Business Law and the Regulation of Business 11th Edition by Richard Mann, Barry Roberts

Exercise 7

FACTS On February 1, 2007, the plaintiff, Antonio Jackson, filed an employment-discrimination suit against his former employer in the United States District Court for the District of Nevada. The defendant, Rent-ACenter, West, Inc., filed a motion under the Federal Arbitration Act (FAA) to dismiss the proceedings, and to compel arbitration based on an arbitration agreement (Agreement), which Jackson signed on February 24, 2003 as a condition of his employment. The Agreement provided for arbitration of all ''past, present or future'' disputes arising out of Jackson's employment with Rent- A-Center. It also provided that ''[t]he Arbitrator, and not any federal, state, or local court or agency, shall have exclusive authority to resolve any dispute relating to the interpretation, applicability, enforceability or formation of this Agreement including, but not limited to any claim that all or any part of this Agreement is void or voidable.''
Jackson opposed the motion on the ground that ''the arbitration agreement in question is clearly unenforceable in that it is unconscionable'' under Nevada law. Rent-ACenter responded that Jackson's unconscionability claim was not properly before the court because Jackson had expressly agreed that the arbitrator would have exclusive authority to resolve any dispute about the enforceability of the Agreement. It also disputed the merits of Jackson's unconscionability claims.
The District Court granted Rent-A-Center's motion to dismiss the proceedings and to compel arbitration. The court found that the Agreement gives the arbitrator exclusive authority to decide whether the Agreement is enforceable, and, because Jackson challenged the validity of the Agreement as a whole, the issue was for the arbitrator. The Court of Appeals for the Ninth Circuit reversed in relevant part, holding that where ''a party challenges an arbitration agreement as unconscionable, and thus asserts that he could not meaningfully assent to the agreement, the threshold question of unconscionability is for the court.'' The U.S. Supreme Court granted certiorari.
DECISION The judgment of the Court of Appeals for the Ninth Circuit is reversed.
OPINION Scalia, J. The FAA reflects the fundamental principle that arbitration is a matter of contract. Section 2 *** provides:
A written provision in … a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract … shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.
The FAA thereby places arbitration agreements on an equal footing with other contracts, [citation], and requires courts to enforce them according to their terms, [citation]. Like other contracts, however, they may be invalidated by ''generally applicable contract defenses, such as fraud, duress, or unconscionability.'' [Citation.] *** The Agreement here contains multiple ''written provision[ s]'' to ''settle by arbitration a controversy,'' § 2. Two are relevant to our discussion. First, the section titled ''Claims Covered By The Agreement'' provides for arbitration of all ''past, present or future'' disputes arising out of Jackson's employment with Rent-A-Center. [Citation.] Second, the section titled ''Arbitration Procedures'' provides that ''[t]he Arbitrator … shall have exclusive authority to resolve any dispute relating to the … enforceability … of this Agreement including, but not limited to any claim that all or any part of this Agreement is void or voidable.'' [Citation.] The current ''controversy'' between the parties is whether the Agreement is unconscionable. It is the second provision, which delegates resolution of that controversy to the arbitrator, that Rent-A-Center seeks to enforce. Adopting the terminology used by the parties, we will refer to it as the delegation provision.
The delegation provision is an agreement to arbitrate threshold issues concerning the arbitration agreement. We have recognized that parties can agree to arbitrate ''gateway'' questions of ''arbitrability,'' such as whether the parties have agreed to arbitrate or whether their agreement covers a particular controversy. [Citations.] This line of cases merely reflects the principle that arbitration is a matter of contract. [Citation.] An agreement to arbitrate a gateway issue is simply an additional, antecedent agreement the party seeking arbitration asks the federal court to enforce, and the FAA operates on this additional arbitration agreement just as it does on any other. *** The question before us, then, is whether the delegation provision is valid under § 2.
