by Jackson Lewis
The United States Supreme Court has ruled that when parties to
arbitration agreements utilize the expedited review procedure provided
by the Federal Arbitration Act ("FAA" or the "Act"), the judicial
review available to them is limited to that which is provided for by
the Act. Accordingly, parties to an arbitration agreement which
contains a provision calling for expanded judicial review may not rely
upon the FAA for enforcement of that provision. Hall Street Associates,
LLC v. Mattel, Inc., No. 06-989, 552 U.S. ___ (March 25, 2008)
Congress
enacted the FAA in 1925 in response to the hostility of American courts
to the enforcement of arbitration agreements. The Act, in Section 2,
provides that a written arbitration provision in a contract involving
commerce is "valid, irrevocable and enforceable," regardless of whether
enforcement is sought in state or federal court. The Act provides
mechanisms allowing a party to secure swiftly a stay of litigation
(Section 3) and an affirmative order to proceed in arbitration (Section
4). The Court has previously recognized that these reflect Congress’
clear intent to move parties to an arbitrable dispute out of court and
into arbitration as quickly and easily as possible.
In Hall
Street Associates the Court was called upon to explain the Act’s
provisions applicable to the other end of the process--the streamlined
mechanisms for enforcing arbitration awards, which the Court referred
to as "the FAA shortcut to confirm, vacate or modify an award." Section
9 of the FAA provides the vehicle for obtaining a judicial decree
confirming an award. It states that upon application to the court for
an order confirming an award, "the court must grant such an order
unless the award is vacated, modified or corrected as prescribed in
sections 10 and 11" of the Act. Section 10 lists grounds for vacating
an award; Section 11 contains grounds for modifying or correcting an
award.
The grounds enumerated in the statute for challenging an
award are narrow. The Court acknowledged that Sections 10 and 11 of the
Act "address egregious departures from the parties’ agreed-upon
arbitration" but it held that such language cannot be stretched to
encompass evidentiary and legal review generally. Arbitration awards
may be set aside by a court, for example, where they were procured by
fraud or corruption, or where the arbitrator was guilty of misconduct,
misbehavior or evident partiality, or exceeded his authority.
Similarly, courts may only correct arbitration awards where there is a
showing of an evident material miscalculation, or material mistake, or
where the arbitrator’s award is imperfect in form.
Over time,
a split arose among the Courts of Appeals as to whether the grounds
listed in the FAA for vacating or modifying an arbitration award were
exclusive, or whether they merely were threshold provisions open to
expansion by consent of the parties to an arbitration agreement.
Although the case selected for review by the Supreme Court to decide
this question was not an employment case, the Court’s interpretation
of the FAA nevertheless is significant for employers, since the FAA is
relied upon by employers to enforce agreements for the arbitration of
workplace claims.
Hall Street Associates began as a lease
dispute over a provision calling for a tenant to indemnify its landlord
for certain costs incurred. After litigation commenced in federal
court, the parties agreed to submit the matter to arbitration, but
included in their agreement the following provision calling for
judicial review: "The Court shall vacate, modify or correct any award:
(i) where the arbitrator’s findings of fact are not supported by
substantial evidence, or (ii) where the arbitrator’s conclusions of
law are erroneous." Such judicial scrutiny of an arbitral award goes
far beyond that contained in Sections 10 and 11 of the FAA. The trial
court, however, acquiesced and the court included that language in its
order directing arbitration. The case then embarked upon a dizzying,
circuitous journey--to arbitration and award, after which the award was
challenged as legally erroneous and vacated by the District Court, then
back to the arbitrator, who reversed his original determination, an
award which was contested by both parties in District Court, which left
the arbitrator’s second ruling substantively intact. The District
Court’s ruling, in turn, was appealed by both parties to the Ninth
Circuit, which reversed and remanded the ruling to the District Court
with instructions to confirm the original award, whereupon the District
Court vacated the award on other grounds, which ruling was again
appealed to the Ninth Circuit, and reversed.
The Supreme Court
concluded that parties relying upon the FAA’s expedited process may
not alter the scope of review provided for by the statute. It held that
the statutory grounds for prompt vacatur and modification of an
arbitrator’s award, set forth in Sections 10 and 11 of the FAA, are
exclusive, and that they may not be expanded by contract.
The
ruling reflects a strict construction of the FAA’s provisions for
enforcing arbitration awards, reflecting the Court’s view that
Sections 9 through 11 of the Act substantiate "a national policy
favoring arbitration with just the limited review needed to maintain
arbitration’s essential virtue of resolving disputes straightaway."
The Court acknowledged that the FAA "lets parties tailor some, even
many, features of arbitration by contract, including the way
arbitrators are chosen, what their qualifications should be, which
issues are arbitrable, along with procedure and choice of substantive
law." But it drew the line at judicial review, hewing to a literal
interpretation of the Act. "Any other reading," it reasoned, "opens the
door to full-bore legal and evidentiary appeals that can render
informal arbitration merely a prelude to a more cumbersome and
time-consuming judicial review process . . . and bring arbitration
theory to grief in post-arbitration process."
It had been argued
that language in the Court’s 1953 decision, Wilko v. Swan, suggested
that judicial review of an arbitrator’s award may be appropriate when
there had been a "manifest disregard of the law", and that if courts
could add grounds to vacate or modify an arbitrator’s award, then
consenting contracting parties could do so as well. The Court, however,
held that the Wilko language was vague, and perhaps no more than a
collective reference to grounds listed in Section 10, concluding that
the text of the Act is inconsistent with enforcing a contract to expand
judicial review following arbitration.
The Court left open to
the possibility of other avenues by which an arbitration award might be
challenged. "In holding that §§ 10 and 11 provide exclusive regimes for
the review provided by the statute, we do not purport to say that they
exclude more searching review based on authority outside the statute as
well. The FAA is not the only way into court for parties wanting review
of arbitration awards: they may contemplate enforcement under state
statutory or common law, for example, where judicial review of
different scope is arguable." In this case, the Court vacated the Ninth
Circuit’s decision. It remanded the case, acknowledging that despite
the parties’ reliance upon the FAA, perhaps the agreement in the case
at bar should have been viewed in a different light, e.g., as an
exercise of the District Court’s case management authority.
For
those who believe that the members of the Court always line up along
ideological fault lines, the Court’s split on this decision is
illuminating. The Court’s ruling was written by Justice Souter, who
was joined by Justice Ginsburg, and Justices Roberts, Thomas, Alito,
and Scalia. Justice Stevens, joined by Justice Kennedy, and Justice
Breyer wrote dissents, expressing the view that parties may supplement
by contract the statutory grounds for review, and that the FAA does not
preclude enforcement of such provisions.
Employers with programs
calling for the mandatory arbitration of workplace claims, and
employers which have incorporated arbitration provisions into
individual agreements, should carefully evaluate any provisions which
call for expanded judicial review of arbitration awards. While the
Court’s decision restricts the parties’ rights to control review of
awards, in light of the continued dramatic growth in employment
litigation, arbitration often remains an attractive alternative to
litigation. Management should continue to evaluate the use of
agreements to arbitrate workplace legal claims as an effective risk
management tool which offers considerable benefits to both employers
and employees.
Login to read more.
|