SCOTUS Grants Certiorari in Consumer Arbitration Cases

The U.S. Supreme Court will hear two cases regarding the power of an arbitrator to determine his own jurisdiction.

On January 15, 2010, in Rent-A-Center West, Inc. v. Jackson, No. 09-497, the U.S. Supreme Court granted certiorari to decide whether the district court is "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 U.S. Court of Appeals for the Ninth Circuit, in a 2-1 panel decision, had held that where the party opposing arbitration asserts that he or she could not meaningfully assent to the agreement, the threshold question of unconscionability is for the court to decide, notwithstanding language in the arbitration agreement that the arbitrator has exclusive authority to make that decision. 581 F.3d 912 (9th Cir. 2009).

On December 3, 2009, in Puleo v. Chase Bank USA, N.A., No. 08-3837, the U.S. Court of Appeals for the Third Circuit sua sponte decided that it would determine in an en banc proceeding (1) whether an unconscionability challenge to an arbitration agreement's class action waiver is to be decided by the court or the arbitrator; and (2) whether the issue turns on whether the waiver provision, if invalid, would render the arbitration clause as a whole unenforceable. The U.S. District Court for the Eastern District of Pennsylvania had held that the plaintiffs' assertion that the class action waiver was unconscionable raised a threshold question of arbitrability for the court (not an arbitrator) to decide. The court held that the waiver was not unconscionable and ordered individual arbitration. No. 07-4800 (E.D. Pa. Order dated Aug. 12, 2008). [Ballard Spahr]

These cases are consumer cases, and so the ultimate SCOTUS decision may not apply to franchise arbitrations. However, it is important to note that in both cases the lower court ruling curbed the power of the arbitrator. As such, those lower court rulings are in line with much of the lower-level skepticism of arbitrators determining unconscionability.

If one or both of the decisions is overturned by SCOTUS, this would be a setback for those franchisees who attempt to challenge their arbitration provisions on grounds of unconscionability (since the standard for franchise-related challenges to ADR would presumably be more strict than consumer-related).

It will also be interesting to note if any of the Justices take the opportunity to address the broader debate over the growing prevalence of arbitration in American life. In theory, the Justices should rule on the most narrow grounds possible. However, one or more of the Justices might take the opportunity to signal (in dicta) potential changes in how the Court will view arbitration cases.

Moreover, the fact that the Court is taking on 2 cases which are meaty jurisprudential threshold issues may indicate an internal debate over the broader issue of arbitration. Although just 4 votes are necessary to grant cert, only a tiny minority of applications manage to get 4 votes, and the fact that 2 cases managed to get a hearing before the high court may be a harbinger of things to come.

Companies that include arbitration agreements in their consumer or employment contracts should carefully monitor two cases in which important opinions are likely to be issued in the coming months. These cases should help clarify whether the court or an arbitrator decides a party's contention that the arbitration agreement is unconscionable and, therefore, unenforceable. Unconscionability is frequently asserted by the consumer or employee in opposing arbitration. [Ballard Spahr]

Note: Rent-A-Center (NASDAQ: RCII) offers franchises through its ColorTyme subsidiary.

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Related Reading:

• SCOTUS Takes Arbitration Case, Justice Department to Increase Fair Credit Enforcement, Public Citizen: Consumer Law & Policy Blog
• US Supreme Court to Decide Fate of Class Arbitration Where Arbitral Clause Is Silent, (pdf) Latham & Watkins' International Dispute Resolution Practice