Supreme Court Says to Follow Contract Provision Requiring Arbitration
In a 5-4 decision, the U.S. Supreme Court established a standard for challenging the enforceability of arbitration clauses in court. The Court held that when a contract says the validity of the contract must be determined by an arbitrator, the question of the entire contract’s validity as a whole must be decided by an arbitrator. However, if a party specifically challenges only the arbitration clause and not the entire contract, a court may have jurisdiction to rule on the matter.
This decision may potentially affect thousands of businesses in Travis County and Central Texas. Companies that have, or are considering arbitration clauses in their employment contracts should pay attention to the Supreme Court’s decision.
The Background of the Case
The issue arose when Antonio Jackson was repeatedly passed over for promotion until he complained to his store manager and human resources at Rent-A-Center West, Inc. (RAC). When he eventually was promoted, he was fired two months later. Jackson then filed a complaint in court alleging racial discrimination and retaliation.
Jackson’s employment contract with RAC contained two arbitration provisions. The first provision required that any dispute arising out of Jackson’s employment had to be resolved by an arbitrator. The second provision stated that only an arbitrator had the authority to answer any question of whether the contract was enforceable or not.
Based on the employment contract, RAC asserted that only an arbitrator could decide whether Jackson suffered discrimination or retaliation, not a court, because it was a dispute arising out of his employment with RAC. Jackson argued that the entire employment agreement was unenforceable; therefore, arbitration was not required.
Jackson claimed that the employment agreement was invalid because the contract was unconscionable, meaning it was so unreasonable and one-sided that it should not be enforced, due to unequal bargaining power.
The Ruling
The Supreme Court ruled in favor of RAC because Jackson challenged the validity of the employment agreement as a whole instead of challenging just the second arbitration provision, which said that an arbitrator must decide whether the contract is enforceable.
The Court stated that if Jackson had challenged only the second arbitration provision, a court may have had jurisdiction to decide whether the provision was valid. However, under the Federal Arbitration Act, a challenge to a contract as a whole is an issue to be resolved by an arbitrator rather than a court, especially when the contract language requires it.
Therefore, when a contract includes a requirement that an arbitrator determine the enforceability of the contract as a whole, an arbitrator may make that decision. But, if a party specifically challenges the requirement to use an arbitrator to determine enforceability, a court may have jurisdiction to decide whether arbitration is really required.
The Implications
This ruling affects disputes between businesses and employees as well as disputes between companies who have arbitration clauses in their contract. It means that provisions requiring arbitration to determine a contract’s validity will generally be enforced. As a consequence, it is important to contact an experienced Austin business attorney when drafting, enforcing or challenging contracts to protect your rights.
