BUCKEYE CHECK CASHING v. CARDEGNA
John Cardegna signed a contract for a loan from Buckeye Check Cashing. The contract contained a clause in which Cardegna agreed to resolve any controversies over the loan through arbitration. Cardegna later sued Buckeye, claiming that the conditions for the loan stipulated by the contract were illegal. Buckeye filed a motion in Florida district court to have the case resolved by arbitration, as required by the contract. Cardegna countered that the contract as a whole was illegal and that the arbitration clause was therefore not enforceable. The court agreed and ruled for Cardegna.
On appeal, the state appeals court reversed, holding that the Federal Arbirtration Act, as interpreted by the U.S. Supreme Court, allows arbitration clauses to be enforced even if they are part of otherwise invalid contracts. The appeals court relied on the U.S. Supreme Court's decision in Prima Paint Corporation v. Flood & Conklin Manufacturing Company. The Florida Supreme Court disagreed with the appeals court's use of Prima Paint, however, because the contract in that case had been merely voidable, while the contract in Cardegna's case was actually illegal. The Florida Supreme Court therefore reversed, ruling in favor of Cardegna.
Under the Federal Arbitration Act, may a party avoid arbitration by arguing that the contract in which the arbitration clause is contained is illegal?
Legal provision: 9 U.S.C. 1
No. The 7-1 majority (Justice Samuel Alito not participating) ruled that challenges to the legality of a contract as a whole must be argued before the arbitrator rather than a court. The opinion by Justice Antonin Scalia explained that "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." The Court held that the Florida Supreme Court had been wrong to rely on a distinction between void and merely voidable contracts, because the word "contract" in the Federal Arbitration Act includes contracts later found to be void. Justice Clarence Thomas dissented due to his long-held view that the FAA does not apply in state courts.
Argument of Christopher Landau
Chief Justice Roberts: We'll hear argument next in Buckeye Check Cashing v. Cardegna.
Mr. Landau: Mr. Chief Justice, and may it please the Court--
This case presents the question whether a party can avoid arbitration by challenging the validity of the underlying contract containing an arbitration clause as opposed to the arbitration clause itself.
We believe that this Court answered that question almost 40 years ago in Prima Paint.
The Florida Supreme Court tried to distinguish Prima Paint on State law grounds, holding that the challenge at issue there, fraud in the inducement, would have rendered the contract voidable under State law, whereas the challenge at issue here, illegality, would have rendered the contract void under State law.
We respectfully submit that this distinction misses the point.
Prima Paint held that a party cannot avoid arbitration by challenging the validity of the underlying contract as opposed to the arbitration clause because an embedded arbitration provision is severable from the underlying contract as a matter of Federal substantive law.
Thus, the nature of the State law ground, on which the underlying contract is challenged, and the State law severability implications of that challenge are irrelevant.
What matters, as a matter of Federal law, is that a challenge to the underlying contract does not allow a court to deny arbitration.
Rather, that challenge must be presented to the arbitrator in the first instance.
That point, we submit, is dispositive.
Chief Justice Roberts: You... you concede, though, that if... if the challenge to the underlying contract implicates the arbitration clause as well, that that is for the court and not the arbitrator.
Mr. Landau: Your Honor, we--
Chief Justice Roberts: In other words, you know, you put a gun to the person's head and say, sign this contract, and the person does.
It contains an arbitration clause.
They don't have to go to arbitration to challenge that.
Mr. Landau: --Your Honor, we concede that there is an asterisk, as we put it in our brief, to the otherwise bright line rule set down in Prima Paint, that rule being if you're challenging the arbitration clause, you can stay in court, but if you're challenging the underlying contract, you have to go to arbitration, precisely along the lines that Your Honor identified where the challenge to the underlying contract involves the parties' assents to the underlying contract, that challenge necessarily challenges your assent to arbitration.
And given that the whole premise of arbitration in the first place is that it's a matter of consent, we would say that that particular challenge, as the lower courts have recognized since Prima Paint, an assent based challenge to the underlying contract, is again an... an exception or an asterisk to the otherwise bright line rule.
Justice Kennedy: Does... does that include a quarrel over offer and acceptance?
Mr. Landau: Your Honor, I think--
Justice Kennedy: I'm... we're trying to explore the... the meaning of... of this... of this assent.
I know there are going to be hard cases, but I want to try to see how we describe this area where it is for the court.
Mr. Landau: --You're absolutely right, Your Honor, that there are going to be hard cases.
If I could just start by answering that by saying I think one thing that's clear is that this case is not one of the hard ones.
The challenge to the underlying contract here--
Justice Kennedy: What about offer and acceptance?
Mr. Landau: --I think generally when you're not saying I didn't agree to the underlying contract, in other words, where you're not saying that's a forgery or the... the person who signed that didn't have authority, where you' re... where you're really... where you're not challenging factual agreement to the underlying contract, then it's fair game to send you to... to arbitration because when... you factually agreed to... to arbitrate.
Justice Kennedy: You misinterpreted my letter.
It was not an acceptance.
Mr. Landau: You misinterpreted my letter.
The... there was no acceptance at all.
I would think that that's... that would fall within the scope of this potential asterisk because you're basically saying I never agreed to any contract at all.
So, therefore, I would think under those circumstances, the whole premise of the Prima Paint rule that... that's once you've agreed to arbitration, you can let the arbitrator decide your grievances with the underlying contract is not present.
Justice O'Connor: Well, Prima Paint did, though, involve what we would characterize as a voidable contract.
Mr. Landau: Your Honor, that is not--
Justice O'Connor: And I think it is conceivable that the Florida court was correct that you could draw the line some way and say contracts that are void should be handled differently.
Mr. Landau: --Your Honor, two responses to that.
At the most fundamental level, I think it misses the point to talk about the nature or the... the State law severability implications of your challenge to the underlying contract because the insight to Prima Paint is that you treat the arbitration clause--
Justice O'Connor: Yes, but voidness is a question of public policy.
The State itself makes a decision that certain contracts can't be entered into.
And the question of voidability is usually one affecting the... the will of the contracting party.
Mr. Landau: --Your Honor, you're entirely correct, and I think again the... the insight of Prima Paint is that you are perfectly able to present your challenge to the underlying contract.
The question is, who is the person to... which is the forum in which you present that?
Are you allowed to... to present that in court or... or are you relegated to... or are you required to submit it to the arbitrator pursuant to your agreement?
And... and I think the Prima Paint court recognized that if you allow parties to avoid arbitration altogether by bringing whatever challenges they may have to the underlying contract, whether it be fraud in the inducement or illegality or... you know, there are obviously any number of grounds for challenging contracts under State law... you effectively vitiate the arbitration agreement, the... the whole point of which is that we're going to... we've chosen the arbitrator as... the arbitration as the correct forum to resolve our dispute.
And... and so again, as long as you are not challenging arbitration specifically... the arbitration law specifically, then it' s fair game to send you to arbitration, again where you are perfectly entitled to raise the whole panoply of challenges that you may have.
