Should Courts Enforce Party Agreements to Expand Judicial Review of Arbitration Awards: Hall Street Assoc., LLC v. Mattel, Inc.by Sarah Cole * and Catharine Adkins * At about the time the Ohio State Journal on Dispute Resolution published the Mayhew-Hite Report, the Supreme Court decided the Hall Street Associates case. We apologize for any confusion created by the poorly-timed release of the article. Please read Professor Cole's comments on the decision in the "Hall Street Decision" section below. At issue in Hall Street Assoc., LLC v. Mattel, Inc. [1] is whether the Federal Arbitration Act ("FAA") prohibits federal courts from enforcing "a post-dispute agreement to review an arbitration award for legal errors or to determine whether substantial evidence supports the arbitrator's factual findings." [2] The Court's disposition of this issue will resolve an inter-circuit disagreement regarding party agreements to expand judicial review of arbitration awards. Currently, courts follow one of two approaches to the issue: [3] Courts may enforce party agreements to expand judicial review of arbitration awards. The First, Third, Fourth, and Fifth Circuits adopted this approach. [4] Under this approach, which is founded upon freedom of contract principles, the standards of review articulated in FAA § 10 are viewed as default rules that may be displaced by contractual language evidencing the parties' desire to expand judicial review of arbitration awards. Although the contractual language must be clear, there are no limitations on the parties' chosen standard of review. Courts may not enforce party agreements to expand judicial review of arbitration awards. The Seventh, Ninth, and Tenth Circuits adopted this approach, which precludes enforcement of any party agreement to expand judicial review of arbitration awards beyond the standards set forth in FAA § 10. [5] This approach is founded on the belief that the FAA establishes the limits of judicial review of arbitration awards. Because parties may not contract for federal jurisdiction, they may not contract for heightened judicial review of arbitration awards. Hall Street's Factual Background: Hall Street filed suit in Oregon state court for a declaratory judgment regarding Mattel's termination of its lease, which it argued was impermissible, and other issues. Mattel removed the suit to the U.S. District Court for the District of Oregon. That court ruled in Mattel's favor on the lease termination issue. The parties then entered into an arbitration agreement to resolve the remaining issues. The agreement stated that the court could vacate, modify, or correct any award where substantial evidence did not support the arbitrator's findings or where the arbitrator's conclusions of law were erroneous. Following a decision in its favor, Mattel sought to have the district court confirm the arbitration award. Hall Street moved to have the award vacated, modified, or corrected on the grounds set forth in the arbitration agreement. The district court vacated the award on one of the bases set forth in the parties' agreement, holding that the arbitrator relied upon an erroneous legal finding. The Ninth Circuit subsequently held that the agreement to expand judicial review of the arbitration award was unenforceable, and remanded the case. On remand, the district court again vacated the award on the ground that the award was based upon an "implausible reading" of the contract. The court of appeals reversed, noting that the only permissible bases for vacatur or modification were those enumerated in sections 10 and 11 of the FAA. Because it found that the arbitrator's decision was not "completely irrational" under section 10(a)(4), the Ninth Circuit directed the district court to enforce the original arbitration award. Arguments: In its brief, Hall Street argued that the FAA prescribes default, rather than mandatory, rules, and that clear contractual language evidencing the parties' intent to expand judicial review of arbitration awards can displace these rules. [6] In support of this argument, Hall Street cited section 2 of the FAA, [7] which imposes a presumption of enforceability on arbitration agreements, and the Court's case law, [8] which states that the primary purpose of the FAA is ensuring that private arbitration agreements are enforced according to their terms. Hall Street emphasized the Court's implicit recognition of bases for vacatur or modification other than those enumerated in sections 10 and 11 of the FAA as further support for the proposition that parties may contract around the default provisions of the FAA, provided that the agreed-upon terms are