Alabama Supreme Court Holds FAA Vacatur Provisions Do Not Preempt State Vacatur Grounds

Last week the Alabama Supreme Court, in Raymond James Fin. Servs., Inc. v. Honea, 2010 WL 2471019 (Ala. June 18, 2010), held that section 10 of the Federal Arbitration Act, which prescribes the exclusive grounds for vacating arbitration awards under federal law, does not preempt vacatur grounds under state law.   In that case, a securities brokerage firm’s customer agreement contained a pre-dispute arbitration clause mandating courts to conduct a de novo review of the arbitration transcripts and exhibits in any appeal from a decision of the arbitrators where damages awarded exceed $100,000, the customer lost $100,000 in principal but recovered nothing in the arbitration, or the panel awarded punitive damages.  After an investment dispute arose, a customer sued her broker and the firm, seeking over $1,000,000 in damages.  Defendants successful moved to compel FINRA arbitration.  After hearings, a three-arbitator panel denied the customer’s claims in their entirety, and she moved to vacate the award in Jefferson Circuit Court in Alabama, alleging manifest disregard of the law and arbitator bias, and seeking de novo review.  The lower court vacated the award; Respondents appealed.

On appeal, Respondents argued that the U.S. Supreme Court’s 2008 Hall Street decision precluded the state court from enforcing the de novo review provision in the parties’ arbitration agreement.  The Alabama Supreme Court concluded that the federal law of vacatur barring parties from expanding by contract the grounds of vacatur is not substantive law, but is procedural, and thus does not preempt conflicting state law under the FAA preemption doctrine.   Instead, the Court applied Alabama’s common law principle that courts should enforce parties’ arbitration agreements as written, including the parties’ provision for de novo review of awards. 

I previously wrote about the complexities of the FAA preemption doctrine in the vacatur context.  While I agree with the Alabama Supreme Court’s ultimate conclusion, I think its reasoning – that the Hall Street Court’s acknowledgement that state law grounds for vacatur might also exist is an explicit declaration that vacatur law is procedural for purposes of preemption analysis — is flawed.  For my own reasoning, albeit pre-Hall Street, see Jill I. Gross, Over-Preemption of State Vacatur Law: State Courts and the FAA, 3 Journal of American Arbitration 1 (2004).

One thought on “Alabama Supreme Court Holds FAA Vacatur Provisions Do Not Preempt State Vacatur Grounds”

  1. As long as the US courts fail to distinguish between appealing and arbitral award and seeking to set the award aside on vacatur grounds, case law (from Hall Street on down to the state courts) will remain confused. See my (pre-Hall Street) articles: ‘Expanded’ Judicial Review Revisited: Kyocera Overturns LaPine, 4 PEPPERDINE DISPUTE RESOLUTION LAW JOURNAL 47 – 60 (2004), and the more extensive analysis in Reframing The Dilemma of Contractually Expanded Judicial Review: Arbitral Appeal vs. Vacatur, 3 PEPPERDINE DISPUTE RESOLUTION LAW JOURNAL 157 – 220 (2003).

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