Ned alerted me to a particularly ridiculous U.S. Supreme Court decision from last week, Buckeye Check Cashing, Inc. v. Cardegna, 04-1264 (2006). The case deals with contract law and arbitration clauses, which you might not think are relevant to you. But ask yourself: "Do I rent?" If you do, you signed a lease. A lease is a contract. Did the lease agreement contain illegal terms? Did it contain an arbitration clause? Maybe you should find out.
Petitioner Buckeye Check Cashing, Inc. is a Florida company that cashes your paycheck in advance and charges you exorbitant interest rates for doing so. Respondent Cardegna sued the company in Florida court, "alleging that Buckeye charged usurious interest rates and that the Agreement violated various Florida laws, rendering it criminal on its face." Usury is the word for charging outrageously high interest rates. It was a crime in the early Christian church, and it's still a civil crime today. Banks are not allowed to charge excessive interest rates, but the problem is that these check-cashing places aren't considered banks, and as such, aren't subject to the same usury laws that banks are. But that's a discussion for another day.
In contract law, if any term of the contract is illegal (e.g., your rental agreement requires you to sacrifice five virgins every month or pay a $1000 penalty, or to use Ned's more down-to-earth example, "breach of a lease resulting in liquidated damages equaling 2x monthly rent for the remainder of the contract’s term; requiring a tenant to pay for management’s attorney fees, etc."), then the entire contract is unenforceable. So, if the other party to the contract tried to take you to court, you could use as your defense the fact that the contract contains one or more illegal terms and thus the contract is void, and you are no longer obliged to adhere to the terms of the contract.
But Buckeye's contract was different: it contained an "arbitration clause." An arbitration clause says that if there's any dispute arising from the contract, the matter doesn't go to a civil court. Instead, it goes to an arbitrator. As Ned points out, this is a problem: "The problem is arbitrators do not employ the tenets of contract law, but rather make decisions in equity." This means that arbitrators will not concern themselves with whether or not a contract is void, or whether one party is completely in the right and the other completely in the wrong. "Equity" means that the arbitrator will not do what is legally correct, but rather, what is fair.
Buckeye filed a motion to compel arbitration at the trial court level. The trial court denied the motion, reasoning that if the dispute is whether or not a contract is illegal, then the dispute must be resolved by a court, even if the contract contains an arbitration clause. A state appellate court reversed that decision, but the Florida Supreme Court reversed the reversal. ("I remixed the remix. It was back to normal!")
But the U.S. Supreme Court reversed the Florida Supreme's Court's reversal of the reversal. Its reasoning was that "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." Apparently, the Court believes, even if the contract may be illegal, and the contract contains a term requiring arbitration, then the contract must still go to an arbitrator, even if the clause that requires arbitration might turn out not to be valid.
Does this make sense?
Apparently so, if you're a contract junkie. The Court used as support for its opinion Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395 (1967), in which the Court ruled that an arbitration clause was "severable" from the rest of a contract. This means that an arbitration clause can never be voided, even if the rest of the contract is unenforceable. This is federal law. Justice Scalia, writing for a near-unanimous Court (Thomas dissented, O'Connor's opinion no longer counts, and Alito never heard the case), recounts the three tenets of arbitration established in Prima Paint:
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.
That's great, but Ned points out a problem: the person writing the contract can fill the contract with illegal terms, and as long as there's an arbitration clause, the contract will go to an arbitrator before it goes to a court. (Although, realistically, the arbitrator will probably judge the contract void, but there's always the possibility that he or she won't. This is unfair to the person signing the contract, who deserves to be treated according to the tenets of contract law, not hippie "equity.")
Thomas disagreed that the Federal Arbitration Act applies to state courts. This opinion (the Court's, that is) should be slightly alarming.