Legal Alert

Supreme Court and Third Circuit Grapple with 'Who Decides Unconscionability of Arbitration Agreement?'

January 20, 2010

Companies that include arbitration agreements in their consumer or employment contracts should carefully monitor two cases in which important opinions are likely to be issued in the coming months. These cases should help clarify whether the court or an arbitrator decides a party's contention that the arbitration agreement is unconscionable and, therefore, unenforceable. Unconscionability is frequently asserted by the consumer or employee in opposing arbitration.

On January 15, 2010, in Rent-A-Center West, Inc. v. Jackson, No. 09-497, the U.S. Supreme Court granted certiorari to decide whether the district court is "required in all cases to determine claims that an arbitration agreement subject to the Federal Arbitration Act ('FAA') is unconscionable, even when the parties to the contract have clearly and unmistakably assigned this 'gateway' issue to the arbitrator for decision." The U.S. Court of Appeals for the Ninth Circuit, in a 2-1 panel decision, had held that where the party opposing arbitration asserts that he or she could not meaningfully assent to the agreement, the threshold question of unconscionability is for the court to decide, notwithstanding language in the arbitration agreement that the arbitrator has exclusive authority to make that decision. 581 F.3d 912 (9th Cir. 2009).

On December 3, 2009, in Puleo v. Chase Bank USA, N.A., No. 08-3837, the U.S. Court of Appeals for the Third Circuit sua sponte decided that it would determine in an en banc proceeding (1) whether an unconscionability challenge to an arbitration agreement's class action waiver is to be decided by the court or the arbitrator; and (2) whether the issue turns on whether the waiver provision, if invalid, would render the arbitration clause as a whole unenforceable. The U.S. District Court for the Eastern District of Pennsylvania had held that the plaintiffs' assertion that the class action waiver was unconscionable raised a threshold question of arbitrability for the court (not an arbitrator) to decide. The court held that the waiver was not unconscionable and ordered individual arbitration. No. 07-4800 (E.D. Pa. Order dated Aug. 12, 2008).

In Rent-A-Center, the Supreme Court entered an expedited briefing schedule pursuant to which briefing will be completed in the spring. In Puleo, en banc oral argument will be held on February 17, 2010. Because the decisions in these cases are likely to have a significant effect on both the drafting of arbitration agreements and the decisions issued by courts in other pending cases, we will issue further alerts as the opinions in Rent-A-Center and Puleo are rendered.

Ballard Spahr's Consumer Financial Services Group is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws throughout the country, and its skill in litigation defense and avoidance (including pioneering work in pre-dispute arbitration programs). For more information, please contact Alan S. Kaplinsky, group Chair, 215.864.8544 or; or Mark J. Levin, 215.864.8235 or

Copyright © 2010 by Ballard Spahr LLP.
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This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.

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