The Federal Arbitration Act

The case arose from a lease dispute between landlord, Hall Street Associates, L. L. C. ('Hall Street') and tenant, Mattel, Inc. ('Mattel'). The leased property had been used for many years as a manufacturing site, and the lease provided that the tenant would indemnify the landlord for any costs resulting from the failure of the tenant or its predecessor lessees to comply with environmental laws while using the premises.

In 1998, the leased property was found to contain high levels of trichloroethylene, which apparently resulted from manufacturing discharges by Mattel's predecessor lessees between 1951 and 1980. The parties agreed to arbitrate their resulting indemnification dispute pursuant to an agreement which was approved and entered as an order by the U.S. District Court for the District of Oregon ('Oregon District Court') and which provided that:

[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: 1) where the arbitrator's findings of facts are not supported by substantial evidence, or 2) where the arbitrator's conclusions of law are erroneous. (Emphasis added.)

Following an arbitration at which Mattel prevailed, the Oregon District Court vacated the award and remanded for further consideration by the arbitrator. In reaching this result, the court expressly invoked the standard of review chosen by the parties in the arbitration agreement, which included review for legal error, and cited LaPine Technology Corp. v. Kyocera Corp., 130 F. 3d 884, 889 (9^th Cir. 1997), a case subsequently overruled en banc by the Ninth Circuit in Kyocera Corp. v. Prudential-Bache Trade Servs., Inc., 341 F.3d 987 (2003), for the proposition that the FAA leaves the parties 'free ' to draft a contract that sets rules for arbitration and dictates an alternative standard of review.'

The Oregon District Court's vacating of the award prompted lengthy hearings and appeals in numerous tribunals and courts, culminating in the U.S. Supreme Court's granting certiorari to decide the important issue of whether parties could contractually vary or add to the FAA's standards for judicial review of arbitration awards.

The Basic Holding

The Supreme Court's consideration of the issue before it was rather straightforward. First, the Court acknowledged that 'arbitration is a creature of contract, and that the FAA is 'motivated, first and foremost, by a congressional desire to enforce agreements into which the parties ha[ve] entered.” Dean Witter Reynolds Inc. v. Byrd, 470 U. S. 213, 220 (1985). In the end, however, the Court passed over this consideration in favor of a strict analysis of the wording of the FAA, stating:

Hall Street is certainly right that the FAA lets parties tailor some, even many features of arbitration by contract, including the way arbitrators are chosen, what their qualifications should be, which issues are arbitrable, along with procedure and choice of substantive law. But to rest this case on the general policy of treating arbitration agreements as enforceable as such would be to beg the question, which is whether the FAA has textual features at odds with enforcing a contract to expand judicial review following the arbitration.

Turning to the language of the FAA, the Court first noted that 'Sections 10 and 11 ' address egregious [arbitrator] departures ' [such as] 'corruption,' 'fraud,” etc, and in that context, the court went on to say:

Given this emphasis on extreme arbitral conduct, the old rule of ejusdem generis has an implicit lesson to teach here. Under that rule, when a statute sets out a series of specific items ending with a general term, that general term is confined to covering subjects comparable to the specifics it follows. Since a general term included in the text is normally so limited, then surely a statute with no textual hook for expansion cannot authorize contracting parties to supplement review for specific instances of outrageous conduct with review for just any legal error. 'Fraud' and a mistake of law are not cut from the same cloth.

Even more importantly, the court found the wording of the FAA to be controlling in that: 1) the FAA exclusively limits the grounds for judicial review of arbitration awards to those set forth in Sections 10 and 11; and 2) such exclusive language is entirely inconsistent with any contractual expansion of those grounds for review. As the court stated:

' [E]xpanding the detailed categories [of Sections 10 and 11] would rub too much against the grain of the [Section] 9 language, where provision for judicial confirmation carries no hint of flexibility. On application for an order confirming the arbitration award, the court 'must grant' the order 'unless the award is vacated, modified, or corrected as prescribed in sections 10 and 11 of this title.' There is nothing malleable about 'must grant,' which unequivocally tells courts to grant confirmation in all cases, except when one of the 'prescribed' exceptions applies. This does not sound remotely like a provision meant to tell a court what to do just in case the parties say nothing else.

Manifest Disregard Argument

In Hall Street, petitioner argued that Wilko v. Swan, 346 U.S. 427, 74 S. Ct. 182, 98 L. Ed. 168 (1953) expressly authorized expansion of the standards for review set forth in the Federal Arbitration Act. The basic holding of Wilko (which was subsequently overruled) was that Section 14 of the Securities Act of 1933 voided any agreement to arbitrate claimed violations of that Act. In the course of explaining that the limited power to vacate an arbitration award would undermine the buyer protections of the Securities Act, the Wilko Court made the following statement, on which the Hall Street petitioner subsequently relied:

The interpretations of the law by the arbitrators in contrast to manifest disregard [of the law] are not subject, in the federal courts, to judicial review for error in interpretation. (Emphasis added.)

