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Back to Buckeye Clarifying an arbitrator's jurisdiction.

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Susan E. Lewis
John Wiley & Sons, Inc.
Russ Bleemer
VOL. 24 NO. 9 OCTOBER 2006
Jossey-Bass Editor:
David Famiano
Production Editor:
Chris Gage
Alternatives to the High Cost of Litigation (Print ISSN 1549-4373, Online ISSN 1549-4381) is a newsletter published 11 times a year by the International Institute for
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VOL. 24 NO. 9 OCTOBER 2006
Some mediators may be reluctant to
assist you for fear their reputation for impartiality will suffer if they help one party
to a negotiation rather than both, as is the
In the broader world of commercial
litigation, however, this reaction is less
likely. A mediator who advises a defendant in a breach-of-contract action, for
In some disciplines, mediators might fear deal
work on a party's behalf will hurt their
reputation for impartiality. In commercial
litigation, this reaction is less likely.
mediator’s traditional role. This concern is
valid in highly polarized contexts such as
the labor-management world, where a
mediator who advised one side might be
regarded as biased.
example, is unlikely to later be regarded as
biased in favor of defendants overall.
In fact, most mediators who serve as
facilitators of intraorganizational discussions will find that the benefits of serving
in this new role will outweigh the limited
risks. They are likely to gain new insights
into the dynamic of internal corporate negotiations, knowledge that can prove useful when they return to helping competing organizations reach agreement.
The next time your organization is
facing an important negotiation, consider engaging a professional mediator to
help you both during preparation and
the talks themselves. The sidebar “An Alternative to the Mediator as Negotiation
Adviser” discusses how companies can
break through internal barriers to using
Mediators, internal or external, can
help you manage the most contentious situations. The potential for concluding talks
with a result acceptable to all segments of
your organization should amply justify the
decision to employ a professional mediator
as your negotiation consultant.
DOI 10.1002/alt.20146
(For bulk reprints of this article,
please call (201) 748-8789.)
Back to Buckeye: Clarifying An Arbitrator’s Jurisdiction
(2006) (available at www.supremecourtus.
On Feb. 21, 2006, the U.S. Supreme Court,
in an opinion by Associate Justice Antonin
Scalia, clarified and expanded the jurisdiction of arbitrators in both federal and state
courts when it decided Buckeye Check Cashing Inc. v. Cardegna, 126 S.Ct. 1204
McLaughlin is a partner in Heller Ehrman LLP,
and is chairman of the firm’s New York office.
He also is chairman of the Executive
Committee and a member of the board of
directors of the International Institute for
Conflict Prevention and Resolution, which
publishes this newsletter with Jossey-Bass.
Scanlon, also based in New York, is special
counsel at Heller Ehrman. She is a former CPR
Institute senior vice president and former
director of CPR’s public policy projects. They
work in the firm’s international arbitration
and ADR practice groups. Their previous
Alternatives article, “A Master’s Checklist for
Drafting International Agreements that Use
Alternative Dispute Resolution,” appeared at
22 Alternatives 154 (October 2004). Clare,
also of New York, is a student at Fordham Law
School, Class of 2007, and was a 2006 summer
associate at Heller Ehrman.
The Court considered whether a court
or an arbitrator would decide if a contract
containing a binding arbitration provision
was void for illegality. It rejected the Florida Supreme Court’s articulation of Florida’s public policy and contract law that
prohibited the severability of any portion
of a contract found illegal and void, including an arbitration clause.
The Court also held that an arbitrator
must decide any challenge to the validity
of a contract, even when challenged as
void or illegal.
In deciding Buckeye, the Court reaffirmed and enlarged landmark arbitration
principles which determine the scope and
applicability of an arbitrator’s jurisdiction.
The 7-1 decision—Justice Clarence
Thomas dissented, and Justice Samuel A.
Alito Jr. didn’t participate—affirmed its
longstanding holding in Prima Paint
Corp. v. Flood Conklin Mfg. Co., 388 U.S.
395 (1967). But it also reinforced Prima
Paint by extending its reach.
Buckeye Check Cashing operates a deferred deposit service where its customer
receives cash in exchange for writing a
check for the amount received plus a finance charge. The firm agrees to hold onto the check until the customer’s next payday or until the arrival of a fixed income
payment, such as social security.
