Companies using arbitration in their consumer and employee contracts are urged to review those documents carefully in light of the U.S. Supreme Court decision on Monday in Rent-a-Center , West v. Jackson , No. 09-497 (June 21, 2010).

The Supreme Court, in a 5-4 decision, enforced the "delegation provision" of Rent-a-Center’s arbitration agreement, which stated that the arbitrator (and not the court) "shall have exclusive authority to resolve any dispute relating to the … enforceability … of the [Arbitration] Agreement including, but not limited to, any claim that all or any part of this [Arbitration] Agreement is void or voidable."

In reaching this decision, the majority stressed that the plaintiff had attacked the entire arbitration agreement rather than the delegation provision specifically, which it effectively treated as a separate arbitration agreement. As a result, the majority found that the case was governed by its decision in Prima Paint Corp. v. Flood & Conklin Mfg. Co. , 388 U.S. 395 (1967) and its progeny, which hold that challenges to the validity of an entire agreement, rather than the arbitration provision contained in the agreement, are for the arbitrator and not the court to decide.

Before the decision, consumer advocates warned that a decision favoring Rent-a-Center would prevent employees and consumers from ever being able to obtain a court ruling on the validity of an arbitration agreement. On Monday, Public Citizen, counsel to the plaintiff, Antonio Jackson, in Rent-a-Center , asserted that the opinion "Shuts [the] Court House Door to Challenges to Unfair Arbitration Clauses."

In fact, the Supreme Court’s decision does not go nearly this far. Rather, it seems primarily based on Mr. Jackson’s failure to make the correct argument in opposing Rent-a-Center’s motion to compel arbitration. As the majority explained: "It may be that had Jackson challenged the delegation provision by arguing that these common procedures [that were to be used during arbitration—the fee-splitting arrangement and the limitations on discovery] as applied to the delegation provision rendered that provision unconscionable, the challenge should have been considered by the court." Slip op. at 10 (emphasis in original). And recently, the Third Circuit, in Puleo v. Chase Bank USA, N.A ., No. 08-3837, 2010 WL 1838762 (May 10, 2010) (en banc), determined that a challenge to the validity of a class action waiver in an arbitration agreement was for the court to resolve because the arbitration provision in Chase’s credit cardholder agreement did not clearly and unmistakably delegate the issue to the arbitrator. (Click here to read our legal alert on Puleo.)

Ballard Spahr’s Consumer Financial Services Group is nationally recognized for its skill in defending banks and other consumer financial services providers in class actions filed in state and federal courts throughout the country. The group pioneered the use of pre-dispute arbitration provisions in consumer contracts and has counseled dozens of clients with respect to implementing arbitration agreements and enforcing them in court. For further information, please contact Alan S. Kaplinsky, Chair of the group, 215.864.8544 or kaplinsky@ballardspahr.com; Jeremy T. Rosenblum, Vice Chair of the group, 215.864.8505 or rosenblum@ballardspahr.com; Mark J. Levin, 215.864.8235 or levinm@ballardspahr.com; or Martin C. Bryce, Jr., 215.864.8238 or bryce@ballardspahr.com.


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