January 19, 2010

Sternlight on Rent-a-Center West

By Art Hinshaw

If you’re a reader of this blog, you know that arbitation is a hot legal topic and that the Supremes have handed down several arbitration decisions over the last few years.  Earlier today Sarah told us that cert was recently granted in the Rent-a-Center West case, and she gave us her take.  Below, Professor Jean Sternlight from the Boyd School of Law at UNLV gives us her take of the case.   Professor Sternlight has written extensively on many ADR topics, including several influential arbitration articles, and she’s a co-author on three ADR text books.

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The Supreme Court granted cert a few days ago in what will likely be a very important arbitration case, Rent-a-Center West v. Jackson, 2010 WL 144073 (1/15/09).  The case focuses on whether courts or instead arbitrators should decide unconscionability challenges to arbitration clauses.  In particular the question presented is:  “Is the District Court required in all cases to determine claims that an arbitration agreement subject to the FAA is unconscionable, even where the parties to the contract have  clearly and unmistakably assigned this ‘gateway’ issue to the arbitrator for decision.”

The question, while perhaps seeming narrow and technical, has enormous practical import.  Currently when arbitration clauses (e.g. in the mandatory arbitration context) are challenged as unconscionable the determination of whether or not they are unconscionable (e.g. due to arbitrator bias, high cost, limits on available relief, limits on available class actions, etc.) are typically made by courts.  Challengers to mandatory arbitration have achieved some significant victories through such rulings.  Most people on both sides of the world of mandatory arbitration believe that courts are more likely than arbitrators to find that a particular arbitration clause is unconscionable.  The cynical thought is that some arbitrators, unconsciously if not consciously, will be reluctant to find a clause unconscionable and thus put themselves out of business in the case.  Thus,   if petitioner wins in Jackson we can expect that many (most? all?) companies that do not already have such language will soon revise their arbitration clauses to expressly state  that all arbitrability determinations, including unconscionability, shall be made by arbitrators rather than courts.  Perhaps the companies will have a somewhat more complex clause that leaves the decision as to whether class action prohibitions are unconscionable with the court, because companies believe that for the flip cynical reason to that stated above arbitrators are more likely to void class action prohibitions than are courts.

The Jackson case arose in Nevada, of all places.  An employee of a rental car entity sought to bring a claim for race discrimination.  The company filed a motion to compel arbitration and the employee argued the arbitration clause was unconscionable.  The federal district court rejected the employee’s argument and ordered arbitration, finding that the arbitrator could consider the unconscionability argument.  It relied on purportedly clear language assigning the arbitrability issue to the arbitrator. The 9th Circuit reversed, 2-1, 581 F.3d 912.  It stated that clear contractual language (giving the issue to the arbitrator) is not  always enforceable, and that there was no meaningful assent that the arbitrator would decide such issues. The 9th Circuit also relied on public policy (arbitration may prevent plaintiff from vindicating his rights) and gave a nod to federalism (courts should be allowed to apply state contract law).  

The Jackson decision will likely turn particularly on interpretations of First Options, 514 U.S. 938 (1995), in which the Court unanimously stated that arbitrability decisions are for the courts unless the parties clearly and unmistakably give them to the arbitrator.   Perhaps respondent in Jackson can convince the Court that some of the First Options language is dictum.  Most interestingly, now Chief Justice Roberts represented the winning respondent in First Options.  No doubt his brief and the oral argument will be thoroughly mined by both sides.

I expect to see lots of amicus activity in this case.

JRS

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