Buckeye Check Cashing customers often are unable to pay the amount owed
when due. At this point, the customer can
roll over his or her balance by paying fees
which defer payment for another period.
A putative class action was brought in
Published online in Wiley InterScience (
Alternatives DOI: 10.1002/alt
VOL. 24 NO. 9 OCTOBER 2006
Florida state court on behalf of Florida customers, who alleged that Buckeye Check
Cashing violated Florida lending and consumer protection statutes with these socalled “pay day loans." The thrust of the
plaintiffs’ claims was that Buckeye Check
Cashing made loan-shark level loans to lowand fixed-income customers. When calculated as interest, the finance charges and fees
violated Florida’s 25% criminal usury
statute, reaching up to a 1,317% A.P.R. in
some cases. See Respondents’ Brief at *2,
Buckeye Check Cashing, Inc. v. Cardegna,
126 S.Ct. 1204 (2006)(No. 04-1264).
The plaintiffs claimed that such practices would make any agreement between
a customer and Buckeye Check Cashing
criminal on its face and therefore void ab
At every transaction, Buckeye Check
Cashing’s customers had signed a “Deferred Deposit and Disclosure Agreement." The agreement had a binding arbitration clause and a provision that any
dispute about the arbitration clause or
the entire agreement would be resolved
by arbitration.
Pursuant to these agreements, Buckeye
Check Cashing moved to compel arbitration. The trial court denied the motion,
deciding that a court and not an arbitrator
should decide whether the contract was
void. Florida’s Fourth District Court of Appeal of reversed the decision, holding that
the agreement to arbitrate was enforceable
because the plaintiffs challenged the entire
contract and not the arbitration provision
itself. See Buckeye Check Cashing Inc. v.
Cardegna, 824 So.2d 228, 27 Fla. L. Weekly D1730 (Fl. Dist Ct. App. 2002).
The Florida Supreme Court reversed
once more, stating it would not enforce
the arbitration agreement of a contract
that was criminal in nature. The U.S.
Supreme Court granted certiorari.
In holding that the contracts’ validity had
to be determined by an arbitrator, the
Court relied on two of its earlier arbitration
decisions, Prima Paint and Southland Corp.
v. Keating, 465 U.S. 1, 104 S.Ct. 852
(1984). These two cases collectively set out
the three controlling principles.
First, Prima Paint established that an
arbitration provision is severable from the
rest of a contract as a matter of substantive
federal arbitration law under the Federal
Arbitration Act § 4.
Second, Prima Paint decided that the issue of the contract’s validity is considered
by the arbitrator in the first instance, unless
the challenge is to the arbitration clause itself. In Prima Paint, the claim that there was
fraud in the inducement of the contract as
a whole was for an arbitrator to decide. On-
The Supreme Court’s
holding means that
arbitration principles
are now substantive
regardless of the
existence of federal
ly if there was an allegation of fraud in the
inducement of the arbitration clause itself
could a court adjudicate the claim. See Prima Paint., 388 U.S. at 403-404.
Finally, Southland established that the
federal arbitration law created by the FAA
applied in state courts. (Justice Thomas,
the sole Buckeye dissenter, objected to the
FAA’s application to state court proceedings. Buckeye, 126 S.Ct. at 1211.)
Application of these three principles to
the Buckeye scenario led the Court to conclude that the issue of a contract’s validity—even when challenged as void and illegal—is within the arbitrator’s jurisdiction.
In Buckeye, the plaintiffs had argued
that no part of an illegal, void ab initio
contract, including its arbitration provision, could be enforced under FAA Section 2 as the contract never came into existence in the first place. FAA Section 2
renders written arbitration agreements
“valid, irrevocable, and enforceable, save
upon such grounds as exist at law or in eq-
Published online in Wiley InterScience (
Alternatives DOI: 10.1002/alt
uity for the revocation of any contract.” 9
U.S.C. Section 2.
They argued that since no contract ever
existed, no arbitration clause could have
existed. Moreover, the Florida Supreme
Court stated that Florida’s public policy
and contract law prohibited the severability of any part of a contract, including an
arbitration provision, contained in an illegal and void contract. Without an arbitration clause, there was nothing to which
FAA Section 2 could be applied.
