Client Alert

U.S. Supreme Court: Parties May Not Expand by Agreement the Scope of Judicial Review under the Federal Arbitration Act

March 27, 2008

In a recent decision in the matter of Hall Street Associates, L.L.C. v. Mattel, Inc. (No. 06-989, slip. op. U.S. Mar. 25, 2008), the U.S. Supreme Court ruled that parties may not expand by agreement the scope of judicial review under the Federal Arbitration Act ("FAA").

The FAA, 9 U. S. C. §§ 9-11, provides expedited judicial review to confirm, vacate, or modify arbitration awards. Under § 9, a court must confirm an award unless it is vacated, modified, or corrected as prescribed in §§ 10 and 11. Section 10 lists grounds for vacating an award, including where the award was procured by corruption, fraud, or undue means, and where the arbitrators are guilty of misconduct or exceeded their powers. Under § 11, the grounds for modifying or correcting an award include evident material miscalculation, evident material mistake, and imperfections in a matter of form not affecting the merits. The issue before the Supreme Court was whether the parties to an arbitration agreement can agree to expand the grounds for vacating an award beyond those set forth in §§ 10 and 11 of the FAA. Writing for the Court, Justice Souter held that the answer is no, at least as far as out-of-court agreements are concerned.

Background

This case began as a lease dispute between a landlord, Hall Street Associates, L.L.C. (“Hall Street”), and its tenant, Mattel, Inc. (“Mattel”), regarding who was responsible for clean-up costs resulting from environmental contamination. The lease agreement did not contain an arbitration clause, and the case had been pending for some years in state and later federal court. When attempts at mediation failed, the parties sought the court’s permission to submit the dispute to arbitration. The District Court agreed and entered the arbitration agreement as an order. The agreement provided, in pertinent part:

[T]he United States District Court for the District of Oregon may enter judgment upon any award, either by confirming the award or by vacating, modifying, or correcting the award. The Court shall vacate, modify, or correct any award: (i) where the arbitrator’s findings of facts are not supported by substantial evidence, or (ii) where the arbitrator’s conclusions of law are erroneous.

After the arbitrator found for Mattel, Hall Street filed a motion with the District Court to vacate the award due to legal error. The District Court, reviewing the award under the expanded review clause, agreed, vacated the award and remanded the case to the arbitrator. On remand, the arbitrator found for Hall Street. Both parties then petitioned for review. The District Court, aside from correcting the arbitrator’s interest calculation, upheld the award. Mattel appealed to the Court of Appeals for the Ninth Circuit. The Ninth Circuit reversed the District Court’s order confirming the arbitration award, holding that because the FAA specifies that arbitration awards can be vacated only in limited cases such as fraud, corruption, partiality, or where the arbitrators exceed their powers, an award has to be upheld even though it contains errors of law. The Ninth Circuit also held “the terms of the arbitration agreement controlling the mode of judicial review are unenforceable and severable” and instructed the District Court on remand to confirm the original arbitration award, unless the award should be vacated on the grounds allowed under § 10, or modified or corrected under the grounds allowable under § 11 of the FAA. After the District Court again held for Hall Street and the Ninth Circuit again reversed, the Supreme Court granted certiorari to decide whether the grounds for vacatur and modification provided by §§ 10 and 11 of the FAA are exclusive.

The Decision

The Supreme Court agreed with the Ninth Circuit that the grounds promulgated under §§ 10 and 11 of the FAA are exclusive, resolving a long-standing circuit split.² The Court based its decision on two grounds. First, the Court rejected Hall Street's argument that the Supreme Court's prior decision in Wilko v. Swan, 346 U.S. 427 (1953), established the rule that “expandable judicial review authority has been accepted as the law.” The Court noted Wilko’s holding that “the interpretations of the law by arbitrators in contrast to manifest disregard [of the law] are not subject, in the federal courts, to judicial review for error in interpretation.” The Court also noted that Wilko's “manifest disregard” language may have referred to the §10 grounds collectively or the §§ 10(a)(3) or 10(a)(4) grounds specifically, which authorize vacatur where arbitrators are guilty of “misconduct” or “exceeded their powers.” The Court found, however, that the Wilko Court’s “manifest disregard” phrasing was “vague” and refused to “accord it the significance that Hall Street urges,” i.e., that parties may provide additional grounds for federal judicial review beyond those promulgated under §§ 10 and 11 of the FAA.