consistent with the primary policies underlying the Act. [9] Finally, Hall Street noted that the expansion of judicial review neither impermissibly conferred federal jurisdiction nor increased the burden on the district court. [10] By contrast, Mattel argued that the Ninth Circuit correctly held that sections 10 and 11 of the FAA are the exclusive grounds for vacatur or modification. [11] Mattel's contention that the FAA does not prescribe default rules relies in part on the language of section 9 of the Act, which states that courts "must grant" an application for an order confirming an award, unless the award has been vacated or modified pursuant to sections 10 or 11. Mattel further asserted that because the New York Arbitration Act of 1920, after which the FAA was patterned, had been interpreted not to permit review of an arbitrator's findings of fact or conclusions of law, the FAA must be interpreted to preclude enforcement of party agreements to expand judicial review of arbitration awards. [12] Finally, Mattel presented several policy arguments against permitting enforcement of expanded judicial review agreements. Chief among these was the argument that enforcement of such agreements would result in arbitrations becoming more like court proceedings and would thus undermine the efficiency of arbitration. [13] Oral Arguments: Oral argument in Hall Street took place on November 7, 2007. While the argument was difficult to follow, the justices expressed several points of view. Chief Justice Roberts suggested that when parties agree to expand judicial review of arbitration awards, they take themselves outside the scope of the Federal Arbitration Act and thus must rely on state courts to determine whether their agreement should be enforced. The Chief Justice told counsel for Hall Street that "[w]e should conclude that you don't fall within the Federal Arbitration Act and it's not a big deal because you can bring – you can have the contract enforced." The Chief also suggested that the plain language of the FAA precludes enforcement of the parties' agreement. By contrast, Justice Scalia seemed to believe that the FAA provides default rules that the parties may contract around but that their ability to contract would be limited by what the court would have been able to do if the action had been brought in court in the first place. Justice Ginsburg also emphasized the issue of limitations – she pressed Hall Street's counsel on the issue of what limitations should be imposed on parties' agreements to expand judicial review. Justice Kennedy appeared to be in favor of the Hall Street view, emphasizing that enforcing the parties' agreements would further the policy underlying the Federal Arbitration Act. Justice Stevens may also lean in Hall Street's direction. He asked Mattel's counsel repeatedly why the drafters of the FAA would want to prevent the parties from choosing the option they selected in this case just because, in Justice Stevens' words, the option "would just take a little longer" than a traditional arbitration. The other justices were harder to read. Justice Alito said very little; Justice Thomas, as is typical, said nothing. Justices Souter seemed to favor Mattel's view of the case, although he seemed to have procedural concerns about the case. Justice Breyer's views are also difficult to predict – at least one of his concerns was whether federal judges have the ability to permit this type of arrangement. Supplemental Briefing Order: Several days after the Hall Street oral argument, the Court issued an order requesting supplemental briefing from the Hall Street parties. The order directed the parties to file supplemental briefs addressing the following questions:
Supplemental briefing orders are unusual. The Court, perhaps prompted by Chief Justice Roberts' questions at oral argument, may be wondering whether the FAA applies at all in this case. It may also be that the Court is considering whether substantive judicial review provisions contained in an agreement among parties transforms what the parties think is arbitration into a procedure governed by common law (contract law) rather than the FAA. If that is the case, then the question becomes whether parties can ask courts to review their contracts on grounds that courts normally do not use to review contracts. Then, the district court judge would have to look at whether he or she had authority to grant the parties' request — in past cases, courts have used their inherent authority to grant or deny such non-traditional requests. But, because courts' inherent authority is discretionary, courts might reject the parties' requests. That