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Supreme Court Rejects Contractual Expansion of Appellate Review of Arbitration Awards under FAA
Posted 6/2/08 Brandy Wingate, Senior Staff Attorney, Thirteenth Court of AppealsOn March 25, 2008, the United States Supreme Court denied litigants their ability to expand appellate review of arbitration awards under the FAA by contract. Hall Street Assocs., LLC v. Mattel, Inc., No. 06-989, 2008 U.S. LEXIS 2911, at * (Mar. 25, 2008). In Hall Street, the parties’ arbitration agreement allowed a district court to set aside an arbitrator’s award if “(1) the arbitratorˇ¦s findings of facts are not supported by substantial evidence, or (2) where the arbitrator’s conclusions of law are erroneous.” Id. at *7. After an arbitrator rendered an award in favor of Mattel, Hall Street moved to vacate the award because of an erroneous conclusion of law. Id. at *8.
Applying the contractually agreed standard of review, the district court agreed with Hall Street, vacated the award, and remanded the case back to the arbitrator. Id. The district court cited LaPine Technology Corp. v. Kyocera Corp., 130 F.3d 884, 889 (9th Cir. 1997), holding that the FAA allows parties to dictate an alternative standard of review. Hall Street, 2008 U.S. LEXIS 2911, at *8-9. On remand, the arbitrator amended the award to apply the correct legal standard in favor of Hall Street. Id. at *9. The parties each sought modification of the second award by the trial court, and after consideration, the trial court affirmed the second award with one slight modification. Id.
On appeal, the Ninth Circuit Court of Appeals reversed the award in favor of Mattel holding that “the terms of the arbitration agreement controlling the mode of judicial review are unenforceable and severable.” Hall Street Assocs., LLC v. Mattel, Inc., 113 Fed. Appx. 272, 273 (9th Cir. 2004). The Ninth Circuit instructed the district court to review the award under the standards set forth in the FAA, which it held were the exclusive grounds for vacating or modifying an award. Id. On remand, the district court again held for Hall Street, and the Ninth Circuit reversed again. Hall Street Assocs., LLC v. Mattel, Inc., 196 Fed. Appx. 476, 477-78 (9th Cir. 2006).
The Supreme Court held that under 9 U.S.C. Section 9, a court “‘must’ confirm an award ‘unless’ it is vacated, modified, or corrected ‘as prescribed’ in Sections 10 and 11.” Hall Street, 2008 U.S. LEXIS 2911, at *11. The Court held that the grounds listed in sections 10 and 11 for vacating or modifying an award are exclusive and cannot be expanded by the parties’ arbitration agreement. First, the Court rejected Hall Street’s argument that, if the courts can add “manifest disregard” as a ground for vacating an arbitration award, then parties can alter the grounds by contract. Id. at *15-17. The Court held that the case on which Hall Street relied, Wilko v. Swan, 347 U.S. 427 (1953), could not be read to allow parties to modify the statutory grounds for vacating an award. Hall Street, 2008 U.S. LEXIS 2911, at *18.
Second, the Court rejected Hall Street’s argument that because arbitration is a creature of contract, parties ought to be able to expand judicial review of arbitration awards through their contracts. Id. at *18. The Court held that the FAA’s language was at odds with this proposition. Id. at *19. The language of the FAA demonstrates that the grounds for vacating and modifying an award were meant to be exclusive. Id. at *19-20. Furthermore, limiting the avenues of review is more consistent with the FAA’s purpose:
Instead of fighting the text, it makes more sense to see the three provisions, Sections 9-11, as substantiating a national policy favoring arbitration with just the limited review needed to maintain arbitration’s essential virtue of resolving disputes straightaway. Any other reading opens the door to the full-bore legal and evidentiary appeals that can “rende[r] 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.
Id. at *22 (citations omitted).
Apparently, at oral argument, the parties pointed out that the trial court had adopted the parties’ arbitration agreement as an order. Id. at *28-29. Thus, the Court questioned whether the agreement, as an order, should be treated as the trial court’s exercise of its authority to manage its docket under Federal Rule of Civil Procedure 16. Id. at *29. Because the lower courts had not considered this possibility, the Court remanded the case to the court of appeals for consideration of the issue. Id. at *29-30. Justices Stephens, Kennedy, and Breyer dissented.
Brandy M. Wingate is a senior staff attorney for Justice Gina M. Benavides at the Thirteenth Court of Appeals in Edinburg, Texas. Any opinions expressed in articles posted on this website reflect those of the author and not the Thirteenth Court of Appeals.