There are two types of validity challenges under § 2: ''One type challenges specifically the validity of the agreement to arbitrate,'' and ''[t]he other challenges the contract as a whole, either on a ground that directly affects the entire agreement (e.g., the agreement was fraudulently induced), or on the ground that the illegality of one of the contract's provisions renders the whole contract invalid.'' [Citation.] In a line of cases neither party has asked us to overrule, we held that only the first type of challenge is relevant to a court's determination whether the arbitration agreement at issue is enforceable. [Citations.] That is because § 2 states that a ''written provision'' ''to settle by arbitration a controversy'' is ''valid, irrevocable, and enforceable'' without mention of the validity of the contract in which it is contained. Thus, a party's challenge to another provision of the contract, or to the contract as a whole, does not prevent a court from enforcing a specific agreement to arbitrate. ''[A]s a matter of substantive federal arbitration law, an arbitration provision is severable from the remainder of the contract.'' [Citation.]
But that agreements to arbitrate are severable does not mean that they are unassailable. If a party challenges the validity under § 2 of the precise agreement to arbitrate at issue, the federal court must consider the challenge before ordering compliance with that agreement under § 4. *** In some cases the claimed basis of invalidity for the contract as a whole will be much easier to establish than the same basis as applied only to the severable agreement to arbitrate. Thus, in an employment contract many elements of alleged unconscionability applicable to the entire contract (outrageously low wages, for example) would not affect the agreement to arbitrate alone. But even where that is not the case, [for example], where the alleged fraud that induced the whole contract equally induced the agreement to arbitrate which was part of that contract-we nonetheless require the basis of challenge to be directed specifically to the agreement to arbitrate before the court will intervene.
Here, the ''written provision … to settle by arbitration a controversy,'' [citation], that Rent-A-Center asks us to enforce is the delegation provision-the provision that gave the arbitrator ''exclusive authority to resolve any dispute relating to the … enforceability … of this Agreement,'' [citation]. The ''remainder of the contract,'' [citation], is the rest of the agreement to arbitrate claims arising out of Jackson's employment with Rent-A-Center. *** In this case, the underlying contract is itself an arbitration agreement. But that makes no difference. Application of the severability rule does not depend on the substance of the remainder of the contract. Section 2 operates on the specific ''written provision'' to ''settle by arbitration a controversy'' that the party seeks to enforce. Accordingly, unless Jackson challenged the delegation provision specifically, we must treat it as valid under § 2, and must enforce it under §§ 3 and 4, leaving any challenge to the validity of the Agreement as a whole for the arbitrator.
The District Court correctly concluded that Jackson challenged only the validity of the contract as a whole. Nowhere in his opposition to Rent-A-Center's motion to compel arbitration did he even mention the delegation provision. [Citation.] ***
As required to make out a claim of unconscionability under Nevada law, [citation], [Jackson] contended that the Agreement was both procedurally and substantively unconscionable. It was procedurally unconscionable, he argued, because it ''was imposed as a condition of employment and was non-negotiable.'' [Citation.] But we need not consider that claim because none of Jackson's substantive unconscionability challenges was specific to the delegation provision. First, he argued that the Agreement's coverage was one sided in that it required arbitration of claims an employee was likely to bring-contract, tort, discrimination, and statutory claims-but did not require arbitration of claims Rent-A-Center was likely to bring-intellectual property, unfair competition, and trade secrets claims. [Citation.] This one-sided-coverage argument clearly did not go to the validity of the delegation provision.
Jackson's other two substantive unconscionability arguments assailed arbitration procedures called for by the contract *** that were to be used during arbitration under both the agreement to arbitrate employment-related disputes and the delegation provision. It may be that had Jackson challenged the delegation provision by arguing that these common procedures as applied to the delegation provision rendered that provision unconscionable, the challenge should have been considered by the court. *** Jackson, however, did not make any arguments specific to the delegation provision; he argued that the *** procedures rendered the entire Agreement invalid.
Jackson's appeal to the Ninth Circuit confirms that he did not contest the validity of the delegation provision in particular. ***
In his brief to this Court, Jackson made the contention, not mentioned below, that the delegation provision itself is substantively unconscionable *** He brought this challenge to the delegation provision too late, and we will not consider it. [Citation.]
INTERPRETATION Under the FAA, where an arbitration agreement includes a delegation provision stating that the arbitrator will determine the enforceability of the arbitration agreement, (1) if a party challenges specifically the enforceability of the delegation provision, the district court considers the challenge, but (2) if a party challenges the enforceability of the arbitration agreement as a whole, the arbitrator considers the challenge.
CRITICAL THINKING QUESTION How likely is it that the parties in this case would have thought that they had agreed that an arbitrator would decide whether they had a valid arbitration agreement?