Third Circuit Makes It Easier to Challenge Delegation Provisions

Challenging a harsh, one-sided arbitration clause became tougher after the Supreme Court’s 2010 decision in Rent-A-Center v. West, if the arbitration agreement contains a delegation clause.  As a result of the Rent-A-Center decision, courts can punt issues about the enforceability of a harsh arbitration clause to an arbitrator if a delegation clause exists.  In effect, courts can rubber-stamp harsh arbitration agreements containing delegation clauses.  According to the Supreme Court in Rent-A-Center, a delegation clause is fully enforceable unless a party “challenge[s] the delegation provision specifically.”

In the wake of Rent-A-Center, some lower courts have interpreted the governing standard as requiring an exclusive, distinct, or unique challenge to the delegation clause, meaning a party seeking to challenge a delegation clause must raise a challenge or defense that applies solely and exclusively to the delegation clause, and not to the broader arbitration clause.  See, e.g., Atkinson v. Harpeth Fin. Servs., LLC, No. 3:17-CV-504, 2017 WL 2223837, at *6 (M.D. Tenn. May 22, 2017) (“[the plaintiff consumer] has, however, failed to advance any challenge to the parties’ agreement to delegate questions of arbitrability that is specific and unique to the delegation provision, and she has failed, therefore, to meet her burden [under the Rent-A-Center standard].”).

In a recent decision, the Third Circuit made it easier for parties to challenge delegation clauses within a broader arbitration agreement.  The Third Circuit rejected the exclusive or unique challenge standard used by some courts and adopted a broader standard for challenging delegation clauses under Rent-A-Center.  The Third Circuit explained that “[i]n specifically challenging a delegation clause, a party may rely on the same arguments that it employs to contest the enforceability of other arbitration agreement provisions.” See MacDonald v. CashCall, Inc, No. 17-2161, (3d Cir. Feb. 27, 2018) (click here for a copy of the decision).  Thus, the challenge to the delegation clause no longer has to be distinct, exclusive, or unique, as some lower courts have required.  This Third Circuit decision adopts a more lenient standard, which is in tension with other courts’ interpretations of Rent-A-Center as requiring a stricter, harsher standard.

This Third Circuit decision, which invalidated both the delegation clause and the broader arbitration agreement, was probably influenced by the fact that this case involves the infamous CashCall arbitration clause, which other courts have held to be a “sham and illusion.”  Also, the underlying case involved a harsh payday loan with 116% annual interest, and these facts may have influenced the Third Circuit’s ultimate decision here.  Nevertheless, I appreciate the standard adopted by the Third Circuit because under this more lenient, broader standard, it should be easier for a consumer or employee to challenge a delegation clause (I believe the Rent-A-Center holding has a disproportionate impact on vulnerable parties who are facing a harsh arbitration clause with one-sided terms.  Parties with bargaining power who can actually negotiate the terms of an arbitration clause probably won’t be faced with harsh, one-sided arbitration provisions.)

Another interesting aspect of this case is that the Third Circuit made the following broad statement: “The common-law rules of contract interpretation apply to arbitration agreements.”  For this principle regarding common law rules applicable to arbitration agreements, the Third Circuit relied on the Supreme Court’s Mastrobuono decision from the 1990s, which did rely on a common-law contract rule and the Restatement (Second) of Contracts.  In most decisions involving the FAA, courts today will interpret section 2’s savings clause as requiring application of the contract law of a particular state, not a free-floating, general common law of nowhere, subject to certain presumptions or rules created by the FAA.  However, the text of section 2 of the FAA does not explicitly mention state contract law.  At the time of the FAA’s enactment during the 1920s, our legal system was still under the rule of Swift v. Tyson; the earth-shifting Erie case would not arrive until 1938.   Thus, I believe the drafters of the FAA probably intended for a uniform, federal law to develop and apply to arbitration clauses, without application of the law of a particular state.  The recent Third Circuit opinion seemed to slip back to the pre-Erie, original view of the FAA for a brief moment when it stated that general common-law rules applied.


Be the first to comment

Leave a Reply

Your email address will not be published.