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Supreme Court to clarify rules for arbitration agreements

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WASHINGTON—The ability of arbitration to settle disputes quickly at a modest cost is under challenge in a case in which the U.S. Supreme Court heard oral arguments last week, observers say.

The issue in Rent-A-Center West Inc. vs. Antonio Jackson is whether a court or an arbitrator decides if an arbitration agreement was entered into under duress.

The issue is particularly relevant to employment contracts, which often have clauses that say an arbitrator will decide any claim, including any concerning the enforceability of the arbitration agreement, say observers.

“A lot of employers use arbitration as means to resolve disputes” because it takes less time and is less costly, said Nigel F. Telman, a partner with law firm Proskauer Rose L.L.P. in Chicago.

But observers say the effectiveness of arbitration would be undermined if courts rather than arbitrators decide whether a case should be arbitrated when this is in dispute.

The case involves Mr. Jackson, an employee of Rent-A-Center West Inc., a unit of Plano, Texas-based Rent-A-Center Inc., who filed a lawsuit in 2007 accusing his employer of race discrimination and retaliation. The employer moved to dismiss the case and compel arbitration based on an agreement Mr. Jackson signed as a condition of his employment.

The employment agreement said the arbitrator “shall have exclusive authority to resolve any dispute relating to the interpretation, applicability, enforceability or formation of this agreement,” according to court records.

The employer argued that in light of the provision, the arbitrator, not the court, should decide whether the arbitration agreement was enforceable.

Mr. Jackson argued that the agreement was “unconscionable,” or signed under duress, in part because it was presented as a nonnegotiable condition of his employment.

A district court ruled in the employer's favor and dismissed the case. Mr. Jackson appealed to the 9th U.S. Circuit Court of Appeals in San Francisco, which reversed the district court last September and held the lower court was required to determine if the arbitration agreement was unconscionable.

When “an arbitration agreement delegates the question of the arbitration agreement's validity to the arbitrator, a dispute as to whether the agreement to arbitrate arbitrability is itself enforceable is nonetheless for the court to decide,” the 9th Circuit said in its 2-1 decision.

The dissenting opinion, however, said the majority would send the case “to a minitrial in the district court to determine an agreement's validity based on just the bare allegation of unconscionability, even when the contract language "clearly and unmistakably' chose a different forum for that question. This is counter to the general policy favoring arbitration of disputes.”

Rent-A-Center's appeal to the U.S. Supreme Court had support from an amicus brief by the Washington-based U.S. Chamber of Commerce, which said that affirming the 9th Circuit ruling would have “significant and deleterious practical consequences, effectively rewriting millions of contracts and severely undermining the very interests that arbitration was designed to serve.”

Sarah R. Cole, a law professor at Ohio State University's Moritz College of Law in Columbus, said, “The Jackson side of this is saying it's just unconscionable” to “be stuck with an arbitrator's decision about unconscionability because arbitrators want to arbitrate cases. They get paid to arbitrate cases. They usually get paid by the business side of the case, so it's just wrong to let the arbitrator” determine this issue.

“On the other side, the business is saying, "We have a contract here. There's clear and unmistakable language'” calling for arbitration, Ms. Cole said.

Phil J. Loree Jr., an attorney with arbitration specialist law firm Loree & Loree in Manhasset, N.Y., said, “There's a lot of attention being paid to this case because it's very frequent that you have challenges to arbitration agreements on unconscionability grounds made by employees and consumers.”

Aaron A. Roblan, a shareholder with law firm Ogletree, Deakins, Nash, Smoak & Stewart P.C. in San Francisco, said, “There's a tremendous amount of litigation over the enforceability of contracts in the employment context, simply because there have been concerns over whether mandatory arbitration contracts,” which often are a condition of employment, “protect employees' substantive rights.”

Donald M. Falk, a partner with law firm Mayer Brown L.L.P. in Palo Alto, Calif., and representing the Chamber of Commerce in this case, said, “I think the significance of the case comes from where the court draws the line as to what extent arbitration agreements have to be enforced as written.”

This case also raises “the question of how far state courts or federal courts purporting to follow federal case law use the mere assertion of an argument about unconscionability as a way to deny enforcement of an arbitration clause,” Mr. Falk said.

“The 9th Circuit's decision flies in the face of virtually every well-reasoned decision on arbitrability and jurisdiction,” said arbitrator Richard Faulkner, a partner with Richardson, Texas-based law firm Blume Faulkner P.L.L.C.