level of uncertainty might doom these kinds of agreements. Analysis of Likely Outcome: Before the arguments in this case, I would have thought that the Court would find that section 10 of the FAA does not impose limitations on judicial review of arbitration awards. Consideration of the era in which the FAA was enacted, when Congress did not anticipate that parties would desire greater judicial review of arbitration awards, offers support for this view. [14] Examination of the purpose underlying the FAA offers additional support. That purpose, enforcement of the terms of arbitration agreements, bolsters the view that federal courts should enforce parties' agreements to expand judicial review of arbitration awards. Further, enforcement of such agreements may be accomplished without threat of compromising the institutional integrity of the courts or the imposition of undue burden, provided that such agreements are enforced only when the agreed-upon standard is familiar to the courts. Prior to the argument, then, it would have seemed likely that the Court would conclude that the FAA does not preclude enforcement of party agreements to expand judicial review of arbitration awards. Although the Court may ultimately find these agreements enforceable, the oral argument and the supplemental briefing requested in this case suggest that the Court may decide to resolve these pressing issues in an unexpected way. It may be that Chief Justice Roberts' view, that expanded judicial review requests transform the underlying process into an arrangement the FAA does not govern, may carry the day. If so, party requests for expanded judicial review of arbitration awards will occur only if a federal district court is willing to enforce the awards without using the FAA as guidance. Hall Street Decision: I am surprised by the 6-3 decision, which Justice Souter authored. The Court emphatically stated that sections 10 and 11 of the FAA are the exclusive grounds for expedited vacatur and modification of arbitration awards. The Court rejected the argument that the existence of the manifest disregard review standard, created in Wilko v. Swan, supports expansion of judicial review. The Court said: [1] manifest disregard is different because the Court created it — in Hall Street, the parties are attempting to create the standard of review; and [2] manifest disregard may be part of section 10 already — it may refer to the section 10 grounds "collectively, rather than adding to them." Moreover, manifest disregard may just be a shorthand for the grounds identified in 10(a)(3) and 10(a)(4), the "subsections authorizing vacatur when the arbitrators were ‘guilty of misconduct' or ‘exceeded their powers.'" The Court also rejected Hall Street's freedom of contract argument on the ground that the FAA's text does not permit an interpretation that allows room for parties to contract. The Court used the principle of ejusdem generis to hold that the provisions of section 10 are exclusive. The Court also concluded that section 9's use of "must" (a court "must grant" an order "unless the award is vacated, modified, or corrected as prescribed in sections 10 and 11 of this title") meant that section 10 could not be flexibly interpreted. Although the Court acknowledged the concern that businesses will flee from arbitration if not allowed to expand judicial review of arbitration awards, it nevertheless concluded that "the statutory text gives us no business to expand the statutory grounds." The Court left open the possibility that parties might use something other than the FAA as a means for obtaining expanded judicial review of arbitration awards. The inherent authority of the trial judge under Rule 16 might permit the parties here to obtain the review requested because the agreement was reached during the course of the proceedings. Perhaps parties writing arbitration agreements in the future will continue to add these provisions and then seek declaratory judgments of legal error following arbitration awards not in their favor. This may get complicated if the winning arbitral party seeks confirmation of the award under the FAA! Professor Chris Drahozal of the University of Kansas School of Law suggests an alternate approach. He believes parties may put a clause in their arbitration agreement requiring the arbitrator to follow the law. Then, the losing party would attempt to gain review of the arbitration award under FAA § 10(a)(4) on the ground that the arbitrator exceeded her powers when she failed to follow the law. I find the Hall Streetdecision surprising from an allegedly "pro-business" court. The decision is decidedly not