U.S. Supreme Court and Texas Supreme Court Continue to Protect Arbitration Rights

06 July 2010 Publication

U.S. Supreme Court Enforces Agreement to Arbitrate Enforceability Disputes

In Rent-A-Center, West, Inc. v. Jackson, __ U.S. ___ (June 21, 2010 slip op.) the U.S. Supreme Court addressed the arbitrability of a dispute regarding whether an arbitration agreement is enforceable. The case arose from a "Mutual Agreement to Arbitrate Claims" that was created in an employment context. That agreement contained two parts. Part one, the substantive part, contained the parties' agreement to arbitrate claims that the employee might have against the employer. Part two, the procedural part, included, among other provisions regarding the conduct of the arbitration, a clause that specifically delegated to the arbitrator the power to arbitrate whether the agreement is enforceable. This clause is referred to as the "delegation provision."

The employee sued in federal court, alleging employment discrimination. The employer moved to dismiss the complaint and to compel arbitration. The employee alleged that the entire arbitration agreement was unconscionable and, thus, unenforceable. The employee, however, did not specifically challenge the enforceability of the delegation provision that gave to the arbitrator the power to decide the unconscionability defense.

Although the enforceability of an "agreement to arbitrate" (as opposed to the enforceability of a contract as a whole) is ordinarily a "gateway issue" for the court to decide, the district court held for the employer because the parties clearly and unmistakably delegated to the arbitrator the power to decide the enforceability issue in that case. That is, the parties by agreement clearly and unmistakably overrode the normal rule that enforceability of an arbitration agreement is for the courts to decide.

The 9th U.S. Circuit Court of Appeals reversed that decision.

In a 5-to-4 decision, the U.S. Supreme Court reversed, holding that (1) the enforceability of an arbitration agreement is by a clear and unmistakable agreement lawfully delegable to an arbitrator; (2) the agreement in that case met that standard; (3) the employee was therefore required to specifically challenge the enforceability of the delegation provision (instead of the agreement as a whole) to render the challenge an issue for the court to decide instead of the arbitrator; and (4) the employee's failure to specifically challenge the enforceability of the delegation provision itself meant that the district court correctly dismissed the case and compelled arbitration of the dispute.

Employers wishing to have arbitrators decide an arbitration agreement's enforceability should include specific clauses to that effect in their agreements. Conversely, employees wishing to avoid such clauses must specifically attack the enforceability of the delegation clause itself.

Texas Supreme Court Protects Arbitration Agreement from Parallel Litigation

In In re Merrill Lynch & Co., Inc. and Merrill, Lynch, Pierce, Fenner & Smith Incorporated, __ S.W.3d __ (June 25, 2010 slip op.), the Texas Supreme Court conditionally granted mandamus relief in favor of Merrill Lynch, staying litigation against it by a non-signatory company when that company's sister company that was a signatory to an arbitration agreement was also asserting identical claims that were potentially subject to a class action carve out from its arbitration agreement with Merrill Lynch, the defendant in both cases. The signatory company had been a party to a class action suit that was dismissed. The possibility remained, however, that the class action could be revived. Until that issue was resolved, it would not be possible to determine whether the signatory's claims would be required to be arbitrated. If the signatory's claims were to be arbitrated (i.e., there was no class action), the non-signatory's suit could not proceed until after the arbitration. (Conversely, if the signatory's claims were to proceed in a class action, the carve out would apply and the non-signatory could proceed with its litigation proceeding.)

In so holding, the Texas Supreme Court relied on its prior decision in In re Merrill Lynch Trust Co., 235 S.W.3d 185, 195 (Tex. 2007) in which it held that where "the same issues must be decided in both arbitration … and in court … the latter must be stayed until the former is completed." In so holding, the Supreme Court further held that

when an issue is pending in both arbitration and litigation, the Federal Arbitration Act generally requires the arbitration to go forward first; arbitration 'should be given priority to the extent it is likely to resolve issues material to this lawsuit.' This has been the practice in all the federal courts. (footnotes omitted).

In the present case, the court observed that the only factual difference from its prior decision was the class action carve out provision and the fact that whether the signatory would participate in a class action suit remained an undecided issue. Nonetheless, the Supreme Court based its mandamus relief on the fact that the class action issue necessarily would be resolved in the future and that protecting Merrill Lynch's bargained for arbitration right took priority over the non-signatory's desire to proceed with its litigation claim.

Both cases reflect the trend among the majority of U.S. courts to enforce arbitration agreements based on traditional contract law principles.

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