Justice Kennedy: It's... it's a little odd that--
Justice Ginsburg: Mr. Landau--
Justice Kennedy: --the way our... it's a little odd that the way our cases have... have worked out is that we assume there's two contracts, one for arbitration and the other for the rest of the contracts.
That's... that's the way we've rationalized these cases.
It seems a little odd to me.
Mr. Landau: Well, Your Honor, again, I think the... the Federal Arbitration Act, both section 4 and section 2 of the Federal Arbitration Act, certainly permits that... that way of looking at it because section 4, as Prima Paint emphasized, says, you know, once the making of the arbitration agreement is clear, it must go to arbitration.
And section 2 says it's the arbitration provision in a written contract... or the written provision in a contract that shall be valid and enforceable.
And so, both those provisions do distinguish between the arbitration provision specifically and, in fact, treat it as an underlying contract.
And again, I don't think there's any shame in admitting that Prima Paint, I think, recognized the important policy implications of a contrary rule, that--
Justice Ginsburg: --Mr. Landau, maybe this... this is a point your... the respondent makes.
Prima Paint talks about section 4 and it says, with respect to matters within the jurisdiction of the Federal court.
So the answer to everything you said could be, fine, if this were proceeding in, say, the Southern District of Florida, but it's in the State court.
And Prima Paint just spoke about procedure in Federal court.
Mr. Landau: --Your Honor, it is certainly true that Prima Paint itself arose from Federal court and that the decision is, I think, rather carefully written to talk about Federal courts as a... in fact, Justice Harlan concurred in Prima Paint to say he would have affirmed the Second Circuit in that case on the basis of the Lawrence case, which said that this rule applies in Federal and State court, the FAA.
But the Court was obviously unwilling in Prima Paint to cross the bridge of saying that our rule applies in State court.
And I think that, frankly, that's why it's written in that way of... of focusing on section 4 and not really specifically addressing section 2.
This Court, however, subsequently confronted that issue head on in the Southland case and held that the substantive provisions of the Federal Arbitration Act, really relying on Prima Paint for the proposition that the... the Federal Arbitration Act does create Federal substantive law enacted under the commerce power... it says that that rule... those rules of substantive arbitration law apply in State as well as Federal court because you really wouldn't want to attribute to Congress kind of a... a reverse Erie presumption of creating substantive Federal law that applied only in diversity cases in Federal court which would then promote forum shopping between Federal and State courts.
Chief Justice Roberts: What... what's wrong with the argument that when you're dealing with a void contract, as opposed to a voidable one, that the State policy is that you don' t enforce any aspect of it?
I mean, if you and I had, you know, a contract for murder and it had an arbitration clause, it' s pretty strange to send that to an arbitrator and enforce part of that contract as opposed to saying that the contract as a whole is void.
Mr. Landau: Not really, Your Honor, in the sense that the... the insight of Prima Paint, again, is that you treat the arbitration clause as separate from the underlying contract.
Chief Justice Roberts: But we don't do that with other provisions of void contracts.
I mean, if our contract had a liquidated damages clause... if you didn't go ahead and murder somebody, you'd owe me $1,000... we don't say, well, that part is enforceable even if the contract as a whole is not enforceable.
We treat it as a whole.
Because the subject matter of the contract is illegal ab initio, the whole contract is... is void and illegal.
Mr. Landau: --Your Honor, that is certainly one plausible world view that one could have taken as an initial matter when confronting this issue.
I mean, it's a little bit like a chicken and egg issue here.
You have got the underlying contract, which contains an arbitration provision, and one could certainly say, as Your Honor just did, that well, if the underlying contract falls, it seems perfectly sensible to say that everything falls.
This Court specifically rejected that approach in Prima Paint.
Justice Scalia: Of course, you could say the same thing about a voidable contract.
You could say, you know, the whole contract is voidable.
Mr. Landau: Well, in fact--
Justice Scalia: I mean, in... in that respect, a contract that's void is no different from a contract that's voidable.
Mr. Landau: --In fact... exactly.
The... in Prima Paint itself, it was far from clear that the rescission suit that was sought there... in other words, when a contract is... is voidable, basically what that does is that... under general common law principles, that creates an option for the aggrieved party.
And that party can either seek to affirm that contract or it can seek to rescind that contract.
And when you seek to rescind it, basically you're saying it was void ab initio, which is exactly what Justice Black said in his dissent in Prima Paint.
Justice Ginsburg: You also run into a problem with the... some States classify a contract as voidable and other States for that same ground make it void.
So at least you would have... you would lose the uniformity if you've made the distinction between those two.
Mr. Landau: You are absolutely right, Your Honor, and I don't think this Court should lose sight of the bright line importance of the Prima Paint rule.
But in a sense, Prima Paint again is a rule of Federal law.
The Court in that case specifically affirmed the Federal law approach taken by the First Circuit as opposed to the State law approach, which I think was a little bit like Your Honor's hypothetical, the Chief Justice's hypothetical.
Chief Justice Roberts: Do we usually... do we usually ask arbitrators to enforce broader notions of public policy as opposed to the specific agreements of the party?
In other words, if the reason the contract is void or voidable has to do with broad State public policy, do we... what... what's this... the best you case you have for the notion that arbitrators enforce those types of constraints as opposed to figuring out what the parties agreed to?
Mr. Landau: Oh, sure, Your Honor.
I think if you think about the Mitsubishi case, all the cases that sent statutory cases to arbitrators and said that, you know, RICO claims or antitrust claims could be arbitrated, I think initially the... the argument that was made against that was precisely the one Your Honor is making, that, gee, arbitrators have expertise in the specific commercial agreements here, but we don't expect them to be knowledgeable about RICO or... or other statutes.
But I think the insight of the cases, really over the last 30 years in this Court, is that arbitrators are perfectly able and certainly have to be presumed to be able to decide legal and public policy questions.
And I think if you... again, if you go the other way and you say, well, we're going to allow challenges to the arbitration clause, we're not going to allow it to be enforced, I think you are really going to declare open season on arbitration in the sense that it is... as a logical matter, there is no way to limit the principle that the other side is proposing to challenges based on illegality, which is what they've tried to... to cabin this off as.
Basically... and I think the Florida Supreme Court was very forthright about this... they said it's any challenge that leads to the contract being void as a matter of State law.
And in fact, the... the respondents in their brief in this Court really admit that it's any challenge that goes to contract formation, the formation at all of the underlying contract.
So they would presumably sweep in all things like consideration, mutuality, anything that could be a ground for that.
Justice Ginsburg: What would be the issues for the arbitrator in this case?
Is there anything other than was it... was this interest usurious?
The dispute between the parties... we' re not told what the issues are that would be subject to arbitration.
Mr. Landau: That is the key issue, Your Honor.
They are essentially saying that the underlying interest in the contract is usurious, in violation of several Florida statutes.
And again, one thing that is important to keep in mind is that there is no question that these issues now, the practices that they're complaining about, are entirely legal in Florida today.
There was an act passed in 2001 that clearly made all this legal.
The only issue is they're saying it was illegal prior to enactment of that statute and whether or not that statute clarified the law or changed the previous law.
