Jackson v. Rent-A-Center: A Supreme Court Challenge to Unconscionable Mandatory Arbitration Clauses in Employment Contracts

By Matt Wessler, Public Justice Budd-Kazan Attorney 

On April 26, the U.S. Supreme Court heard argument in a watershed arbitration case, Rent-A-Center v. Jackson, that poses significant questions about the scope and meaning of the Federal Arbitration Act (“FAA”), the relationship between courts and arbitration, and the basic ability of consumers and employees to gain access to courts. The issue – which seemed to puzzle and, at times, frustrate the Court – was whether an arbitration agreement could require a court, when faced with an unconscionability challenge to the arbitration agreement, to enforce the agreement and send the parties to arbitration, where an arbitrator would decide the unconscionability challenge.

By the end of oral argument, the only thing that seemed clear was that it remains deeply uncertain just how the Court will resolve the central issues in the case. The Court seemed most focused on the contract law theory underlying the defense of unconscionability – whether this defense is one of formation or post-formation – and whether it falls within the meaning of section 4 of the FAA. It may be that the Court’s resolution of this question will dictate the outcome of the case, though the consensus seems to be that no single majority could agree on what the outcome should be. See, e,g, http://lawprofessors.typepad.com/contractsprof_blog; http://prawfsblawg.blogs.com/prawfsblawg/2010/04/formation-is-a-very-basic-existential-analysis-thoughts-on-the-rentacenter-oral-argument.html; http://www.law.com/jsp/article.
But apart from how the Court will ultimately decide the case, one sweeping theory that was initially proposed by the Petitioner, Rent-A-Center, appears to have been put to rest.

Rent-A-Center seeks an expansive rule.
When it initially asked the Supreme Court to hear this case, Rent-A-Center sought to obtain a far-reaching victory. The question originally posed to the Supreme Court by Rent-A-Center was:

Whether a district court or an arbitrator should decide claims that an arbitration agreement under the Federal Arbitration Act (“FAA”) is unconscionable, when the parties to the agreement have clearly and unmistakably assigned this “gateway” issue to the arbitrator for decision.

Pet. Br. at (i). If answered in Rent-A-Center’s favor, this question would establish a bright-line rule that, where an arbitration agreement contains a delegation clause like the one in Rent-A-Center’s arbitration agreement, any and all unconscionability challenges would have to be decided by an arbitrator, and a court’s only duty would be to enforce the arbitration agreement and send to the parties to arbitration.

Rent-A-Center could have asked the Court to decide a much narrower question, i.e., whether Respondent Antonio Jackson’s specific unconscionability challenges – which the Ninth Circuit had held were for a court to decide – were more appropriately decided by an arbitrator. Instead, though, Rent-A-Center pursued a more ambitious result: “the ability for it and like-minded companies to draft around the FAA’s requirement that courts review the validity and enforceability of arbitration clauses before enforcing them.” Respondent’s Br. at 43 n. 14. Thus, according to Rent-A-Center, where there is no dispute that a party “(1) signed the Arbitration Agreement; (2) it covers his claims for relief; (3) it refers the issue of unconscionability to the arbitrator; and (4) it does so in clear and unmistakable language,” under the basic principles of the FAA, a court is compelled to “enforce the agreement in accordance with its terms” and send the parties to arbitration. Pet. Br. at 14.

By its plain logic, Rent-A-Center’s position would never allow a party to raise an unconscionability challenge in court. The question it presented made no distinction between types of unconscionability challenges: on its face, it sought a decision as to whether unconscionability challenges are categorically either for a court or for an arbitrator, where the arbitration agreement contains a clear and unmistakable delegation clause. And nowhere in its opening brief did Rent-A-Center suggest that some unconscionability challenges were always for a court. Instead, Rent-A-Center insisted that “proper application of the FAA should result in ‘unobstructed enforcement’ of the parties’ agreement to submit any disputes regarding [claims including unconscionability] to the arbitrator for a prompt and fair decision.” Pet. Br. at 20 (italics added). It also urged that “courts must enforce agreements to arbitrate in the manner provided for in the parties agreement.” Pet. Br. at 12. Thus, according to Rent-A-Center, where an arbitration clause delegates unconscionability challenges to an arbitrator, all unconscionability challenges, irrespective of the basis or substance of the challenge, must be decided by the arbitrator.

In his brief on the merits, Jackson explained that the reach of this rule would completely eliminate the ability of courts to review even the most unfair and abusive types of arbitration provisions. Jackson pointed out that under Rent-A-Center’s theory, if an arbitration agreement that “requires one party to pay prohibitively large fees, travel extraordinary distances, or submit her claim to an arbitrator with close ties to the other party . . . were also to contain a delegation clause, then any questions as to the validity and enforceability of that clause would have to be decided by an arbitrator, not the court.” Resp. Br. at 12. This would present an “insurmountable Catch-22,” because “to pursue such a challenge in arbitration a party would have to subject itself to the aspects of the clause that it is arguing are unconscionable in the first place.” Id. Courts have, Jackson explained, struck down arbitration clauses that required employees and consumers to pay unfairly large sums of money to arbitrators to have their claims heard, or arbitration clauses that made individuals travel across the country to raise their claims. But “if Rent-A-Center were to succeed, there would be nothing to stop stronger parties to contracts . . . from inserting similar language into the arbitration clauses that routinely appear in employment and consumer contracts” and insulating these clauses from meaningful judicial review for elements of basic fairness. Respondent’s Br. at 9.

