Disputes between parties as to whether or not a particular issue
is arbitrable are not uncommon. The party seeking to avoid
arbitration may assert both procedural and substantive defenses to
claims that a dispute is arbitrable. Claims of procedural
inarbitrability, such as a statute of limitations issue, are for
the arbitrator. As a general rule, however, claims of substantive
arbitrability (contract formation issues such as whether the
dispute is within the scope of the arbitration agreement, whether
the arbitration agreement is enforceable, or whether an agreement
to arbitrate exists) are for the courts. There are exceptions to
the general rule, however, and the determination of whether a court
or an arbitrator is to resolve the dispute may become quite
complex.
Two Supreme Court cases decided one day apart in June of 2010,
Rent-A-Center West v. Jackson and Granite Rock Co. v.
International Brotherhood of Teamsters, represent the most
recent manifestations of two divergent, though often blurry, lines
of judicial reasoning regarding who decides the arbitrability of an
agreement.
The first line of cases holds that the question of arbitrability is
undeniably an issue for judicial determination. The Supreme Court
has found, in cases such as AT&T Technologies Inc. v.
Communication Workers of America, that unless the parties
clearly and unmistakably provide otherwise, the question of whether
the parties agreed to arbitrate is to be decided by the court, not
the arbitrator. This statement reflects the Court's
recognition, however, that, if the parties do clearly and
unmistakably provide otherwise, issues of substantive arbitrability
may, in some cases, be decided by the arbitrator rather than a
court.
The second line of Supreme Court jurisprudence holds that an
arbitrator should decide defenses, such as fraud in the factum or
fraud in the inducement, that would render an established contract
void or voidable. Cases such as Prima Paint Corp. v. Flood
& Conkling Manufacturing Co. and Buckeye Check
Cashing, Inc. v. Cardegna have held that, because an
arbitration provision is severable from the remainder of the
contract, the arbitrator determines the contract's validity (as
opposed to its formation) unless one party separately claims the
arbitration provision itself is invalid.
Rent-A-Center interweaves both lines of reasoning to find
that an arbitrator decides the issue of arbitrability as long as
the parties clearly and unmistakably provide for such a
determination and the validity of their agreement to arbitrate such
threshold issues is not specifically challenged. The facts are
simple: Jackson, a former employee of Rent-A-Center filed an
employment discrimination suit against Rent-A-Center in federal
court. Rent-A-Center filed a motion under the Federal Arbitration
Act ("FAA") to compel arbitration, arguing that the
Rent-A-Center Mutual Agreement to Arbitrate Claims
("Agreement") that Jackson signed precluded Jackson from
pursuing his claims in court. Jackson challenged the validity of
the Agreement on grounds of unconscionability because it contained
discovery provisions that were one-sided and a provision specifying
that the arbitrator's fee was to be shared equally by the
parties and, procedurally, because it was presented to him as a
non-negotiable condition of employment.
Critically, the Agreement contained a "delegation
provision" stating 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 part of this
Agreement is void or voidable."
Justice Scalia authored the majority opinion of a divided Supreme
Court, holding that the issue of arbitrability is for the
arbitrator in the first instance. The first section of the opinion
explains that the FAA controls and treats arbitration as a
"matter of contract, on an equal footing with other
contracts." It provides that a written provision in a contract
"to settle by arbitration a controversy thereafter arising out
of such a contract...[is] valid, irrevocable and enforceable."
As the delegation provision at issue clearly expressed the intent
of the parties to arbitrate arbitrability, the Court found the
inquiry over who decides such threshold question to be at an
end.
In the second part of the opinion, the Court, relying on the second
line of cases mentioned above such as Prima Paint, found
that only challenges to the validity of the arbitration agreement
itself are for a court. Agreements to arbitrate are severable from
the remainder of the contract, and 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. While such agreements to arbitrate can be challenged and
such challenges must be decided by a court, a party must
specifically assert that the agreement to arbitrate itself is
invalid, as induced by fraud for example. The Court took the time
to explain how Jackson might have directed his unconscionability
claims specifically to the delegation provision, yet conceded that
such a claim "would be ... a much more difficult argument to
sustain." As Jackson's claims were not limited to the
delegation provision, however, this issue was ultimately
moot.
In Granite Rock, the Court adhered to the first line of
cases mentioned above and found that a court may order arbitration
of a particular dispute only where the court is satisfied that the
parties agreed to arbitrate that dispute. Granite Rock Company and
the International Brotherhood of Teamsters ("IBT"), Local
287 were parties to a collective bargaining agreement that was set
to expire on April 30, 2004. As Local 287 found certain provisions
of the expiring agreement inadequate, no new agreement was reached
as of June, 2004, and Local 287 went on strike. By July, the
parties reached a tentative agreement on a successor contract that
contained a broad arbitration clause requiring the parties to
arbitrate "[a]ll disputes arising under the agreement."
