South Carolina BAR Journal
SC Lawyer, May 2011, #1.
Effects of Recent U.S. Supreme Court Decisions on Arbitrations and Class Action Litigation in South Carolina
South Carolina LawyerMay 2011Effects of Recent U.S. Supreme Court Decisions on Arbitrations and Class Action Litigation in South CarolinaBy Jack Pringle and Shaun C. BlakeThe U.S. Supreme Court issued several decisions during its most recent term that may affect where and how arbitrations and class actions are conducted in South Carolina. Likewise, the S.C. Supreme Court recently issued a significant decision addressing arbitration and class action litigation. Herron v. Century BMW, 387 S.C. 525, 693 S.E.2d 394 (2010), reh'g denied (June 9, 2010) (Herron). This article will analyze Herron (and supporting South Carolina case law) in the context of the issues arising in three U.S. Supreme Court cases: Stolt-Nielsen S.A. v. Animal Feeds Int'l Corp., 130 S. Ct. 1758, (2010) (Stolt-Nielsen), Rent-A-Center, W., Inc. v. Jackson, 130 S. Ct. 2772 (2010) (Rent-A-Center), and Shady Grove Orthopedic Assoc., P.A. v. Allstate Ins. Co., No. 08-1008 (March 31, 2010) (Shady Grove).
The Federal Arbitration Act and arbitrability: An issue for both state and federal courts
Herron is the most recent case where the S.C. Supreme Court has addressed "arbitrability" under the Federal Arbitration Act, 9 U.S.C. 1, et seq. (FAA). The FAA provides that agreements to arbitrate involving interstate commerce are enforceable "save upon such grounds as exist at law or in equity for the revocation of any contract." 9 U.S.C. § 2. The question of "arbitrability" under the FAA typically involves certain "gateway matters, such as whether the parties have a valid arbitration agreement at all," Green Tree Financial Corp. v. Bazzle, 539 U.S. 444, 452 (2003) (Bazzle); "whether parties are bound by a given arbitration clause," Howsam v. Dean Witter Reynolds, 537 U.S. 79, 84 (2002); and "whether an arbitration clause in a concededly binding contract applies to a particular type of controversy." Id. Arbitrability also encompasses the question of what decisionmaker, either court or arbitrator, considers these threshold questions.
Because the FAA is binding on state courts where interstate commerce is involved, both federal and state courts routinely wrestle with the question of "arbitrability." See Munoz v. Green Tree Fin. Corp., 343 S.C. 531, 542 S.E.2d 360 (2001). Our courts look to the decisions of the U.S. Supreme Court when considering the FAA, and arbitrability determinations of the S.C. Supreme Court have reached the U.S. Supreme Court for review. See, e.g., Bazzle.
Herron, Rent-A-Center and the U.S. Supreme Court's evolving view of arbitrability
The Herron plaintiffs brought a putative class action in state court against Century BMW and other South Carolina auto dealers, alleging that the dealers charged an illegal administrative fee in violation of the South Carolina Regulation of Manufacturers, Distributors and Dealers Act, S.C. Code Ann. § 56-15-10, et seq. (Dealers Act). Century moved to compel arbitration pursuant to a contract between the parties.
The plaintiffs challenged the arbitration clause in that contract as unconscionable and placed the arbitrability of the parties' agreement before the trial court. The trial court ruled that the arbitration clause was unconscionable and refused to compel arbitration, relying on Simpson v. MSA of Myrtle Beach, Inc., 373 S.C. 14, 644 S.E.2d 663 (2007) (Simpson).
Who decides arbitrability?
The Herron plaintiffs' unconscionability challenge to the parties' arbitration agreement was properly addressed by the courts. Under the FAA, courts will consider "threshold" questions of "arbitrability" unless there is "clea[r] and unmistakabl[e] evidence" that the parties intended otherwise. AT and T Technologies, Inc. v. Communications Workers of Am., 475 U.S. 643, 649, (1986) (ATandT). However, there are two categories of cases in which the arbitrator is the appropriate decisionmaker for "gateway matters." Under the first category, and as the ATandT decision recognizes, parties can agree to submit the question of arbitrability to arbitration.
Secondly, under the rule of Prima Paint Corp. v. Flood and Conklin Mfg. Co., 388 U.S. 395 (1967) (Prima Paint), the issue of contract validity (as opposed to the issue of the validity of an arbitration agreement found within that contract) is for the arbitrator, not the courts. Prima Paint's rationale is that the FAA applies only to those agreements to arbitrate between parties, and therefore a court is empowered only to hear a "discrete challenge" to the parties' arbitration agreement. Justice Black, dissenting in Prima Paint, characterized the Court's holding as "fantastic" and...