Can Careful Drafting Expand Judicial Review?

Kristen M. Blankley *

Although arbitration is often touted for the finality achieved through the process, some parties are unsatisfied with the lack of judicial review embodied in the Federal Arbitration Act ("FAA"). Because judicial review under the FAA and under federal common law is so limited, parties have begun to include within their agreements to arbitrate specific clauses detailing the standard of judicial review. The courts, however, have not universally accepted parties' attempts to dictate the appropriate standards of review. Indeed, such judicial review provisions have been taken as an affront to the courts' Article III responsibilities.

Even under the FAA, an arbitral award may be vacated if the arbitrator exceeded his or her powers under the contract. This begs the question: Can careful delineations of an arbitrator's power on the front end have the effect of increasing judicial review on the back end? Although the answer to this question is not yet clear, careful drafting may be one way to ensure a more comprehensive review of arbitral awards.

Judicial Review Under the FAA

Under the FAA, awards can be confirmed under Section 9, vacated under Section 10, or modified pursuant to Section 11. If an award is confirmed, it essentially becomes an order of the court. Under Section 10, an arbitration award can be vacated — or completely overturned — if one of four narrow circumstances are met. An award may be vacated if: 1) "the award was procured by corruption, fraud, or undue means"; 2) "there was evident partiality or corruption in the arbitrators"; 3) "the arbitrators were guilty of misconduct . . . or of any other misbehavior by which the rights of any party have been prejudiced"; or 4) "the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made." [3] All of these exceptions are quite limited, and none of them deal with the merits of the case. Under this Section, even wrongly decided arbitration decisions may still be upheld on "appeal." Indeed, the United States Supreme Court has held: "[A]s long as the arbitrator is even arguably construing or applying the contract and acting within the scope of his authority, that a court is convinced he committed serious error does not suffice to overturn his decision." [4]

The ability to correct or modify an award under Section 11 of the FAA is likewise limited. Generally, an award may only be changed under the following three circumstances: 1) "[w]here there was an evident material miscalculation of figures or an evident material mistake in the description of any person, thing, or property referred to in the award;" 2) "[w]here the arbitrators have awarded upon a matter not submitted to them, unless it is a matter not affecting the merits of the decision upon the matter submitted;" and 3) where the award is "imperfect in matter of form not affecting the merits of the controversy." [5] Indeed, under this statute, modification is only warranted "so as to effect the intent thereof and promote justice between the parties." [6]

Despite the limited statutory grounds for review, some federal courts fashioned an exception and began to review arbitrator awards for a "manifest disregard for the law." [7] Other federally created standards of review include "complete irrationality," "failing to draw the essence of the award from the arbitration contract," and "arbitrary and capricious." Although "manifest disregard" sounds amorphous enough, this exception, too, is quite limited. Indeed, "manifest disregard" has been interpreted by at least one court to require a determination of whether "the arbitrators clearly identify the applicable, governing law and then proceed to ignore it." [8] Further, some courts hold that a "mere mistake of law by an arbitrator cannot serve as the basis for judicial review." [9] In order for a court to apply the "manifest disregard" standard, however, that court must be able to determine exactly how the arbitrator decided the case. Without a written arbitration opinion, it is unclear if a court could ever find a manifest disregard of the law.

Is Increased Review Beneficial?

Sometimes, arbitrators decide cases wrongly. Indeed, no party with an apparently wrongly decided award will be satisfied to learn that in "contracting for arbitration of disputes . . . the parties bargained for a decision by the arbitrator, not necessarily a good one[.]" [10] Fear of being on the short end of one of these bad decisions could cause parties to seek to expand judicial review. In a sense, increasing judicial review is a way to indirectly control the quality of the arbitrator and the arbitration process. Increased judicial review may also give the losing party a "second bite" at the proverbial apple or allow the participants to "hedge their bets."

These parties, however, should be aware that increased judicial review is only effective if the arbitrator actually writes a reasoned award. Without such an award, the courts would have nothing to review! If the arbitrator is aware, however, that the losing party will almost assuredly appeal the award, the arbitrator may take greater care in writing the award, thus adding an additional benefit to increased judicial review.

Broader review, however, leads to increased costs and decreased efficiency. Significant time and money may be expended for the arbitrator to issue a detailed and reasoned award. In order for the arbitrator to render such a decision, the parties may be required to pay for the cost of producing a transcript of the proceedings and the costs associated with post-hearing briefing. These costs and time considerations are then exponentially increased when the parties actually litigate the merits of the review of the award. If the parties are aware of these potential costs, they may decide that arbitration is not the proper forum in the first place.

