Keeping Arbitration Where it Belongs – In Arbitration: Big Win for Employers in Rent-a-Center, West, Inc. v. Jackson

July 2010

Employers who wish to arbitrate employment disputes should pay special attention to the U.S. Supreme Court’s recent decision in Rent-a-Center, West, Inc. v. Jackson. Although the purpose of an arbitration agreement is to resolve matters out of court, this purpose is often undermined by an in-court challenge to the validity of the agreement itself. In this case, the Court finally reached the issue of who should determine the enforceability of the arbitration agreement where a delegation clause specifically delegates that power to the arbitrator. In a big win for employers, the Court concluded that the validity of an arbitration agreement may be determined by an arbitrator unless the employee very specifically challenges the provision putting that power in the hands of a judge.

The Facts. When Antonio Jackson was hired by Rent-a-Center, he signed an employment agreement that required all disputes arising out of the employment relationship to be submitted to arbitration. The agreement gave the arbitrator exclusive authority to interpret the agreement and determine whether the arbitration clause was valid. In 2007, Jackson filed suit against Rent-a-Center in federal court. Rent-a-Center moved to compel arbitration pursuant to the agreement. When Jackson claimed that the arbitration agreement was unenforceable, Rent-a-Center argued that only an arbitrator could decide the enforceability of the agreement pursuant to the delegation clause.

The Analysis. The Supreme Court agreed. It held that under the Federal Arbitration Act, there are two types of challenges to the validity of an arbitration agreement. If the challenge is to the validity of the delegation clause, rather than the agreement as a whole, the sub-issue of the delegation clause is severable and must be resolved by the court. However, if the Plaintiff challenges the entire agreement, it is not severable and the entire action is properly directed to the arbitrator.

The Court concluded that Jackson had challenged the agreement as a whole rather than the delegation clause. Although Jackson specifically objected to delegation after Rent-a-Center moved to compel, the Court decided that it was too late to invoke the court’s jurisdiction. Furthermore, although the underlying contract had no real substance other than the arbitration agreement, the Court found that this did not affect the severability of the contract or how the Court’s reasoning should be applied.

The Effect. For employers, the Court’s holding may make it easier to keep employment disputes out of court from start to finish. Where an arbitration agreement contains a delegation clause, a claim that the entire arbitration agreement is invalid or unenforceable will be insufficient to invoke the court’s jurisdiction. Unless the delegation clause is specifically challenged, the arbitrator will have the power to determine whether the arbitration agreement is enforceable.

Even if an employee does challenge the delegation clause, he or she will have to prove to the court that the delegation clause itself is somehow unfair or unenforceable apart from the enforceability of arbitration agreement. Accordingly, this adds an extra hurdle for employees seeking to avoid arbitration. Employers wishing to strengthen their arbitration agreements should consider inserting a delegation clause. Please contact your employment law attorney for more information regarding the appropriate use of these clauses.

Please note that the information contained in this newsletter is not intended to provide specific legal advice. You should consult with an attorney and not rely on any information contained herein regarding your specific situation.