But presumably the arbitrator would be asked to decide is... was the law in Florida prior to 2001 such that... that these other statutes that limited... that limited interest applied here.
The underlying dispute is really about whether these charges are interest or whether it's a service fee for cashing a check.
That's the heart of the underlying dispute, and that's certainly one that the arbitrator is capable of deciding--
Justice Scalia: Did the arbitrator--
Mr. Landau: --looking to Florida--
Justice Scalia: --Could the arbitrator decide that I'm... I'm going to apply the new statute rather than the old one?
Mr. Landau: --Well, I think the arbitrator will say, you know... first of all, if I could just make one point clear for the record.
The... this... the underlying issue here, whether or not this 2001 statute changed the law or simply clarified the law is currently pending in the Florida Supreme Court.
It was argued on... on September 30th in... in a case that did not involve arbitration.
So presumably, the arbitrator, if this case goes to arbitration, will look at that case and will decide whether or not that governs this case, will decide is there any ground for distinguishing this case.
And... and, you know, one point to remember is that when you go to arbitration, that's not the end of the line.
You have rights to judicial review of arbitration.
So going back to your hypothetical, Mr. Chief Justice, if the... if the contract were to be, let's say, for murder... that's a favorite example of... of respondents... that does not mean that a contract for murder gets enforced.
That means that the arbitrator will decide whether the contract for murder is... is valid under State law and... again, this is in the far fetched situation where somebody who has signed a contract for murder is actually trying to enforce arbitration, you know, presumably from his or her jail cell--
--and then would... would try to enforce arbitration, and then if... you know, if the arbitrator says it's illegal, would... you know, even if the arbitrator were, in the most fanciful situation, to say, yes, this contract for murder is legal under the law of our State, well, then presumably you could go up for manifest disregard review.
There are safeguards in the process.
What they're trying to do is short circuit the process, and I think this goes back to Justice Ginsburg's question.
The... what they are now describing as the threshold issue of contract formation... contract validity is not a threshold issue at all.
It's what this whole dispute is about.
It is what they are challenging here.
They are saying these contracts are illegal because they charge too much interest, that what they're charging is in fact interest and that was illegal.
Well, they are now saying that the... the court should decide that underlying question as a threshold matter.
Well, then there's actually nothing whatsoever left for the arbitrator to decide, and they have effectively vitiated the arbitration agreement.
Chief Justice Roberts: Oh, no, that's not true.
There may be dozens of other subsidiary issues apart from illegality.
They may say, well, once you determine that it's legal, we think that we're entitled to these damages or those damages or... or the rate should be this or that.
Just because there's a threshold issue doesn't mean there aren't other issues that an arbitrator might decide.
Mr. Landau: --Well, Your Honor, I... I guess maybe it depends on how you look at the word threshold.
I mean, I would think that that is the core issue in the dispute.
I mean, certainly there... you are absolutely right that there could be some ancillary issues like damages.
But clearly, the... the nub, the crux of their challenge here is a challenge to the legality of the underlying contract.
And under their view, they get to obtain judicial resolution of that issue in the first instance, notwithstanding the fact that they don't dispute that they agreed to arbitrate all issues relating not only to the validity of the arbitration clause itself, but relating to the underlying contract.
So there's no question here... and I think this is really important not to lose sight of... that this dispute falls within the plain language of their arbitration provision.
If you look at joint appendix 42, the arbitration provision here is very broadly worded in this regard, and the parties clearly agreed to do it.
The only question is basically whether the State could frustrate the... the plain, express intent of the parties by saying, oh, well, this challenge implicates arbitration... implicates legality.
Justice Stevens: If the case was one in which the merits issue you claim is basically the same as the legality issue under the contract... but would your argument be as strong if it were different, if you had a different reason for claiming that the contract was void or voidable?
Mr. Landau: The... I think the argument, Your Honor, would be the same.
It's just... it's a particularly stark illustration here of the dangers of the... of... of that position.
It may not... you're absolutely right.
It may not always be the case that the... that the challenge to the contract is going to be the merits dispute in itself, but I think where, as here, it is, it really shows how pernicious this rule is and precisely why the Prima Paint rule, which again has been in effect almost 40 years now... why that approach works and actually promotes the policy supporting arbitration.
And when you... again, when you think of an alternative rule, it's one in which you could come in... the party who has concededly agreed to an arbitration clause and says, well, I think the underlying contract is void on public policy grounds, which again you can make in virtually any case.
Under the Florida Supreme Court's rationale in this Court... in this case, that is a basis for remaining in court, and--
Justice Stevens: What about the possibility that you always want a neutral decision maker in cases like this?
The arbitrator always has an interest in finding that the contract is valid and arbitrable because that's his source of business is arbitrating disputes.
Mr. Landau: --Your Honor, you... I think it's important to keep in mind that in this case, they have not challenged the arbitrator.
Justice Stevens: No.
I'm just talking about as a general matter if we're trying to decide the issue not just on these facts, but what is the better rule--
Mr. Landau: --Your Honor, I don't... I think that's... again, that... if you were to have a presumption that the arbitrator is always in favor of upholding a contract, that would seem somewhat in tension at the very--
Justice Breyer: No, no.
I mean, the question is, I take it, in most of the arbitration associations, once you have arbitration, you will get paid even though... the arbitrator will be paid, won't he, whether--
Mr. Landau: --Oh, yes.
Justice Breyer: --he decides one way or the other?
Mr. Landau: Oh, I'm sorry.
Justice Breyer: So he has no particular interest in getting paid in upholding the contract or not.
Mr. Landau: You're absolutely right, Your Honor.
That is absolutely clear.
And... and again, I would think he would not have an interest in... in saying that a contract for murder is perfectly valid.
You're absolutely right.
It wouldn' t get him more money in his pocket and it certainly would, I think, lead to the reputation of a rogue arbitrator out there who is not to be trusted.
And... and presumably that person wouldn't... wouldn't get much business.
Again, so I think that the key point here is that the respondents have tried to create a lot of State law issues regarding void, voidable.
And... and I think as Justice Ginsburg pointed out, the problem is it's kind of like trying to put a square peg in a round hole, that whether something is void or voidable under State law, which may vary from State to State, kind of misses the whole point which is the genius of a Federal separability rule is we don't care about those State law issues.
You don't have to get into that bog to decide the arbitrability question or the... you know, you cannot avoid arbitration by simply coming up with all those grounds.
And whether it's ground A for challenging the underlying contract and whatever the severability implications may be of ground A or ground B, the point is when you're not challenging the arbitration clause, it's fair game to send you to arbitration, and then you can raise ground A or ground B or whatever ground you have before the arbitrator.
And it's simply not a basis for avoiding arbitration altogether to be talking about that.
And again, the... the point... I think this is all kind of a common sensical point that you want to get parties quickly to arbitration.
I mean, if you... if you have a situation where the parties have to spend years in court litigating these kind of issues, that really, in and of itself, defeats the whole point of... of arbitration.
Justice Kennedy: Well, Prima Paint certainly displaced the States and State law from this area in a very substantial... to a very substantial extent.
