Monday, June 28, 2010

Rent a Center v Jackson: Guest Post by Mr. Badrinath Srinivasan

Mr. Badrinath Srinivasan (Badri) has been one of the most supportive readers of this blog. He has contributed several comments on this blog and an interesting piece on amendment of applications filed under Section 34 of the Arbitration and Conciliation Act. Recently, he published a short post on The Practical Academic Blog on Rent a Center v Jackson. While signing off, he had promised to come back with further analysis on the topic soon. In this guest post, he analyses the decision in further detail. Following is the text of Badri's post.

Recently, the US Supreme Court judgement (USSC) has delivered the judgement in Rent-A-Center v Jackson (Jackson) which is probably one of the most closely followed cases in the recent times on arbitration. We had several blogs like the Contract Professor Blog, ADR Professor Blog post quite a few posts on it.
The USSC has decided the case by a wafer thin majority of 5:4. Readers might note that there have been significant number of dissents on many of the landmark judgements by the USSC on arbitration [Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614 (1985) (5:3, one judge not participating), Prima Paint Corp. v. Flood & Conklin Mfg. Co. 388 US 395 (1967) (6:3) , Hall Street v. Mattel (6:3).], but this is probably the one of those few such cases where the USSC has been divided so thinly.

Jackson presents a great reading. Readers may spare some time and read the judgement (25 pages including dissent) because this is a judgement that is going to be discussed or applied by several courts all over the world a la Mitsubishi Motors. One of the notable aspects of Jackson is that unlike most cases where an arbitration clause in the main contract is the subject of challenge, in this case, a separate independent arbitration agreement (such arbitration agreements are known as submission agreements) was challenged. The purpose of this post is to give a descriptive comment on the majority opinion. But first, the facts.

[Some facts noted here are not from the Supreme Court opinion but are taken from the Court of Appeals opinion]

July 2000: Rent-a-Center (RC) began to ask its employees to sign arbitration agreements to agree for arbitration of all disputes.

23.02.2003: Jackson (J) entered into a Mutual Agreement to Arbitrate Claims (AA) as a condition of his employment in RC. The AA provided for arbitration of all disputes arising out of J's employment with RC. Specifically, the AA provided:

"The 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."

01.02.2007: J filed a suit alleging racial discrimination by RC in the District Court of Nevada. RC applied to the said court for dismissal of the suit and to compel arbitration of J's claim on the basis of the AA.

Brief Contentions:
As stated previously, RC filed a motion asking the court to either dismiss J's suit or stay it since J had signed the AA precluding him from litigating disputes concerning employment before the courts.
J contended that the AA was unconscionable under state law (Nevada) [Note that the FAA, as the same suggests, is a Federal Law].

RC rebutted the contention stating that the question regarding unconscionability of the AA must be decided by the arbitrators and not the court.
The District Court held in favour of RC while the Court of Appeals chose to hold in favour of J. RC appealed.

Relevant Provisions of Law:
§§ 2, 3 & 4 of the FAA read:

Section 2. Validity, irrevocability, and enforcement of agreements to arbitrate
A written provision in any maritime transaction or a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction, or the refusal to perform the whole or any part thereof, or an agreement in writing to submit to arbitration an existing controversy arising out of such a contract, transaction, or refusal, shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.
Section 3. Stay of proceedings where issue therein referable to arbitration
If any suit or proceeding be brought in any of the courts of the United States upon any issue referable to arbitration under an agreement in writing for such arbitration, the court in which such suit is pending,
upon being satisfied that the issue involved in such suit or proceeding is referable to arbitration under such an agreement, shall on application of one of the parties stay the trial of the action until such arbitration has been had in accordance with the terms of the agreement, providing the applicant for the stay is not in default in proceeding with such arbitration. Section 4. Failure to arbitrate under agreement; petition to United States court having jurisdiction for order to compel arbitration; notice and service thereof; hearing and determination
A party aggrieved by the alleged failure, neglect, or refusal of another to arbitrate under a written agreement for arbitration may petition any United States district court which, save for such agreement, would have jurisdiction under Title 28, in a civil action or in admiralty of the subject matter of a suit arising out of the controversy between the parties, for an order directing that such arbitration proceed in the manner provided for in such agreement. Five days' notice in writing of such application shall be served upon the party in default. Service thereof shall be made in the manner provided by the Federal Rules of Civil Procedure. The court shall hear the parties,
and upon being satisfied that the making of the agreement for arbitration or the failure to comply therewith is not in issue, the court shall make an order directing the parties to proceed to arbitration in accordance with the terms of the agreement. The hearing and proceedings, under such agreement, shall be within the district in which the petition for an order directing such arbitration is filed. If the making of the arbitration agreement or the failure, neglect, or refusal to perform the same be in issue, the court shall proceed summarily to the trial thereof. If no jury trial be demanded by the party alleged to be in default, or if the matter in dispute is within admiralty jurisdiction, the court shall hear and determine such issue. Where such an issue is raised, the party alleged to be in default may, except in cases of admiralty, on or before the return day of the notice of application, demand a jury trial of such issue, and upon such demand the court shall make an order referring the issue or issues to a jury in the manner provided by the Federal Rules of Civil Procedure, or may specially call a jury for that purpose. If the jury find that no agreement in writing for arbitration was made or that there is no default in proceeding thereunder, the proceeding shall be dismissed. If the jury find that an agreement for arbitration was made in writing and that there is a default in proceeding thereunder, the court shall make an order summarily directing the parties to proceed with the arbitration in accordance with the terms thereof

