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Enforceability of Arbitration Agreements That Restrict Statutorily-Mandated Rights: the Sharpening Split Among the Circuits By: Howard S

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Enforceability of Arbitration Agreements That Restrict Statutorily-Mandated Rights: the Sharpening Split Among the Circuits By: Howard S Enforceability of Arbitration Agreements that Restrict Statutorily-Mandated Rights: the Sharpening Split Among the Circuits By: Howard S. Suskin1 and Marek H. Badyna2 Increasingly, many arbitration Eighth Circuits have held that an Subsequently, in PacifiCare agreements include clauses that arbitration clause that is alleged Health Systems, Inc. v. Book,6 attempt to limit substantive rights to impermissibly preclude or limit the Court held that when there is and remedies that are otherwise statutorily authorized remedies is ambiguity about the scope of a afforded to parties by various still a valid agreement to arbitrate, remedies limitation in an arbitration federal and state statutes. For and that the arbitrator should decide agreement, an arbitrator must example, many employment, the availability of remedies along decide the issues of enforceability cable television subscriptions, with the other issues in the case. in the first instance. PacifiCare or residential mortgage loan This article examines the different addressed the question of whether contracts contain arbitration approaches courts have taken with parties could be compelled to clauses purporting to exclude or regard to the enforceability of such arbitrate claims arising under limit punitive or actual damages clauses. the Racketeer Influenced and Corrupt Organizations Act (RICO), otherwise available under Introduction applicable remedial statutes.3 notwithstanding the fact that The current split among the These clauses have been subject to the arbitration agreement’s bar circuits has its genesis in a trilogy varying degrees of judicial scrutiny, of punitive damages could be of U.S. Supreme Court opinions depending on the jurisdiction construed to limit the arbitrator’s that have touched upon, but not authority to award treble damages where the dispute is brought. resolved, the issue of enforceability under the RICO statute.7 The Court One particular issue as to which of arbitration clauses that preclude concluded that it was unclear the circuits are sharply divided is or limit statutorily authorized whether the arbitration agreement, whether courts should adjudicate remedies. which prohibited awards of “punitive the enforceability of an arbitration In Gilmer v. Interstate/Johnson damages,” actually would prevent clause before arbitration if the party Lane Corp.,4 the Supreme Court an arbitrator from awarding treble opposing arbitration contends that stated that “[b]y agreeing to damages under RICO.8 The parties’ public policy prohibits the waiver of arbitrate a statutory claim, a party agreement was also subject the party’s statutory rights that the does not forego the substantive to uncertainty surrounding the clause purports to effect. rights afforded by the statute; it parties’ intent with respect to the The First, Fifth, Sixth, Ninth, only submits to their resolution contractual term “punitive.”9 The Eleventh, and D.C. Circuits have in an arbitral, rather than judicial Court concluded that the case was held that in the first instance the forum.” The Court, however, did not not ripe for judicial determination, court, not the arbitrator, should analyze the issue of enforceability and that the arbitrator should decide the validity of an arbitration of the rights-restrictive agreements decide the issue of the agreement’s clause that allegedly offends in more detail, as the facts in Gilmer enforceability in the first instance.10 some statutory provision and did not involve limitations upon the The Court’s ruling, however, did not its underlying public policy. In types of relief that the arbitrator address the situation where there contrast, the Third, Seventh, and could award.5 was not any ambiguity affecting the 1 scope of remedial limitations in the agreements based upon their will deny the motion to compel arbitration agreement.11 remedial restrictions fall within the arbitration only where the invalid Most recently, in Buckeye category of gateway matters to be terms of the arbitration agreement 16 Check Cashing, Inc. v. Cardegna, decided by a court. Other circuits render the entire arbitration 20 the Supreme Court held that disagree, holding that challenges clause void. If all provisions a challenge to the validity of a to the adequacy of arbitration of the arbitration agreement contract as a whole, and not remedies have nothing to do with are enforceable, the court must specifically to the arbitration clause whether the parties agreed to compel arbitration. If, however, within it, must be resolved by the arbitrate, and that such challenges some or all of the provisions in the arbitrator