I'm curious now.
Have there been any attempts in Congress to overrule Prima Paint?
Mr. Landau: I'm not aware of any, Your Honor.
And to the contrary, I think the Federal Arbitration Act has been amended multiple times since 1967 and it has always been in a pro arbitration direction, as this Court emphasized in the Allied Bruce case where there was a concerted attack not on Prima Paint, but on Southland.
And in a sense, Southland is really a... a reflection of Prima Paint because Southland simply says that the... the substantive Federal arbitration law that was announced in Prima Paint sensibly should not be limited to Federal court, but should also apply in State court.
So I think the... the Court faced a fork in the road in Prima Paint about the meaning of the Federal Arbitration Act.
Was it just a procedural provision that governed in... in Federal proceedings based on Congress' power over the Federal courts and their procedures?
Or was it a substantive provision enacted under the Commerce Clause?
And this Court took the latter approach and made that absolutely crystal clear in... in Southland and then later again in Allied Bruce.
And so what I think the respondents are really asking you to do here is to really overrule root and branch the whole Federal substantive law of arbitrability altogether and say, well, this should just be... you took the wrong path back in 1967 and... and you should just interpret the FAA to be a... a procedural statute.
We would respectfully submit that that would cause an earthquake in the law in terms of arbitration and, therefore, would respectfully urge you to reverse the Supreme Court of Florida's judgment.
I'd like to reserve the balance of my time.
Argument of F. Paul Bland, Jr.
Chief Justice Roberts: Thank you, Mr. Landau.
Mr. Bland: Thank you, Mr. Chief Justice, and may it please the Court--
This Court has repeatedly said that Federal law preempts State law only where Congress clearly and manifestly intended for it to do so.
And the Court has also repeatedly said that the best guide to what Congress intended was the language of the statutes.
Now, petitioners have not pointed to any language of the Federal Arbitration Act itself that would create a separability rule for this case.
And moreover, the language of the act itself and particularly section 2... and particularly section 2 the way it was followed in the Prima Paint case... actually strongly supports us.
Section 2 says that an arbitration provision is enforceable if it is in a contract evidencing interstate commerce.
Now, to order of arbitration, they say, well, the... the threshold issue is whether there's an agreement.
Let's have the arbitrator decide that.
To order arbitration is to enforce the act.
That is enforcing the act.
But they want to enforce the act before we've determined if section 2 is met, before the requirements of section 2 are met.
That's not the way--
Chief Justice Roberts: I guess what they would say is that there... they insist only that the agreement be to arbitrate, and to the extent there is an agreement to arbitrate, they can enforce section 2, and the arbitrator can decide whether the broader agreement is enforceable.
Mr. Bland: --That's an argument.
The word agreement was used in section 4, and that's the... that provision, of course, is the provision that refers only to the... not only applies to the United States district courts, that refers to jurisdiction under title 28 and twice refers to the Federal Rules of Civil Procedure, and that in the Southland case in footnote 10, this Court said doesn't apply in the State courts.
Section 2 doesn't use the word agreement.
Section 2 uses the word contract, Mr. Chief Justice.
And the word contract is a very different idea than agreement.
If section 2 had said an agreement in interstate commerce or a transaction in interstate commerce, perhaps they would have a point.
But the court, instead, used... excuse me.
The Congress, instead, used the word contract.
Contract is one of the most important words in the law.
Now, when the Court in Prima Paint looked at this, in the first sentence, the very first sentence of Prima Paint, the Court said this case involves a contract involving the U.S. Arbitration Act.
And in the first sentence, the Court said this case is a case involving contracting parties.
The Court didn't say we're going to see what the arbitrator thinks as to whether there's a contract.
In Prima Paint, this Court did it the right way.
They said section 2... does it apply first?
Only if it does apply, only if once after we have crossed that Rubicon will we go to the next step.
Then the Court in Prima Paint goes and discusses whether or not the interstate commerce prong has been met.
And there' s a long discussion of is this in interstate commerce or not, and they find that it is.
Well, under their theory, under petitioner's theory, why should the Court be deciding interstate commerce.
Arbitrator... the interstate commerce issue goes to the whole contract.
Why shouldn't the arbitrator decide the interstate commerce issue?
Justice Breyer: When I was working on the first options in those cases, I thought there was from Southland a pretty clear distinction between whether the person is attacking the arbitration clause itself.
If he says that's not valid, that probably goes to the court, unless there's some other special thing.
But if what he's doing is attacking the rest of the contract as illegal, that doesn't.
That goes to the arbitrator.
Now, I really did think that was the law.
And even if I was wrong in thinking that was the law, it seems to me the whole community, the whole business community in the United States thinks it's the law.
Everybody else thinks it's the law, and the briefs on your side don't even say that it isn' t the law, except for yours.
They say go and overrule the cases that make it the law.
Mr. Bland: We... we do not in any way urge this Court to overturn... the Court does not need to overturn Southland, Your Honor.
And let me make two points about Southland.
Justice Breyer: I mean, logically you're right.
I accept all that you're saying logically.
You could make those distinctions, but you also could come out the other way logically.
And so to expose to you what's really bothering me about the case are two things.
One, I think you're worried about consumer contracts, and there are a lot of good arguments on your side.
But this rule also applies to business contracts, and there what's bothering me is that... that the whole business community seems to have developed an arbitration system throughout the world that depends upon the distinction I just made.
And if we decide for you, we're going to throw a large section of those contracts back into the laws of the 50 States and arbitration will be seriously injured as the commercial community has come to rely on it.
Now, that's what's worrying me because I wouldn't want to reach a decision, in the absence of it being clear anyway, that would make a significant negative difference to the gross national product of the United States, for example.
Mr. Bland: Well, Your Honor, let... before I go on with the statutory arguments--
Justice Breyer: I'm putting it dramatically because I want to get your--
Mr. Bland: --let me... before I talk about the statutory arguments, then let me go to the policy arguments and this idea that we're going to open the flood gates and undermine the Federal Arbitration Act.
It is a minimal requirement to say that you must have a contract in interstate commerce.
And in the Southland case, on page 10, at the bottom of page 10 and page 11, before it said that section 2 would apply in States, Chief Justice Burger's opinion for this Court started off and said there... we perceive two limitations on arbitration... on the enforceability of arbitration provisions.
And the first of those is it does have to be in a contract in interstate commerce.
So there is nothing in Southland that said, oh, well, the question about whether or not there's a contract is something the arbitrator gets to decide.
The beginning of the opinion said that particular issue is one for the... is one that is a limitation on the enforceability of contracts.
Is this going to lead to an explosion of litigation over the formation of contracts?
It will not because there are fairly few cases where there is an argument that the entire contract is void ab initio such that it comes up.
Justice Scalia: Every usury case, for example.
That's very few?
I mean, that's a lot of cases.
Mr. Bland: After the National Banking Act, Your Honor, there are actually very few usury cases left.
If you look at the six cases they cite that are all... they say they're Federal.
There are six Federal court of appeals decisions that support them.
Four of those are payday lending cases decided since 2000.
