Smith v. JEM Group, Inc.

A court, rather than an arbitrator, has the authority to decide the validity of an arbitration clause in an attorney retainer agreement.

JEM Group, Inc. (“JEM”) appealed a denial of its motion to compel arbitration. The motion to compel was based on an arbitration clause in an attorney retainer agreement. JEM specifically argued that an arbitrator, not the court, should decide whether an arbitration clause is unconscionable. The Ninth Circuit elicited precedent from Bridge Fund Capital Corp. v. Fastbucks Franchise Corp., which reads, “‘the question of arbitrability is for the court to decide regardless of whether the specific challenge to the arbitration clause is raised as a distinct claim in the complaint’ so long as ‘the plaintiff’s challenge to the validity of an arbitration clause is a distinct question from the validity of the contract as a whole.’” Although the plaintiff did not challenge the arbitration clause’s validity in her complaint, the panel found that her challenge to the validity in an opposition to the motion to compel arbitration sufficed. Thus, applying the rule above, the panel found that the district court correctly decided the arbitration clause’s validity. JEM also argued that Washington law did not apply to this issue because the Federal Arbitration Act (“FAA”) preempts it. The panel ruled otherwise. The FAA will preempt state rules on arbitration clauses if the state rules burden the objectives of the FAA or if they specify how arbitration should be conducted. Because the Washington laws implemented in this case do not burden the purposes of the FAA and deal only with the formation of agreements with arbitration clauses, the district court correctly applied Washington law when determining the validity of this arbitration clause. AFFIRMED.