WHICH COMES FIRST – THE CHICKEN OR THE EGG?
In just another of a long line of labor and employment related decisions issued recently, the U.S. Supreme Court provided some guidance — and a strong warning — to those seeking to invalidate arbitration agreements. Highlighting the importance of procedural nuances and the careful framing of the argument and issues, the Court in Rent-A-Center v. Jackson addressed the issue of whether a “district court may decide a claim that an arbitration agreement is unconscionable, where the agreement explicitly assigns that decision to the arbitrator.”
Antonio Jackson, a former Rent-A-Center (“RAC”) employee filed an employment discrimination suit against RAC in U.S. District Court alleging violation of federal law. In response to the Complaint, RAC filed a Motion to Dismiss or Stay alleging that Jackson and RAC had entered into a Mutual Agreement to Arbitrate as a condition of Jackson’s employment. The agreement in question contained what is commonly referred to as a “delegation provision” whereby the arbitrator – as opposed to a court — was charged with determining threshold or gateway issues such as whether a particular clause in an arbitration agreement is enforceable under the Federal Arbitration Act (“FAA”).
In opposing RAC’s Motion to Dismiss, Jackson argued that the Agreement as a whole was unconscionable. The District Court disagreed, dismissing the case and ordering that the matters to be decided, including the threshold issue of arbitrability, were for the arbitrator. On appeal, the Ninth Circuit Court of Appeals – which generally covers California – reversed in relevant part. In doing so, it acknowledged that Jackson was not challenging the validity of the delegation provision, but reasoned that Jackson’s contention that the entire agreement was unconscionable was indeed an issue for the court to decide (rather than the arbitrator).
Not so fast, said the United States Supreme Court. In reversing the Ninth Circuit, the Court noted the key distinction between both types of challenges under the FAA — one which challenges the “validity of the agreement to arbitrate” and the other which challenges the enforceability of the agreement “as a whole.” The Court noted that Jackson did not challenge the validity of the parties’ threshold agreement to arbitrate and held that, since Jackson failed to challenge the delegation provision, the gateway issue of whether the agreement to arbitrate was enforceable in the first place should be decided by the arbitrator.
In so ruling, the Court stuck to basics, recognizing that arbitration is a matter of contract, and reinforcing that there’s a difference between threshold issues of enforceability – which come first – and the actual, underlying merits of the rest of the arbitration agreement. Specifically, if the parties clearly and unambiguously agree that the arbitrator has the authority to determine the issue of whether the agreement to arbitrate is itself enforceable, a court cannot intervene.
- This case is a reminder to employers who wish to rely on arbitration as an alternative to the litigation process that it is imperative the language used in arbitration agreements is clear, both with respect to threshold jurisdictional questions, as well as on the merits of the subject matter covered by the agreement.