The Court did not find this “chicken or
the egg” argument persuasive. It found
FAA Section 2 necessarily had to include
“putative contracts” because that section allowed a challenge to an arbitration provision “upon such grounds as exist at law or
in equity for the revocation of any contract." This definition had to include contracts that later prove to be void. If the definition did not, arbitration agreements that
were voidable could be challenged for revocation while potentially void agreements
would be able to pass unchallenged.
The Court rejected this “bewildering
circularity." Instead, the Court reapplied
Prima Paint’s holding and permitted federal severability principles to cover both void
and voidable contracts.
The Court acknowledged that the Prima Paint rule contained a “conundrum.”
Under the rule, a court will enforce a contract’s arbitration agreement by sending the
dispute to an arbitrator. In turn, the arbitrator might find the contract to be void.
As a result, a clause from a void contract
had been enforced by a court. The plaintiffs’ alternative was to have a court “deny
effect to an arbitration provision in a contract that the court later finds to be perfectly enforceable." This situation would occur
when an arbitrator was not allowed to decide a dispute surrounding a contract that
a court would later declare to be valid.
Between these two options, Prima
Paint had chosen in favor of the “separate
enforceability of arbitration provisions.”
The consequence of that choice was to
send challenges to the validity of a contract
as a whole to an arbitrator. When the
Buckeye Court reiterated Prima Paint’s preference, it emphasized that this choice applied whether the challenge was brought in
federal or state court. Consequently, the
challenges to the contract’s validity had to
be heard by an arbitrator despite the contrary Florida law.
VOL. 24 NO. 9 OCTOBER 2006
Buckeye’s most important consequence
concerns its effect on the scope and applicability of an arbitrator’s jurisdiction.
The strong reaffirmation of Prima
Paint’s severability principle supports the
independent vitality of arbitration clauses
necessary for the enforcement of parties’
agreements to arbitrate. Buckeye also maintains Prima Paint’s proposition that a contract’s overall validity should be decided by
an arbitrator, unless the challenge is to the
arbitration clause itself.
Under Buckeye, nothing short of particularized facts demonstrating that an arbitration provision was induced by fraud or it
was used to effectuate the scheme to defraud
would allow a court to intrude on the arbitrator’s jurisdiction. See Rubin v. Sona Int’l
Corp., 2006 WL 525658 at *2-3 (S.D.N.Y
March. 3, 2006)(rejecting sufficiency of a
general allegation that the arbitration clause
was part of an overall scheme to defraud). As
a result, the Court strengthens the principle
that generalized challenges to a contract’s validity cannot be used to sidestep arbitration.
Despite this fundamental agreement,
Buckeye is more than a simple reiteration of
Prima Paint. Buckeye expands an arbitrator’s jurisdiction by expanding Prima
Paint’s holding.
The Court was clear in its disagreement
with the Florida Supreme Court that both
voidable (Prima Paint) and void (Buckeye)
Class Arbitration
(continued from front page)
NYSE, NASD and AMEX rules”); Olde
Discount Corp. v. Hubbard, 172 F.3d 879
(10th Cir. 1999)(table only; unpublished
opinion); Coheleach v. Bear, Stearns & Co.,
Inc., 2006 WL 2067034, at *3 (S.D.N.Y.
July 26, 2006). This exception may not apply, however, when the employee is part of
a collective action under the FLSA. Chapman, 279 F. Supp. 2d at 1288; Coheleach,
2006 WL 2067034, at *2 (not necessary to
reach issue where no other potential
claimants opted into putative collective action under FLSA).]
An arbitrator faced with the threshold
question of whether a class arbitration is
contractually called for no doubt may find
guidance in those court decisions which,
contracts were within an arbitrator’s jurisdiction. Consequently, entire lines of cases
that rely upon this void/voidable distinction—most notably a line of Second Circuit decisions, see, e.g., Adams v. Suozzi,
433 F.3d 220 (2d Cir. 2005); Denney v.
BDO Seidman L.L.P., 412 F.3d 58 (2d Cir.
