Today in Jackson v. Rent-A-Center West, the Court again confirmed its view that challenges to a contract which contains an arbitration agreement will go to the arbitrator, a view that it has held and repeatedly affirmed since its decision in Prima Paint in the mid 1960s. Under Prima Paint, a party may enforce a potentially valid arbitration agreement contained in a potentially invalid contract. But today the Court went further. In a case where an individual claimed that the arbitration agreement itself was unconscionable and therefore unenforceable, the Court stated that an arbitrator will decide whether a potentially invalid arbitration agreement is enforceable unless the objecting party’s challenge goes to the “delegation provision”, i.e. the portion of the contract that delegates the power to the arbitrator to decide unconscionablility questions. In other words, following Rent-A-Center, a party who wishes to challenge an arbitration agreement must do so with greater specificity than would have satisfied the Court under Prima Paint. A claim that the entire arbitration agreement is unconscionable or invalid for other reasons will no longer be enough to avoid evaluation of the claim by the arbitrator rather than the court. Unless the party challenges the particular provision of the arbitration agreement that delegates the claims to the arbitrator, it will be the arbitrator, not the court, who will decide unconscionability issues.
As with other recent arbitration decisions, Jackson is a victory for businesses who typically draft arbitration provisions in contracts with employees and consumers. Following Jackson, I would expect to see businesses rewriting their contracts to delegate enforceability questions (such as whether the arbitration agreement is unconscionable) to the arbitrator. Now, a party may specifically challenge that provision as unconscionable. But the party will have to prove that permitting arbitrators to decide unconscionability provisions is unfair to the challenging party. Given the general view that arbitrators are unbiased, professional third party decision makers, I would suspect that such a challenge would be very difficult to win (in the absence of evidence that the arbitrator was inherently biased in favor of one side). Thus, it would appear that the road has been paved to permit greater delegation of power to arbitrators, an outcome that businesses but not consumers, employees and their advocates, would prefer.
So Rent-a-Center East (no relation to Rent-a-Center West) creates an identical arbitration clause to the one used by Rent-a-Center West–silent on class arbitration and assigning enforceability of the arbitration clause to the arbitrator. The rental contracts also include a usurious interest provision that is a clear violation of state and/or federal law. Thousands of customers are harmed, but none suffer more than a few hundred dollars in damages. What options are available to those customers? After Stolt-Nielsen and Rent-a-Center, exactly one: arbitrate alone. The arbitrator won’t have the power to order a class arbitration, and the court won’t have the power to decide whether the unavailability of class arbitration is unconscionable.
It has always been difficult for consumers and employees to prove arbitration clauses to be unconscionable. To succeed in such attacks consumers and employees have typically had to make substantial factual showings, often at great expense.
Now, in light of Jackson, the challengers’ burden has increased substantially. The challengers will need to focus specifically on why it is unconscionable for arbitrators to decide unconscionability in the particular case. Then, even if successful in that proof (which will be hard absent evidence of arbitrator bias or very high arbitrator fees or arbitration costs) the challengers will still have the additional burden of convincing the court that the arbitration clause itself is unconscionable.
” Given the general view that arbitrators are unbiased, professional third party decision makers”
Among whom?
While I would agree that arbitration clauses are rarely successfully challenged for arbitrator bias, I would not agree that the view that arbitrators and unbiased, professional third parties. Legal presumptions, burden of proof, and difficulties involved in obtaining evidence are a much greater factor in the usual legal outcome.
Neither the general public (76% of securities customers believe that securities arbitration is unfair), nor members of Congress, nor te association of state securities law administrators , nor the Minnesota Attorney General nor professionals who litigate arbitrations, nor academics who study arbitration empirically (and here share anything approaching a consensus on this issue.