Corporate Governance

Mind Your Peas and Queues at the Supreme Court: Reconciling Rent-a-Center with Citizens United, Part I

By Jennifer S. Taub

On June 21, in Rent-a-Center, West, Inc.  v. Jackson, a slim 5-4 Supreme Court majority once again favored a corporate person over a real person.  The dissent called it a 'bizarre' decision, and it was. The majority held that an employee who believed that the arbitration agreement he signed was unenforceable, could only challenge its enforceability through arbitration. 

District Court:
The case began in 2007, when Antonio Jackson filed a lawsuit against Rent-a-Center, West, Inc. , claiming racially-based employment discrimination and retaliation.  Prior to any trial on the merits of his discrimination claims, Rent-a-Center filed a motion to dismiss. The corporation argued that because back in 2003, when he was hired, Mr. Jackson signed an arbitration agreement, he was not entitled to pursue his case in court.  The 2003 arbitration agreement directed all disputes, including employment discrimination claims to an arbitrator. In addition, the agreement contained what's known as a 'delegation provision,' which stated that if there was a dispute over whether the agreement was unenforceable, the parties would go to an arbitrator, not to court to settle that question.

Hoping to avoid arbitration, Mr. Jackson opposed the motion to dismiss, arguing that the arbitration agreement was unconscionable and unenforceable under Nevada law.  For example, the agreement was very one-sided, with claims important to an employee (such as discrimination claims) sent to arbitration, but claims important to Rent-a-Center (trade secret disputes) not bound by the arbitration agreement and permitted to go to court. And, Nevada law routinely invalidates one-sided contracts. The district court granted Rent-a-Center's motion to dismiss.

9^th Circuit Court of Appeals:
On appeal, the 9^th Circuit sided, in part, with Mr. Jackson, vacating the lower court's order mandating arbitration. And, the 9th Circuit remanded the case to the the district court for it (not an arbitrator) to decide whether the arbitration agreement was unconscionable and thus whether Mr. Jackson could have 'meaningfully assent[ed]'  to its terms.  The decision applied the Federal Arbitration Act (the 'FAA'). While the FAA establishes clear support for arbitration agreements, it has historically been interpreted to allow a judge to decide gateway questions such as an agreement's validity. Under Section 2 of the FAA, aribration clauses are to enforced as written "save upon grounds that exist at law or in equity for the revocation of any contract."

Supreme Court:
In the majority opinion, written by Justice Scalia and joined by Roberts, Kennedy, Thomas and Alito, the Court had to split hairs in order to force Mr. Jackson into arbitration. The five justices 'reasoned'  that there are two distinct ways to ask a court to invalidate an arbitration agreement under the FAA. One way, 'challenges specifically the validity of the agreement to arbitrate.' The second way 'challenges the contract as a whole, either on a ground that directly affects the entire agreement ( e.g. , the agreement was fraudulently induced), or on the ground that the illegality of one of the contract's provisions renders the whole contract invalid.'  They claimed that prior precedent dictated that the right way to ask is the first way.  

Full post as published by The Race to the Bottom on June 29, 2010 (boomark / email).