U.S. Supreme Court Issues Two More Arbitration Decisions

The U.S. Supreme Court closed out its employment cases for the 2010 Term with two arbitration decisions. The Court held in one opinion that the arbitrator must resolve an arbitrability issue. The Court reached the opposite result in the other. Here's what happened.

In Granite Rock Co. v. Teamsters, the company and its union agreed on a new contract. But the Company would not agree to hold the union harmless for strike-related damage. The union continued to strike. The company argued the strike violated the "no-strike" clause in the parties' new contract, which also contained an arbitration clause. The union believed the agreement was not properly ratified and, therefore, not a contract when the strike occurred.

Granite sued the Teamsters in federal court alleging breach of contract against the local union, and interference with contract against the International. District court allowed a jury to decide when the agreement was ratified - which determined if the strike was arbitrated or resolved in court. Once the jury decided the agreement was properly ratified, the district court sent the case to arbitration over the merits of the breach of contract issue. The Ninth Circuit, though, held that the arbitrator should have decided the ratification issue.

The Supreme Court held the district court got it right. The court was required to decide if the parties agreed to arbitrate the breach of the no-strike clause issue, because courts enforce arbitration only to the extent the parties agreed. The date the contract was ratified amounted to a dispute over the applicability of arbitration to the dispute. If ratified, there would be a valid contract. Here's how the court put it:

a court may order arbitration of a particular dispute only where the court is satisfied that the parties agreed to arbitrate that dispute. See First Options, supra, at 943; AT&T Technologies, supra, at 648−649. To satisfy itself that such agreement exists, the court must resolve any issue that calls into question the formation or applicability of the specific arbitration clause that a party seeks to have the court enforce. See, e.g., Rent-A-Center, West, Inc. v. Jackson, ante, at 4−6 (opinion of SCALIA, J.). Where there is no provision validly committing them to an arbitrator, see ante, at 7, these issues typically concern the scope of the arbitration clause and its enforceability. In addition, these issues always include whether the clause was agreed to, and may include when that agreement was formed.
So, the court, not the arbitrator, had to decide when the contract was ratified.

This decision was 7-2, authored by Justice Thomas. Justices Sotomayor and Stevens dissented from this part of the opinion, but joined in the unanimous decision that there is no claim for tortious interference under federal law.

The opinion in Granite Rock Co. v. Teamsters is here.

Just a couple of days earlier, though, the Court held in Rent-a-Center West, Inc. v. Jackson that the arbitrator must decide arbitrability, albeit in a different context. Granite was decided under Section 301 of the LMRA. Rent-a-Center is a Federal Arbitration Act case. But the Court cites FAA decisions in Granite, too. So, the analysis is probably the same.

Jackson sued for employment discrimination in Nevada federal court. Rent-a-Center sought to compel arbitration. Jackson argued the agreement was "unconscionable" under Nevada law, which is a defense to the enforceability of the arbitration agreement.

But the arbitration agreement provided: "[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 any part of this Agreement is void or voidable."

So, unlike in Granite, the parties' agreement expressly gave the arbitrator the authority to determine whether the agreement was void, or enforceable. The Court held that, given the parties' "clear and unmistakable" agreement, any dispute over this provision was itself a question for the arbitrator to resolve:

The delegation provision is an agreement to arbitrate threshold issues concerning the arbitration agreement. We have recognized that parties can agree to arbitrate"gateway" questions of "arbitrability," such as whether the parties have agreed to arbitrate or whether their agreement covers a particular controversy.

The Court then analyzed whether the FAA permitted the court to permit the arbitrator to decide if the agreement was unconscionable. The Court held that the FAA did permit this. In particular, the court decided that Jackson alleged the entire arbitration agreement was invalid, not exclusively the provision conferring on the arbitrator the right to decide unconscionability. Had Jackson been able to argue this delegation provision alone was unconscionable (and how would he do that?) the court may have come down a different way.

Therefore, Jackson's challenge to the arbitration agreement as "unconscionable" must be decided by the arbitrator.

If arbitration agreements reserve the power to decide unconscionability to the arbitrator, that will certainly affect courts' power to decide "unconscionability" claims by plaintiffs seeking to avoid arbitration agreements.

This one was 5-4. The dissent argued the majority simply got it wrong, synthesizing the law as follows:

questions related to the validity of an arbitration agreement are usually matters for a court to resolve before it refers a dispute to arbitration. But questions of arbitrability may go to the arbitrator in two instances: (1) when the parties have demonstrated, clearly and unmistakably, that it is their intent to do so; or (2) when the validity of an arbitration agreement depends exclusively on the validity of the substantive contract of which it is a part.

The majority believed this rule required arbitration because both prongs were satisfied. But the dissent argued (1) because the agreement was alleged to be unconscionable, Jackson could not have "clearly and unmistakably" submitted arbitrability to the arbitrator. The dissent also argued

when a party raises a good-faith validity challenge to the arbitration agreement itself, that issue must be resolved before a court can say that he clearly and unmistakably intended to arbitrate that very validity question. This case well illustrates the point: If respondent’s unconscionability claim is correct—i.e., if the terms of the agreement are so one-sided and the process of its making so unfair—it would contravene the existence of clear and unmistakable assent to arbitrate the very question petitioner now seeks to arbitrate. Accordingly, it is necessary for the court to resolve the merits of respondent’s unconscionability claim in order to decide whether the parties have a valid arbitration agreement under §2. Otherwise, that section’s preservation of revocation issues for the Court would be meaningless.

The bottom line: unless or until Congress overturns this decision, it appears employers will be able to avoid courts' rulings on unconscionability and have arbitrators decide them instead.

The opinion in Rent-a-Center West, Inc. v. Jackson is here.