United States: US Supreme Court Decision Confirms Arbitrators' Jurisdiction To Decide Questions Of Arbitrability

The United States Supreme Court recently held in Rent-A-Center, West, Inc. v. Jackson¹ ("Rent-a-Center") that arbitrators, rather than the courts, have jurisdiction to determine challenges to the validity of arbitration clauses in which questions of arbitrability are delegated to the arbitrator, unless the challenging party specifically alleges that the delegation provision is invalid.

The ruling is significant for international arbitration practitioners because it reinforces the well-established concepts of competence-competence and severability and reaffirms the pro-arbitration stance that has been asserted by US courts in recent years. The decision is also relevant to the ongoing debate in the US regarding the Arbitration Fairness Act.

Background

Rent-A-Center concerned an arbitration agreement in an employment contract that required all claims arising out of that employment contract to be referred to arbitration. Critically, the arbitration clause in Rent-a-Center 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 [arbitration] Agreement including, but not limited to any claim that all or any part of this [arbitration] Agreement is void or voidable."

The employee subject to the agreement brought a claim in a US federal court for alleged employment discrimination and sought to have the arbitration clause ruled invalid on the ground that it was unconscionable. Notably, the employee challenged the validity of the arbitration agreement as a whole, but did not expressly contest the provision delegating the question of arbitrability to the arbitrator.

The trial court denied the employee's challenge on the basis that questions of arbitrability had been assigned to the arbitrator and therefore compelled the employee to arbitrate his claims. The employee subsequently appealed the trial court's ruling. The appellate court reversed the trial court's ruling, holding that the trial court should have decided whether the arbitration clause was unconscionable before compelling arbitration.

The US Supreme Court then accepted the case, in order to determine this issue: must a trial court resolve whether an arbitration clause that delegates arbitrability to the arbitrator is unconscionable before compelling arbitration?

The Decision: Arbitrators Decide Arbitrability unless the Delegation Provision Is Specifically Challenged

After reviewing two lines of US Supreme Court precedent, which hold that generally (1) courts decide questions of arbitrability unless the intention to delegate such questions to the arbitrators is clear, and (2) courts resolve threshold disputes over the validity of arbitration agreements, the Court ruled that, where questions regarding the validity of an arbitration agreement have been assigned to the arbitrator, the validity of the specific provision delegating that authority to the arbitrators must be challenged in order for a court to have jurisdiction to resolve the dispute. Accordingly, the US Supreme Court reaffirmed that arbitrators have the power to decide questions of arbitrability where such power is given to them unless the challenging party specifically alleges that the clause delegating arbitrability to the arbitrator is invalid.

Significance of Rent-a-Center for International Practitioners

Rent-a-Center is significant for international arbitration practitioners because it reaffirms the well-established principle of competence-competence, which provides that arbitrators are empowered to determine their own jurisdictions. The principle of competence-competence is enshrined in several countries' national laws as well as most institutional rules, and ensures that the mere assertion of jurisdictional challenges does not prevent parties from resolving disputes in arbitration.

Rent-a-Center also confirms the importance of the doctrine of severability by expressly endorsing that doctrine, which provides that an arbitration clause is separate from the underlying contract in which it is contained. The principle of severability is also widely accepted in national laws and institutional rules, as well as in the UNCITRAL model law, and insulates arbitration clauses from challenges to the validity of the underlying contract.

Last, Rent-a-Center recognizes the well-established principle that arbitration is a creature of contract and reinforces the concept that arbitration is a consensual form of dispute resolution. As such, parties should be held to the terms to which they agreed.

Impact of Rent-a-Center on the Arbitration Fairness Act Debate

While Rent-a-Center would appear to be a pro-arbitration decision, it is likely to impact on the debate over the draft Arbitration Fairness Act ("AFA") that is currently pending before the US Congress for consideration. In its current form, the AFA would invalidate pre-dispute arbitration agreements in a variety of contracts (including employment agreements) and would also invalidate pre-dispute agreements to arbitrate civil rights claims. Because Rent-a-Center enforced a pre-dispute arbitration agreement that an employee claimed was unconscionable, which resulted in the employee having to arbitrate civil rights claims, it seems likely that the decision will provide ammunition to members of the US Congress who seek to pass the AFA.

Footnotes

^{1.561 US ___ (2010)}

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