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Wednesday, April 28, 2010

"Formation is a very basic existential analysis": Thoughts on the Rent-a-Center Oral Argument

Those who are interested in contract law, arbitration, labor & employment law, and federal courts should check out the oral argument for Rent-A-Center, West v. Jackson.  The quote above is from Robert Friedman, counsel for Rent-A-Center, and as a Contracts professor I enjoyed the sentiment.  But ultimately Rent-A-Center's argument hinges on a effort to separate unconscionability into two different categories -- a separation that has no basis in common law or statute.

The question before the Court is "Is the district court required in all cases to determine claims that an arbitration agreement subject to the Federal Arbitration Act (FAA) is unconscionable, even when the parties to the contract have clearly and unmistakably assigned this 'gateway' issue to the arbitrator for decision?"  The case involves a Sec. 1981 racial discrimination claim brought by employee Antonio Jackson against Rent-A-Center.  Jackson signed an arbitration agreement which stated:

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.

In the opinion below, the Ninth Circuit held that courts must decide whether the agreement to arbitrate is unconscionable as a threshold matter, regardless of what the agreement itself says.

In his argument, Friedman conceded -- indeed, he had to concede -- that if an arbitration clause was fraudulently induced, it cannot force the defrauded party into arbitrating whether there was fraud.  He also conceded that some cases of duress -- namely, "a gun to somebody's head" -- would not go to the arbitrator.  What Friedman was trying to distinguish was cases in which no contract was formed (due to fraud or duress) and cases in which there is a contract but it needs reformation in some way.  Some on the court seemed sympathetic to this, looking to draw a line perhaps between "total" and "partial" unconscionability.  As Chief Justice Roberts put it, "[O]nce you get past that [g]ateway question of whether the formation of the contract was not unconscionable, then claims that particular provisions were unconscionable are by definition for the arbitrator to decide."

The First Circuit suggested something along these lines in Awuah v. Coverall N. Am., Inc., 554 F.3d 7 (1st Cir. 2009).  In that case, the First Circuit said that a court could refuse to enforce an arbitration agreement if it were "impossibly burdensome" or provided only "illusory" relief.  But the common law of unconscionability makes no such distinctions between "illusory" contracts and "non-illusory but unconscionable" contracts.  All unconscionable agreements are subject to judicial reform.  And it would make no sense to say that an agreement to arbitrate is possibly unconscionable, but the arbitrator -- whose power derives solely from that possibly unconscionable agreement -- gets to decide whether it is unconscionable and, if so, what the remedy shall be.  As Ian Silverberg, counsel for Jackson, pointed out, Rent-A-Center wants "a rule where certain unconscionability challenges went to the court and other unconscionability challenges didn't go to the court."  There's no basis for this in the FAA.

The Supreme Court has a legitimate concern that some state courts have been pushing the bounds of unconscionability with respect to arbitration agreements. Justice Ginsburg, in particular, seemed to think that the agreement at issue was not all that unconscionable.  But that's the bed the Court made for itself in Gilmer.  Once it said: (a) litigants can agree to arbitrate statutory rights prior to the dispute, but (b) they cannot waive those rights and (c) normal contractual remedies apply, a result like the one in Rent-A-Center was in play.  The Court itself has said: “Of course, courts should remain attuned to well-supported claims that the agreement to arbitrate resulted from the sort of fraud or overwhelming economic power that would provide grounds ‘for the revocation of any contract.’ ” Mitsubishi, 473 U.S. at 627 (quoting FAA Sec. 2).  The Ninth Circuit has to be upheld, I believe, unless the Court is going to start mucking around in state common law.  It could make the argument that the Ninth Circuit is disingenuously applying unconscionability law here.  But that's not the question presented.  I don't see any way to give the arbitrator the ability to decide the legitimacy of the agreement to arbitrate itself.

Justice Breyer, author of First Options, summed it up this way:

[First Options says that] unless it's clear and unmistakable that they wanted this matter [--] the matter of whether the arbitration clause itself is unconscionable [--] referred to the arbitrator, whether or not they wanted that referred to the arbitrator has to be clear and unmistakable. And they are claiming no, because . . . the provision that says that is itself a product of unconscionability. . . . [W]hy isn't that the simplest, most direct and four-sentence ground for deciding this case?

If you haven't done so already, check out this great preview post by Aaron Bruhl.  I hope Aaron will weigh in with his thoughts on the argument.

