Supreme Court Decision: Who Determines The Enforceability Of Agreements To Arbitrate?
Arbitration clauses are becoming increasingly prevalent in employment contracts and the Supreme Court’s recent opinion in Rent-A-Center, West, Inc. v. Jackson, 130 S.Ct. 2772 (2010), provides employers with even greater clarity regarding the enforceability of such provisions. On June 21, 2010, the Supreme Court issued an opinion settling the question of whether, under the Federal Arbitration Act, the district court may decide if an agreement to arbitrate is unconscionable where the arbitration agreement specifically assigns that decision to the arbitrator. The short answer is yes, but the challenge must be specifically directed at the agreement to arbitrate and not merely the agreement as a whole.
In its opinion, the Court distinguished the two validity challenges a party can bring under Section 2 of the Federal Arbitration Act: (1) a challenge to the enforeceability of the entire agreement and (2) a challenge to the enforceability of just the agreement to arbitrate. As a threshold matter, the Court noted that the Federal Arbitration Act considers arbitration agreements to be the same as contracts and, as such, arbitration agreements are enforced according to their terms. Notably, this classification also renders arbitration agreements vulnerable to typical contract defenses, including validity defenses such as unconscionability. The Court recognized the long-standing federal arbitration principle that the agreement to arbitrate provision is severable from the rest of the contract. Therefore, if a challenge to just the agreement to arbitrate is made in the district court, the district court can and must decide that issue before enforcing the parties’ agreement to arbitrate because it is severable from the rest of the contract.
Ultimately, the Court found that if the entire agreement is being challenged as unconscionable or invalid, that decision belongs to the arbitrator. If only the enforceability of the agreement to arbitrate is being challenged, the district court may decide the issue because it does not affect the remainder of the contract. In other words, when considering an agreement to arbitrate, the district court should only intervene if the validity challenge is directed specifically to the agreement to arbitrate and not the validity of the contract as a whole. This is an important distinction for employers and employees to keep in mind when challenging an employment agreement that contains an arbitration clause.
