June 21, 2010  

U.S. Supreme Court Shuts Courthouse Door to Consumers, Employees Challenging Unfair Arbitration Clauses

Company’s Hand-Picked Arbitrator Can Decide Whether It’s Fair for the Company to Hand Pick the Arbitrator

WASHINGTON, D.C. – A divided U.S. Supreme Court today dealt a major blow to consumers and employees seeking to challenge arbitration agreements on the ground that they are unfair or unconscionable. Public Citizen was co-counsel in the case and will be spearheading efforts in Congress to curtail its effects.

In a 5-4 decision by Justice Antonin Scalia, the court held that if a company’s arbitration agreement includes a clause delegating fairness challenges to the arbitrator, a court must enforce that agreement and send the matter to arbitration. The decision in Rent-a-Center v. Jackson arose out of an employment discrimination claim brought by Antonio Jackson against his former employer. When Mr. Jackson sued, the company invoked its arbitration agreement and claimed that, under the agreement, any challenges to the agreement had to be decided by the arbitrator.

“The court’s decision today effectively puts the fox in charge of the henhouse,” said Deepak Gupta, a Public Citizen attorney. “Under the court’s logic, the company's hand-picked arbitrator can decide whether it's fair for the company to hand pick the arbitrator.”

Most Americans don’t know it, but when they take a job, buy goods or services of various kinds, put a family member into a nursing home or decide to start a small business franchise, they may be giving up their right to sue. Buried in the fine print of an increasing number of consumer and employment contracts is an arbitration clause, an “agreement” to send all disputes to mandatory binding arbitration. Under such clauses, no matter how serious the claim — race or gender discrimination, failure to pay the minimum wage, nursing home abuse, overcharging for services — the decision of the arbitrator is final.

Until today’s Supreme Court decision, consumers and employees had the right to go to court and ask a judge to find an arbitration agreement unconscionable or unfair, and therefore unenforceable. Although most arbitration agreements are enforceable, court review weeded out the very worst abuses—like imposing exorbitant fees, forcing consumers or employees to travel great distances to arbitrate, or allowing a corporation to pick an arbitrator that is clearly biased in its favor.

Today’s Supreme Court decision will leave many challenges to the fairness of a corporate arbitration system entirely in the hands of arbitrators themselves. Nothing will stop companies from inserting clauses like the kind approved by today’s decision into standard-form arbitration agreements. Companies would then be free to impose one-sided terms or select clearly biased arbitrators with close ties to the company, secure in the knowledge that any challenge to the fairness of arbitration will be decided by the arbitrator whose very authority comes from the challenged arbitration agreement.
 
 In a stinging dissent, Justice John Paul Stevens pointed out that neither party had urged the rule adopted by the court and characterized the court’s reasoning as “fantastic.” 

Today’s decision will spur efforts in Congress to pass the Arbitration Fairness Act (H.R. 1020, S. 931), a measure that would ensure that any decision to arbitrate in a consumer, employment or franchise dispute is made voluntarily and after a dispute has arisen, so that corporations cannot take advantage of their unfair bargaining power to force individuals into arbitration.

Public Citizen’s co-counsel in the case were the Hardy Law Group of Reno, Nev., and Public Justice of Washington, D.C. Oral argument was presented by Ian Silverberg of the Hardy Law Group.

To read the brief, go to http://www.citizen.org/our-work/litigation/cases/rent-center-west-inc-v-jackson.

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