Title
Buckeye Check Cashing v Cardegna, YCA 2006, 326 et seq. 
Content

326

Supreme Court of the United States, 21 February 2006, No. 04-1264

Parties:

Plaintiff: Buckeye Check Cashing, Inc. (US)

Defendant: John Cardegna (US), et al.

Published in:

546 U.S. _  (2006); 512 [2006 AMC]; 2006 WL 386362

Subject matter:

— separability of arbitration clause

— validity of contract to be decided by arbitrator

— Federal Arbitration Act applies to proceedings in state courts

Facts

John Cardegna and Donna Reuter entered into various deferred-payment transactions with Buckeye Check Cashing (Buckeye), 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 a Deferred Deposit and Disclosure Agreement which included a clause referring disputes to arbitration. Cardegna and Reuter (collectively, the plaintiffs) later 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 a claim that a contract is illegal and void ab initio. The District Court of Appeal of Florida for the Fourth District reversed, holding that 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 Florida Supreme Court 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 also is criminal in nature". The Supreme Court, before Roberts, Chief Justice, Stevens, Scalia, Kennedy, Souter, Thomas, Ginsburg and Breyer, JJ, in an opinion by Antonin Scalia, reversed and remanded, reaffirming its opinion that "regardless of whether the 327 challenge 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".

The Court noted at the outset that Sect. 2 of the Federal Arbitration Act (FAA) provides that arbitration agreements are valid save upon such grounds as exist for the revocation of any contract. It also noted that challenges to an arbitration agreement can either concern the agreement itself or the contract as a whole. In the present case, the claim was of the latter type.

The Supreme Court referred to its 1967 decision in Prima Faint (see below) where it held that a claim of fraud in the inducement of the arbitration clause should be heard by the court whereas a claim of fraud in the inducement of the contract was for the arbitrator to decide, and rejected the view that the question of severability was one of state law. The Court also referred to its 1984 decision in Southland (see below) where it held that the FAA created a body of federal substantive law which was applicable in both state and federal court and rejected the view that state law could bar enforcement of Sect. 2 FAA in the context of state-law claims brought in state court.

Based on the above, the Supreme Court concluded that the relevant propositions were, therefore, that (1) an arbitration provision is severable from the remainder of the contract as a matter of substantive federal arbitration law; (2) 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; (3) this arbitration law applies in state as well as federal courts. Since the plaintiffs challenged the Deferred Deposit and Disclosure Agreements as a whole rather than the arbitration provisions therein, the Court concluded that the arbitration provisions were enforceable and the dispute should be heard by an arbitrator.

The Supreme Court then considered that in declining to apply Prima Paint's rule of severability, the Florida Supreme Court relied on the distinction between void and voidable contracts in Florida law, reasoning that Florida law does not allow "salvageable" parts to be severed from a contract found to be void under that law. The Court noted that this distinction was irrelevant as it was not made in Prima Paint and Southland. Also, the Court in Southland expressly rejected the proposition that the enforceability of the arbitration agreement turned on state law.

The Supreme Court dismissed Buckeye's argument that the Prima Paint rule of severability does not apply in state court because Prima Paint only concerned FAA procedural provisions (Sects. 3 and 4) which appear to apply by their terms only in federal court. The Court reasoned that Sect. 4 FAA — which provides that a party may obtain an order compelling arbitration from a federal district court 328— had indeed "much to do with Prima Paint's understanding of the rule of; severability". However, the separability rule ultimately arises out of Sect. 2 FAA, as it establishes how the guarantee in Sect. 2 FAA that arbitration agreements be treated like all other contracts is to be implemented. The Court added that Buckeye's contention that Prima Paint only establishes a federal-court rule of procedure also ran contrary to Southland's understanding ofthat case. Southlands based its application of Sect. 2 FAA in state court, inter alia, on Prima Paint's reliance "on Congress' broad power to fashion substantive rules under the; Commerce Clause" and refused to "believe Congress intended to limit the Arbitration Act to disputes subject only to federal-court jurisdiction".

The Supreme Court also denied Buckeye's contention that since Sect. 2 FAA only applies by its terms to arbitration agreements involving a "contract", it cannot apply where there is no contract because the agreement between the parties is null and void ab initio. The Court dismissed such a narrow reading of "contract". It pointed to the last part of Sect. 2 FAA, which states that a challenge to an arbitration provision is allowed "upon such grounds as exist at law or in equity for the revocation of any contract". In the Court's opinion, "contract" must in this case include contracts that later prove to be void.

Justice Thomas filed a dissenting opinion reaffirming his view that the FAA does not apply to proceedings in state court and cannot be the basis there "for displacing a state law that prohibits enforcement of an arbitration clause contained in a contract that is unenforceable under state law".

Excerpt

[1] "We decide whether a court or an arbitrator should consider the claim that a contract containing an arbitration provision is void for illegality.

(...)

