Labor & Employment Law

SCOTUS: Arbitrator, not court, decides whether arbitration agreement is unconscionable (5-4)

The US Supreme Court decided Rent-A-Center West v. Jackson (US Supreme Ct 06/21/2010) this morning.

When he was hired, Jackson signed an agreement to arbitrate all future disputes. That agreement provided: "The Arbitrator, and not any federal, state, or local court or agency, shall have exclusive authority to resolve any dispute relating to the interpretation, applicability, enforceability or formation of this Agreement including, but not limited to any claim that all or any part of this Agreement is void or voidable."

Jackson sued under 42 USC Section 1981, claiming race discrimination and retaliation. The trial court granted the employer's motion to dismiss and to compel arbitration. The 9th Circuit (2-1) reversed.

Jackson argued that the arbitration agreement was unconscionable, and that the issue of unconscionability must be decided by a court rather than an arbitrator.

The US Supreme Court held (5-4) that under the Federal Arbitration Act, where an agreement to arbitrate includes an agreement that the arbitrator will determine the enforceability of the agreement, if a party challenges specifically the enforceability of that particular agreement, the district court considers the challenge, but if a party challenges the enforceability of the agreement as a whole, the challenge is for the arbitrator.

The agreement contained two arbitration provisions, one to arbitrate employment disputes, and a second to give the arbitrator exclusive authority to resolve the "gateway" question of whether the agreement is enforceable. The employer sought enforcement of the second provision, which is severable from the rest of the contract. Jackson did not challenge this second provision specifically, so the Court treated his challenge as a challenge to the whole contract. It is well settled that a challenge to the whole contract is an issue to be resolved by the arbitrator rather than the court.

The DISSENT argued that the majority improperly applied the rule of severability. Jackson did challenge the validity of the arbitration agreement and should not have to object to "the particular line in the agreement" that purports to assign the validity issue to the arbitrator.

Full post as published by Arbitration Blog on June 21, 2010 (boomark / email).