Hall St. Assocs., L.L.C. v. Mattel, Inc., 196 F. App’x 476 (9th Cir. 2006), cert. granted, 127 S. Ct. 2875 (May 29, 2007) Argument: November 7, 2007
By Sarah Cole
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Issue: 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.”
Importance of the Issue: The Court’s decision in this case will likely resolve inter-circuit disagreement regarding the permissibility of party agreements to expand judicial review of arbitration awards. Currently, courts approach the issue in one of two ways:
Courts enforce party agreements to expand judicial review of arbitration awards. The First, Third, Fourth, and Fifth Circuits follow this freedom of contract approach. Under this approach, courts find that the FAA’s judicial review provisions are default rules that may be displaced by contractual language evidencing the parties’ desire to expand judicial review of arbitration awards. If the parties’ contractual language is clear, courts impose no limitations on their 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. Courts following this approach find that the FAA establishes the limits of judicial review of arbitration awards. Because the FAA sets the limits of judicial review, party agreements to expand judicial review impermissibly attempt to create federal jurisdiction by contract. Because parties may not contract for federal jurisdiction, agreements for heightened judicial review of arbitration awards are unenforceable.
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 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 covering the remaining issues. The agreement provided that the court vacate, modify, or correct any award where the arbitrator’s findings were not supported by substantial evidence or where the arbitrator’s conclusions of law were erroneous. The arbitrator issued a decision in favor of Mattel, which Mattel sought to have confirmed by the district court. 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, finding that the arbitrator had made and 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.
Hall Street Associates, L.L.C.: Hall Street argues that the FAA prescribes default, rather than mandatory, rules, and that these rules may be displaced by clear contractual language evidencing the parties’ intent to expand judicial review of arbitration awards. Hall Street supports this contention with the language of FAA § 2, which ensures that arbitration agreements, like any other contracts, are enforceable. Hall Street also referenced the Court’s case law, which states that the primary purpose of the FAA is to ensure that private arbitration agreements are enforced according to their terms. Hall Street cites 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. Finally, Hall Street notes that the expansion of judicial review agreed upon neither impermissibly conferred federal jurisdiction nor increased the burden on the district court.
Mattel, Inc.: Mattel argues that the Ninth Circuit correctly held that sections 10 and 11 of the FAA are the exclusive grounds for vacatur or modification of an arbitration award. 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 asserts 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. Finally, Mattel presents several policy arguments against enforcement of expanded judicial review provisions in arbitration agreements. Mattel’s chief contention is that enforcement of such agreements would undermine the efficiency of arbitration.
Analysis of Likely Outcome:
FAA § 10 does not appear to set forth an exhaustive list of grounds upon which federal courts may vacate or modify arbitration awards. In section 10, Congress stated that a court “may make an order vacating the award” and then identified several grounds upon which a party could base its challenge to an arbitration award. By using the word “may”, Congress likely intended to confer discretion on federal courts to decide whether or not to vacate an arbitration award.
Another possibility is that, in 1925, Congress did not anticipate that parties would desire judicial review of arbitration awards beyond the bases section 10 identifies. Because it is unlikely that Congress intended to address the issue presented in this case, reference to the purposes underlying the Act may prove decisive. Reference to the primary purpose underlying the Act, enforcement of the terms of arbitration agreements, supports the view that federal courts should enforce parties’ agreements to expand judicial review of arbitration awards.
Finally, enforcement of such agreements may be accomplished without compromising the institutional integrity of the courts or the imposition of undue burdens on the courts, provided that such agreements are enforced only when the agreed-upon standard is familiar to the courts. Thus, the Court should conclude that the FAA does not preclude enforcement of party agreements to expand judicial review of arbitration awards.
–Sarah Cole, with assistance from Catharine Adkins
Sarah Rudolph Cole, Revising the FAA to Permit Expanded Judicial Review of Arbitration Awards, __ NEV. L.J. __ (forthcoming _____)
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.
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).
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).
Brief for the Petitioner at 16, Hall Street Associates, Inc. v. Mattel, Inc., No-06-989 (U.S. July 27, 2007).
Id. at 17.
Id. at 24.
Id. at 35–36.
Brief for Respondent at 19, Hall Street Associates, Inc. v. Mattel, Inc., No. 06-989 (U.S. Sept. 14, 2007).
Id. at 27.
Id. at 44.