Expanded Review — Current Circuit Split

Currently, a circuit split exists regarding the parties' ability to contract for judicial review of an arbitration award different than that dictated by the FAA. The courts favorable to this position generally hold that arbitration is a creature of contract, and the parties should have the freedom to contract for greater review. The courts holding the opposite usually note that the jurisdiction and sovereignty of the Article III courts may not be abridged by the simple contracts of parties engaging in arbitration.

The first appellate court to decide this issue was Gateway Technologies, Inc. v. MCI Telecommunications Corp. [11] In Gateway, the Fifth Circuit permitted the party-dictated review for "errors of law" because "as the Supreme Court has emphasized, arbitration is a creature of contract and the FAA's pro-arbitration policy does not operate without regard to the wishes of the contracting parties." [12] The Fourth Circuit followed suit in 1997, upholding judicial review for "errors of law or reasoning" based on the freedom-of-contract theory. [13] In 2001, the Third Circuit joined the Fifth and Fourth Circuits in Roadway Package System, Inc. v. Kayser, [14] and held it would now "join with the great weight of authority and hold that parties may opt out of the FAA's off-the-rack vacatur standards and fashion their own (including by referencing state law standards)." [15] Most recently, the First Circuit in Puerto Rico Telephone Co. v. U.S. Phone Manufacturing Corp. [16] determined that parties could contract for greater judicial review than is provided in the FAA. These courts allowing for increased review generally view the provisions of the FAA as default provisions that may be modified by contract. Additionally, if the parties involved appear to be sophisticated business people, the courts have been more likely to uphold the standard of review dictated by the contract.

Not every court, however, has been so willing to accept party-dictated standards of review. In 2001, the Tenth Circuit's decision in Bowen v. Amoco Pipeline Co., [17] was the first circuit opinion to take the opposite position. In Bowen, the parties attempted to contract for the right to appeal an award "on the grounds that the award is not supported by evidence." [18] The court, however, did not accept the parties' attempt at creating judicial review, holding that increased review would "interfere with the judicial process" [19] and would be contrary to the purposes of the FAA, especially if the parties dictate a standard of review unfamiliar to the courts.

The Ninth Circuit also held that judicial review cannot be expanded by contract. [20] In Kyocera, the court recognized party-dictated review would "jeopardize the very benefits of arbitration, rendering informal arbitration merely a prelude to a more cumbersome and time-consuming judicial review process." [21] As in Bowden, the Kyocera court expressed concern about allowing "private parties [to] dictate how federal courts shall conduct their proceedings." [22] Further, the Kyocera court noted that Congress, in enacting the FAA, was not giving private parties the "power to dictate how the federal courts conduct the business of resolving disputes." [23] Accordingly, both Bowen and Kyocera echo these concerns of judicial sovereignty and independence.

Thus far, the U.S. Supreme Court has declined to grant certiorari on this issue. Until such time, this split will remain unresolved. However, because these decisions only directly address the issue of party-dictated expanded judicial review, there appears to be some room within which parties may work to expand judicial review in other ways.

Can More Careful Drafting Create Expanded Review?

Without delving into whether expanded review is or should be permissible under the FAA, a question remains whether parties can find another way to achieve increased review. As noted above, the FAA allows courts to review arbitration decisions to determine if the arbitrators "exceeded their powers." What if, then, the parties specifically delineate the powers of the arbitrator? Does that create additional grounds for a court to review?

Although parties can create any number of different types of instructions for the arbitrator, some instructions may be easier to review than others. For example, reviewing whether an arbitrator has followed an articulated formula for damages would undoubtedly be easier than reviewing whether an arbitrator followed a charge to "act appropriately." If the parties seek only a determination of liability, appealing an award including a damages calculation could be easily overturned on appeal for "exceeding the powers" of the arbitrator. Further, if the parties wished to designate only certain available remedies, and the arbitrator issued a remedy not enumerated, again, the arbitrator would likely have "exceeded the powers" granted under the arbitration agreement. Without specifying the arbitrator's jurisdiction in this matter, the awards of monetary damages in the first example and unexpected damages in the second example would likely stand. However, by designating the arbitrator's jurisdiction in this matter, the arbitrator's decision could likely be challenged under Section 10(a)(4) of the FAA.