2005); Sphere Drake Ins. Ltd. v. Clarendon
Nat’l Ins. Co., 263 F.3d 26 (2d Cir.
2001)—are no longer good law. See, e.g.,
Rubin v. Sona Int’l Corp., supra (Buckeye
renders void-based argument “moot.”).
Nevertheless, in the wake of conclusively resolving one issue, Buckeye has intentionally left open another related jurisdictional issue—those relating to disputes
as to whether an agreement was ever concluded. In Buckeye’s first footnote, the
Court points out that the issue of a contract’s validity is different from the issue of
whether an agreement between the obligor
and obligee was actually concluded. The
Court made it clear that Buckeye does not
address the issue decided in the cases cited
by the Florida Supreme Court that held it
was for courts to decide issues of formation, such as the existence of obligor signatures, a signor’s authority to commit a principal or a signor’s mental capacity.
At least one court has interpreted
Buckeye to stand for the principle that
these signatory challenges are still within a
court’s jurisdiction and not an arbitrator’s.
See Fox Int’l Relations v. Fiserv Securities
Inc., 418 F.Supp. 2d 718 (E.D. Pa. 2006).
See also Rowe Enterprises LLC v. Int’l Systems & Electronics Corp., 2006 WL
1697633, 31 Fla. L. Weekly D1697 (Fl.
Dist Ct. App. June 22, 2006).
A further important consequence of
Buckeye involves the Court’s unequivocal
Prima Paint application to state courts. In
Buckeye, the Court is clear: Southland applied Prima Paint’s severability and validity
principles to state courts. By synthesizing
the two cases’ principal holdings, Buckeye
ensures that Prima Paint would not be understood as “establishing nothing more
than a federal-court rule of procedure.”
Thus, these arbitration principles are
substantive law which is applied regardless
of the existence of federal jurisdiction.
both pre- and post-Bazzle, have weighed in
on the matter.
Historically, most federal courts considering the issue have concluded that,
where the arbitration agreement does not
explicitly provide for a collective or representative procedure, plaintiffs may not
press forward with anything more than
their individualized claims in arbitration.
See, e.g., Champ v. Siegel Trading Co., 55
F.3d 269, 274-77 (7th Cir. 1995)(refusing
to certify an arbitral class when the arbitration agreement itself was silent on the issue, since Federal Arbitration Act Section 4
only authorizes courts to enforce arbitration agreements according to their terms,
with neither variation nor addition);
Howard v. Klynveld Peat Marwick Goerdeler, 977 F. Supp. 654, 665 n.7 (S.D.N.Y.
1997)(“the Court notes that a plaintiff
such as Howard, who has agreed to arbi-
trate all claims arising out of her employment may not avoid arbitration by pursuing class claims. Such claims must be pursued in non-class arbitration”), aff ’d 173
F.3d 844 (2d Cir. 1999); Bischoff v. DirecTV Inc., 180 F. Supp.2d 1097, 1108-09
(C.D. Cal. 2002)(stating “that a district
court cannot order arbitration to proceed
on a class-wide basis unless the arbitration
clause contains a provision for class-wide
resolution of claims”); Gamaro v. Thorp
Consumer Discount Co., 828 F. Supp. 673,
674 (D. Minn. 1993)(declining to allow
class-wide arbitration in a dispute where
the arbitration agreement did not expressly
provide for class-wide relief.). But see Cole
v. Long John Silver’s Restaurants Inc., 388 F.
Supp. 2d 644, 650 (D.S.C. 2005)(while
holding that it would not vacate an arbitrator’s post-Bazzle decision that employees
could arbitrate FLSA claims as a class, the
While seemingly a mere reiteration of Prima Paint’s holding, the Buckeye decision
both clarifies and expands an arbitrator’s
jurisdiction by adding potentially void
contracts to an arbitrator’s domain and by
unequivocally extending the severability
and validity principles into state court.
These modifications have already begun to
affect current arbitrations. Though Buckeye Check Cashing seems likely to produce
further litigation, the decision provides
guidance and resolution to many jurisdictional questions.
DOI 10.1002/alt.20147
(For bulk reprints of this article,
please call (201) 748-8789.)
Published online in Wiley InterScience (
Alternatives DOI: 10.1002/alt
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