As readers of this blog could probably guess, I am not a big fan of the Supreme Court’s decision in Rent–A–Center, West, Inc. v. Jackson, 561 U.S. 63 (2010), where the Supreme Court gave its blessings to delegation clauses in arbitration agreements. Pursuant to a delegation clause, an arbitrator is authorized to resolve disputes about the enforceability of an arbitration clause. If a delegation clause does not exist, a court normally decides whether the parties entered into a valid agreement to arbitrate. Under the Supreme Court’s Rent-A-Center decision, lower courts in effect rubber-stamp delegation clauses and compel arbitration, even if one party has good arguments that the arbitration clause is defective in some manner. I don’t like the impact of Rent-A-Center because judicial rubberstamping of delegation clauses makes it difficult for courts to police the fairness of arbitration provisions. I believe courts should serve in this gate-keeping or policing role and supervise the fairness of arbitration provisions, instead of allowing arbitrators to resolve issues about the enforceability of an arbitration clause. Instead of allowing arbitrators to make these determinations in a secretive, basically unreviewable manner without producing precedent, I’d rather have courts determine the fairness and enforceability of arbitration clauses, particularly in the context of consumer and employment arbitration.
Under Rent-A-Center, courts are supposed to rubber-stamp and enforce delegation clauses unless a party directs a specific, narrow challenge to the enforceability of a delegation clause. For example, challenging the discovery features of arbitration would be an attack on an arbitration clause as a whole, but not to the delegation clause specifically.
I used to think that making a highly-specific challenge to a tiny delegation clause was very difficult and like, in the immortal words of Scotty from Star Trek describing transporter technology, “trying to hit a bullet, with a smaller bullet, while wearing a blindfold, riding a horse.” But some plaintiffs in an employment class action were recently able to make this difficult showing.
In Pinela v. Neiman Marcus Group, No A137520 (Cal. Ct. App. June 29, 2015) (click here for a copy of the decision), a California appellate court found that the plaintiff employees had successfully challenged the enforceability of a tiny delegation clause, which then opened the door for the court to address and strike down as unconscionable the broader arbitration clause.
The contract contained a choice of law clause providing for Texas law to govern, and the interaction between the choice of law clause and the delegation clause gave rise to the successful attack on the delegation clause. The California plaintiffs argued that if the delegation clause were enforced, the arbitrator would have to resolve the enforceability of the choice of law clause and the enforceability of the arbitration agreement pursuant to Texas law only, and the arbitrator could not rely on California law at all. In effect, by delegating the enforceability disputes to the arbitrator, the plaintiffs would be stripped from the protections of California law. According to the appellate court, this inability to rely on California law unfairly and unequally burdened the plaintiffs, and as a result, the delegation clause was substantively unconscionable. Also, the delegation clause was procedurally unconscionable because it would have been difficult for a layperson to grasp the meaning of a delegation clause coupled together with a Texas choice of law clause. The court suggested that only a Texas lawyer “skilled in the intricacies of arbitrability” would be able to make an informed assessment regarding the delegation clause.
Having found the delegation clause to be unenforceable, the court then addressed the enforceability of the arbitration agreement, and the court struck down the entire arbitration agreement as unconscionable. Here’s a Vulcan salute to the plaintiffs’ attorneys in this case for successfully making the difficult, narrow attack on the delegation clause: Kudos and may they live long and prosper!