Posted by Matt Bodie on April 28, 2010 at 11:11 AM in Civil Procedure, Employment and Labor Law, Judicial Process, Workplace Law | Permalink


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This website provides me a lot of information regarding state labor laws which is definitely quite helpful. I really find it easy to read such data on the net.

Posted by: State Labor Laws | Jun 16, 2010 3:09:25 AM

@ Kelly -- Yes, I think what both of us are discussing is, essentially, an application or extension of the Prima Paint separability rule. As you say, usually that rule conceptually separates the underlying contract (employment agreement, contract for sale of goods, whatever) from the agreement to arbitrate. Here we are conceptually separating yet another agreement, the agreement to arbitrate disputes over the validity of the agreement to arbitrate disputes over the underlying contract. (That's a mouthful.) But it's the same basic idea.

As far as whether the arguments in the briefs present things this way, my reading of them is that the argument in favor of enforcing the clause relies more on First Options. My own view is that the First Options rule standing alone is insufficient, because of the bootstrapping problem. That is why you need the separability argument.

Posted by: Aaron | Apr 30, 2010 3:02:58 PM

Matt Brodie: You question treating the agreement to arbitrate labor disputes as separate from the agreement to have the arbitrator determine the validity of the agreement to arbitrate. Treating these two as separate agreements, as Aaron suggests some members of the Court may do (and my own reading of the transcript confirms the possibility), has an analogy in well-established arbitration law.

Frequently, an arbitration clause appears in an larger contract. If the employment contract here (Agreement 1) had contained an arbitration clause, the arbitration clause would be construed as a separate agreement (Agreement 2). Even if Agreement 1, the employment contract, were subject to a claim of fraud, that claim would be submitted to the arbitrator, while the arbitration clause (Agreement 2) could be challenged in court only if there were fraud directed at it (again, treating it as a separate agreement).

I believe what Aaron is suggesting is that the Court may also treat an agreement to submit the validity of the arbitration clause to the arbitrator as another, separate agreement, Agreement 3. That is, Agreement 3 is treated as an agreement to arbitrate the validity of Agreement 2. In that case, the Court would only hear arguments about fraud directed specifically at Agreement 3. This argument actually fits in quite well, conceptually, with the existing framework of arbitration law.

Question: Did anyone (other than the justices) raise this argument in the briefs?

I had the impression from the transcript that no one saw this coming, or at least that the pro-arbitration argument was not built around this premise. This concept could make sense of some of the arguments, since the "I was in Alaska" defense would work as well for Agreement 3 as for Agreements 1 and 2. But the concession that fraud as to Agreement 2 would vitiate Agreement 3 is inconsistent with this approach.

Posted by: Kelly | Apr 29, 2010 11:38:15 PM

Thanks for the thoughtful posts and the shout-out to my “Mandatory Core” essay. There’s also a discussion about Rent-a-Center on Contracts Profs Blog, which I’d link to if my technical savvy hadn’t peaked in 1997.

Here’s something I’ve been chewing over. Suppose the Court adopts some variation of the “illusory remedy”/”impossibly burdensome” test from Awuah v. Coverall (which Matt mentions above) or Aaron’s distinction between (1) garden-variety unconscionability claims (such as challenges to discovery limitations or class action waivers) and (2) those that would force the plaintiff to endure the allegedly unconscionable injury just to get a ruling that the arbitration clause was, in fact, unconscionable (such as excessive costs or travel to Iceland). Suppose that the Court says that category (1) unconscionability claims are for the arbitrator, but category (2) claims are for the court.

If so, what will the next generation of arbitration clauses look like? Bear with me through a quick digression: ever since courts began to strike down class arbitration waivers on the grounds that they discouraged plaintiffs from prosecuting numerous low-value claims, companies began lacing arbitration clauses with elaborate incentives for plaintiffs to pursue those claims on an individual basis. For example, for all you iPhone owners out there, if you arbitrate against AT&T and win more than its last written settlement offer, AT&T will pay you a bounty of $10,000 and double your attorney’s fees. Shockingly, this is not pure largesse; it actually stems from AT&T’s desire to convince courts that its class arbitration waiver doesn’t immunize it from liability.

Could an “illusory remedy”/”impossibly burdensome” rule lead to two-tiered arbitration clauses? In tier one, a company sets forth the procedures that govern arbitration of the narrow question of whether the arbitration clause is unconscionable. Like AT&T’s class arbitration waiver, these rules are very plaintiff-friendly, making it virtually impossible to contend that the clause that delegates the issue of unconscionability to the arbitrator is itself unconscionable. (I.e., there would be no category (2) claims). Tier two sets forth the standards that govern arbitration of the plaintiff’s substantive claim. Whatever these tier two rules are, the first tier has effectively shielded them from judicial scrutiny.