[2] "To overcome judicial resistance to arbitration, Congress enacted the Federal Arbitration Act (FAA), 9 U.S.C. Sects. 1-16. Sect. 2 embodies the national policy favoring arbitration and places arbitration agreements on equal footing with all other contracts: 

'A written provision in ... a contract... to settle by arbitration a controversy thereafter arising out of such contract... or an agreement in writing to submit to arbitration an existing controversy arising out of such a contract... shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract. '

329

[3] "Challenges to the validity of arbitration agreements 'upon such grounds as exist at law or in equity for the revocation of any contract' can be divided into two types. One type challenges specifically the validity of the agreement to arbitrate. See, e.g., Southland Corp. v. Keating, 465 U.S. 1, 4-5 (1984) (challenging the agreement to arbitrate as void under California law insofar as it purported to cover claims brought under the state Franchise Investment Law). The other challenges the contract as a whole, either on a ground that directly affects the entire agreement (e.g., the agreement was fraudulently induced), or  on the ground that the illegality of one of the contract's provisions renders the whole contract invalid.1

[4] "Respondents' claim is of this second type. The crux of the complaint is that the contract as a whole (including its arbitration provision) is rendered invalid by the usurious finance charge.

[5] "In Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395 (1967),we addressed the question of who — court or arbitrator — decides these two types of challenges. The issue in the case was 'whether a claim of fraud in the inducement jof the entire contract is to be resolved by the federal court, or whether the matter is to be referred to the arbitrators'. Id., at 402. Guided by Sect. 4 of the FAA,2 we held that 'if the claim is fraud in the inducement of the arbitration clause itself — an issue which goes to the making of the agreement to arbitrate — the federal court may proceed to adjudicate it. But the statutory language does not permit the federal court to consider claims of fraud in the inducement of the contract generally.' Id., at 403-404 (internal quotation marks and footnote 330omitted). We rejected the view that the question of 'severability' was one of state law, so that if state law held the arbitration provision not to be severable a challenge to the contract as a whole would be decided by the court. See id., at 400,402-403.

[6] "Subsequently, in Southland Corp., we held that the FAA 'create[d] a body of federal substantive law', which was 'applicable in state and federal court'. 465 U.S. at 12 (internal quotation marks omitted). We rejected the view that state law could bar enforcement of Sect. 2, even in the context of state-law claims brought in state court. See id., at 10-14; see also Allied-Bruce Terminix Cos. v. Dobson, 513 U.S. 265, 270-273 (1995).

[7] "Prima Paint and Southland 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. 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.

[8] "The parties have not requested, and we do not undertake, reconsideration of those holdings. Applying them to this case, we conclude that because respondents challenge the Agreement, but not specifically its arbitration provisions, those provisions are enforceable apart from the remainder of the contract. The challenge should therefore be considered by an arbitrator, not a court.

[9] "In declining to apply Prima Paint's rule of severability, the Florida Supreme Court relied on the distinction between void and voidable contracts. 'Florida public policy and contract law', it concluded, permit 'no severable, or salvageable, parts of a contract found illegal and void under Florida law'. 894 So.2d at 864. Prima Paint makes this conclusion 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. See 388 U.S. at 400-404. Indeed, the opinion expressly disclaimed any need to decide what state law remedy was available, id., at 400, n. 3, (though Justice Black's dissent asserted that state law rendered the contract void, id. at 407).

[10] "Likewise in Southland, which arose in state court, we did not ask whether the several challenges made there — fraud, misrepresentation, breach of contract, breach of fiduciary duty, and violation of the California Franchise Investment Law — would render the contract void or voidable. We simply rejected the proposition that the enforceability of the arbitration agreement turned on the 331 state legislature's judgment concerning the forum for enforcement of the statelaw cause of action. See 465 U.S. at 10.

[11] "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', 894 So.2d at 864.

[12] "Respondents assert that Prima Paint's rule of severability does not apply in state court. They argue that Prima Paint interpreted only Sects. 3 and 4 — two of the FAA's procedural provisions, which appear to apply by their terms only in federal court — but not Sect. 2, the only provision that we have applied in state court.

[13] "This does not accurately describe Prima Paint. Although Sect. 4, in particular, had much to do with Prima Paint's understanding of the rule of severability, see 388 U.S. at 403-404, this rule ultimately arises out of Sect. 2, the FAA's substantive command that arbitration agreements be treated like all other contracts. The rule of severability establishes how this equal-footing guarantee for 'a written [arbitration] provision' is to be implemented. 

[14] "Respondents' reading of Prima Paint as establishing nothing more than a federal-court rule of procedure also runs contrary to Southland's understanding of that case. One of the bases for Southland's application of Sect. 2 in state court was precisely Prima Paint's 'reli[ance] for [its] holding on Congress' broad power to fashion substantive rules under the Commerce Clause'. 465 U.S. at 11 ; see also Prima Paint, supra, at 407 (Black, J., dissenting) ('[t]he Court here holds that the [FAA], as a matter of federal substantive law...' (emphasis added)). Southland itself refused to 'believe Congress intended to limit the Arbitration Act to disputes subject only to federal-court jurisdiction'. 465 U.S. at 15. 

