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Who is Watching the Watchmen?

Another View of Rent-A-Center, Arbitration and Arbitrability

By Neal R. TroumOctober 1, 2010 | Print
Alan Moore’s graphic novel, “Watchmen,” is a dark story critical of the idea of the superhero. The comic’s title refers to a quote attributed to the Roman satirist Juvenal, “Who watches the watchmen?” which asked what control exists over those to whom power has been given. From one point of view, “Watchmen” is a story that warns of the consequences of inadequate control over those who possess power.

Arbitrators are not superheroes. But within the arbitral forum, they have power—arguably more power than judges, with oversight limited to the most egregious improprieties, and without the constraints of procedural and evidentiary rules.

So the question—Who watches the arbitrators?—is an important one. One limit on the powers wielded by arbitrators is the safeguards that exist on the back end. Courts can vacate an arbitration award under the Federal Arbitration Act, for example, where the arbitrators have been partial, where they have been guilty of “misconduct” or “misbehavior,” where there has been “prejudice,” or where an arbitration ruling has been tainted with “corruption, fraud, or undue means.” 9 U.S.C. § 10(a). Another way to check the power of an arbitrator is to have someone other than the arbitrator decide if arbitration is the proper forum in the first place.

Whether a case goes to arbitration can be a hard-fought battle, and for good reason. The publicity that can accompany high-stakes litigation can be a powerful weapon against an opposing party with skeletons in the closet. The limited grounds for appeal of an arbitration award risk near-unreviewable compensatory and punitive damages awards.

For these reasons, among others, whether a case goes to arbitration in the first place, and whether a court or an arbitrator will have the power to decide a dispute, is a question whose answer matters.

Rent-A-Center, West Inc. v. Jackson, 130 S. Ct. 2772 (June 21, 2010)(available at www. supremecourt.gov/opinions/09pdf/09-497.pdf, (2010), asks who gets to decide who gets to decide—that is, who gets to determine whether a contractual agreement to arbitrate is enforceable. The Court addresses this question in the context of an arbitration clause that expressly provides that the arbitrator, and not a court, should decide whether the arbitration clause is enforceable.

Rent-A-Center is an employment discrimination suit filed in federal court. Defendant and former employer Rent-A-Center sought to invoke the arbitration clause in Jackson’s employment contract and compel arbitration. That contract specified that all “past, present or future” disputes would go to arbitration. It also provided that an “[a]rbitrator, and not any [court], shall have exclusive authority to resolve any dispute relating to [the agreement] . . . including, but not limited to any claim that all or any part of this Agreement is void or voidable.” (Emphasis added.) Jackson sought to avoid arbitration, claiming that the contract was unenforceable.

Deciding who gets to decide—specifically, deciding whether the agreement to arbitrate was enforceable such that Jackson’s claim should be adjudicated in arbitration and not in court—can get a little tricky. On the one hand, Jackson’s agreement with his employer expressly stated that the arbitrator would decide whether the agreement was enforceable, so the scope of the arbitrator’s power looked to encompass the question whether the arbitration clause was enforceable.

On the other hand, if the contract was unenforceable because it was unconscionable, as Jackson argued, the provision allocating power to the arbitrator was not valid, and the power to decide who gets to decide could not have been delegated by such a contract provision.

CUTTING THE KNOT

The federal district court cut the Gordian knot and sided with the arbitrator, holding that the arbitrator had the power to decide whether the agreement was enforceable, and thus whether the case was arbitrable. It hedged its bet, though, ruling in the alternative that the agreement was not in fact unconscionable. The Ninth U.S. Circuit Court of Appeals, in a split decision, reversed.

The Supreme Court last spring agreed with the district court, concluding that the arbitrator should be the one to decide whether the arbitrator should be the one to decide the parties’ dispute.

The Court began with the baseline rule that arbitration is a matter of contract. Thus, generally applicable contract defenses, like fraud, duress, and unconscionability, were applicable. So it was possible that a contractual provision saying that the arbitrator got to decide threshold arbitrability questions could theoretically be unenforceable where such a defense applied.

The Rent-A-Center Court ultimately provided an answer to who decides who gets to decide: It depends on the kind of challenge made. Did the party opposing arbitration (1) challenge the enforceability of the contract containing the arbitration provision as a whole, or (2) challenge the contract’s arbitration provision only? Based on precedent, the Court said, only the former class of challenges was for the arbitrator to decide.

The logic dictating this result is not easy to discern, and Rent-A-Center is somewhat inscrutable in terms of how the Court arrived at its decision. In lieu of such an explanation, the Court gives an example of the kind of threshold challenge a court should decide. “[F]raud in the inducement of the arbitration clause itself ”—but not the contract as a whole—is sufficient to invalidate an arbitration provision and has the effect of allocating the threshold arbitrability question to a court. It is not easy to see how that might play out in the real world, however.

TWO THRESHOLD CATEGORIES

If that’s the rule—and the Court has told us it is—then, under Rent-A-Center, threshold questions relating to whether an arbitration provision is enforceable can fall into one of two categories, and which category they fall into should determine who decides threshold questions.

A problem with just the arbitration provision? Goes to the court. A contractual defense challenging the validity of the contract as a whole? The arbitrator gets that one. Again, it’s not clear why this should be the rule, and there is little in the Court’s opinion that purports to explain why the rule is what it is. It is nonetheless easy to apply.

As to the case before it, the Court characterized Jackson’s argument as one that questioned the validity of the entire agreement between him and Rent-A-Center, and not the validity of the part of the agreement that set forth who should decide whether the arbitration provision was enforceable. Thus, under the Court’s bright-line rule, the question raised—“Is the contract with the arbitration provision enforceable?”—was for the arbitrator. “[U]nless Jackson challenged the delegation provision specifically, we must treat it as valid,” the Supreme Court ruled, and it sent the matter to arbitration.

If what is going on beneath the table in Rent-A-Center is somewhat confusing, there may be more to come. The Supreme Court has granted certiorari in another FAA arbitration case, Laster v. AT&T Mobility LLC, 584 F.3d 849 (9th Cir. 2009), now captioned AT&T Mobility LLC, v. Concepcion, No. 09-893, to be heard on Nov. 9. This case deals with a question that looks similar to the Rent-A-Center issue, relating to the unconscionability of an arbitration clause that “requires arbitration, but bars class actions.” Laster, 584 F.3d at 852.

If the math in Rent-A-Center is a little difficult to follow, AT&T Mobility may make Rent-A-Center look easy. The arbitration clause in the case involves the payment of a premium to the customer/claimant by a company/contract-author, but only where the company “does not make a settlement offer to the aggrieved customer in a sum equal to or higher than is ultimately awarded in arbitration, and before an arbitrator is selected.” Laster, 584 F.3d at 855-56. Again, this is tricky stuff.

Rent-A-Center makes it easy to ensure that someone watches the watchmen. All you have to do to is argue that the provision of the relevant agreement mandating arbitration is unenforceable, and the court will decide the threshold arbitrability question. If you instead challenge the enforceability of a contract containing an arbitration provision as a whole, then the threshold arbitrability question goes to the arbitrator, and the watchmen, so to speak, are left to watch themselves.


 

 

Neal R. Troum is a senior associate in Stradley Ronon Stevens & Young’s litigation practice group in Philadelphia. He focuses on complex civil litigation, including securities fraud, insurance coverage matters and appellate practice.

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