By James M. Gaitis With the issuance of the United States Supreme Court’s decision in Rent-a-Center, West, Inc. v. Jackson, the foundational principle of party autonomy in arbitration has suffered yet another blow. In essence, and as was fairly and pejoratively described in what may well be Justice Stevens’ last opinion (dissenting, as it was), the majority’s “breezy” and “fantastic” decision in Rent-a-Center, West decrees that that even when a separately documented arbitration agreement is clearly part and parcel of an integrated contract, that arbitration agreement must be viewed as a separate, stand-alone contract. What follows, according to Justice Scalia and the four joining conservative justices, is the conclusion that such an arbitration agreement not only is wholly separate from the primary contract but, also, that each independent “agreement” within the arbitration agreement is, itself, a severable agreement that must be challenged separately by a party who asserts that the arbitration provision is unconscionable and thus unenforceable. In other words, and as odd as it seems, the Court ruled that a general assertion that an arbitration agreement is void or voidable will not suffice to raise the question whether sub-provisions within that arbitration agreement are enforceable. In Rent-a-Center, West, this wholly unexpected and inexplicable ruling resulted in a determination that Jackson had waived his right to assert that a court, rather than an arbitrator, should determine whether the arbitration agreement was enforceable, the waiver supposedly occurring because Jackson had not focused on a sub-provision in the arbitration agreement that purported to grant that authority to the arbitrator. The issue at hand was narrow, to be sure. But the Court’s resolution is significant in that it plainly illustrates the conservative majority’s willingness to purport to base its decisions on the precepts of party autonomy when it suits the majority’s ideological objective and to utterly disregard those same precepts when the majority’s ideological objective so requires. The recent string of Supreme Court decisions illustrates this regrettable trend. And why does that matter? It matters because the sanctity of freedom of contract is implicated and because the legislative history of the Federal Arbitration Act (FAA) shows that the FAA had no purpose other than to enforce the parties’ intent when they enter into arbitration agreements: [The FAA] creates no new legislation, grants no new rights, except a remedy to enforce an agreement in commercial contracts and admiralty contracts. 65 Cong. Rec. 1931 (1924) (Rep. Graham). * * * * * The legislative history of the [FAA] establishes that the purpose behind its passage was to ensure judicial enforcement of privately made agreements to arbitrate. Dean Witter Reynolds v. Byrd, 470 U.S. 213, 219 (1985). And any lawyer (and, hopefully, many a non-lawyer) knows that the essence of any contract is what the parties “intended.” So let us take the quickest of looks at three prominent examples of recent Supreme Court split-decisions on the topic of arbitration and see where they lead. The first is the Court’s decision in Hall Street in which the majority held that a contractual agreement that an arbitrator’s award may be judicially reviewed for legal error is not enforceable under the FAA. Party autonomy be damned (and the legislative history of the FAA ignored). The second is Stolt-Nielsen in which the majority held that the issue whether an arbitration agreement permits class arbitration must be resolved by a strict contract law analysis regarding whether the parties actually intended to permit class arbitration. Hail to party autonomy. And now the third, Rent-a-Center, West in which the majority holds that when a separate arbitration agreement that is part of an integrated contract contains a separate clause granting the arbitrator authority to decide arbitrability issues, the question whether a party legally agreed to such an arbitration agreement as a whole (including the ancillary arbitrability jurisdiction clause) is irrelevant. This breezy and fantastic holding emasculates the law of contractual intent and, in so doing, casts aside the very purpose of the FAA, which was nothing more than to enforce the intent of the parties when they did, of their own free will, enter into an agreement to arbitrate. In keeping with the principle of party autonomy, the clear rule under the FAA should be that if a party cannot be held to have agreed to an arbitration agreement or clause, the party cannot be held to have agreed to subparts of that same agreement or clause. Other commentators have fairly noted that the majority’s decision in Rent-a-Center, West is baffling and, by its nature, not easy to quickly digest and explain. And, I believe, there are reasons why that is so. One primary reason is that Justice Scalia’s opinion craftily