Arbitrator May Decide Whether Entire Arbitration Agreement is Enforceable

By Ted Olsen

Recently, the U.S. Supreme Court has shown surprising interest in legal questions regarding arbitration, and specifically, issues arising from the Federal Arbitration Act, 9 U.S.C. § 1 et seq.  (In the last newsletter, we reported on the Court's decision in Stolt-Nielsen S.A. v. AnimalFeeds Int'l Corp., No. 08-1198 (U.S. April 27, 2010), which held that the FAA would not support the arbitration of class claims when the arbitration agreement itself is silent on whether the arbitrator had authority over such claims.)

On June 21, 2010, the Supreme Court addressed the question of whether an arbitrator or a court must decide a case challenging the arbitration agreement as unconscionable, and therefore, unforceable.  While the parties had agreed, in the arbitration agreement, that the arbitrator would determine the enforceability of the agreement, one of the parties, an employee, contended that the agreement was unconscionable and unenforceable, and that the issue should be decided by a court.  In Rent-A-Center West Inc. v. Jackson, No. 09-497 (U.S. June 21, 2010), in a 5-4 decision, the Court's majority decided that (a) the enforceability of the parties' contract as a whole could be decided by the arbitrator, as the agreement itself delegated to an arbitrator authority to determine the enforceability of the agreement, but that (b) the enforceability of the delegation provision itself must be decided by a federal district court. 

The arbitration agreement provided for arbitration of all disputes arising out of Mr. Jackson's employment with Rent-A-Center.  It also gave the "Arbitrator . . . exclusive authority to resolve any dispute relating to the [Agreement's] enforceability . . . including . . . any claim that all or any part of this Agreement is void or voidable," in a separately stated "delegation provision."

The employee challenged the validity of the entire arbitration agreement, and did not specifically challenge the enforceability of the delegation provision.  He attacked the arbitration agreement as placing limitations on discovery, and as being one-sided, favoring Rent-A-Center.

Finding that the employee's challenge was as to the arbitration agreement as a whole, the Supreme Court majority ruled that his contentions should be decided by the arbitrator, as the parties had agreed.  Justice Scalia, writing the majority opinion, explained that if Mr. Jackson had challenged the delegation provision as unconscionable and unenforceable, such a challenge would be decided by a court.

Sherman & Howard has prepared this advisory to provide general information on recent legal developments that may be of interest. This advisory does not provide legal advice for any specific situation and does not create an attorney-client relationship between any reader and the Firm.

©2010 Sherman & Howard L.L.C.                                                        July 7, 2010