Buckeye Check Cashing, Inc. v. Cardegna

2006-02-21

Headline: Customers’ lawsuits claiming entire contracts are illegal must be sent to arbitration when the deal includes an arbitration clause, so courts generally cannot decide whole-contract illegality claims first, affecting consumer contract disputes nationwide.

Holding: The Court held that when a contract contains an arbitration clause, a challenge that the entire contract is illegal must be decided by an arbitrator, not a court, and federal arbitration law applies in state courts.

Real World Impact:

Requires arbitrators to decide whole-contract illegality claims when arbitration clauses exist.
Limits courts from blocking arbitration based on contract-wide illegality claims.
Applies federal arbitration law in state courts to enforce arbitration agreements.

Topics: arbitration agreements, consumer lending, contract validity, state court enforcement

Summary

Background

Two consumers entered deferred-payment agreements with Buckeye Check Cashing, a lender, and signed contracts that required disputes to go to binding arbitration. They sued in Florida state court, alleging Buckeye charged usurious finance charges and that the entire agreements violated Florida law and were therefore illegal.

Reasoning

The Court addressed who should decide claims that a contract is illegal: a judge or an arbitrator. Citing earlier cases, the Court said arbitration clauses are legally separate from the rest of a contract, and unless the challenge targets the arbitration clause itself, an arbitrator must decide the contract’s overall validity. The Court relied on Prima Paint’s severability rule and Southland’s holding that the Federal Arbitration Act creates federal substantive law that applies in state courts, and it reaffirmed those precedents rather than reconsider them.

Real world impact

Because the arbitration clauses are enforceable apart from the rest of the agreements, the consumers’ claims that the whole contracts are void must go to arbitration first. That limits courts’ ability to refuse arbitration based on a claim that a contract is illegal. The ruling can push many consumer and small-dollar loan disputes into arbitration rather than public courts. The decision does not resolve whether the contracts were actually illegal; it only decides who decides that question.

Dissents or concurrances

Justice Thomas dissented, arguing the Federal Arbitration Act does not apply in state courts and that state law should determine whether arbitration clauses can be enforced; he would have left the Florida Supreme Court’s decision in place.