One to Watch: Should an Arbitrator Decide Enforceability?
The U.S. Supreme Court yesterday heard oral argument in Jackson v. Rent-A-Center West, Inc., which poses the question whether the enforceability of an arbitration agreement should be decided by an arbitrator or by a court.
In Jackson, plaintiff Antonio Jackson, a former employee of defendant Rent-A-Center West, sued alleging race discrimination and retaliation. Rent-A-Center moved to dismiss and to compel arbitration, based on the parties' arbitration agreement which provided, among other things, that the arbitrator had exclusive authority to decide any issue related to the "interpretation, applicability, enforceability or formation" of the arbitration agreement. Jackson asserted that the arbitration agreement was unconscionable and therefore unenforceable. The district court granted defendant's motion to dismiss and entered an order compelling arbitration, holding that the issue of enforceability of the arbitration agreement was for the arbitrator to decide. The district court also issued an alternative holding that Jackson had not shown the agreement was substantively unconscionable. Jackson appealed.
The Ninth Circuit reversed, holding that the issue of whether the arbitration agreement was enforceable was for a court, not an arbitrator, to decide. Specifically, the Court held that where "when a party specifically challenges the validity of arbitration provisions within a larger contract, apart from the validity of the contract as a whole, a court decides the threshold question of the enforceability of the arbitration provisions," notwithstanding the fact that the agreement provides that an arbitrator should make that decision. The Ninth Circuit remanded for the Court to consider all of Jackson's arguments that the agreement was unconscionable.
The Supreme Court granted review to consider whether an arbitrator or a court should decide enforceability of an arbitration agreement.
"Arbitration Fairness Act" Still Looming
The Act would expressly invalidate arbitration agreements—retroactively—in employment, consumer or franchise disputes and in any "dispute arising under any statute intended to protect civil rights or to regulate contracts or transactions between parties of unequal bargaining power." Specifically, in the context of a "consumer dispute," broadly defined, the Act would make a "predispute arbitration agreement" invalid and unenforceable. Significantly, the Act would also expressly assign the task of determining the enforceability of arbitration agreements to courts under federal law, not to arbitrators, contrary to a long line of federal cases holding the opposite. Federal courts have long held that attacks on the validity of an entire contract, as distinct from attacks aimed at the arbitration clause, are to be determined by the arbitrator. The Act provides that its "effective date" would be the date of enactment, but also provides that it "shall apply with respect to any dispute or claim that arises on or after such date." This effectively makes the Act retroactive, since it would invalidate predispute arbitration agreements that a party sought to enforce in certain disputes after the Act's effective date.
The Consumer Bankers Association has issued a public letter urging opposition of the Act.
Supreme Court's Term Included Arbitration Preemption Ruling
Preston involved a fee dispute between Alex Ferrer, more commonly known as TV's "Judge Alex," and Los Angeles entertainment attorney Arnold Preston. The fee contract contained a provision providing that the parties would arbitrate “any dispute ... relating to the terms of [the contract] or the breach, validity, or legality thereof ... in accordance with the rules [of the American Arbitration Association].” The Court held that this arbitration provision preempts California law to the extent that it placed primary jurisdiction for the dispute in the California Labor Commission.
Judge Alex asserted that the contract was void because Preston was acting as a "talent agent" under California law without the requisite license from the California Labor Commission. Preston responded that he was merely a "personal manager" and needed no such license. California law vests primary jurisdiction over such license disputes in the California Labor Commission. (Cal. Labor Code § 1700.44.)
The Court has consistently held, however, that "attacks on the validity of an entire contract, as distinct from attacks aimed at the arbitration clause, are within the arbitrator's ken." Analyzing the conflict between state law and the FAA, the Court held that the "procedural proscriptions" of state law "conflict with the FAA's dispute resolution regime" and were therefore preempted. The effect of preemption here was that that the arbitrator would decide the licensing issue, not the Labor Commission.
If California law placed primary jurisdiction for the dispute in state court, there would be little doubt that under the Court's prior rulings, the FAA would preempt. The news from Preston is that the same result obtains where California law would vest primary jurisdiction in an administrative agency.