Rent-A-Center retreats from its extreme position.
Having apparently grasped the sweeping breadth of its initial proposal, Rent-A-Center in its reply brief conceded that a court must be allowed to decide some types of unconscionability challenges raised by a party to an arbitration agreement. Those challenges Rent-A-Center agreed were necessarily for a court were “situations where access to arbitration was ‘impossibly burdensome.’” Reply Br. at 18.   Rent-A-Center agreed that where arbitration agreements do “not provide access to arbitration and . . . the unconscionability defense hence cannot be decided in that forum, the court, as a threshold matter, could refuse to compel arbitration” irrespective of any delegation clause. Reply Br. at 17. But an unconscionability claim that raised “essentially a fairness issue” could still be delegated to the arbitrator. Reply Br. at 18.

At the oral argument, counsel for Rent-A-Center initially seemed to reprise the original position Rent-A-Center had staked out in its opening brief. Counsel stated flatly that “[a]ttacks on the fairness” of the arbitration agreement “would be for the arbitrator to decide.” Tr. at 9. According to counsel, “the determination of unconscionability is for the arbitrator. . . . the limited role of the court goes only to the making, not to the issue of unconscionability.” Tr. at 57.

But Rent-A-Center retreated in the face of the Court's push-back. When Justice Stevens asked whether an arbitrator must always decide unconscionability challenges “no matter how one-sided?” counsel hedged, admitting that “if there is an issue about arbitral access, as in there is a block at the door, you cannot get a ticket for the show, because of some impediment in getting to arbitration in the first place . . . . that would be a different story.” Tr. at 11-12. Rent-A-Center’s counsel offered no basis – either from caselaw or the FAA – for this distinction, but he at least appeared to confirm that Rent-A-Center had backed down from its initially absolute position. Ultimately, counsel appeared to want to carve out two categories of challenges that were always for a court: those challenges that deal with a set of very narrow formation issues (“Making issues [that] go to the actual formation, mutual assent, and there is obviously no mutual assent if you have a gun to your head.” Tr. at 21), and those that deal with the impossibility of access to the arbitral forum. Thus, he told the Court, “[t]here [are] two areas that we agree are for the court. One is to determine whether or not there is an issue with the making of the agreement. The other one if it’s challenged is to determine whether or not there is indeed access to arbitration.” Tr. at 57-8.

The Court seems to reject Rent-A-Center’s original position.
The Court, for its part, appeared skeptical that Rent-A-Center’s original rule was reasonable or justified. Instead, most members seemed to agree that there were at least certain types of unconscionability challenges that could in no instance be delegated to an arbitrator for decision. Thus, Justice Breyer and Justice Stevens (presumably along with Justices Ginsburg and Sotomayor, who seemed generally skeptical of Rent-A-Center’s position in total) agreed that where an arbitration agreement imposed prohibitive costs on a party such that she could not gain access to the arbitral forum, a court must decide whether such a provision was unconscionable. Tr. at 11, 13. Chief Justice Roberts thought that courts “get to decide is there a valid contract or is there not,” suggesting that he, too, would not agree that parties could delegate all questions relating to the validity and enforceability of an arbitration agreement. Tr. at 21 (noting at the same time, however, that once a court decides that question, an unconscionability challenge lodged against a specific provision “is for the arbitrator”); Tr. at 26 (“[O]nce you get past that gateway question of whether the formation of the contract was not unconscionable, then claims that particular provisions were unconscionable are by definition for the arbitrator to decide.”). Justice Scalia initially seemed amenable to Rent-A-Center’s original rule, telling Jackson’s counsel that “I would say all unconscionability challenges, if you have an agreement that is as clear as this one, would go to the arbitrator.” Tr. at 47. But by the end, even he appeared to reject Rent-A-Center’s original rule, telling Rent-A-Center's counsel, "[i]f there is no access to arbitration there is no way that you can leave that issue to the arbitrator . . . . Because you don’t get to the arbitrator.” Tr. at 58.

Some hope for arbitration fairness?
Rent-A-Center v. Jackson began modestly, as a limited – and routine – dispute about whether a single arbitration agreement is valid and enforceable. When it reached the Supreme Court, however, the central dispute in the case had dramatically expanded in scope, to whether companies could unilaterally write their standard form contracts to completely eliminate meaningful judicial review of the fairness of arbitration clauses before they are enforced, thereby leaving arbitration to be policed only by arbitrators themselves. But by the time oral argument ended on Monday, it appeared as though the Court remained unwilling to adopt such a broad proposition. A majority of the Court indicated that at least some judicial review was necessary in order to ensure that arbitration does not spiral out of control, and even Rent-A-Center itself backed away from its original, sweeping proposition.

Although the Court’s decision in Rent-A-Center will ultimately reveal just how far companies may go to eliminate courts from their traditional role of ensuring that arbitration agreements meet basic elements of fairness, it appears, at least preliminarily, that based upon Rent-A-Center’s own concessions and the Court’s skepticism, the biggest fears of the consumer, employee, and civil rights communities – that the Court would fully insulate corporations and arbitration from any meaningful judicial review from even the most abusive arbitration agreements – may perhaps be unfounded. How the Court will harmonize these sentiments with the structure, text, and logic of the FAA, or with the basic contract law governing claims of unconscionability remains to be seen, but this development should encourage those who believe that there must be some role for courts in policing the most abusive elements of the arbitration system.

About the Author

Matt Wessler is the Budd-Kazan Attorney at Public Justice.  He was co-counsel for the plaintiff in Jackson v. Rent-A-Center in the U.S. Supreme Court.