The principal economic effect of this case actually is going to involve the payday lending industry.
And was it irrational for the State of Florida to say that it's loan sharking to charge people up to 1300 percent interest?
We think that that... whether... whether Florida made a good decision or not with its usury laws, usury laws just don' t apply to many cases.
Justice Scalia: What about fraud in the inducement?
Mr. Bland: Fraud in the inducement does not go to rendering the contract void ab initio.
A contract comes into existence.
You cross the statutory language of section 2.
Fraud in the inducement... there is a contract.
Now one party has a defense to it.
Justice Ginsburg: Mr. Bland.
Mr. Bland: --Your Honor--
Justice Ginsburg: Mr. Bland, some State may say fraud in the inducement is void.
These... these are classifications that States make.
These are labels that the State puts on them.
And you are introducing vast disuniformity if you say that the line to draw is between void and voidable.
You are forced into that because the Prima Paint case dealt with voidable.
So you... that you... you are drawing a line between void and voidable which shifts from State to State.
Mr. Bland: --Well, the... the... Your Honor, first, the Congress drew the line when it said that you had to have a contract first as to whether or not a contract came into existence.
But the law of contracts does not differ so much from State to State.
This case in the American Airlines v.... this Court... excuse me... in the American Airlines v. Wolens case said that the law of contracts is not largely disuniform from State to State, and there is no State in the country that I know of... and I'm fairly certain of this... that hold that fraud in the inducement means that a contract never came into existence.
And the reason for that is... is that if someone defrauds me into buying a stock or someone has an unconscionable deal or almost any of the other things that give rise to defenses to formed contracts, one party has an option to get of out it.
If someone defrauds me into buying a stock but then the stock price shoots up through the roof... it's one of Justice Breyer's clever technology inventions that works--
--I have an option at that point to hold onto the stock, even though I was defrauded.
I was defrauded.
I was cheated, but I'm happy with it.
It turns out it's okay.
It is left to the option--
Chief Justice Roberts: But almost every State--
Mr. Bland: --of the party.
Chief Justice Roberts: --almost ever State will... has an exception for contracts that are void against public policy.
And it's just left to the creativity of the lawyer in any given case to explain why a particular contract is contrary to public policy.
And you would allow that to be shifted from the arbitrators to court presumably based simply on an allegation, well, the contract is void, it's against public policy.
Mr. Bland: I think you will find, Your Honor, if you look at the... at the law that's developed around void ab initio contracts, that it's fairly rare.
It's a fairly small universe of cases where State courts have found that an entire line of business is illegal, where State courts have found that no contract ever comes into existence because of a public policy.
Justice Ginsburg: But if you open the door... if you open the door... public policy has been called an unruly horse.
All you have to do is open the door and you will have litigation in court, and then the court will decide what the arbitrator would other... otherwise decide.
Mr. Bland: But, Your Honor, there are already a host of circumstances in which litigants would like to be able to get out of contracts that do not involve arbitration clauses, where they would like to be able to argue that no contract came into existence in the first place.
And the public policy typically... and in Florida particularly... tends to be linked to statutes.
In most States, there is a rule that says of contract law, that we will not void a contract because some judge feels there's a public policy, but it has to be based on a statute.
And we cited several cases, and the law professors in Professor Alderman and Braucher's brief cited a variety of cases around the country in which courts have only struck down contracts for public policy where they violated a statute that forbid equality.
Justice Ginsburg: You're giving the end result.
How many cases have the lawyers gone into court and said, court, strike down this contract because it's against public policy?
Courts may reject many of those, but--
Mr. Bland: Well, I think there's no reason to suspect that there's going to be abuse in which parties are going to come in and make frivolous arguments that an entire line of business is illegal and then... and that that's going to cause a flood gate of cases into courts because courts have, with rule 11 and other similar rules, a lot of ways of getting rid of those.
Justice Breyer: --Well, what about--
Mr. Bland: It's very hard--
Justice Scalia: You get rid of them after frustrating the arbitration provision, the whole purpose of which is to keep you out of courts.
I'd like to... I'd like to ask you about your argument on section 2, which--
Mr. Bland: --Please.
Justice Scalia: --appears at page 3 of the petitioner' s brief.
If you want to read it the way you're reading it, you say a written provision in a contract evidencing a transaction involving commerce.
You say that has to be a... a contract that is a valid contract.
Well, what do you do about the end of section 2 which says, shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract?
That would apply to... to contracts that are not... not void but voidable.
Mr. Bland: Exactly, and that's the language--
Justice Scalia: So Southland was wrong.
Mr. Bland: --No.
With all respect, Your Honor, that's the language that... that the separability rule in Prima Paint has been used to apply to.
The first part of section 2 says this is how you create an arbitration provision.
You have an enforceable provision if it's in a contract, but there is an exception for general State contract laws that provide defenses to a contract.
Justice Scalia: Why?
Mr. Bland: That--
Justice Scalia: Why would you make that... that weird distinction--
Mr. Bland: --Because that--
Justice Scalia: --and treat the first part of it as though it applies across the board to the entire contract, but the last part of it, reading it differently?
I... I don't understand that.
Mr. Bland: --The first part of it is the way you... the way you trigger the existing forceability option at all is that it has to be in a contract in interstate commerce.
That's why in Prima Paint the Court went through interstate commerce rather than leaving that for the arbitrator.
The second part is once you have an enforceable agreement, it may be subject to certain defenses.
And then in Prima Paint, what this Court did was it looked at section 4 of the act and it derived from section 4 of the act, the one that only applies in Federal court and refers to the Federal Rules of Judicial Procedure, a rule of separability for these kinds of defenses, for the defenses that arise in the Savings Clause.
Justice Scalia: It seems to me even if you separate it, you still have the language, save upon such grounds that exist in law or in equity for the revocation of any contract.
Unless you take that language, the reference to contract in section 2, as referring to two separate things, the contract without the... without the arbitration clause and the arbitration clause alone, it seems to me section 2 doesn't make any sense.
Mr. Bland: With all respect, Your Honor, I think that the way that it makes sense is that the... you get the threshold issue of getting through the limitation, as this Court described it in Southland on pages 10 and 11, of the limitation on the enforceability of arbitration clauses of is it in a contract in the first place.
That is the... what the first part is talking about.
Then separately the Court... the... the Congress had intended only a limited intrusion into State law, as this Court said in the Volt case where it said that this... that there was not... this is not the National Bank Act.
There was no field preemption.
There was no express preemption.
There was only conflict preemption.
And in the Allied Bruce case, what Justice Breyer's opinion for the Court said was we recognize that State law will play an important role for certain contract defenses after the contract has first been found to be enforceable.
I think that if... if this jurisdictional idea... the way you get into the Arbitration Act, what triggers that the Arbitration Act exists... and this is pretty much the language that's used at the... in the bottom of 10 and top of 11 of Southland... is that you have an arbitration agreement that's enforceable.
Then there is a but in which Congress left out an alternative where you have specific challenges to how the arbitration clause is formed.
I think that that's a very workable system, but that's also the way Congress drafted the statute.
