The United States Supreme Court, in an opinion written by Justice Scalia, reversed and remanded, holding that regardless of whether it is brought in federal or state court, a challenge to the validity of a contract as a whole, and not specifically to the arbitration clause within it, must go to the arbitrator, not the court. This conclusion was based on 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, the Federal arbitration law applies in state as well as federal courts.

The Court observed that a claim that the agreement as a whole (including its arbitration provision) is rendered invalid by the usurious finance charge fails because this challenges the agreement, and not specifically its arbitration provisions, and the latter are enforceable apart from the remainder of the contract. Thus, the challenge should be considered by an arbitrator, not a court.

The Court rejected an argument that the Federal Arbitration Act applies only to valid contracts, reasoning as follows:

We do not read ‘contract’ so narrowly. The word appears four times in §2 [of the Federal Arbitration Act]. 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 a contract.’ (Emphasis added). There can be no doubt that ‘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. 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.