US Supreme Court Permits Arbitrators Rather Than Court to Rule on Whether an Arbitration Agreement is Enforceable Creating an Inherent and Untenable Conflict of Interest

Despite the prevalence and overreaching of arbitration agreements in employment cases, traditionally in state and federal court, interpreting both the Federal and California Arbitration Acts (FAA and CAA, respectively), employees have at least been permitted to seek a Court’s determination about whether or not the arbitration agreement the employee signed is enforceable. In other words, despite the fact that an employee signed an arbitration agreement, the employee still generally had been able to ask a court to rule on important enforceability issues such as the existence of the agreement and whether an agreement is so unconscionable as to be unenforceable.

Then came the US Supreme Court in Rent-A-Center, West, Inc. v Jackson, 130 S. Ct. 2772 (2010) and poked a rather major hole in this important safeguard.

Rent-A-Center, interpreting the FAA, held that – where the arbitration agreement itself took this important safeguard away from the courts and assigned it to the arbitrator – the arbitrator holds all the power to rule on whether or not the arbitrator gets to hear the case (i.e., the existence and enforceability of the agreement).

Basically, the US Supreme Court permitted the employer to require an employee not only to give us his or her access to the courts, but to require the employee to give up the important checks and balances of holding out for a judge to determine whether the case must go to arbitration. The Court held that the very arbitrator who will earn significant income from presiding over the case gets to decide whether or not the arbitrator keeps the case or loses the case to the court system. Talk about the fox guarding the hen house!!

It is important to note a few parameters of this ruling: (1) although the ruling is the pronouncement of the highest court in the land, it is unclear how the California courts will interpret the CAA, and we can only hope they will do so in a more honest and forthright manner, with at least a bit of concern for the employees whose hands are tied by this absurd ruling, and (2) the US Supreme Court did leave open some possible limitation to this ruling, by noting that the employee in Rent-A-Center did not specifically claim that this provision permitting the arbitrator to rule on the existence and enforceability of the agreement, as applied to this provision, made this provision unconscionable.

Although there are many fair minded arbitrators out there, it is simply an inherent and untenable conflict of interest to permit the very arbitrator who has a vested economic interest in the outcome, to rule on whether or not the case should be heard by the arbitrator. Let’s hope the courts interpret the CAA differently and take a second look at this precipitous ruling.

Jody LeWitter
January 3, 2011