in the first instance.12 must first be considered by the agreement are unenforceable, then 17 Buckeye involved a putative class arbitrator. the court must determine whether the unenforceable provisions action, in which plaintiffs challenged First, Fifth, Sixth, Ninth, are severable.21 If the offending the validity of the entire contract Eleventh, and D.C. Circuits between the parties, including the Adjudicate the Enforceability of provisions are severable from the arbitration provision. The Court Substantive Restrictions rest of the arbitration agreement, explained that federal courts in Arbitration Agreements the court must compel arbitration may adjudicate only challenges Prior to Arbitration according to the remaining, valid 22 that “go[ ] to the making of the The First, Fifth, Sixth, Ninth, terms of the parties’ agreement. agreement to arbitrate,”13 as the Eleventh, and D.C. Circuits have The Eleventh Circuit also Federal Arbitration Act does not held a court’s determination permits district courts to compel permit federal courts to consider of arbitrability encompasses arbitration without first passing on challenges to contracts generally. the issue of enforceability of the validity of remedial restrictions Thus, unless the challenge is to the substantive restrictions contained if the agreement contains an arbitration clause itself, the issue in the arbitration agreement that unambiguous severability of the contract’s validity is to be allegedly conflict with state or clause, and there is no doubt considered by the arbitrator in the federal statutes and public policy. that the dispute would wind up first instance.14 Under this approach, a trial court in the arbitration. A district court Despite its various can either invalidate the entire might then refrain from ruling pronouncements, the Supreme agreement to arbitrate and hear on the validity of the challenged Court has not yet resolved the merits of the case, or sever the restrictions and direct the parties definitively whether the issue of offending provisions and require to proceed to arbitration because enforceability of an arbitration arbitration under the remainder there is no longer any question as 18 clause that limits a party’s of the contract. The differences to whether the parties had a valid 23 substantive remedies must be in outcomes on the issue of agreement to arbitrate. resolved by the courts or left severability reflect variations among The decisions striking arbitration 19 for the arbitrators. The circuit different arbitration agreements. clauses in their entirety most often courts currently are split on this Under the approach taken involve agreements without a issue, reflecting a divergence in these circuits, when a party severability clause, and situations of views concerning the proper challenges the validity of an where the agreements are scope of judicial review regarding arbitration clause on the ground pervasively infected with illegality, the enforceability of arbitration that it contains unenforceable particularly if “the offensive agreements. The prevailing remedial restrictions, the court must provisions clearly represent an tendency among the circuits has first decide whether the restrictions attempt . to achieve though been to assign the issue to the are unenforceable because they arbitration what Congress has courts.15 The majority of circuits defeat the remedial purpose of expressly forbidden.”24 The hold that challenges to arbitration the state or federal statute. Courts decisions in which the courts 2 severed the offending provisions that purported to forfeit plaintiff’s provision is severable from the and compelled arbitration, on statutorily-mandated rights to remainder of the contract.35 In the other hand, typically involve exemplary damages, attorney’s general, the more one of the agreements with discrete, readily fees, and one-year statute of parties overreaches, the less a separable provisions.25 limitations.29 The court refused to court is likely to sever the offending sever the offending provisions, provisions and enforce the rest Clauses Foreclosing of the arbitration agreement. But Substantive Rights Might instead concluding that the Invalidate an Otherwise entire arbitration clause must be when the agreement contains Enforceable Agreement To eliminated as it clearly purported a severability clause and the Arbitrate to achieve through arbitration offending provisions are discrete and separable, a court is likely In several instances, the circuit what Congress has expressly 30 to sever the unenforceable part courts have invalidated entire forbidden. The court concluded and compel arbitration under the arbitration agreements that that severance is inappropriate remainder of the agreement.36 foreclosed statutory remedies. when the entire clause represents In Paladino v. Avnet Computer an integrated scheme to contravene For example, in Morrison v. Circuit Technologies, Inc.,
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