Before we go further to analyse the decision, we'll make a small detour and briefly touch upon the case of First Options of Chicago v. Kaplan 514 US 938 (1995) [First Options] because First Options has a huge role to play in this decision.

In First Options an agreement called the "Workout Agreement" was the matter of controversy. . MKI was a wholly owned investment company of one Manuel Kaplan. The Workout Agreement was signed between MKI and First Options of Chicago (FOC) to govern the working out (whatever it means) of debts of Manuel Kaplan, his wife Karol Kaplan and MKI. Due to certain events, FOC took control of the assets of MKI and demanded personal payment from Manuel and Karol Kaplan for the debts of MKI. The Kaplans denied thair liability for the debts of MKI. FOC initiated arbitration. This Workout Agreement contained four documents out of which one contained the arbitration clause and only MKI and FOC were signatories to this document. Hence, the Kaplans contended that there was no arbitration agreement in existence between FOC and the Kaplans but made written submisstions before the arbitrators. The arbitrators held in favour of FOC. The Kaplans sought to set aside the award. The question which the USSC chose to decide on was whether the court had to decide questions pertaining to arbitrability of a dispute.

The USSC held (I quote relevant portions of the judgement as they are so as to show a clear picture as to what was held in First Options:

"[T]he question "who has the primary power to decide arbitrability" turns upon what the parties agreed about that matter. Did the parties agree to submit the arbitrability question itself to arbitration? If so, then the court's standard for reviewing the arbitrator's decision about that matter should not differ from the standard courts apply when they review any other matter that parties have agreed to arbitrate."
"[T]he court should give considerable leeway to the arbitrator, setting aside his or her decision only in certain narrow circumstances... If, on the other hand, the parties did not agree to submit the arbitrability question itself to arbitration, then the court should decide that question just as it would decide any other question that the parties did not submit to arbitration, namely independently. These two answers flow inexorably from the fact that arbitration is simply a matter of contract between the parties; it is a way to resolve those disputes--but only those disputes--that the parties have agreed to submit to arbitration."
"When deciding whether the parties agreed to arbitrate a certain matter (including arbitrability), courts generally (though with a qualification we discuss below) should apply ordinary state law principles that govern the formation of contracts... The relevant state law here, for example, would require the court to see whether the parties objectively revealed an intent to submit the arbitrability issue to arbitration."
"This Court, however, has (as we just said) added an important qualification, applicable when courts decide whether a party has agreed that arbitrators should decide arbitrability: Courts should not assume that the parties agreed to arbitrate arbitrability unless there is "clea[r] and unmistakabl[e]" evidence that they did so."
"And, given the principle that a party can be forced to arbitrate only those issues it specifically has agreed to submit to arbitration, one can understand why courts might hesitate to interpret silence or ambiguity on the "who should decide arbitrability" point as giving the arbitrators that power, for doing so might too often force unwilling parties to arbitrate a matter they reasonably would have thought a judge, not an arbitrator, would decide."
The court held that since the arbitration agreement did not provide clearly that the parties, including the Kaplans, did not specifically want the arbitrability issue to be decided by the arbitrator, the courts would have the jurisdiction to decide arbitrability issues.
Now that the background has been discussed, we'll analyse the Jackson decision.