Justice Breyer: --It's not... the workability of it depends on how many challenges you get to people saying this contract is void, you know.
And if there are a lot of them, then that takes a whole wide set of cases out of arbitration and puts them into the courts, just where they're trying to escape.
And... and so I don't know the answer to how many, to be truthful, and I suspect no one does.
So I'm wondering if there isn't another route to the problem you're getting at, which is, as I think in other countries, you say there's a doctrine of kompetenz kompetenz.
You know that?
You know what I'm thinking of?
Mr. Bland: No, I'm afraid I do not, Your Honor.
Justice Breyer: It's arbitration generally.
They don't even look to see whether people agreed about the arbitration clause.
It says arbitration.
It goes to arbitration regardless.
Now, the safeguard is, A, maybe the arbitrator will get it right or, B, if the arbitrator doesn't get it right, they have to come to court to enforce it.
And at that point, you could say, you know, this arbitrator is out to lunch.
Our cases say he has to be really out to lunch, but you could make some distinctions there, you see.
And... and if this is really a problem that arbitrators are upholding illegal contracts, that might be the place to begin to make the distinctions.
Say, Judge, look at this a little more closely where it's illegal, the whole contract, et cetera.
What do you think?
Mr. Bland: I... I think two things, Your Honor.
First, I' d like to say that I think an enormous difference between the European illustrations, for example, that you give in this setting is that here the Federal Arbitration Act is not a common law rule of let's push as many cases as we can from the civil justice system into arbitration.
It is a statute that has language.
And the way this Court has treated that language before is this Court has always said not until the case falls within section 2 will you then go and enforce section 2, that you have to be in the act before you apply the act.
Justice Ginsburg: --If we take--
Mr. Bland: And I think that that language is--
Justice Ginsburg: --if we take, Mr. Bland, what you said so... the words transaction involving commerce, but a contract... okay.
So you spoke about void contracts.
Well, what about there's not enough consideration, things that go to the formation?
So this contract was never formed.
Mr. Bland: --Those are issues that we believe also are issues that a court would resolve.
I think, Your Honor, that there are very few--
Justice Ginsburg: --So we're going far... far beyond a void subject matter like usury.
But you could say there... there wasn't sufficient consideration.
There was no mutuality or things that go to the formation of a contract.
Mr. Bland: --I think that when Your Honor used the word far, that that... that that is not really fair.
There are really very, very few contracts in the United States of America in 2005 that are going to be struck down because there wasn' t enough consideration.
That sort of argument against contract formation very rarely comes up.
I do a ton of consumer contract cases.
We've never gotten rid of a contract on the grounds there wasn't consideration.
These doctrines are on the books.
They are certainly part of what makes a contract different from an agreement.
It' s certainly one of the reasons why I think it's important that Congress chose such a loaded word, but these... there are very few cases that involve this.
And... and one thing about the... about the illegal issue and the voidability... the... the void ab initio issue that Your Honor raises.
In Florida... and we cited a number of cases of this in our brief and in the... in... both in our brief and... and in the contract law professors' amicus brief, there's a number of cases around the country.
You only strike down a contract as void ab initio where the principal purpose, the essence of the contract is that... that it was to do an illegal purpose, was that it was to violate a statute as reflected in... as... as it would reflect the public policy of a State.
You could have a contract that has one or two illegal provisions or minor legal provisions.
Those are not enough to get the entire contract thrown out as void ab initio.
It's a much higher test.
If I can use an analogy.
There may be a lot of people who wish they weren't married, but meeting the tests of annulment are very different from divorce.
Trying to prove that a contract is void ab initio such that it is so extremely illegal that no provision of it will come into contract doesn't come up very often.
What we are talking about with void ab initio contracts that violate public policies and statutes are we are talking about businesses that are skirting around on the edge of legality.
We are talking about a business where there is a colorable argument that someone can go into court and say, this entire line of business is loan sharking.
It's a crime.
It's 29 times the... the felony rate of loan sharking in Florida.
That' s why so many of these cases are payday lending cases.
You don't see a lot of void ab initio cases in which come... someone comes in and say, hey, you know, they sold me a car and the entire line of business of car selling was void ab initio.
The only example that's supposed to show the flood gates that has come from petitioner's brief is they cite to this Vacation Beach case in Florida.
And what... that was a case that involved was sort of a uniquely Florida problem, but after a bunch of hurricanes, they've had people come down who were unlicensed contractors and they go and say we know how to fix roofs and so forth and they do not.
And then people's roofs blow off, and there have actually been a number of people who have died.
So the State set up a licensing regime that was a licensing regime not designed to extort money from businesses, but a licensing regime designed... scheme based on safety and health and welfare of the citizens and said, you can't go into this line of business without passing certain certifications.
So in that case, it was a declaratory judgment action in which a company... in which a company comes in and says, this company is falsely representing they know how to do this work and they don't.
And in fact, the court of appeals notes it could be a crime.
And now petitioner comes in and says, well, this is an outrage.
Of course, the arbitrator should decide that question in the first place.
That's a business that is arguably... and probably more than arguably... operating on the outskirts of the law.
Their reliance interests are different.
Chief Justice Roberts: But there's no... but... but why do you assume that that underlying illegality taints the arbitration clause?
I mean, take the arbitration clause that you would find in a perfectly normal contract, and if you put it in the... the contract of the sort that you're hypothesizing, I don't see why this underlying substance of the contract taints the enforceability of the arbitration clause.
Mr. Bland: Because... because the language of the statute is what draws the key link difference to me, Your Honor.
The statute says an arbitration provision is enforceable if it is in a contract evidencing interstate commerce.
The in a contract makes the legality of the whole contract... for the contract comes into existence.
You can't drive this car until you start it, and the way that the Federal Arbitration Act works is it becomes enforceable once those terms are met.
Under their theory, there's no good reason why in Prima Paint this Court spent all those pages talking about whether interstate commerce was met.
Why wasn't that for the arbitrator?
The reason that that wasn't for the arbitrator was that was something that went to the threshold issue of whether section 2 had been met.
Justice Ginsburg: Are you saying then if this case, the case that was brought in Florida, had been brought or removed in... more likely removed because there was diversity, removed to the Federal court, the Federal court should do just what the Florida Supreme Court did?
Or would the Federal court say, well, we've got our instructions from Prima Paint?
It says excise the arbitration clause.
If that's okay, we decide the other questions.
Mr. Bland: Your Honor, in this case I believe that the answer is that you would have the same result in State court or in Federal court.
And the reason I believe that is because section 2 makes the existence of a contract a precondition, and you don't get to anything else if that is not met.
Justice Scalia: Doesn't it... doesn't it follow from... from that theory of yours that in every case you are entitled to a judicial determination, not an arbitrator's determination, but a judicial determination that this was a contract evidencing a transaction involving commerce?
Mr. Bland: Yes, we do believe that, Your Honor.
Justice Scalia: Wow.
So in every... every case, the person who... who is being brought to arbitration can say, I deny that interstate commerce is involved in... in this... in this contract and I want to have a... a judicial determination of it.