pro-business. Although the Court implies that the FAA's statutory language compelled this result, I think it is clear from the numerous debates on the issue that the Court could have gone either way. How this fits in to the Court's general jurisprudence (alleged to be pro-business), I do not know. One of the concerns voiced immediately after the opinion's issuance is whether Hall Street eliminates the use of the manifest disregard standard of review. I believe the manifest disregard standard is still good law for two reasons. First, manifest disregard may still be a legitimate standard for reviewing arbitration awards because it was judicially created rather than party created. Second, the standard may still be good law because the Court went out of its way to suggest that the standard may be grounded in section 10, when its decision could clearly have reached a different result (although that would have required rejecting dicta from First Options where the Court said "[t]he party still can ask a court to review the arbitrator's decision, but the court will set that decision aside only in very unusual circumstances. See, e.g., 9 U.S.C. § 10 (award procured by corruption, fraud, or undue means; arbitrator exceeded his powers); Wilko v. Swan, 346 U.S. 427, 436-437, 74 S.Ct. 182, 187-188, 98 L.Ed. 168 (1953) (parties bound by arbitrator's decision not in "manifest disregard" of the law), overruled on other grounds, Rodriguez de Quijas v. Shearson/American Express, Inc., 490 U.S. 477, 109 S.Ct. 1917, 104 L.Ed.2d 526 (1989).") Although it appears that the Court preserved manifest disregard as a standard of review, I am not convinced that the manifest disregard standard is "different" simply because it is court created rather than party created. I think a more consistent decision would have rejected manifest disregard as well as the party-created grounds. If sections 10 and 11 provide the exclusive grounds for judicial review of arbitration awards, unless manifest disregard is simply another way to say the arbitrator engaged in misconduct or exceeded her powers, it should not be a viable standard of review. Moreover, I believe the decision raises questions about the viability of other judicially created standards of review such as "completely irrational", "public policy" and "arbitrary and capricious." It is difficult to argue that those standards are contained within section 10. So, are they no longer viable standards of review? Because the Court does not address this question, I would advise future litigants not to rely on anything but section 10 and manifest disregard as standards of review. Sarah Cole * Squire, Sanders & Dempsey Designated Professor of Law. * J.D. expected 2009. [1] 196 F. App'x 476 (9th Cir. 2006), cert. granted, 127 S. Ct. 2875 (May 29, 2007). [2] Sarah Rudolph Cole, Revising the FAA to Permit Expanded Judicial Review of Arbitration Awards, 8 Nev. L.J. 214 (2007). [3] Another approach, which has not been adopted by any of the circuits but has influenced both commentators and court decisions, is that parties may agree to expand judicial review of arbitration awards, provided that the agreed-upon standard is familiar to the courts. LaPine Tech. Corp. v. Kyocera Corp., 130 F.3d 884, 891 (9th Cir. 1997) (Kozinski, J., concurring). This requirement ensures that the enforcement of expanded review agreements will neither threaten the integrity of the court nor unduly burden the courts with the task of familiarizing themselves with foreign standards. [4] P.R. Tel. Co. v. U.S. Phone Mfg. Corp., 427 F.3d 21 (1st Cir. 2005); Roadway Package Sys., Inc. v. Kayser, 257 F.3d 287 (3d Cir. 2001); Syncor Int'l Corp. v. McLeland, No. 96-2261, 1997 WL 452245 (4th Cir. Aug. 11, 1997); Gateway Techs., Inc. v. MCI Telecomms. Corp., 64 F.3d 993 (5th Cir. 1995). [5] Kyocera Corp. v. Prudential-Bache Trade Servs., Inc., 341 F.3d 987 (9th Cir. 2003); Bowen v. Amoco Pipeline Co., 254 F.3d 925 (10th Cir. 2001); Chi. Typographical Union No. 16 v. Chi. Sun-Times, Inc., 935 F.2d 1501 (7th Cir. 1991). The Eighth Circuit has also expressed reluctance to recognize a right to agree to expanded judicial review of arbitration awards. See Schoch v. InfoUSA, Inc., 341 F.3d 785, 789 (8th Cir. 2003); UHC Mgmt. Co., Inc. v. Computer Sci. Corp., 148 F.3d 992, 997–98 (8th Cir. 2003). [6] Brief for the Petitioner at 16, Hall Street Associates, Inc. v. Mattel, Inc., No-06-989 (U.S. July 27, 2007). [7] Id. at 21. [8] Id. at 17. [9] Id. at 24. [10] Id. at 35–36. [11] Brief for Respondent at 19, Hall Street Associates, Inc. v. Mattel, Inc., No. 06-989 (U.S. Sept. 14, 2007). [12] Id. at 27. [13] Id. at 44. [14] Cole, supra note 1. |