not depend on the fact that the broader arbitration agreement in Rent-A-Center was a separate agreement: “Application of the severability rule does not depend on the substance of the remainder of the contract.” In addition, the Court notably limited its holding to challenges to the “validity” of an arbitration agreement as a whole, as distinct from challenges to whether any agreement between the parties was ever concluded.
Import for Future Cases
The Rent-A-Center decision is part of a recent series of Court decisions considering arbitration agreements. Earlier this year, the Supreme Court held in Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 130 S. Ct. 1758 (2010), that it is inconsistent with the FAA to impose a class action on parties to an arbitration proceeding solely for public policy reasons. Rather, the arbitration agreement must demonstrate that the parties agreed, not simply to bilateral arbitration, but to class arbitration.
On May 24, 2010, the Supreme Court granted certiorari in AT&T Mobility LLC v. Concepcion, No. 09-893, another class arbitration case. The Supreme Court will consider whether the FAA preempts states from conditioning the enforcement of an arbitration agreement on the availability of class-wide arbitration when class-wide arbitration is not necessary to ensure that the parties to the arbitration agreement are able to vindicate their claims. The Ninth Circuit held that the class action waiver provision of AT&T’s arbitration agreement was unconscionable under California state law and, therefore, unenforceable. Laster v. AT&T Mobility LLC, 584 F.3d 849 (9th Cir. 2009). Given that the Court reiterated in Stoltz-Nielsen that “the central or primary purpose of the FAA is to ensure that private agreements to arbitrate are enforced according to their terms,” the Court may well conclude that the FAA preempts California state law, such that class-action waiver provisions are enforceable. Stoltz-Nielsen, 130 S. Ct. at 1773.
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This article was originally published by Bingham McCutchen LLP.