Arbitration in The United States - Validity of Arbitration Clauses

Validity of Arbitration Clauses

The validity of arbitration clauses in the US is not a settled legal matter. Typically, the validity of an arbitration clause is decided by a court rather than an arbitrator. However, if the validity of the entire arbitration agreement is in dispute, then the Supreme Court of the United States case of Rent-A-Center, West, Inc. v. Jackson may apply. In that case, the court held that "under the FAA, where an agreement to arbitrate includes an agreement that the arbitrator will determine the enforceability of the agreement, if a party challenges specifically the enforceability of that particular agreement, the district court considers the challenge, but if a party challenges the enforceability of the agreement as a whole, the challenge is for the arbitrator." In other words, the law typically allows federal courts to decide these types of "gateway" or validity questions, but the Supreme Court ruled that since Jackson targeted the entire contract rather than a specific clause, the arbitrator decided the validity. Public Citizen, an advocacy organization opposed to forced arbitration, characterized the decision negatively: "the court said that companies can write their contracts so that the companies' own arbitrator decides whether it's fair to submit a case to that arbitrator."

In insurance law, arbitration is complicated by the fact that insurance is regulated at the state level under the McCarran–Ferguson Act. From a federal perspective, however, a circuit court ruling has determined that McCarran-Ferguson requires a state statute rather than administrative interpretations. The Missouri Department of Insurance attempted to block a binding arbitration agreement under its state authority, but since this action was based only on a policy of the department and not on a state statute, the United States district court found that the Department of Insurance did not have the authority to invalidate the arbitration agreement.