Arbitration: Supreme Court Grants Cert Request on Circuit Split Over Contracting (Web)

The U.S. Supreme Court returned alternative dispute resolution to its docket Tuesday when it granted a certiorari petition in a case that is expected to decide whether to limit parties’ ability to contract for expanded judicial review of an arbitration decision.

The argument this fall in Hall Street Associates LLC v. Mattel Inc., No. 06-989, a case emanating from the Ninth U.S. Circuit Court of Appeals, should settle a split among federal circuit courts.

The case has a long ADR and litigation history. Last year, the Ninth Circuit declined to rehear the case in front of the full court, rejecting an en banc appeal request. The appeals court let stand an August 2006, Ninth Circuit panel decision that reinstated an arbitration award in Mattel’s favor.

The result was that Mattel is not responsible for indemnifying the costs of a toxic waste cleanup on Supreme Court petitioner Hall Street Associates’ property, which the toymaker leased.

In an unusual move, the Court decided to review Ninth Circuit decisions that have not been published.

Taking the case may signal the Court’s direction. The Ninth Circuit is home to a notorious expanded review matter involving opinions over the course of nearly a decade and an award that, with interest, swelled to more than half a billion dollars. In Kyocera v. Prudential-Bache Trade Services Inc., 341 F.3d 987 (9th Cir. 2003), the Ninth Circuit, in an en banc decision, held that parties can’t expand the basis for a court to review an arbitration award beyond the Federal Arbitration Act limits.

The U.S. Supreme Court declined to hear Kyocera, 540 U.S. 1098 (2004). But Hall Street Associates gives it a chance to bring Kyocera, and the circuit courts that have followed it, in line with five circuit courts that permit parties to contract for expanded review.

At the same time, Kyocera’s strict construction view–allowing awards to be overturned based only on FAA Section 10 and 11 standards on vacating and modifying awards for, for example, fraud or evident partiality by the tribunal–could win out over party-contracting principles at the conservative Court. The same day the Court agreed to hear Hall Street Associates, it told plaintiffs that needed to strictly adhere to a 180-day Equal Employment Opportunity Commission filing rule in a pay discrimination case, forcing employees to file claims as soon as their pay was changed, rather than allowing later pay dates to act as continuing violations for later-discovered discrimination. See Ledbetter v. Goodyear Tire & Rubber Co. Inc., No. 05-1074 (May 29, 2007)(available at http://www.supremecourtus.gov/opinions/06pdf/05-1074.pdf).
The Court certified one review question:

Did the Ninth Circuit Court of Appeals err when it held, in conflict with several
other federal Courts of Appeals, that the Federal Arbitration Act (“FAA”) precludes a federal court from enforcing the parties’ clearly expressed agreement providing for more expansive judicial review of an arbitration award than the narrow standard of review otherwise provided for in the FAA?

There are plenty of interesting facts and circumstances surrounding the case. First, it was tried in federal district court on Mattel’s lease termination. Then, the full case was mediated, unsuccessfully.

The parties told the district court that they had decided to arbitrate the case, even though there was no existing arbitration provision.

That, according to Hall Street Associates’s cert petition, meant that the agreement to allow for de novo judicial review, which “was central to the parties’ agreement to arbitrate their dispute, a dispute which was not subject to a preexisting agreement to arbitrate and which could have been properly litigated in federal court in the first instance.”

The Scotusblog, which covers U.S. Supreme Court doings, posted the cert petition here: http://www.scotusblog.com/movabletype/archives/06-989.pdf.

The arbitrator’s January 2002, award recognized that Mattel broadly indemnified Hall Street Associates, and noted that the toymaker’s “only exception” to the obligation was if it was in compliance with environmental laws and didn’t contribute to the hazardous waste condition.

In fact, the entire Hall Street Associates cleanup controversy goes back more than half a century, when Mattel’s predecessor on the Beaverton, Ore., land manufactured View-Master, a “stereo” image toy that allowed users to see pictures in 3-D. The View-Master company used solvent trichloroethylene to clean equipment. TCE was later discovered to be carcinogenic. Thousands of workers were exposed to the chemical, which had infiltrated a well on the site.