I suppose this sounds a little paranoid. But then again, it’s not all that more far-fetched than the notion of delegating the validity of the arbitration clause to the arbitrator would’ve seemed a few decades ago!

Posted by: David Horton | Apr 29, 2010 11:05:09 PM

I'm not sure I buy that there are two separate agreements here. Couldn't you break down the whole contract into multiple separate agreements? Isn't the agreement not to include discovery separable from the agreement to have an arbitrator from AAA? What you're essentially doing is selecting certain aspects of the arbitration agreement that pertain (or do not pertain) to arbitrator fairness. I see the point. But I don't see two separate agreements, at least not here.

I guess what worried me most was Justice Scalia trying to convince Jackson's counsel that courts have great freedom to overrule arbitrators. What's going to happen if the Court (through some sort of severability or "partial unconscionability" argument) says that this type of unconscionability is an issue for arbitrators? Then the courts that currently have concerns about unconscionability will just start undoing these things at the back end. Justice Scalia (oddly enough) seems to think that's okay. But I don't. The standard for review of even legal errors is extremely lenient towards arbitrators. It would be disingenuous, to some extent, for courts to do their review at that point, but they may feel they have no other choice. I'd hate to see these efforts to define a fair arbitration be pushed back until after the parties have spent their time and energy going through an arbitration.

Which I guess gets us back to our ground of agreement: somebody (courts, legislatures, AAA) needs to develop a civil procedure of arbitration, at least when it comes to litigating statutory claims. I hope it happens soon.

One last note: those interested in this should also check out David Horton, The Mandatory Core of Section 4 of the Federal Arbitration Act, 96 Va. L. Rev. In Brief 1 (2010), http://www.virginialawreview.org/inbrief/2010/04/02/horton.pdf.

Posted by: Matt Bodie | Apr 29, 2010 11:44:36 AM

Since Matt kindly asked me what I thought . . .

Without in any way trying to be comprehensive, here are a few thoughts:

1. Regarding the distinction, which came up quite a bit in the argument, between things that go to the existence of a contract versus challenges to the validity of a contract -– The text of the FAA might be interpreted as contemplating this distinction, and the Court has made this distinction in some prior cases (see Buckeye fn.1), but I share your apparent feeling that this distinction isn’t the most satisfying thing in the world on which to allow major decisions to turn.

2a. One thing that I find illuminating in thinking about these issues is to be careful about distinguishing between the different agreements at issue. At points a couple Justices did this. Agreement 1 is an agreement to arbitrate employment disputes. Agreement 2 is an agreement to arbitrate disputes over the validity of Agreement 1. Here both agreements happen to be on the same piece of paper, but they could be different documents and could even be executed at different times. (Justice Kennedy gets at this point around pp. 36-37 of the transcript.)

2b. If Agreement 2 is unconscionable, then it shouldn’t be enforced, and I agree that it would seem prima facie weird to say that the arbitrator could rule on the validity of Agreement 2. However, do Jackson’s unconscionability arguments really concern Agreement 2? This is kind of a tough call, and the Justices were (understandably) having trouble nailing this down. So let’s make it easier with a hypothetical case where the unconscionability argument is that the arbitration clause restricts the damages available and restricts the discovery needed to prove the employment discrimination claim. Those challenges go to Agreement 1, in that they say that it would be unfair to have the underlying employment dispute resolved on such terms. Therefore, those challenges can go to the arbitrator, as his/her authority comes from the (unchallenged) Agreement 2.

2c. What would count as a challenge to Agreement 2, which would go to the court? Tentatively, I’d say things like arbitrator bias or the fact that you would have to travel to Iceland to have the arbitration in the first place. (I think these would count as attacks on both Agreement 1 and Agreement 2, which is fine.) Perhaps what I’m getting at here is basically what the First Circuit was getting at in Awuah. Or maybe you could just say that a clause like Agreement 2 is contrary to public policy or whatever – I don’t think the Supreme Court would buy that, but it would be an argument that would be presented to a court.

3. How will the case come out? I’m not sure, given that the oral argument shows that everything is really looking pretty muddled and, even if it weren’t all muddled, there are genuinely hard issues here. (Recall I’m not being comprehensive in this post!) I hope that the opinions in the case turn out to be as satisfying as I have found our discussions about the issue on this blog.

Posted by: Aaron | Apr 28, 2010 3:14:36 PM

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