Local 287 members then allegedly ratified the successor agreement
on July 2, 2004. On July 5, however, Local 287 members were
instructed not to return to work by the IBT until Granite Rock
agreed to a back-to-work agreement that would shield its employees
from liability arising from the strike. Granite Rock refused and
subsequently sued IBT and Local 287, seeking an injunction against
the continuation of the strike and asserting that it breached the
no-strike clause in the parties' agreement. Local 287 defended
by asserting that the successor contract had never been ratified
and did not exist. It moved to compel arbitration of the entire
dispute, including the issue of whether Granite Rock and Local 287
had reached an agreement on July 2, 2004.
The Supreme Court split 7-2 on the arbitrability issue. Justice
Thomas's majority opinion asserted the "well-settled"
principle that where an issue of arbitrability turns on whether a
contract was ever formed, "the dispute is generally for the
courts to decide." Local 287, the party seeking arbitration,
argued that the federal presumption in favor of arbitration
mandated that any doubts concerning arbitral issues should be
resolved in favor of arbitration, and that the severability
principle, explained in Rent-A-Center, meant that the
contract's arbitration clause should be applied to all disputes
within its scope unless the validity challenge was to the
arbitration clause itself. The Court, in response, found it
necessary to "reemphasize the proper framework for deciding
when disputes are arbitrable" under its precedents, finding
that "courts should order arbitration of a dispute only where
the court is satisfied that neither the formation of the
parties' arbitration agreement nor (absent a valid provision
specifically committing such disputes to an arbitrator) its
enforceability or applicability to the dispute is in
issue."
The Court ultimately decided that the presumption favoring
arbitration in FAA and labor cases should be applied "only
where it reflects, and derives legitimacy from, a judicial
conclusion that arbitration of a particular dispute is what parties
intended because their express agreement to arbitrate was validly
formed and is legally enforceable and best construed to encompass
the dispute." As this principle required the court to
determine when the contract between Local 287 and Granite Rock was
formed and what it covered, it compelled reversal of the Ninth
Circuit's decision, which had relegated those issues to the
arbitrator.
Both Granite Rock and Rent-A-Center involved the
issue of the appropriate adjudicator of issues of arbitrability
that arose under a written contract. Yet in Rent-A-Center,
the Court held that the arbitrability issue was to be decided by
the arbitrator. In Granite Rock, by contrast, it held that
the arbitrability issue was to be decided by the court. Given these
conflicting holdings and the unusual factual context of each case,
it is hard to reconcile the two cases and draw conclusions, yet the
cases appear to be explainable on two bases. First, Granite
Rock involved an issue of contract formation while
Rent-A-Center revolved around of the validity of a
contract, the formation of which both parties conceded. Second, the
agreement in Rent-A-Center expressly delegated to the
arbitrator the issues of the enforceability and validity of the
agreement to arbitrate, while the agreement in Granite
Rock contained no such provision. Similarly, the arbitration
provision in Rent-A-Center governed all "past,
present or future" disputes arising out of Jackson's
employment, while the language of the arbitration provision in
Granite Rock pertained only to disputes "arising
under" the agreement. Thus, the arbitration provision at issue
in Rent-A-Center was much clearer and more
inclusive.
Questions remain however, as to whether the Court would have sent
the contract formation issue in Granite Rock to the
arbitrator if, as in Rent-A-Center, it had contained a
delegation provision. Also left unresolved is what would have been
the outcome in Rent-A-Center, if Jackson had challenged
the validity of the delegation provision itself. Regardless, the
takeaway for parties favoring arbitration and seeking a more cost
efficient, extra-judicial resolution of their dispute is to clearly
and unmistakably draft their contracts so as to expressly delegate
all conceivable issues they desire arbitrated to the arbitrator. As
seen in Rent-A-Center, however, even this express language
might not keep parties out of court. At the very least, a court
will have to initially determine who determines arbitrability if
the issue is contested. Additionally, as Justice Thomas suggested
in Rent-a-Center, a party resisting arbitration may
challenge the validity of the specific arbitration provision in the
contract and, as the Supreme Court left this issue undecided,
extensive litigation might be required to resolve the matter.
In the wake of Rent-A-Center and Granite Rock,
arbitration provisions, provided they are clearly and unmistakably
expressed and as broad in scope as possible, are somewhat less
susceptible to a challenge in the court of law. When a dispute
arises over a contract containing a delegation provision, parties
wishing to have a court, rather than an arbitrator, decide the
validity of the arbitration agreement will now have to specifically
tailor their attacks on the delegation provision, rather than on
the agreement as a whole, which will likely prove difficult.
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The author is grateful for the assistance of James Gillenwater, a 2010 Dinsmore & Shohl summer associate. James is a graduate of Vanderbilt University, a Fulbright Scholar, and will be a second year law student at Duke University.
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