U.S. Supreme Court Reinforces Right to Mandatory Arbitration

In cases in which plaintiffs are challenging the validity of an entire underlying contract, courts are obligated to enforce the arbitration clause, according to a recent ruling the by U.S. Supreme Court.

The case, Buckeye Check Cashing Inc., v. Cardegna, et al., No. 04-1264 (U.S. Feb. 21, 2006) pitted two usual high-court allies against each other—Justice Antonin Scalia wrote the majority opinion reinforcing the broad reach of the Federal Arbitration Act’s mandates, while Justice Clarence Thomas wrote a terse one-paragraph dissent disapproving the application of the FAA to state court proceedings.

The Buckeye case arose after the respondents, John Cardegna and Donna Reuter, entered into various deferred-payment transactions with Buckeye Check Cashing in which they received cash in exchange for a personal check in the amount of the cash plus a finance charge. For each transaction, they signed a "Deferred Deposit and Disclosure Agreement" (Agreement) that included a mandatory arbitration provision.

The respondents brought a putative class action in Florida state court alleging that Buckeye charged usurious interest rates and that the Agreement violated Florida lending and consumer protection laws, rendering it criminal on its face. Buckeye moved to compel arbitration.

The trial court denied Buckeye’s motion, holding that a court rather than an arbitrator should resolve a claim that a contract is illegal and void ab initio.

The District Court of Appeal Fourth of Florida reversed, holding that because the respondents did not challenge the arbitration provision itself, but instead claimed the entire contract was void, the agreement to arbitrate was enforceable, and the question of the contract’s legality should go to the arbitrator.

The Florida Supreme Court reversed on the ground that the contract was alleged to violate state law and was criminal in nature.

On appeal, Justice Scalia cited U.S. Supreme Court precedent for three controlling propositions:

• As a matter of substantive federal arbitration law, an arbitration provision is severable from the remainder of the contract

• Unless the challenge is to the arbitration clause itself, the issue of the contract’s validity is considered by the arbitrator

• This rule applies to state as well as federal actions

See Southland Corp. v. Keating, 465 U.S. 1 (1984); Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395 (1967).

The high court rejected the Florida Supreme Court’s distinction between void and voidable contracts. The latter had concluded that severability of an arbitration clause should not be allowed in a contract "found illegal and void under Florida law."

However, "Prima Paint makes this conclusion irrelevant," clarified Justice Scalia. "That case rejected application of state severability rules to the arbitration agreement without discussing whether the challenge at issue would have rendered the contract void or voidable."

"[W]e cannot accept the Florida Supreme Court’s conclusion that enforceability of the arbitration agreement should turn on ‘Florida public policy and contract law,’" the Supreme Court concluded.

Under the Prima Paint rule, the court acknowledged that courts may enforce an arbitration agreement in a contract that an arbitrator later finds to be void. But under the rule argued for by the respondents, courts would be allowed to deny effect to arbitration provisions in contracts that courts later might find enforceable, the court added.

"Prima Paint resolved this conundrum—and resolved it in favor of the separate enforceability of arbitration provisions," Justice Scalia stated. "We reaffirm today, that regardless of whether the challenge is brought in federal or state court, a challenge to the validity of the contract as a whole, and not specifically to the arbitration clause, must go to the arbitrator."

The opinion of the court was joined by Justices Roberts, Stevens, Kennedy, Souter, Ginsburg and Breyer. Justice Alito did not take part in consideration of the case.

This article is presented for informational purposes only and is not intended to constitute legal advice.