U.S. Court of Appeals for the Ninth Circuit is set to issue an opinion with potentially far-reaching implications for contractual arbitration. The question before the en banc 9th Circuit in Nagrampa v. Mailcoups is who decides the question of whether an agreement to arbitration is unenforceable because it is a part of a contract of adhesion - the courts or the abitrator.
Earlier this year, the three-judge panel of the 9th Circuit held that the question is to be resolved by the arbitrator, Nagrampa v. Mailcoups, Inc., 401 F.3d 1029 (9th Cir. 2005). The Court (O'Scannlain, Bea, and Cowen) relied on lesser-known Warren era precedent, Prima Paint Corp. v. Flood & Conclin Mfg. Co., 388 U.S. 395 (1967), which held that pursuant to the Federal Arbitration Act, federal courts can only adjudicate challenges to the validity of the specific arbitration clause. Any challenge to the general validity of the contract itself is to be resolved by the arbitrator. Applying that principle, the Nagrampa court held that the plaintiff's claim that the entire contract (including the arb. provision) was an uneforceable contract of adhesion was not a challenge to the validity of the arbitration clause, and thus could not be decided by the courts. The enbanc court has now de-published this opinion.
Law.com reports that based on the questions at oral argument by the en banc panel, the Court appears to be leaning toward a conclusion that judges are still ultimate arbiters of whether a mandatory arbitration agreement is fair. In my opinion, while such a conclusion would probably be a corrrect interpretation of the Arbitration Act, it could not be squared with Prima Paint.
To be sure, Prima Paint majority seems to be a poor interpretation of the Arbitration Act. Section 4 of the Act allows the courts to hear cases in which making of the agreement for arbitration is not an issue. The Prima Paint majority narrowly interprets this provision as limited to making of the arbitration clause. To me, this makes no sense: on what basis did the Court sever an arbitration clause from the rest of the agreement? Similarly, it makes no sense to have judges decide one aspect of unconsionability, and arbitrators another. Also, allowing arbitrators to rule on contract formation fairness issues would do nothing to take advantages of what arbitrators do best: provide expertise in day-to-day performance of contract and quickly resolve cases. Instead, arbitrators would be required to decide legal issues on which they are hardly better experts than judges. Finally, to have an arbitrator decide the issue of whether a mandatory arbitration agrement is fair raises due process concerns -- an arbitrator would hardly be a neutral arbiter in that situation.
In light of these apparent problems, it is not surprising that as pointed out by Justice Black's dissent in Prima Paint, the congressional intent in enacting the Arbitration Act was to have the courts enforce agreements to arbitrate "unless the court, not the arbitrator, finds grounds in law or in equity for the revocation of any contract." (388 U.S. at p. 412.) Indeed, if there is no valid contract, there is nothing to arbitrate.
But despite its many problems, Prima Paint remains good law and I do not see how 9th Circuit could get around it. If the court has no jurisdiction to hear that the entire contract was fraudulently induced, by logical implication, it cannot hear a challenge that the entire contract is a contract of adhesion. As I read the Nagrampa opinion, the contract of adhesion challenge is directed at the entire agreement, not just the arbitration clause.
So, one way or the other, the case might well end up before the U.S. Supreme Court. It would not surprise me to see the high court abandon Prima Paint severability approach and hold that the courts should decide all challenges to fairness of the mandatory arbitration agreement (whether directed to the arbitration clause or the entire contract).
As usual, thanks to How Appealing for the tip about this interesting case.
UPDATE: here is the post at the Aribtration Blog about this case, along with the link to the audio transcript for en banc oral argument.
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Posted by: Coofedeebroli | September 13, 2011 at 01:02