The Court also rejected Hall Street’s second argument that an expansion of §§ 10 and 11 of the FAA to include review for legal error should prevail because “arbitration is a creature of contract, and the FAA is motivated, first and foremost, by a congressional desire to enforce agreements into which parties have entered.” Again, the Court noted that the FAA allows parties to tailor many features of arbitration by contract, including, inter alia, the manner in which arbitrators are chosen, procedural rules, and substantive law. But the Court noted that this argument misses the point. The issue is not whether private parties may draft and later modify arbitration agreements, but whether statutory grounds for prompt vacatur and modification provided by the FAA preclude private parties from drafting and later modifying arbitration agreements to provide grounds for judicial review beyond those promulgated under §§ 10 and 11 of the FAA. The Court relied directly upon the text of the FAA, holding “that the text compels a reading of the §§ 10 and 11 categories as exclusive.” Coupled with the § 9 language that district courts must grant an order confirming an arbitration award “unless the award is vacated, modified, or corrected as prescribed in sections 10 and 11 of this title,” this language “unequivocally tells courts to grant confirmation in all cases,” except when the specific grounds of §§ 10 and 11 apply.

District Court’s Case Management Authority under Federal Rule of Civil Procedure 16?

Even though the Court agreed with the Ninth Circuit that the FAA “confines its expedited judicial review to the grounds listed in 9 U.S.C. §§ 10 and 11,” the Court vacated the judgment and remanded the case. The Court raised the question whether the District Court’s authority to manage its cases under Rule 16 of the Federal Rules of Civil Procedure “independently warranted that court’s order on the mode of resolving the indemnification issues remaining in this case.” The Court noted that the arbitration agreement at issue had been “submitted to the District Court as a request to deviate from the standard sequence of trial procedure, and was adopted by the District Court as an order.” Therefore, it “left the issue open for Hall Street to press on remand” and expressed no opinion on the issue “beyond noting the claim of relevant case management authority independent of the FAA.” Thus, the Court hinted at a possible exception to the exclusive provisions of §§ 10 and 11 of the FAA.

Alternate Avenues for Review of Arbitration Awards Outside the FAA?

The Court also noted that in holding §§ 10 and 11 provide exclusive regimes for review under the FAA, “we do not purport to say that [§§ 10 and 11] exclude more searching review based on authority outside the statute as well.” The FAA does not provide the only method of judicial review for parties seeking to challenge arbitration awards. Parties “may contemplate enforcement under state statutory or common law, for example, where judicial review of a different scope is arguable.” Thus, the Court made clear that its opinion applied solely to the “scope of expeditious judicial review under §§ 9, 10, and 11, deciding nothing about other possible avenues for judicial enforcement of arbitration awards.”

Conclusion

The Supreme Court's decision in Hall Street makes it clear that parties may not expand by agreement the scope of judicial review of arbitral awards beyond the grounds promulgated under §§ 10 and 11 of the FAA. Whether a district court may entertain such a request pursuant to its authority to manage its cases under Rule 16 of the Federal Rules of Civil Procedure, and whether parties may challenge an arbitration award under other statutory or common law grounds, remains open.

^{1 Justices Roberts, Thomas, Ginsburg, and Alito joined; Justice Scalia joined as to all but one footnote. Justice Stevens filed a dissenting opinion, in which Justice Kennedy joined; Justice Breyer filed a separate dissenting opinion.}

^{2The Ninth and Tenth Circuits have found that parties may not contract for expanded judicial review (the Eighth Circuit, in dicta, appears to agree), while the First, Third, Fourth, Fifth, and Sixth Circuits have held that parties may do so.}