Rent-a-Center = Rent-a-Wreck

June 25, 2010
Guest Post

By Alan B. Morrison, Lerner Family Associate Dean for Public Interest & Public Service, George Washington University Law School
Like a brakeless train careening down a mountain, the Supreme Court delivered another blow to those seeking to avoid having their claims shunted off into arbitration when it held in Rent-a Center v. Jackson (No. 09-497, June 21, 2010) that the company's contract with its employee gave the power to the arbitrator, instead of a court, to decide when the terms of the arbitration were unconscionable. The 5-4 decision is significant in its own right (and wrongly decided as well), but that outcome is hardly surprising given the single-mindedness with which a narrow majority of the Court has pushed the Federal Arbitration Act of 1925 (FAA) into places that its authors could never have foreseen.

The FAA was passed by Congress to overcome decisions that made agreements to arbitrate unenforceable, even between two sophisticated businesses, the only ones that were seeking to use arbitration instead of the courts in those days. In recent years, the Court has embraced arbitration with a passion and upheld arbitration clauses that applied not only to contract claims, but to claims arising under federal laws of all kinds, including those barring discrimination in employment on grounds of race, gender, age, and other protected categories. Moreover, although the FAA contains an exception for contracts involving employees working "in commerce," the Court narrowly construed this exemption so that the employment agreements of workers who, under the prevailing interpretation of the Commerce Clause in 1925, could not constitutionally have been reached then, had their claims forced into arbitration so long as they, or as the Court ruled in a subsequent case, their union, "agreed" to have those claims arbitrated. The Court also rejected attempts by states to preclude arbitrations in certain situations, or impose conditions on their use, beyond those generally applicable all contracts, such as the defense of unconscionability.

The Court has also ruled that arbitrators not courts should decide the scope of what the parties agreed to arbitrate as well as the validity of any defenses to the validity of the contract, like failure of consideration or the statute of frauds. Until Rent-a-Center the rule had been that claims that arbitration clauses alone were unconscionable (and hence unenforceable) were to be decided by the courts, not arbitrators. But, in an opinion written by Justice Scalia, the employment contract in Rent-a-Center, which was given to the prospective employee on a take-it-or-leave-it basis, and contained a clause giving the arbitrator, rather than a court, the right to decide whether the part of the contract mandating arbitration was unconscionable, was upheld. The result, which the Court said was agreed to by the employee, is that the arbitrator rules on whether the terms of the arbitration agreement are fair, in which case he gets to decide the case (and get paid for doing so), or unconscionable, in which case the matter goes back to court. In Rent-a-Center, the employee was forced to arbitrate all of his claims, but the employer could go to court on the claims that it really cared about. In other agreements, the unconscionable feature is that the arbitral forum is unduly favorable to the party with the superior bargaining position, or other elements of the process are so one-sided that arbitration would not be enforced by a court. It is difficult to imagine that the Congress that specifically preserved all state-law defenses to contracts generally, as a precondition of enforceability, would have envisioned that it would be the arbitrators rather than the courts that would determine the validity of such defenses.

As everyone except perhaps the same five-person majority on the Supreme Court knows, mandatory, pre-printed arbitration clauses appear everywhere from employment contracts, to stock brokerage agreements, to purchases of computers, cell phones, and most other commercial products. In many situations, the claim will be so small and/or the case so complicated that, unless the case can be brought as a class action, no lawyer will take it, and no claimant would stand a chance against the company, whether in court or in arbitration. For a time the Supreme Court seemed open to the notion that even if a contract required arbitration, the arbitration could be done on a class basis, at least where the contract did not forbid it. But then on April 27, the Court, in an opinion written by Justice Alito, the same five-Justice majority (with Justice Sotomayor recused) held that where a contract does not authorize arbitration class actions (as most do not), a class arbitration was not permitted. Stolt-Nielsen v. AnimalFeeds International Corp. (No. 08-1198). The Court seemed to leave open the theoretical possibility that some underlying principle of law might provide a basis for class arbitration, but no sensible person would place much hope in that occurring. Thus, unless the company drafting the arbitration clause does what no company has done (or would have any incentive to do) and permits claimants to aggregate their claims in class-wide arbitrations, those claims would become effectively unenforceable. Indeed, most such agreements mandate arbitration and then specifically forbid class actions, thus closing off that theoretical possibility.

But victims of corporate overreaching have one remaining quiver in their litigation sheath: the argument that agreements that preclude class arbitrations are unconscionable as applied to claims that are viable only as class actions. A month ago the Court agreed to hear a case in which the Ninth Circuit upheld such a claim of unconscionability. AT&T Mobility Corp. v. Conception, (No. 09-893). However, unless the Court suddenly wakes up to the reality of what mandatory arbitration is doing to the rights of individuals, class actions for any claim involving a contractual relationship, even those based on federal statutory rights, will be a thing of the past.

The optimist in me says that if the Court stays true to its love affair with one on one arbitration, Congress will step and fix the problem, especially because the rights that it created when it enacted federal statutes are being systematically undermined. It could forbid enforcement of mandatory pre-dispute arbitration provisions, across-the-board, or as applied to federal statutory rights or for class actions. It could also assure that arbitrations are generally fair and that some forum - either a court or an arbitral tribunal - is available for claims that are viable only as class actions. The one thing it cannot in good conscience do is allow the Federal Arbitration Act to continue to ride roughshod over the rights of ordinary Americans.