June 21, 2010

Rent-A-Center v. Jackson: Supreme Court upholds the right to contract for arbitration

By Rent-A-Center v. Jackson: Supreme Court upholds the right to contract for arbitration

Author: Timothy Sandefur

The U.S. Supreme Court today held that a contract in which two parties agree to arbitrate their disputes must be enforced, despite the sometimes clever attempts by lower court judges (especially in California) to undermine these agreements. The case is Rent-A-Center v. Jackson, and PLF filed a friend of the court brief, which you can read here.

The 5-4 decision holds that when the parties agree to a contract, and that contract contains an arbitration clause, then it is up to the arbitrator to decide whether the agreement is enforceable or not. The only time a court considers the validity of the arbitration agreement is when a party challenges the validity of the agreement to delegate the validity question to the arbitrator.

The question is a bit technical, but it’s crucial for the validity of arbitration agreements. If someone can get out of having to submit the case to the arbitrator by claiming that the agreement is “unconscionable” or “contrary to public policy” or whathaveyou, then courts can abuse their power to unravel these agreements by declaring them always to be unconscionable or contrary to public policy. That’s basically what’s going on in California, where the state’s highest court has tried (and succeeded) to create a whole separate dimension of law to govern arbitration agreements, simply because the judges don’t like arbitration.

(Why don’t they like arbitration? They think it’s biased toward big business, because arbitration tends to be routine for big business, and arbitrators tend to be experienced business people, who tend to lean in one direction in their decisions. There may be some merit to this, but it’s always amusing to see the same people who make this argument have no trouble with the existence of administrative agencies, which blend the legislative, executive, and judicial powers, and where the person presiding over your hearing is literally being paid by the prosecution!)

As I explained here, PLF often files briefs in cases involving the Federal Arbitration Act, because that Act requires the enforcement of arbitration contracts. The freedom of contract—whether it be a contract to sell goods or services, or a contract to go to arbitration—is crucial to liberty, and the keystone of a healthy economy.

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