Still, the arbitrator concluded that Mattel’s failure to test the site’s well water didn’t violate “applicable” environmental laws. Specifically, the arbitrator noted that Mattel had violated the Oregon Drinking Water Quality Act, but found that the act was health law, and not directed at protecting landowners.

As a result, the arbitrator found that Mattel qualified for the contractual exception to the indemnification requirements.

The federal district court vacated the award three months later, finding the arbitrator’s reading of the exception an “overly restrictive construction.”

The arbitrator, on remand, found that Mattel violated an applicable law, the exception didn’t apply, and Mattel was liable to indemnify Hall Street Associates. An award totaling more than $810,000, which included declaratory relief against Mattel for future cleanup costs, was confirmed by the district court.

Both sides appealed, arguing over the effects of Kyocera.

In November 2004, the Ninth Circuit reversed the district court’s order to vacate the arbitrator’s initial determination that the exception to indemnification applied, citing Kyocera, and noting that the judicial review standards in the arbitration agreement were “unenforceable and severable.”

The circuit court ordered the lower court to confirm, unless it found FAA standards to overturn the arbitrator’s decision. The district court found that under 9 U.S.C. § 10, the arbitrator exceeded his power by issuing an “implausible” contract interpretation.

With the stricken award now reinstated, Mattel appealed to the Ninth Circuit again. In an unpublished opinion, Hall Street Associates v. Mattel Inc., 196 Fed. Appx. 476, 2006 WL 2193411 (9th Cir. Aug. 1, 2006)(available at http://www.ca9.uscourts.gov/coa/memdispo.nsf/pdfview/080106/$File/05-35721.PDF), the Ninth Circuit reversed again, holding
 
Although the arbitrator's assessment of the merits in this case contains possible errors of law, those errors are not a sufficient basis for a federal court to overrule an arbitration award. See Employers Ins. of Wausau v. Nat'l Union Fire Ins. Co. of Pittsburgh, 933 F.2d 1481, 1486 (9th Cir.1991) ("We may not predicate reversal on . . . erroneous findings of fact or conclusions of law."); see also Hawaii Teamsters and Allied Workers Union, Local 996 v. United Parcel Serv., 241 F.3d 1177, 1181 (9th Cir.2001) ("Our task is, in essence, to review the procedural soundness of the arbitral decision, not its substantive merit.").

Furthermore, it cannot be said that the arbitrator's decision in this case is "completely irrational."

See Kyocera Corp. v. Prudential-Bache Trade Servs. Inc., 341 F.3d 987, 997 (9th Cir.2003) (en banc)(construing 9 U.S.C. § 10(a)(4), the only subsection of either 9 U.S.C. §§ 10 or 11 that could conceivably apply to the arbitration award in this case). Thus, we remand the case to the district court with instructions to enforce the original arbitration award and declare Mattel the prevailing party. The district court's award of attorneys' fees in favor of Hall Street is also reversed and the district court should determine the attorneys' fees and costs due to Mattel under the arbitration agreement.

A dissent by Judge Susan Graber may have helped encourage the Supreme Court to look at the circuit split issue and accept the case. “The arbitrator’s conclusion that the statute was not ‘applicable’ is completely irrational,” wrote Graber, “in view of [the lease’s] clear meaning . . . [and] the undisputed facts that Mattel failed to test the water supply for eighteen years even though the statute required it to have done so, resulting in Mattel’s signing of a consent order with the state’s Department of Environmental Quality.”

Graber’s dissent can be found here: http://www.ca9.uscourts.gov/coa/memdispo.nsf/pdfview/080106/$File/05-35721d.PDF.

The Ninth Circuit denied en banc review last October, but the Supreme Court agreed to hear the case on May 29.

An argument date hasn’t been set yet. It will be two terms since the Court last heard an arbitration case. Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440 (2006)(available at http://www.supremecourtus.gov/opinions/05pdf/04-1264.pdf), which was argued on Nov. 29, 2005, held that a challenge to the validity of a contract as a whole, and not specifically to an arbitration clause in the contract, must go to the arbitrator, not the court.

 
–Russ Bleemer, Editor, Alternatives