The U.S. Supreme Court Jan. 15 agreed to review an appeals court decision that a court, not an arbitrator, must decide whether an arbitration agreement signed by a former employee suing for race discrimination is unconscionable, despite a provision in the agreement giving arbitrators exclusive authority to resolve disputes over enforceability of the agreement (Rent-A-Center West Inc. v. Jackson, U.S., No. 09-497, cert. granted 1/15/10).

Rent-A-Center West Inc. asked the justices to reverse the U.S. Court of Appeals for the Ninth Circuit's 2-1 decision last September that Antonio Jackson, a former account manager for the Nevada rent-to-own company, is entitled to have a court decide whether the arbitration agreement he signed as a condition of employment is unconscionable under state contract law ( 581 F.3d 912, 107 FEP Cases 254 (9th Cir. 2009); 27 HRR 1001, 9/21/09).

When “a party challenges an arbitration agreement as unconscionable, and thus asserts that he could not meaningfully assent to the agreement, the threshold question of unconscionability is for the court,” the Ninth Circuit panel majority said.

A district court correctly found that the provision calling for Rent-A-Center West Inc. and Antonio Jackson to split equally the arbitration costs is not substantively unconscionable, the appeals court said. However, it found that the district court on remand must address Jackson's additional arguments that the arbitration agreement's coverage and discovery provisions unfairly favor the company and make the agreement substantively unconscionable.

Judge Cynthia Holcomb Hall dissented, asserting that “the question of the arbitration agreement's validity should have gone to the arbitrator, as the parties 'clearly and unmistakably provide[d]' in their agreement.”

Sued for Race Discrimination, Retaliation.

Jackson, who is African American, started working for Rent-A-Center in June 2004 as an account manager in Washoe County, Nev. According to his complaint, the company repeatedly denied him promotions and gave the positions to non-African Americans with less seniority. Jackson alleged that he repeatedly complained to the corporate office and the human resources department and filled out three discrimination complaints. He claimed that Rent-A-Center retaliated against him by suspending him, transferring him to a less desirable location, and then firing him without cause two months after the company had finally promoted him.

Jackson sued Rent-A-Center in February 2007, bringing race discrimination and retaliation claims under the Civil Rights Act of 1866 (42 U.S.C. § 1981). The company moved to compel arbitration under an agreement Jackson signed as a condition of employment that specifically covers discrimination claims. Jackson argued that the arbitration agreement is unenforceable because it is substantively and procedurally unconscionable.

The U.S. District Court for the District of Nevada granted the motion to compel arbitration. The appeals court said the district court erred by applying the rule in Buckeye Check Cashing Inc. v. Cardegna ( 546 U.S. 440, 74 USLW 4126 (2006)) that when a party challenges the validity of a contract, but not its arbitration provisions, the arbitrator, not the court, decides whether the contract is valid. The appeals court found that the “flip side of this rule” applies in this case--“that when a party specifically challenges the validity of arbitration provisions within a larger contract, apart from the contract as a whole, a court decides the threshold question of the enforceability of the arbitration provisions.”

Ruling Undermines FAA's Purpose, Employer Says.

In its Oct. 23, 2009, petition for Supreme Court review, Rent-A-Center argued that the Ninth Circuit's decision undermines the Federal Arbitration Act's purpose “to enforce agreements to arbitrate according to their express terms.”

The general rule is that trial courts decide two “gateway” issues--whether there is a valid and binding agreement to arbitrate and whether that agreement covers the particular dispute, the company said. It asserted that the Supreme Court has recognized an exception to the general rule when the parties clearly and unmistakably agree that the arbitrator will decide those gateway issues. The Ninth Circuit “created, without support, a new 'exception to the exception' that swallows most of the exception whole,” the company said.

Jackson in his Dec. 17, 2009, brief opposing Supreme Court review denied the existence of any circuit conflict on this issue. The arbitration agreement in this case “incorporates sections 2 and 4 of the [FAA], which does leave room for the court to make the threshold determination of arbitrability,” Jackson said.

By Susan J. McGolrick

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