Unconscionable Arbitration Clauses: Who Decides?
posted by Lawrence Cunningham
Suppose the law is pellucid that a contract providing for resolving all disputes by arbitration requires that they be submitted to arbitration if the parties clearly and unmistakably so intend. Then suppose a boilerplate employment contract saying: “We clearly and unmistakably intend that all disputes arising hereunder, including disputes about the enforceability of this agreement, shall be submitted to arbitration.” A dispute arises. Can that dispute be litigated or is arbitration required?
The Supreme Court soon will decide, and on what this may depend. Its precedents, construing the Federal Arbitration Act, state the standard of clear and unmistakable intention. A pending case presents a contract clearly and unmistakably committing all disputes, including disputes about the contract’s enforceability, to arbitration. The opinion being reviewed, a 2-1 by the Ninth Circuit, prescribes a threshold issue for judicial decision before determining whether the dispute is subject to arbitration: whether the contract is unconscionable.
The logic? “Intentions of the parties” is a meaningful legal notion only when a bargain is the product of free exchange. The doctrine of unconscionability recognizes that some purported bargains do not follow that pattern. Instead, terms are massively one-sided, obnoxiously unfair, and presented as a take-it-or-leave it contract of adhesion. Contracts formed that way do not manifest recognizable intention that can be evaluated, whether as clear and unmistakable or otherwise. The threshold issue of unconscionability must therefore be resolved, by a court, before deciding whether the dispute is subject to binding arbitration. Or so said a majority of the Ninth Circuit panel.
The case, Jackson v. Rent-A-Center, involves a terminated (apparently at-will) employee suing an employer for wrongful discharge (on grounds of retaliation and race discrimination). The employer moved to dismiss under the agreement, which the employee opposed, asserting unconscionability. The district court granted the motion, applying the clear and unmistakable standard, but a divided Ninth Circuit reversed, directing judicial determination of the threshold unconscionability claim.
The unconscionability claim, in turn, asserts both substantive and procedural elements, as any successful unconscionability claim must. The substantive unconscionability assertion cites lop-sided provisions governing sharing of the arbitration’s costs, its discovery procedures and the claims covered. The procedural unconscionability assertion points to the contract’s take-it-or-leave it quality (an assertion that it is a contract of adhesion). The District Court did not evaluate all these assertions, only finding the cost-sharing term passed muster, and the Ninth Circuit affirmed that, but directed judicial examination of the others too.
The dissent notices that the court faced an arbitration agreement more favorable to the employer than most are but an unconscionability claim thinner than most are. It worries that the majority invites litigation of run-of-the-mill arbitration clauses on mere assertions of unconscionability, even when the writing “clearly and unmistakably” makes arbitration the dispute resolution device. It reads the Supreme Court precedents more capaciously, as directing threshold determinations about intention to arbitrators too, so long as the language makes that clear and unmistakable.
The majority makes good points as matters of contract law and logic and the dissent’s objection is fair—if the standard complaint registered against judicial supervision of contract arrangements. But neither opinion sees another way to resolve case. They do not distinguish between various clauses within the agreement.
These include the issue of who decides enforceability, how a particular arbitration would proceed, and the commitment to arbitrate underlying substantive disputes. The majority suggests that, if any part of the agreement is unconscionable (an adhesion contract containing lop-sided discovery and claims coverage clauses, say), then the entire agreement is unenforceable, including other rules of arbitration procedure and the arbitration clause itself.
That may be fine. But another approach would identify the unconscionable provisions, as a judicial matter, and declare those unenforceable. Here, if the discovery and claims coverage clauses are substantively unconscionable, and the form was an adhesion contract, then those clauses would be stricken. But that should not necessarily render the other terms unenforceable.
This alternative resembles a severability approach or the “blue-pencil” route some courts use to rewrite overly-broad covenants not to compete to render the revision enforceable. It strikes the obnoxious clauses and lets the others stand. Is that unconscionable?
February 22, 2010 at 8:09 pm
Posted in: Contract Law & Beyond
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Responses (5)
Patrick S. O'Donnell - February 23, 2010 at 12:02 am
I trust you meant “intention” above in the third para. where you’ve twice typed “intension.”
Patrick S. O'Donnell - February 23, 2010 at 12:06 am
…and sixth para.
