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The Supreme Court's recent decision upholding the use of arbitration to resolve consumer/business disputes will leave a very favorable mark on the dispute resolution landscape for decades to come.
The issue before the High Court was: who decides whether a contract that contains an arbitration agreement is void - the arbitrator or a judge?
In Buckeye Check Cashing, Inc. v. Cardegna, 126 S. Ct. 1204 (2006), Cardegna brought a putative class action alleging that Buckeye's loan agreements violated Florida lending and consumer protection laws.
Cardegna argued that the entire contract was void for illegality, and that the arbitration clause was therefore also void. Buckeye countered that this issue was for an arbitrator and not a court to decide.
In siding with Buckeye, the 7-1 decision vested authority to resolve disputes with arbitrators and not with judges for all cases, whether challenged in federal or state court.
The Supreme Court could not have been any clearer in stating, "…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."
According to Alan Kaplinsky, a senior partner at Ballard Spahr Andrews & Ingersoll LLP in Philadelphia, "this opinion finally puts to rest the notion that an attack on the underlying agreement containing the arbitration provision based on alleged illegality - in this case usury - is for the court rather than the arbitrator to decide."
Here the Supreme Court relied on the established body of federal substantive law relating to arbitration that is applicable to both federal and state courts. The basis of which was formed by combining the opinions of Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395 (1967) and Southland Corp. v. Keating, 465 U. S. 1, 12 (1984). The Supreme Court then laid out three tenets for arbitration.
First, as a matter of substantive federal arbitration law, an arbitration provision is severable from the remainder of the contract. Second, unless the challenge is to the arbitration clause itself, the issue of the contract's validity is considered by the arbitrator in the first instance. Third, this arbitration law applies in state as well as federal courts.
Kaplinsky, picking up on the preemption drumbeat, noted, "The Supreme Court made it clear that state policy is irrelevant and that under the FAA [Federal Arbitration Act] it is for arbitrators to resolve attacks on the underlying agreement as a whole, regardless of the nature of the attack."
Echoing the preemption sentiments was Professor Stephen Ware from the University of Kansas Law School, "Buckeye holds that the separability doctrine arises from FAA section 2, and therefore preempts inconsistent state law."
Ware also noted, "Footnote 1 is very helpful in saying what is included in separability and what apparently isn't (whether a contract was formed at all - including issues such as capacity to contract, mutual assent and an agent's authority)."
In terms of general acceptance of arbitration by the Supreme Court, this decision is a solid extension of the trend that started in Prima Paint and Southland, and continued in the more recent decisions in PacifiCare Health Systems, Inc. v. Book, 538 U.S. 401 (2003) and Green Tree Financial Corp. v. Bazzle, 539 U.S. 444 (2003)(Westlaw registration required).
"Our High Court is indeed in love with arbitration," noted Roger Haydock, Director of Education for the National Arbitration Forum. "The Buckeye decision, alone, is a very strong pro-arbitration statement, and, coupled with the Court's recent holdings in PacifiCare and Bazzle, it sends a loud and clear message that arbitration is here to stay for good."
Haydock continued, stating, "This trend also reinforces Prima Paint and Southland and indicates that the Supreme Court remains faithful to the FAA's express command that private agreements to arbitrate are to be enforced as written and that all courts – state and federal – are to enforce these arbitration agreements."
The Buckeye decision demonstrates that the Supreme Court Justices simply trust the judgment of arbitrators to decide disputes, as they have for decades.
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