Giving detailed instructions in areas other than remedies specifications may be a bit more difficult. For example, in Kyocera, the arbitration agreement specified the arbitrator must "decide the matters submitted based upon the evidence presented, the terms of this Agreement . . . and the laws of the State of California." [24] When the parties attempted to argue the arbitrator exceeded his powers by rendering a decision contrary to California law, the Ninth Circuit held this argument clothed in Section 10(a)(4) language was "in reality simply a recasting" of the previous arguments concerning contractually expanded judicial review. [25] Thus, under Kyocera, requiring an arbitrator to simply "follow the law" will be insufficient to create expanded judicial review. Perhaps this is the right result because it would contradict and expand the "manifest regard" standard already employed by most circuits.

Even if parties may not be able to expand judicial review by requiring the arbitrator to follow certain law, if the parties gave specific enough instructions regarding the exact law to be applied, this may create a reviewable inquiry. For example, if the arbitration agreement requires a determination of rights under a specific statutory scheme, the ultimate award could possibly be reviewed for compliance with — but not application of — the correct statute. Parties who would like to take advantage of this type of review would be best served by writing their arbitration agreements in the most specific way possible. However, the parties would first have to know exactly what to draft to take advantage of this possibility.

In conclusion, the use of Section 10(a)(4) as a means of expanding judicial review is an untested method by which parties seeking to expand judicial review could accomplish this goal. If testing this theory, the parties would be well-advised to explicitly draft their arbitration agreement in a way that predicts what issues would likely be raised on appeal.

[1] This article is based on this author's prior article, Be More Specific: Can Writing a Detailed Arbitration Agreement Expand Judicial Review Under the Federal Arbitration Act?, 2 Seton Hall Circuit Review 239 (2006). To access the full text of this article, please click here.

*Ms. Blankley is an associate with Squire, Sanders & Dempsey L.L.P. She received her law degree from The Ohio State University Moritz College of Law in 2004 and her Bachelors of the Arts degree from Hiram College in 2001.

[3] 9 U.S.C. § 10.

[4] United Paperworkers Int'l Union v. Misco, Inc., 484 U.S. 29, 38 (1987).

[5] 9 U.S.C. § 11.

[6] Id.

[7] The "manifest disregard" standard was first articulated in dicta in the Supreme Court's opinion in Wilko v. Swan, 346 U.S. 427, 436-37 (1953); see also First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 942 (1995).

[8] Schoch v. InfoUSA, Inc., 341 F.3d 785, 788 (8th Cir. 2003) (quoting Boise Cascade Corp. v. Paper Allied-Indus. Chem. & Energy Workers (PACE), Local 7-0159, 309 F.3d 1075, 1080 (8th Cir. 2002)).

[9] Puerto Rico Tel. Co., Inc. v. U.S. Phone Mfg. Corp., 427 F.3d 21, 32 (1st Cir. 2005) (quoting Prudential-Bache Secs., Inc. v. Tanner, 72 F.3d 234, 239 n.6 (1st Cir. 1995)).

[10] Saint Mary Home, Inc. v. Serv. Emp. Int'l Union, Dist. 1199, 116 F.3d 41, 45 (2d Cir. 1997). The Second Circuit went on to note, "It is not for us to second-guess [the choices exhibited in the arbitration contract] or judicially rewrite the agreement because one party now wishes it were different." Id.

[11] 64 F.3d 993 (5th Cir. 1995).

[12] Id. at 996 (quoting Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52, 57 (1995)) (internal quotation marks omitted).

[13] Syncor Int'l Corp. v. McLeland, No. 96-2261, 1997 WL 452245, at *6 (4th Cir. 1997).

[14] 257 F.3d 287 (3d Cir. 2001).

[15] Id. at 293.

[16] 427 F.3d 21 (1st Cir. 2005).

[17] 254 F.3d 925 (10th Cir. 2001).

[18] Id. at 930.

[19] Id. at 934.

[20] Kyocera Corp. v. Prudential-Bache Trade Servs., Inc., 341 F.3d 987, 1000 (9th Cir. 2003) (en banc).

[21] Id. at 998.

[22] Id. at 999.

[23] Id. at 1000.

[24] 341 F.3d 987, 1002 (9th Cir. 2003) (internal quotation marks omitted).

[25] Id.