Mr. Bland: And of course, in the Efabco case--
Justice Scalia: Well, I mean, that's--
Mr. Bland: --Well, that... this Court 2 years ago in 2003 in the Efabco case, the Alabama Supreme Court had developed a practice of finding that lots of contracts didn't involve interstate commerce and interstate commerce didn't reach to a lot of things.
And this Court just 2 years ago said this is an issue for the court and there is interstate commerce here and they... they... and this Court... I can't remember the phrase... per curiam.
There was no need for an argument or whatever.
The Court just came in and resolved it--
Justice Ginsburg: You said this was an issue for the court.
Was there an alternate forum in that case?
Was it an arbitration case?
Mr. Bland: --This was an arbitration case, and the Alabama Supreme Court had said that we're not going to enforce the Federal Arbitration Act, and Alabama is one of the three States that has... that has a State statute that bars it.
Justice Breyer: I had thought that the interstate commerce question was like Crowell v. Benson.
You know, it's like a constitutional fact.
And in fact, if you can't... if there's not the constitutional... if there's not the connection with interstate commerce, Congress, at least arguably, would lack the constitutional power to tell the State court what to do in this case.
So it's not as surprising if there is a difference between that kind of fact and the kind of fact that goes to whether the... the contract is void ab initio.
Mr. Bland: But it... but it is also a statutory fact, Your Honor.
Justice Breyer: Yes, it is.
Mr. Bland: It's a fact that the statute says both.
It is a constitutional fact.
I certainly concede that.
Justice Ginsburg, I believe I did not answer... I'm sorry.
Justice Scalia: --The question isn't whether the court can... can determine that fact.
Ultimately, if the arbitrator determines it incorrectly, you can take it to court.
But the question is whether in every arbitration case, you can go immediately to court to have that question of interstate commerce or not determined.
And that would really throw a monkey wrench into the whole system, it seems to me.
Mr. Bland: Your Honor, it's... it would not throw a monkey wrench because it's exactly what happened in Prima Paint.
In Prima Paint, this Court started off and before it enforced the Arbitration Act, before it got into what it called the main issue and started talking about what does section 4 mean, this Court first went and did the entire interstate commerce analysis.
This Court said, we've got to figure out if we're in section 2 first and described that.
It's not the monkey wrench.
It's exactly what's happened.
And in the Efabco case, it was a issue for the Court.
To say that now, whether or not section 2 exists except for the assent agreement, but everything else about a contract and everything else about interstate commerce would suddenly be for the arbitrator, that is an exact shift from what this Court did in Prima Paint, and it's a shift from what Chief Justice Warren Burger said in the... in the Southland case, that this is a prerequisite.
Justice Scalia: Once the case is in the court, of course, the court has to decide that question.
Once it is in the court.
And it was in the court in... in Prima Paint.
The question is does it have to go first to the court before it goes to the arbitrator, and... and Prima Paint doesn't decide that question.
Mr. Bland: Well, where these cases come up again and again, Your Honor, is someone brings a lawsuit in court and then there is a motion to compel arbitration and there is a challenge to that motion.
There are next to no challenges anywhere in the country right now in the... after your decision 2 years ago, in which anyone is saying, oh, this transaction doesn't involve interstate commerce.
There are going to be a small number of challenges involving companies operating at the edge of legality and maybe a tiny number of challenges involving consideration where people are going to be able to say there's no contract at all, there's not even a... there's not even a beginning of a contract here.
There's not going to be a wealth of hundreds of the... of those, but there's going to be some cases, mostly involving the payday lending industry, but they're just aren't dozens of businesses out there where there is a conceivable, plausible, colorable argument that the whole line of business is violating the law.
Justice Stevens: Mr. Bland, I'm curious to know if you agree with your opponent that whoever decides it, an arbitrator or a judge, it's really going to be decided by the Florida Supreme Court in the next couple of months.
Mr. Bland: I think that the question of whether or not this is illegal will be something that's decided by the Florida Supreme Court, but that question... first of all, if this case is sent back to arbitration, the arbitration clause, of course, is on an individual basis and this case could never be pursued on an individual basis.
If it's not done as a class action, it would be the end of the case.
But moreover, the arbitrator is basically free to ignore what the ruling of the Florida Supreme Court is.
You know, there was a ruling from the Third Circuit a few weeks ago that said that glaring errors of law are not grounds for overturning an arbitration decision.
So the Florida Supreme Court could come out and say this is plainly illegal, and then a row of arbitrators could come in and say, seems okay to us, and there's really not going to be a court challenge to that.
So I would not agree with that as a matter of... as a matter of practical reality, Your Honor.
This State law that we're talking about is not about hostility to arbitration.
The rule that distinguishes between void contracts and the small universe of cases that are void ab initio is a rule that goes back something like a hundred years in Florida and it goes back hundreds more years through... it's come up in decisions of this Court.
It has come up in decisions of English courts that go back that were traced by the contract professors.
At the time that the Congress wrote the Arbitration Act in 1925, this distinction was set out in Corbin and in the First Restatement of Contracts.
This is basic, core common law of contracts.
And the idea that in 1925 Congress wanted to throw out all of the basic core rules of contracts and, instead, replace them with some new Federal rule of contract, when they didn't define contract, and when they put it as a precondition before the act applies, the idea that general rules of State contract law are going to be tossed overboard is really going to be a dramatic change for this Court... for this Court' s jurisprudence.
In case after case, this Court has said arbitration clauses are as enforceable as other contracts, but no more so.
And that was the basis of this Court's ruling in the EEOC v. Waffle House case just a few years ago.
Just like petitioner here, the Waffle House was saying arbitration clauses are sort of super contracts.
They are something so many businesses have relied on, as Justice Breyer says, that they are... that they are treated by a different and better set of rules.
These are contracts which are just better and more important than other contracts.
And this Court stopped and, in Justice Stevens' opinion in the Waffle Case, said slow down.
First, you just have to treat these like other contracts.
And here, there's no signature line for the EEOC.
The EEOC didn't sign on.
We're going to treat this like another contract, and by a 6 to 3 vote, this Court found that you couldn't enforce it.
They want to put the cart before the horse.
They want to enforce this Arbitration Act before its terms were met.
That is not what this Court did in Prima Paint.
Prima Paint did it right.
They said section 2 first and only if section 2 applies, then do we jump to the next point, you know, sort of dinner before dessert.
And that was the appropriate approach because you have to find out if section 2 is there and cross that threshold before you start saying now that we're in the Federal Arbitration Act, how much fun would it be to apply section 4, the part that keeps talking about the Federal Rules of Civil Procedure, to cases in State court proceedings and apply a decision that was based entirely on language in section 4 to State court proceedings.
That is simply an enormous expansion of the law in this area, and we urge the Court strongly to affirm the decision below.
Rebuttal of Christopher Landau
Chief Justice Roberts: Thank you, Mr. Bland.
Mr. Landau, you have 4-and-a-half minutes remaining.
Mr. Landau: Thank you, Mr. Chief Justice.
Justice Scalia: Mr. Landau, I'd like to know how you read section 2.
What... what meaning do you give to a written provision in a contract?
