Godfather buffs will remember Johnny Fontane’s contract with the famous bandleader. Don Corleone’s most feared enforcer, Luca Brasi, held a gun to the bandleader’s head, and the Don assured him that either his brains or his signature would shortly be on the contract. The bandleader signed, and Johnny Fontane’s singing career was re-launched.
Now we know the rest of the story.
The written contract was nothing but an arbitration clause covering all disputes arising from the relationship. The clause also provided that disputes concerning the making or validity of the agreement would be decided by the arbitrator. Fontane quit the band; the bandleader sued for breach of contract in a California federal court; Fontane moved to compel arbitration; the bandleader insisted that the Court should deny enforcement of the arbitration agreement based on unconscionabiliity; and Fontane replied that the clause committed that issue to the arbitrator.
The District Court ruled for Fontane and compelled arbitration. The Ninth Circuit in a 2-1 decision reversed, and held that the allegations of unconscionability required the conclusion that the written agreement alone was not clear and unmistakable evidence that the parties had agreed to arbitrate arbitrability. The Supreme Court granted certiorari.
Fast forward from this 1945 scene in a 1972 movie, to June 21, 2010. On that date, the Supreme Court of the United States decided , 5-4, in Rent-a-Center, West, Inc. v. Jackson, No. 09-497, 2010 U.S. LEXIS 4981, in analogous circumstances (albeit the coercion was economic not physical) that the validity of the arbitration agreement is an arbitrable issue.
That decision rests on a series of legal propositions that the four dissenting justices, and probably a fair number of arbitration lawyers, will find to be remarkable convolutions of arbitration jurisprudence as we knew it until two days ago:
1. A “stand-alone” written arbitration clause, viewed apart from any other writings or oral arrangements constituting the parties’ relationship, is, for purposes of Section 2 of the FAA “a contract evidencing a transaction involving commerce.”
2. Based on that premise, a subsidiary clause in a the stand-alone arbitration agreement, providing that arbitrability disputes are arbitrable, fits within Section 2 as “a written provision in … a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising.”
3. The “First Options” principle, that clear and unmistakable evidence of an agreement to arbitrate arbitrability is required to make arbitrability an issue for the arbitrator rather than the court, simply does not apply when the issue presented is not whether the provision was actually agreed to, but whether the provision is legally binding under applicable state contract law.
4. An unconscionability challenge to an arbitration clause under state law does not concern whether the arbitration clause was actually agreed to, but only whether it is legally binding, and therefore the “First Options” principle is not implicated.
5. The severability principle of Prima Paint v. Conklin applies to a stand-alone arbitration agreement just as it does to any other contract. Thus, if a party contends that the entire stand-alone arbitration agreement is unconscionable or otherwise invalid under a state’s general contract law, that issue must be decided by an arbitrator. Only if the state contract law challenge pertains to a particular written provision in the contract may that challenge be decided by the court.
A critique of this remarkable opinion will follow in a subsequent Commentary. Your commentator is in transit to Toronto for a two-day visit. Pending my next post, readers should study the Jackson decision, and especially Justice Stevens’s faithful rendition of federal arbitration law in the dissenting opinion joined by Justices Breyer, Ginsburg and Sotomayor.