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Buckeye v. Cardegna: Contract validity is for arbitrator to decide
February 21, 2006 by Ross Runkel at LawMemo
The US Supreme Court says it is for an arbitrator - not a state court - to decide whether or not a contract containing an arbitration clause is illegal.
This is a strong re-statement (extension?) of the rule laid down in Prima Paint Corp v. Flood & Conklin, 388 US 395 (1967), in which the US Supreme Court said that it was up to the arbitrator - not the court - to decide whether the underlying contract was subject to a defense of fraud in the inducement.
The latest case, Buckeye Check Cashing, Inc. v. Cardegna (US Supreme Court 02/21/2006) involved a claim that the entire contract was illegal and therefore void under Florida's usury laws. The Court concluded (7-1) that it did not matter whether the issue was stated in terms of "void" or "voidable," or whether the matter arose in federal court or state court. It's for the arbitrator to decide.
The details:
- Cardegna claimed that Buckeye made illegal usurious loans disguised as check cashing transactions in violation of Florida law. The agreement Cardegna signed contained an arbitration clause, so Buckeye filed a motion to compel arbitration.
- Buckeye relied on Prima Paint Corp v. Flood & Conklin, 388 US 395 (1967).
- The Florida Supreme Court distinguished Prima Paint, saying that case dealt with whether the contract was voidable. In Cardegna's case the issue was whether the contract was void under Florida law. Therefore, said the Florida court, since a void contract would mean the arbitration clause could not be enforced, the issue was to be decided by a court.
The US Supreme Court's reasoning:
- Regardless of whether it is brought in federal or state court, a challenge to the validity of a contract as a whole, and not specifically to the arbitration clause within it, must go to the arbitrator, not the court.
- Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U. S. 395, and Southland Corp. v. Keating, 465 U. S. 1, answer the question presented here by establishing three propositions.
- First, as a matter of substantive federal arbitration law, an arbitration provision is severable from the remainder of the contract. Prima Paint.
- 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. Prima Paint.
- Third, this arbitration law applies in state as well as federal courts. Southland.
- The crux of Cardegna's claim is that the Agreement as a whole (including its arbitration provision) is rendered invalid by the usurious finance charge. Because this challenges the Agreement, and not specifically its arbitration provisions, the latter are enforceable apart from the remainder of the contract, and the challenge should be considered by an arbitrator, not a court. The Florida Supreme Court erred in declining to apply Prima Paint's severability rule, and Cardegna's assertion that that rule does not apply in state court runs contrary to Prima Paint and Southland.
Justice Thomas DISSENTED, arguing that the Federal Arbitration Act does not apply in state courts.
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