Mr. Landau: --Your Honor, I think the word contract is not a precondition in the sense that respondents talk about in the sense that the court has to look into whether it's a valid contract with all the bells and whistles of State contract law because I think that is entirely inconsistent with Prima Paint.
I think the... the answer is--
Chief Justice Roberts: But State law... the supposition is that State law provides that in this case, the usury context, whatever, you do not have a contract.
That's the difference between void ab initio and voidable.
Mr. Landau: --Your Honor, I think the point is that it... the key part there is... I think Justice Breyer was getting to this... that it has to be a... a contract that evidences interstate commerce to have the hook of commerce power for the FAA to apply in the first place.
That was enacted under the substantive commerce power.
Then the question arises... and this is really where they're hanging their hats in this case to say, well, you have the word contract.
The word contract brings with it all the bells and whistles of State law for a valid underlying contract.
The problem with that is that looking at it that way... I think this is the heart of this case... that completely undermines... or the severability rule says, we've got a different contract.
The underlying contract is... is there, and you can raise your challenge to that contract, but as long as you're not challenging the... the arbitration clause, then any challenge you have to the underlying contract goes to the arbitrator.
And again, I think the point is to say that, well, they don't deny that there's a severability rule, but to say that before you apply the Federal severability rule, you have to go and look at the underlying contract and ascertain all this is to deny the Federal severability rule.
Justice Scalia: I... I guess that respondent uses the language in the way it... he says it should be used when he refers to a contract that is void ab initio.
There's no such thing as a contract that is void ab initio, is there?
Mr. Landau: No.
Justice Scalia: If you take the meaning of contract that he takes in section 2.
Mr. Landau: I... I think you're... you're right, Your Honor.
I mean, I think the... the point is it... it just doesn't make sense to say that you have to go through all the bells and whistles of looking at the validity of the underlying contract if the whole point of Prima Paint... I think this goes back to what the Chief Justice said is you just look at the arbitration provision as a severable contract.
So to say that--
Chief Justice Roberts: But I... his answer would be, well, you only get to do that if you're under the Federal Arbitration Act in the first place, and if you don't have a contract, then you're not under the Federal Arbitration Act under State law.
Mr. Landau: --You're right, Your Honor.
I think that's the key point, that to say that the... you have to go to the... the validity of the underlying contract under State law and the severability implications of the challenge to the underlying contract before you... before you even get to the arbitration clause is essentially to negate the severability of the arbitration clause because the whole reason you're looking at the underlying contract is presumably to see whether or not the arbitration clause can fall.
So they cannot logically have a regime that says the arbitration clause is severable from the underlying contract.
Justice Breyer: They can logically because they say the arbitration clause, when embedded in a contract that is voidable... i.e., A and B enter into a contract.
B says it's voidable.
I void it.
I void it.
And there they say, fine, there was a contract and therefore this arbitration clause, which is separable... you go to arbitration.
But if it's void, where B doesn' t have to say I void it, I void it, you never had a contract in the first place.
Now, that is a logical position.
Mr. Landau: And you're absolutely right, Your Honor, and that was the lines that were drawn in Prima Paint.
That... that was the... the real issue that was presented.
They said there was no contract.
They said I'm bringing a rescission suit.
And if you read what Justice Black said in dissent in Prima Paint, he said there was no contract.
And this kind of goes back to what Justice Ginsburg was saying, that to talk about the implications, the severability implications, of particular challenges under State law misses the point that the Federal severability rule doesn't depend on State law.
Chief Justice Roberts: Thank you, Mr. Landau.
Mr. Landau: Thank you.
Chief Justice Roberts: The case is submitted.
Argument of Speaker
Mr. Speaker: Justice Scalia has the opinion in number 04-1264, Buckeye Check Cashing Inc. v. Cardegna.
Argument of Justice Scalia
Mr. Scalia: This case is here on writ of certiorari to the Supreme Court of Florida.
The respondents John Cardegna and Donna Reuter entered into various deferred payment transactions with the petitioner Buckeye Check Cashing, in which they received cash in exchange for a personal check in the amount of the cash plus a finance charge.
For each separate transaction, they signed an agreement that included provisions for the arbitration of disputes arising out of the contracts.
The respondents brought a putative class action in Florida State Court alleging that Buckeye charged usurious interest rates and that the agreement violated various Florida Lending and Consumer Protection laws, rendering it criminal on its face.
Buckeye moved to compel arbitration.
The trial court denied the motion, holding that a court rather than an arbitrator should resolve the claim that a contract is illegal and void ab initio.
The District Court of Appeal of Florida for the 4th circuit reversed holding it because respondents did not challenge the arbitration provision itself, but instead claimed that the entire contract was void, the agreement to arbitrate was enforceable, and the question of the contract’s legality should go to the arbitrator.
The respondents appealed, and the Florida Supreme Court in its turn reversed, reasoning that to enforce an agreement to arbitrate in a contract challenged as unlawful, “could breathe life into a contract that not only violates State Law, but is also criminal in nature”.
In an opinion filed with the clerk today, we reversed the judgment of the Florida Supreme Court and affirm that regardless of whether the challenge is brought in Federal or State Court, a challenge to the validity of the contract as a whole and not specifically to the arbitration clause must go to the arbitrator.
To overcome judicial resistance to arbitration, Congress enacted the Federal Arbitration Act, Section 2 of which embodies the national policy favoring arbitration and places arbitration agreements on equal footing with all other contracts by providing that they “shall be valid, irrevocable and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract”.
Our prior contracts dealing with Section 2, notably Prima Paint and Southland Corporation, establish three propositions: first, as a matter of substantive federal arbitration law and arbitration provision is severable from the remainder of the contract; second, unless the challenge is to the arbitration provision itself, the issue of the contract’s validity is considered by the arbitrator in the first instance; and third, this arbitration law applies in State as well as Federal Courts.
The parties have not requested, and we do not undertake reconsideration of these holdings.
Applying them to this case, we conclude that because respondents challenged the agreement but not specifically its arbitration provisions, those provisions are enforceable apart from the remainder of the contract, and challenge to their validity should be considered by an Arbitrator, not a Court.
In declining to apply Prima Paint’s rule of severability, the Florida Supreme Court relied on the state distinction between void and voidable contracts.
Prima Paint makes this distinction irrelevant.
That case rejected application of state severability rules to the arbitration agreement without discussing whether the challenge at issue would have rendered the contract void or voidable.
Likewise, in Southland, which arose in State Court, we did not ask whether the several challenges made there would render the contract void or voidable.
We simply rejected the proposition that the enforceability of the arbitration agreement turned on the State Legislature’s judgment concerning the forum for enforcement of the State Law cause of action.
So also here, we cannot accept the Florida Supreme Court’s conclusion that enforceability of the arbitration agreement should turn on “Florida public policy and contract law”.
Accordingly, the judgment of the Florida Supreme Court is reversed and the case is remanded for further proceedings not inconsistent with this opinion.
Justice Thomas has filed a dissenting opinion.
Justice Alito took no part in the consideration or decision of this case.