Buckeye Check Cashing Supreme Court Decision Offers Solace to Businesses Using Arbitration Agreements

by Professor Sarah Rudolph Cole [1]

The U.S. Supreme Court's recent opinion in Buckeye Check Cashing v. Cardegna, 123 S. Ct. 1204 (2006), is a controversial pro-business decision that those who advocate a national policy favoring arbitration will welcome.

The court ruled that an agreement to arbitrate, even when contained in an illegal contract, is enforceable. This decision offers additional support and encouragement to businesses to continue using arbitration as a primary mechanism for resolving disputes with businesses, consumers and employees.

The Buckeye Check Cashing suit involved two consumers who entered into agreements with the company to receive cash in exchange for a check in the amount of the cash plus a finance charge. Each consumer signed an agreement that contained an arbitration clause requiring they arbitrate disputes arising out of their check-cashing relationship. The consumers sued in Florida court, contending Buckeye Check Cashing charged usurious interest rates and that the contract was illegal under Florida law.

The question for the Florida courts was whether the court or an arbitrator should decide whether a contract containing an arbitration clause is illegal on its face. The Florida Supreme Court refused to send the case to arbitration, reasoning an arbitrator might "breathe life into a contract that not only violates state law, but also is criminal in nature ... ."

The Supreme Court disagreed, saying the question whether an agreement is illegal should go to an arbitrator if the underlying agreement contained an arbitration clause. This decision affirmed the Supreme Court's commitment to its 1967 Prima Paint decision. [2]

In that case, the high court ruled a party that claimed it was fraudulently induced into signing a contract that contained an arbitration clause, must arbitrate the question of whether fraudulent inducement occurred. Prima Paint was different from Buckeye, however, because the contract in the Prima Paint case was voidable, that is, it was legal on its face but illegal means may have been used to obtain one side's agreement. The contract in Buckeye, however, allegedly was void, or illegal on its face.

The Supreme Court rejected a distinction between void and voidable contracts. According to the court, the Federal Arbitration Act applies to all contracts that involve interstate commerce and includes within its purview even contracts that may be illegal and unenforceable.

Thus, a dispute over whether the contract is enforceable is a question for the arbitrator, not the court. Interestingly, the court also rejected the consumers' concern that the Prima Paint rule allows a court to enforce an arbitration agreement in a contract that the arbitrator later finds to be void, stating that plaintiffs approach allows a court to deny enforcement of a valid arbitration agreement in a contract that the court later finds enforceable.

What the court fails to see, however, is that the former result leaves the case with an arbitrator who may be somewhat self-interested (he is paid only if he hears the case) in finding the contract valid. Moreover, a dispute that goes to arbitration is virtually unreviewable even when the arbitrator draws an erroneous legal conclusion.

By contrast, if the latter rule was followed, all that is lost is time – the court, if it decides the contract is illegal, never sends the case to arbitration. If it finds the contract legal, arbitration ultimately occurs, but has simply been delayed a short time. The first result seems unjust, the second only mildly unfair.

While Buckeye Check Cashing vs. Cardegna is likely in for the same heavy academic criticism Prima Paint has received for 40 years, the confirmation that arbitration agreements will be enforced even if the contract containing the arbitration clause is invalid or illegal, should give solace to businesses that use arbitration agreements.

What is more remarkable about Buckeye is that it concerns an arguably more problematic situation than was at issue in Prima Paint. In that case, two businesses with relatively equal bargaining power entered into a contract that was legal. The only issue was whether one side tricked the other into signing the contract.

In Buckeye, by contrast, the parties involved are a business and two consumers who have virtually no bargaining power. It would be fiction to imagine the consumers either knew about the arbitration clause or intended to agree to it. Moreover, the contract is allegedly illegal on its face.

Still, the Supreme Court didn't hesitate to enforce the arbitration agreement. In so doing, it reaffirmed a strong federal policy favoring enforcement of arbitration agreements that should allow businesses to sleep peacefully for years to come.

[1] Sarah Rudolph Cole is the Squire, Sanders & Dempsey Designated Professor of Law at the Moritz College of Law. This article was previously published as an op-ed in Business First of Columbus on April 21, 2006.

[2] Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395 (1967).