Decision:We'll call the majority opinion, given by Scalia, J., as MAJ and the Dissent, by Stevens, J., as DIS. To make summarizing of the MAJ more easy, we'll do it pointwise. My observations will be in square brackets.

1. The FAA places the arbitration agreement on the equal footing to that of a contract. Hence, an arbitration agreement would be unenforceable on the same grounds as a contract would be, including on grounds such as fraud, duress, unconscionbility etc. This is in the form of § 2 of the FAA. Thus, J would be free to challenge the validity of the AA on the basis of unconscionbility.

2. As per § 4 of the FAA, the court shall refer the matter to arbitration if the making of the arbitration agreement or the failure to comply with the arbitration agreement was not in issue.
[I'll quote the third point for emphasis sake, because this is where the MAJ makes a point which the DIS would criticise.]

3. "The Agreement here contains MULTIPLE written provisions to settle by arbitration a controversy." (emphasis mine)

4. Out of the multiple provisions to settle a controversy by arbitration, two relevant provisions are:
a) A part of the AA titled "Claims Covered by the Agreement" provides that all disputes, whether past, present or future, would be referred to arbitration
b) Another part of the agreement "Arbitration Procedures" provides that the arbitrator shall have the exclusive authority to resolve all disputes.

5. 4(b) above is called the delegation provision, which delegates resolution of any dispute relating to the agreement, including questions relating to the validity of the AA to the arbitrator.
[Even J's counsel seem to call this the delegation provision. For clarity, I'll quote (leaving the editing out) the delegation provision as it is partially quoted in the MAJ:
"The Arbitrator shall have the exclusive authority to resolve any dispute relating to the enforceability of this Agreement including, but not limited to any claim that all or any party of this Agreement is void or voidable".
Now, if 4(b) is the delegation provision, what does 4(a) do?]

6. Parties can agree to arbitrate threshold questions of arbitrability [see the decision of First Options, discussed above]. Such an agreement acts, distinct to the agreement to arbitrate disputes that the AA provides for. In the MAJ's words (which I am sure would be quoted a zillion times by courts all over the USA):
"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 as it does on any other."
[The MAJ has, thus, differentiated an agreement to arbitrate disputes under the Contract/ the arbitration agreement from an agreement to arbitrate threshold/ gateway issues.]

7. As per the law on severability, where a party challenges a contract or a party thereof, that challenge would not automatically prevent a court from enforcing the arbitration clause in the contract, unless the validity of the arbitration agreement is SPECIFICALLY challenged. In such a case, the court has to decide on the validity of the arbitration agreement, and if found valid, refer the same to arbitration. In certain cases, the entire contract containing the arbitration clause may not be invalid; some of the clauses in the contract might be unconscionable but the remaining provisions, including the arbitration clause, might be valid.

8. In this case, since J has not challenged the delegation provision SPECIFICALLY, the court should treat it as valid under § 2and enforce it under §§ 3 and 4 of the FAA.

9. Severability rule is a matter of federal law and not state law. Hence, the contention that the arbitrators cannot decide the dispute in view of the fact that the state law prevents the severability doctrine from being applicable in case the entire contract is challenged as per state law cannot be sustained.

10. J’s argument that the delegation provision is unconscionable because he would not be entitled to a full judicial review post-arbitration due to the ruling in Hall Street v. Mattel 552 US 576 (2008) [where it was held that parties cannot add by contract to the grounds under the FAA by which arbitral awards could be set aside.] is rejected because it is brought at a belated stage before the Supreme Court. [The court also noted, vide foot note 5, that J submitted his brief before the Court Of Appeals for the Ninth Circuit before Hall Street v. Mattel was decided but also held that J could have had submitted a “supplemental briefing” and that Hall Street v Mattel merely upheld a rule that was affirmed by the Court Of Appeals for the Ninth Circuit as early as in 2003.]

So, in case you enter into an arbitration agreement (whether in the form of an arbitration clause or submission agreement) providing for New York or another city in the US as the seat, make sure you have a delegation provision that is as unequivocal as it was in this case so that you let the arbitrator decide all disputes, including disputes relating to arbitrability. 

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