Patrick S. O'Donnell - February 23, 2010 at 6:31 am
Setting aside the instant case, the identification of unconscionable provisions in an adhesion contract while leaving other terms enforceable seems open to the following objections noted by Hugh Collins, who argues that the “blue-pencil” route is
“unlikely to have any impact on the use and content of adhesion contracts. Since it is not unlawful in itself to use the oppressive terms in a standard form contract, there is no reason to leave them out. Even if the terms are of doubtful validity, there is in fact good reason for leaving them in as a source of bargaining strength in post-breach negotiations. Since the consumer is most unlikely to litigate the issue before a court because of the expense involved, the objectionable clauses will never be formally invalidated, and so they can be relied upon for the purposes of negotiating or imposing a settlement on the consumer. THESE CONSIDERATIONS WILL APPLY EVEN IF A COURT DETERMINES THAT THE CLAUSE IS INVALID, FOR THERE IS NO REASON TO REFRAIN FROM USING THE CLAUSE AS A BARGAINING COUNTER IN CONTRACTS WITH OTHER CUSTOMERS. THESE CUSTOMERS ARE MOST UNLIKELY TO BE ABLE TO DISCOVER WHETHER OR NOT A COURT HAS DECLARED A CLAUSE INVALID, AND THE PRECEDENT MAY ALWAYS BE DISTINGUISHED BY INTRODUCING A MINOR ALTERATION IN THE CONTRACT. If the purpose of this [kind of private law] regulation includes an attempt to discourage the use of oppressive clauses in adhesion contracts, then is it poorly designed to achieve compliance.”
Collins identifies another problem with discrete or particular identification of unfair or unconscionable terms, namely, that
“It focuse attention on a particular clause in a contract, which excludes the evidence relevant to the operation of that clause. This closure rule ignores evidence about the balance of advantage in the contract as a whole. For example, the clause may be harsh, but the contract may contain some compensating advantage such as a low price or an onerous obligation with respect to quality on the business. More significantly, the court has difficulty in gaining access to information about the operation of the market within which the contract has been formed as a self-regulatory regime. The particular market conditions, the distinct qualities of the product or service supplied, or the structure of the business arrangements will not necessarily be regarded as relevant considerations when the court is merely instructed to consider whether the particular term is unfair, unreasonable, or unconscionable.”
Collins himself offers an alternative approach in the book from which this was taken: Regulating Contracts (1999).
Matt Bodie - February 23, 2010 at 9:13 am
Thanks for posting on this — this may be the most important arbitration case to come along in a while. Here’s the question presented:
Is the district court required in all cases to determine claims that an arbitration agreement subject to the Federal Arbitration Act (“FAA”) is unconscionable, even when the parties to the contract have clearly and unmistakably assigned this “gateway” issue to the arbitrator for decision?
I’m somewhat surprised that the Court took this case, because it seems like an issue for state contract law. The court has always endorsed the application of state contract defenses to arbitration agreements. Here’s what the Court said in Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 33 (1991):
“[T]he FAA’s purpose was to place arbitration agreements on the same footing as other contracts. Thus, arbitration agreements are enforceable ‘save upon such grounds as exist at law or in equity for the revocation of any contract.’ 9 U.S.C. § 2. ‘Of course, courts should remain attuned to well-supported claims that the agreement to arbitrate resulted from the sort of fraud or overwhelming economic power that would provide grounds for the revocation of any contract.’ Mitsubishi, 473 U.S., at 627 . . . . As with the claimed procedural inadequacies discussed above, this claim of unequal bargaining power is best left for resolution in specific cases.”
So while I think your blue-pencil approach might make sense to some courts, it only makes sense as a matter of state contract law. And I don’t see why adding in more boilerplate should take the unconscionability question out of the hands of state law and put it into the arbitrator’s hands.
Aaron Bruhl - February 23, 2010 at 1:57 pm
As it happens, I also did a post on this case yesterday, over at PrawfsBlawg. I guess great minds think alike (or at least they think simultaneously)!
http://prawfsblawg.blogs.com/prawfsblawg/2010/02/in-april-the-supreme-court-will-hear-argument-in-rent-a-center-v-jackson-which-concerns-the-question-of-who—court-or-arbi.html
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