Relying on the Rent-A-Center decision, the Eighth Circuit Court of Appeals issued a decision last month that construed the parties’ relevant arbitration agreement very narrowly, thereby ducking a decision about whether the larger “disputes” section of the contract was void under state law. That makes the Eighth Circuit the first federal court to do exactly what the Rent-A-Center dissenters feared: force parties with an unenforceable arbitration agreement into arbitration just because the invalid provision was outside the sentence(s) containing the phrase “all disputes shall be decided in arbitration” (or a variation on that phrase).
I am the first to acknowledge that I am not even remotely impartial about this case, having represented the appellant, the party who argued its arbitration agreement was invalid. But, whether one agrees with the Eighth Circuit or not, there is no question that this is an important decision expanding the rule of Rent-A-Center and the general severability doctrine of federal arbitration law. This decision will allow courts in the Eighth Circuit (and potentially across the country) to define the relevant arbitration agreement very narrowly, and will make it much more difficult for parties to have a court decide whether their arbitration agreements are invalid.
In this case, M.A. Mortenson Co. v. Saunders Concrete Co, Inc., No. 11-2749 (8th Cir. April 30, 2012), the parties’ contract had a four paragraph section entitled “Disputes.” The second of those four paragraphs obligated the subcontractor to arbitrate disputes with the general contractor, at the general contractor’s discretion, even if the general contractor was not obligated to arbitrate with the owner. The general contractor never argued that the second paragraph was a “delegation clause” like the one present in Rent-A-Center (a clause agreeing to send disputes about the validity of the arbitration agreement to the arbitrator), and neither the district court nor the Eighth Circuit interpreted the second paragraph as a delegation clause.
Instead, the general contractor successfully compelled arbitration by arguing that under Rent-A-Center, that second paragraph contained a “specific agreement to arbitrate” that could be enforced, regardless of the content of the remaining four paragraphs. In contrast, the subcontractor had argued that all four paragraphs must be considered together-because they all related to any disputes arising under the subcontract, and just differentiated the process the subcontractor had to follow in particular instances (for example, pursue an administrative procedure or a third party before demanding arbitration with the general). The subcontractor had a strong argument that the fourth paragraph of the Disputes section was void under New York law (as a pay-if-paid provision). The Eighth Circuit avoided analyzing the fourth paragraph, however, by finding that the second paragraph “is a separate provision containing a specific agreement to arbitrate” and affirming the district court’s decision to compel arbitration.
I am unaware of any other federal court applying Rent-A-Center as the Eighth Circuit did today. (And let me tell you, I have spent a lot of time looking.) In fact, to date courts have carefully limited Rent-A-Center to its facts, so that only the poor soul with a delegation provision in his or her larger arbitration contract has to argue there is something invalid about the delegation clause in particular. E.g., Quilloin v. Tenet Healthsystem Phil., ___ F.3d __, 2012 WL 833742 (3d Cir. March 14, 2012) (finding Rent-A-Center “inapposite” because the there was “only one agreement to arbitrate” and the parties did not agree “to arbitrate arbitrability”); Palmer v. Infosys Technologies, Ltd. Inc., No. 2:11cv217, 2011 WL 5434258, at *2-4 (M.D. Ala. Nov. 9, 2011)(concluding that the arbitration agreement did not include a delegation provision and therefore the court could address the unconscionability arguments directed at multiple aspects of the arbitration agreement). For that reason, the M.A. Mortenson case is an important one for anyone who litigates arbitrability.