[15] "Respondents point to the language of Sect. 2, which renders 'valid, irrevocable, and enforceable' 'a written provision in' or 'an agreement in writing to submit to arbitration an existing controversy arising out of' a 'contract'. Since, respondents argue, the only arbitration agreements to which Sect. 2 applies are those involving a 'contract', and since an agreement void ab initio under state law is not a 'contract', there is no 'written provision' in or 'controversy arising out of' a 'contract', to which Sect. 2 can apply. 

[16] "This argument echoes Justice Black's dissent in Prima Paint: 'Sects. 2 and 3 of the Act assume the existence of a valid contract. They merely provide for enforcement where such a valid contract exists.' 388 U.S. at 412-413.

[17] "We do not read 'contract' so narrowly. The word appears four times in Sect. 2. Its last appearance is in the final clause, which allows a challenge to an arbitration provision 'upon such grounds as exist at law or in equity for the revocation of any contract'. (Emphasis added.) There can be no doubt that 332'contract' as used this last time must include contracts that later prove to be void. Otherwise, the grounds for revocation would be limited to those that rendered a contract voidable - which would mean (implausibly) that an arbitration agreement could be challenged as voidable but not as void.

[18] "Because the sentence's final use of 'contract' so obviously includes putative contracts, we will not read the same word earlier in the same sentence to have a more narrow meaning.3 We note that neither Prima Paint nor Southland lends support to respondents' reading; as we have discussed, neither case turned on whether the challenge at issue would render the contract voidable or void.

[19] "It is true, as respondents assert, that the Prima Paint rule permits a court to enforce an arbitration agreement in a contract that the arbitrator later finds to be void. But it is equally true that respondents' approach permits a court to deny effect to an arbitration provision in a contract that the court later finds to be perfectly enforceable. Prima Paint resolved this conundrum — and resolved it in favor of the separate enforceability of arbitration provisions.

[20] "We reaffirm today 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.

[21] "The judgment of the Florida Supreme Court is reversed, and the case is remanded for further proceedings not inconsistent with this opinion. Justice Alito took no part in the consideration or decision of this case."

Dissenting Opinion by Justice Clarence Thomas

[22] "I remain of the view that the Federal Arbitration Act (FAA), 9 U.S.C. Sect. 1 et seq., does not apply to proceedings in state courts. See Allied-Bruce Terminix Cos. v. Dobson, 513 U.S. 265, 285-297 (1995) (Thomas, J.,dissenting); Doctor's Associates, Inc. v. Casarotto, 517 U.S. 681, 689 (1996)4 (same); Green Tree Financial Corp. v. Bazzle, 539 U.S. 444, 460 (2003)5 (same). Thus, in state-court 333 proceedings, the FAA cannot be the basis for displacing a state law that prohibits enforcement of an arbitration clause contained in a contract that is unenforceable under state law. Accordingly, I would leave undisturbed the judgment of the Florida Supreme Court."

1The issue of the contract's validity is different from the issue of whether any agreement between the alleged obligor and obligee was ever concluded. Our opinion today addresses only the former, and does not speak to the issue decided in the cases cited by respondents (and by the Florida Supreme Court), which hold that it is for courts to decide whether the alleged obligor ever signed the contract, Chastain v. Robinson-Humphrey Co., 957 F.2d851 (11 Cir. 1992), whether the signor lacked authority to commit the alleged principal, Sandvik AB v. Advent lnt'l Corp., 220 F.3d 99 (3d Cir. 2000) [reported in Yearbook XXVI (2001) pp. 961-977 (US no. 344)]; Sphere Drake Ins. ltd. v. All American Ins. Co., 256 F.3d 587 (7 Cir. 2001), and whether the signor lacked the mental capacity to assent, Spahr v. Secco, 330 F.3d 1266 (10 Cir. 2003)."
2"In pertinent part, Sect. 4 reads: 'A party aggrieved by the alleged failure, neglect, or refusal of another to arbitrate under a written agreement for arbitration may petition any United States district court [with jurisdiction] ... for an order directing that such arbitration proceed in a manner provided for in such agreement.... [U]pon being satisfied that the making of the agreement for arbitration or the failure to comply therewith is not in issue, the court shall make an order directing the parties to proceed to arbitration in accordance with the terms of the agreement....'"
3"Our more natural reading is confirmed by the use of the word 'contract' elsewhere in the United States Code to refer to putative agreements, regardless of whether they are legal. For instance, the Sherman Act, 26 Stat. 209, as amended, states that '[e]very contract, combination ... or conspiracy in restraint of trade ... is hereby declared to be illegal'. 15 U.S.C. Sect. 1. Under respondents', reading of 'contract', a bewildering circularity would result: A contract illegal because it was in, restraint of trade would not be a 'contract' at all, and thus the statutory prohibition would not apply."
4Reported in Yearbook XXIII (1998) pp. 204-209.
5Reported in Yearbook XXVIII (2003) pp. 231-242.

Referring Principles
Trans-Lex Principle: XIII.2.4 - Principle of separability of the arbitration clause
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