Arbitration: U.S. Supreme Court Today Rejects Contracting for Heightened Judicial Review in Arbitration. (Web)

The U.S. Supreme Court today rejected the concept of providing for heightened judicial review in arbitration contracts.

The decision in Hall Street Associates L.L.C. v. Mattel Inc., No. 06–989, (March 25, 2008)(available at http://www.supremecourtus.gov/opinions/07pdf/06-989.pdf), bars parties from writing contracts that allow court review for arbitration awards.

It also opens a door, ever so slightly, to the vitality of “manifest disregard of the law” challenges to arbitration awards. “Manifest disregard” is a longstanding case-derived standard that judges have used in striking arbitration awards.

In a three-opinion, 6-3 decision that sends the case back for further consideration, Associate Justice David H. Souter, writing for the majority, rejects two Hall Street Associates’ propositions for expanding courts’ powers to review decisions.

The Court backs a strict reading of Federal Arbitration Act Sections 10 and 11 terms limiting how arbitration agreements are enforced. The view that parties may contract for expanded review beyond the FAA’s express terms–adopted in full or in part by the First, Third, Fifth, and Sixth U.S. Circuit Courts–was rejected.

The Court affirmed the Ninth Circuit’s reasoning in the case rejecting judicial review; the Tenth Circuit also has declined to permit parties to expand Section 9 award review standards.

“We now hold that §§10 and 11 respectively provide the FAA’s exclusive grounds for expedited vacatur and modification,” writes Souter for the majority.

But the Court didn’t back the Ninth Circuit beyond its FAA view. The majority opinion vacates the appellate decision and sends the case back to the appeals court to consider open issues stemming from the Court’s request for additional post-argument briefing.

The majority opinion says the issues subject to supplemental briefing after the Court arguments in November--dealing with whether there is there an independent basis beyond the FAA to consider the case--weren’t really answered, and aren’t appropriate for the new opinion.

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First, the decision says that Hall Street Associates’ view that Wilko v. Swan, 346 U. S. 427 (1953), permits parties to expand the limits of judicial review for arbitration is incorrect.

Hall Street Associates claimed that Wilko’s recognition of courts’ ability to override arbitration awards for “manifest disregard of the law”–the case says that the Securities Act of 1933 voided agreements to arbitrate violations of the act–allows contracting parties to add the grounds to their contracts.

“Although it is true that the Court’s discussion includes some language arguably favoring Hall Street’s position, arguable is as far as it goes,” writes Souter.

On Hall Street Associates’ Wilko view, Souter wrote that the “manifest disregard” statement actually “expressly rejects just what Hall Street asks for here[--]general review for an arbitrator’s legal errors.”

But the opinion questions whether the Wilko standard is a “further ground” for vacating awards, conceding that “some Circuits have read it the same way.”

Arbitration practitioners will be looking closely at the Court’s Wilko analysis on the manifest disregard standard. Souter writes that the 1953 case had some vague phrasing. Regardless of whether “manifest disregard”was meant as a new review ground; as a reference to Section 10 grounds collectively rather than as an addition; or as a reference to Section 10 subsections, the majority opinion states, “We, when speaking as a Court, have merely taken the Wilko language as we found it, without embellishment, see First Options of Chicago Inc. v. Kaplan, 514 U. S. 938, 942 (1995), and now that its meaning is implicated, we see no reason to accord it the significance that Hall Street urges.”

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Second, the Court rejected Hall Street Associates’ view that judicial review should be allowed because arbitration is based on contract, and the FAA is backed by legislative history that Congress wants such agreements enforced.

“The argument comes up short,” the opinion notes, because FAA Sections 10 and 11 are “at odds with enforcing a contract to expand judicial review following the arbitration.”

Regarding the congressional motivation to enforce contracts as written, the majority opinion says that the FAA text “compels a reading of the §§10 and 11 categories as exclusive.”

And, the opinion continues, “even if we assumed §§10 and 11 could be supplemented to some extent, it would stretch basic interpretive principles to expand the stated grounds to the point of evidentiary and legal review generally.”

The Court found that the enforcement exceptions deal with extreme conduct, and don’t justify expansion for more mundane mistakes of law.

The Court also notes that FAA Section 9's categorical language–that a court “must grant” an application for an award confirmation order–“does not sound remotely like a provision meant to tell a court what to do just in case the parties say nothing else.”

The majority concludes, “[i]nstead of fighting the text, it makes more sense to see the three provisions, §§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.”

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The case was sent back to the Ninth Circuit for further consideration. In the opinion’s final section, the Court notes that the FAA isn’t the “only way into court for parties wanting review of arbitration awards.”

Noting the decision is limited to the scope of FAA Sections 9-11, the Court says that parties may want to “contemplate enforcement under state statutory or common law,” or even other FAA grounds that were assumed in the case, such as whether the lease agreement between Hall Street Associates and Mattel at the heart of the dispute is an FAA Section 2 contract “involving commerce.”

In fact, the arbitration agreement in the case arose during district court litigation over responsibility for cleanup of a toxic waste site. The parties decided to arbitrate the case to head off further costly court processes.

The majority Supreme Court opinion points out that a question about the procedural posture was raised at the Nov. 7 oral argument: “[S]hould the agreement be treated as an exercise of the District Court’s authority to manage its cases under Federal Rules of Civil Procedure 16?”

The Court required supplemental briefs in a Nov. 16 order; the supplemental briefs, which can be found here: http://www.abanet.org/publiced/preview/briefs/nov07.shtml#hallstreet

The Souter opinion notes that the case management issue was suggested in Hall Street Associates’ supplemental brief, implicating issues such as FAA waiver, and the relationship of the FAA to the federal procedure rules and the Alternative Dispute Resolution Act of 1998, 28 U.S.C. § 651 et seq.

“We express no opinion on these matters beyond leaving them open for Hall Street to press on remand,” writes Souter.

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Associate Justice John Paul Stevens disagreed, writing in a dissent that while the FAA’s premise is that arbitration “may be more expeditious and less costly than ordinary litigation,” Section 9 doesn’t require “expedited treatment.”

That, he notes, “is a reason for interpreting the statute liberally to favor the parties’ use of arbitration. An unnecessary refusal to enforce a perfectly reasonable category of arbitration agreements defeats the primary purpose of the statute.”

Stevens also notes that the while the majority’s reasoning could suggest that FAA Sections 10 and 11 are the exclusive means to challenge an arbitration award, “the literal text does not compel that reading–a reading that is flatly inconsistent with the overriding interest in effectuating the clearly expressed intent of the contracting parties.”

Associate Justice Anthony M. Kennedy joined Stevens’ dissent.

Associate Justice Stephen G. Breyer wrote a separate dissent, rejecting a remand. Breyer writes that he would send the case to the Ninth Circuit to affirm the District Court’s judgment to enforce the arbitrator’s final award.

The majority opinion also notes that Associate Justice Antonin Scalia, didn’t join in the majority opinion’s Footnote 7. The footnote discusses the FAA’s legislative history.

Russ Bleemer, Editor, Alternatives