Legal Commentary

Those who are interested in contract law, arbitration, labor & employment law, and federal courts should check out the oral argument for Rent-A-Center, West v. Jackson.  The quote above is from Robert Friedman, counsel for Rent-A-Center, and as a Contracts professor I enjoyed the sentiment.  But ultimately Rent-A-Center's argument hinges on a effort to separate unconscionability into two different categories -- a separation that has no basis in common law or statute.

The question before the Court is "Is the district court required in all cases to determine claims that an arbitration agreement subject to the Federal Arbitration Act (FAA) is unconscionable, even when the parties to the contract have clearly and unmistakably assigned this 'gateway' issue to the arbitrator for decision?"  The case involves a Sec. 1981 racial discrimination claim brought by employee Antonio Jackson against Rent-A-Center.  Jackson signed an arbitration agreement which stated:

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.

In the opinion below, the Ninth Circuit held that courts must decide whether the agreement to arbitrate is unconscionable as a threshold matter, regardless of what the agreement itself says.

In his argument, Friedman conceded -- indeed, he had to concede -- that if an arbitration clause was fraudulently induced, it cannot force the defrauded party into arbitrating whether there was fraud.  He also conceded that some cases of duress -- namely, "a gun to somebody's head" -- would not go to the arbitrator.  What Friedman was trying to distinguish was cases in which no contract was formed (due to fraud or duress) and cases in which there is a contract but it needs reformation in some way.  Some on the court seemed sympathetic to this, looking to draw a line perhaps between "total" and "partial" unconscionability.  As Chief Justice Roberts put it, "[O]nce you get past that [g]ateway question of whether the formation of the contract was not unconscionable, then claims that particular provisions were unconscionable are by definition for the arbitrator to decide."

The First Circuit suggested something along these lines in Awuah v. Coverall N. Am., Inc., 554 F.3d 7 (1st Cir. 2009).  In that case, the First Circuit said that a court could refuse to enforce an arbitration agreement if it were "impossibly burdensome" or provided only "illusory" relief.  But the common law of unconscionability makes no such distinctions between "illusory" contracts and "non-illusory but unconscionable" contracts.  All unconscionable agreements are subject to judicial reform.  And it would make no sense to say that an agreement to arbitrate is possibly unconscionable, but the arbitrator -- whose power derives solely from that possibly unconscionable agreement -- gets to decide whether it is unconscionable and, if so, what the remedy shall be.  As Ian Silverberg, counsel for Jackson, pointed out, Rent-A-Center wants "a rule where certain unconscionability challenges went to the court and other unconscionability challenges didn't go to the court."  There's no basis for this in the FAA.

The Supreme Court has a legitimate concern that some state courts have been pushing the bounds of unconscionability with respect to arbitration agreements. Justice Ginsburg, in particular, seemed to think that the agreement at issue was not all that unconscionable.  But that's the bed the Court made for itself in Gilmer.  Once it said: (a) litigants can agree to arbitrate statutory rights prior to the dispute, but (b) they cannot waive those rights and (c) normal contractual remedies apply, a result like the one in Rent-A-Center was in play.  The Court itself has said: ?Of course, courts should remain attuned to well-supported claims that the agreement to arbitrate resulted from the sort of fraud or overwhelming economic power that would provide grounds ?for the revocation of any contract.? ? Mitsubishi, 473 U.S. at 627 (quoting FAA Sec. 2).  The Ninth Circuit has to be upheld, I believe, unless the Court is going to start mucking around in state common law.  It could make the argument that the Ninth Circuit is disingenuously applying unconscionability law here.  But that's not the question presented.  I don't see any way to give the arbitrator the ability to decide the legitimacy of the agreement to arbitrate itself.

Justice Breyer, author of First Options, summed it up this way:

[First Options says that] unless it's clear and unmistakable that they wanted this matter [--] the matter of whether the arbitration clause itself is unconscionable [--] referred to the arbitrator, whether or not they wanted that referred to the arbitrator has to be clear and unmistakable. And they are claiming no, because . . . the provision that says that is itself a product of unconscionability. . . . [W]hy isn't that the simplest, most direct and four-sentence ground for deciding this case?

If you haven't done so already, check out this great preview post by Aaron Bruhl.  I hope Aaron will weigh in with his thoughts on the argument.