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 Scaliaand 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).
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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 agreementpermits 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 arbitrabilityjurisdiction 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 not agree to enter into a contract containing an arbitration provision, that party will still be held in the first instance, and before the merits of the contention are resolved, to having agreed to the arbitration clause within the very contract the party challenges as unenforceable. The foundation for the anomalous Prima Paint rule no doubt originates largely in international arbitration law and the doctrine of competence-competence, which, too, gave the arbitrator the authority to determine whether the base contract was void or voidable even though the arbitrator’s own authority would logically be deemed nonexistent were the contract to be voided. In the international context, this inconsistency in logic (something normally to be abhorred in the law, especially when it comes to contract construction) was and is tolerated because it serves to keep the issue out of national courts that have always been feared to be biased in favor of their own nationals and against foreign parties. But quite the opposite consideration should now control the question whether Prima Paint continues to be justified in contemporary domestic U.S. arbitrations. That is so because the proliferating business of arbitration, and more particularly the profession of being an arbitrator, has expanded so greatly that the United States now is home to tens of thousands of arbitrators, all of whom would like to realize more than a bit of income now and then. Which means that now, far more than ever before, arbitrators have a significant personal financial stake (in arbitration parlance, we call this a “potential bias”) in resolving the arbitrability question in favor of arbitrability and thereby ensuring a flow of income. Stated otherwise, just as the international arbitration law concept of competence-competence was designed to eliminate the perceived potential bias of the decision maker (in international arbitration, the national courts), American domestic arbitration law, too, should insulate the parties from having arbitrability issues resolved by a decision maker who is potentially biased (in U.S. domestic arbitrations, the arbitrator). For these reasons, I join with Justice Stevens in rejecting the “fantasy” (i.e., the imputing of intent when the existence of that intent has yet to be proved) that serves as the foundation for Prima Paint and, just as did Justice Stevens, I reject the even more confounding “fantasy” of nesting doll severability that underlies Justice Scalia’s majority opinion in Rent-a-Center, West, which further undermines party autonomy and the holy grail of contractual intent.
James M. Gaitis is the former Director of the International Dispute Management Programme at the Centre for Energy, Petroleum & Mineral Law & Policy, University of Dundee, Scotland, where he remains a member of the Global Faculty. He is the Editor-in-Chief of the second edition of The College of Commercial Arbitrators Guide to Best Practices in Commercial Arbitration (J. Gaitis, C. von Kann, R. Wachsmuth forthcoming Fall 2010) and the author of numerous law review articles on the topic of arbitration, several of which have been repeatedly cited to the United States Supreme Court and lower state and federal appellate courts. Over the past twenty years he has served on a diverse array of arbitration rosters, including as a Fellow of the College of Commercial Arbitrators, a Fellow of the Chartered Institute of Arbitrators, and as a panelist on the AAA Complex Case Panel and the Energy/Oil & Gas Panels of the AAA and CPR. He received his BA from the University of Notre Dame and his JD from the College of Law at the University of Iowa where he was an editor of the Iowa Law Review. He is also the author of two published novels. He may be reached via email at: email@example.com.