On June 21, 2010, in a 5-4 decision, the Supreme Court enforced a provision in an arbitration agreement that required the arbitrator to decide the question of whether the agreement was unconscionable. Rent-A-Center, West, Inc. v. Jackson, ___ U.S. ___, 2010 WL 2471058 (2010). Rent-A Center was a discrimination suit. The employer moved to compel arbitration, based on a “Mutual Agreement to Arbitrate Claims” that the plaintiff signed as a condition of his employment.
The plaintiff opposed arbitration, asserting that the arbitration agreement was unconscionable and therefore unenforceable. The employer responded that the court could not decide that issue of unconscionability because the arbitration agreement gave the arbitrator “exclusive authority to resolve any dispute relating to the interpretation, applicability, enforceability or formation of this Agreement….”
The Supreme Court, in an opinion by Justice Scalia, began with the fundamental principle of the Federal Arbitration Act: Agreements to arbitrate are as enforceable as any other contract. The threshold issue for any motion to compel arbitration, therefore, is whether a valid agreement to arbitrate exists. The Court recited its earlier cases distinguishing between two types of challenges to the validity of an arbitration agreement. If a party challenges specifically the validity of the agreement to arbitrate, a court must rule on such a challenge and determine that a valid agreement to arbitrate exists before compelling arbitration. A party’s challenge to the validity of the contract as a whole, however, does not prevent a court from enforcing a specific agreement to arbitrate contained within the contract, leaving the arbitrator to decide the question of whether the entire contract is valid. 2010 WL 2471058 at *5. See also Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440 (2006); Prima Paint Corp. v. Flood & Conklin Mfg. Co., 399 U.S. 395 (1967). Under this “severability” rule, a court severs an agreement to arbitrate from the rest of the contract for purposes of assessing the arbitration agreement’s validity.
In Rent-A-Center, plaintiff's pleadings challenged “the entire agreement” and contended “the arbitration agreement as a whole” was unconscionable. It did not matter to Justice Scalia that the “entire agreement” plaintiff challenged was nothing but an arbitration agreement. Faced with a challenge to the validity of the entire contract, the Court held that the district court should have enforced the not-specifically-challenged provision within the contract that required the arbitrator to rule on plaintiff’s allegation that the entire agreement was unconscionable.
Justice Stevens wrote a vigorous dissent. He expressed disagreement with the severability rule in the first instance, but concluded that the majority misapplied the rule in any event. In Justice Stevens’ view, the fact that the entire contract was an arbitration agreement was crucial because it meant plaintiff's challenge to the validity of the entire contract was a challenge specifically to the validity of the arbitration agreement. Justice Stevens argued that the majority’s rationale adds “infinite layers of severability,” under which the party resisting arbitration must plead the unenforceability of the particular clause that delegates to the arbitrator the power to rule on a challenge to arbitration. In Justice Stevens’ view, this created an unreasonable obstacle to a party who was clearly attacking the validity of an agreement to arbitrate any issue, including issues of arbitrability.
Rent-A-Center is important in that it reflects the Supreme Court’s continued willingness to enforce arbitration agreements as they are written. Because most arbitration agreements are drafted by companies that specifically want arbitration, those companies can look at their own drafting processes as opportunities to create the precise framework they want for resolving disputes. Including in the arbitration agreement a “delegation” provision like the one in Rent-A-Center can be a useful tool for a business to increase the odds that its intention to arbitrate disputes will be enforced.