exploits a clear anomaly in arbitration law—the principle of competence-competence, as embedded in American domestic arbitration law by the Supreme Court’s decision in Prima Paint. Prima Paint simply provides that arbitration agreements within broader contracts are “severable” from the main contract, the consequence being that when a party asserts that a base contract is void or voidable, that issue is for the arbitrator to resolve but that when a party more narrowly asserts only that an arbitration agreement embedded within a general contract is void or voidable, that issue is for the court to decide. Justice Scalia exploits this principle of severability to now find that an arbitration agreement can have many sub-arbitration agreements embedded within it and that each such embedded agreement is severable or potentially severable such that each such sub-provision must be discretely challenged by a party to ensure they have preserved their standing to raise that issue. As Justice Steven’s puts it, the majority “plucked” a narrow aspect of the arbitration provision and treated it as a stand-alone agreement, the net effect being that the principle of severability has become multi-tiered or multi-layered, like Russian “nesting dolls.” Prima Paint itself, of course, is based on a fictional concept that is difficult to reconcile with long-existing contract interpretation law. That fiction is that when a party alleges that it did […]

By Alan Scott Rau One really needs a few days to absorb the importance of cases like this—I know instant punditry is increasingly de rigueur, but I’m quite uneasy with it. Anyway, with that caveat, one could say the following: The doctrinal importance of the case seems swamped by the overwhelming reality that arbitration, at least in adhesion contracts, has become something of a political football: Apparently “to decide that classwide arbitration is permitted” is not within the province of arbitrators without some explicit authorization (Stolt-Nielsen), but “to decide that an arbitration clause is unconscionable” is not within the province of courts, as long as the parties have incorporated a boilerplate AAA clause. (Rent-A-Center). It doesn’t take much of an infusion of Legal Realism to see that the conservative proclivities of the 5-justice majority, and the interests of drafting businesses, are in both cases driving the engine. On the purely doctrinal point, I think Scalia, surprisingly, has the best of the argument. (I say “surprisingly,” because Justices Stevens and Breyer have over the years been by far the most sensible and knowledgeable justices on arbitration matters). Justice Stevens, astonishingly, goes so far as to doubt the validity of the Prima Paint “separability” doctrine, a cornerstone of arbitration learning—calling it “erroneous” and “fantastic” and a mere “pleading standard.” Rent-A-Center is not, of course, about separability at all, but it is about the First Options case: With nothing in the contract, the question of the “unconscionability” of the arbitration clause—here, unconscionability because of “one sidedness,” and because of “limitations on discovery”—would indeed be a matter for the court; however, First Options suggests that this question can be delegated to the arbitrators, and the Court holds that that’s exactly what happened here. Now, it’s not coherent to suggest that everything can be delegated to the arbitrators—it’s meaningless to suggest that a contract could delegate to the arbitrators the power to decide whether an arbitration clause is valid over the objection that one of the parties was insane, or that the arbitration clause was induced by a gun to the head. The “delegation” there is faulty. But that’s not this case, and I see no logical impediment to the parties delegating to the arbitrators the power to decide whether the one-sided operation of the clause is enforceable. The fault line then, the key to the Scalia opinion —-which follows from the previous paragraph—is Scalia’s distinction between “the very existence of an agreement, the very existence of consent,” on the one hand, and the ” validity of that consent” on the other. He holds that this is a matter for the arbitrator because the former question is not implicated. This is a distinction which is the key also to Scalia’s opinion in the Cardegna case. I have written about this—it seems a rather fine distinction—but as long as the parties could entrust the arbitrators with this decision, First Options would seem satisfied. Alan Scott Rau is the Burg Family Professor of Law at The University of Texas at Austin School of Law. He received his BA and LLB from Harvard University. Professor Rau teaches and writes in the areas of Contracts and Alternative Dispute Resolution (particularly Arbitration). He is co-author of Processes of Dispute Resolution: The Role of Lawyers (3rd ed., 2002); ADR and Arbitration: Statutes and Commentary (West, 1998), and Cases and Materials on Contracts (West, 2nd ed. 1992), and the author of several articles, including most recently “The Arbitrability Question Itself” (American Review of International Arbitration, 1999); “La Contractualisation de l’Arbitrage: Le Modele Americain” (Revue de l’Arbitrage, 2001), and “All You Need to Know About Separability in Seventeen Simple Propositions” (American Review of International Arbitration, 2003). He serves on the Commercial and International Panels of the American Arbitration Association, and has been a visiting faculty member at the University of Toronto, China University of Political Science and Law in Beijing, Willamette University College of Law, the University of Geneva; and the Universities of Paris-I and Paris-II. Some of Professor Rau’s scholarly papers may be downloaded at the Social Science Research Network. Technorati Tags: law, ADR, arbitration

By Kent B. Scott and Cody W. Wilson How Do We Get the Mediator to See It Our Way? The client who asks this question has not understood the mediation process. This client erroneously believes that it must persuade the mediator that it has the best case. Thus, the client must be reminded that the mediator does not decide the dispute, so persuading the mediator is not the goal. The goal is to persuade the decision maker for the adversary that it is in both side’s interest to enter into mutually agreeable settlement. It is important to educate the mediator about the dispute but the reason for doing so is not so the mediator can reach a decision on the merits. It is to enable the mediator to engage in “reality testing” with each side so that they recognize that there are good reasons to settle, and to serve as an an effective intermediary in the dispute, conveying information and offers back and forth between the parties. When and Where Should We Mediate? Mediation can take place at any time before litigation is commenced or if already commenced, before the jury reaches a verdict, a judge hands down a ruling, or an arbitrator renders an award. When to mediate will vary with each case. The chemistry of each case will dictate the answer. The main danger is in mediating too soon. So it is important to keep in mind the elements of a successful mediation to make sure they are in place before beginning the mediation. As to where to mediate, the location is usually determined by the mediator and the parties. If the mediation is administered by the AAA, the case administrator and the mediator will work with the parties to determine the place and date for the mediation. Part VI of this series will discuss how to get the mediation started. Stay tuned. [Ed. note: the contents of this post were first published on a different form in the May/July 2008 Edition of the AAA Dispute Resolution Journal.] Kent B. Scott is a shareholder in the law firm of Babcock Scott & Babcock in Salt Lake City whose practice focuses on the prevention and resolution of construction disputes. As a mediator and arbitrator, Mr. Scott currently serves on the AAA’s panel of mediators and the AAA’s Large Complex Construction Case Panel. He also serves on the arbitration and mediation panels for the U.S. District Courts (District of Utah), State District Court (Utah) and Utah Dispute Resolution. Mr. Scott is a founding member of the Dispute Resolution Section of the Utah Bar and a Trustee for the Utah Council on Conflict Resolution. Cody W. Wilson is an associate in the law firm of Babcock Scott & Babcock, concentrating his practice in the area of construction law, is licensed in all courts in the State of Utah, the U.S. District Court of Utah, the 10th Circuit Court of Appeals, the U.S. Court of Federal Claims and is a member of the ABA Forum on the Construction Industry. They can be reached at kent@babcockscott.com and cody@babcockscott.com.

[UPDATE: The U.S. Supreme Court decided Rent-a-Center v. Jackson today. Find a link to the opinion here. Commentary about the case to follow. Stay tuned.] A new arbitration-related petition has been filed recently before the U.S. Supreme The case comes from the Court of Appeals for the Fifth Circuit. On December 17, 2009, the Fifth Circuit granted the motion to dismiss the case without any opinion. In Zurich American Insurance Company v. Pioneer Natural Resources USA, Inc., No 09-1305, the question presented is: Whether, in a case removed under the Convention on the Recognition and Enforcement of Arbitral Awards, 9 U.S.C. § 205, an order denying a motion to compel arbitration and remanding to state court is appealable under the Federal Arbitration Act’s express right of interlocutory appeal from such denials, 9 U.S.C. § 16(a)(1)(C), notwithstanding 28 U.S.C. § 1447(d). Petition for certiorari (from Scotus Blog) Other Cases Pending: Rent-a-Center v. Jackson (read more here) AT&T Mobility v. Concepcion (read more here) Stay tuned. Technorati Tags: ADR, law, arbitration