The Hall Street petitioner argued that the foregoing statement recognized 'manifest disregard of the law' as a further ground for vacating arbitration awards, in addition to those listed in Section 10 of the FAA and, as a result, the grounds set forth in Section 10 could not possibly be exclusive. The Hall Street court rejected this argument for a number of reasons, including the following: 1) Wilko involved a supposed judicial expansion of the FAA through interpretation, whereas Hall Street involved an attempted private expansion by contract; and 2) the statement in Wilko expressly rejected precisely what the petitioner in Hall Street was seeking, i.e., general appellate review of an arbitrator's legal errors. Significantly the Hall Street Court went on to make the following additional observation about Wilko:

Then there is the vagueness of Wilko's phrasing. Maybe the term 'manifest disregard' was meant to name a new ground for review, but maybe it merely referred to the [Section] 10 grounds collectively, rather than adding to them ' Or, as some courts have thought, 'manifest disregard' may have been shorthand for [Section] 10(a)(3) or [Section] 10(a)(4), the subsections authorizing vacatur when the arbitrators were 'guilty of misconduct' or 'exceeded their powers.' ' We, when speaking as a Court, have merely taken the Wilko language as we found it, without embellishment ' and now that its meaning is implicated, we see no reason to accord it the significance that Hall Street urges.

The above-quoted language appears to open the door for future elimination or at least severe erosion of the 'manifest disregard,' standard for review of arbitration awards. Such an occurrence would mark a watershed change in the law of arbitration. While courts since Wilko have differed widely on the meaning of 'manifest disregard,' they have been quite uniform in holding that the phrase itself represents an independent ground for judicial review of arbitration awards. If 'manifest disregard' were no longer an accepted standard for review, that would vastly change the arbitration landscape and (for better or for worse) would greatly increase the difficulty of vacating arbitration awards.

Possible Limitations on Hall Street

The Hall Street court noted that the applicable arbitration agreement was 'entered into in the course of district-court litigation, was submitted to the Oregon District Court as a request to deviate from the standard sequence of trial procedure, and was adopted by the District Court as an order.' On that basis, the court raised at least the possibility that the appellate standard in the arbitration agreement might ultimately be upheld 'as an exercise of the District Court's authority to manage its cases under Federal Rule of Civil Procedure 16 ' .' While an interesting twist, this possible exception to the court's ruling is unlikely to evolve into one of broad applicability.

Perhaps more importantly, the Court carved out the following additional limitation on its basic ruling:

In holding that [Sections] 10 and 11 provide exclusive regimes for the review provided by the statute, we do not purport to say that they exclude more searching review based on authority outside the statute as well. The FAA is not the only way into court for parties wanting review of arbitration awards: they may contemplate enforcement under state statutory or common law, for example, where judicial review of different scope is arguable. But here we speak only to the scope of the expeditious judicial review under [Sections] 9, 10 and 11, deciding nothing about other possible avenues for judicial enforcement of arbitration awards.

In the end, the court's 'state law' limitation may have little practical effect. Thus, for example, the grounds for review in Section 23 of the Revised Uniform Arbitration Act (RUAA) appear to be just as surrounded by words of exclusivity as the standards for review in Section 10 of the FAA.

Further, the year 2000 Commentary to Section 23 indicated that: 1) The drafters specifically considered inclusion of a provision that 'the parties could 'opt in' to judicial review of arbitration awards for errors of law or fact or any other grounds not prohibited by applicable law.' In the end, however, Section 23 contained no such language; and 2) only a few state courts had addressed the contractual expansion of statutory standards for review of arbitration awards, and those few decisions were 'split,' with only one upholding such contractual expansion.

Policy Considerations

In the final analysis, it appears that Hall Street cut back substantially, if not almost entirely on contractual expansion of statutory grounds for judicial review of arbitration awards. While the Hall Street Court heard extensive argument from both sides about the policy ramifications of its upcoming decision, it ultimately eschewed most such considerations in favor of a strict reading of Sections 9-11 of the FAA. The court, however, did pause at one point to note that there is a real, fundamental difference between arbitration and litigation and that its decision was in furtherance of maintaining the simplicity and cost-effectiveness of arbitration, as opposed to litigation:

Instead of fighting the text [of Sections 9-11], it makes more sense to see the three provisions ' as substantiating a national policy favoring arbitration with just the limited review needed to maintain arbitration's essential virtue of resolving disputes straightaway. Any other reading opens the door to the full-bore legal and evidentiary appeals that can 'rende[r] informal arbitration merely a prelude to a more cumbersome and time-consuming judicial review process,' ' and bring arbitration theory to grief in [the] post-arbitration process. (Citations omitted.)

It appears that Hall Street's preclusion of expanded judicial review of most if not all arbitration awards, coupled with preservation of the parties' right to expanded internal review before a second panel of arbitrators strikes a proper balance between a norm of cost-effective arbitration, on the one hand and on the other, the parties' need to preserve certain procedural rights (including a right to a comprehensive appeal) in relatively rare instances involving exceptionally complex and extended arbitrations.

John Wilkinson is a neutral with JAMS, The Resolution Experts (New York). He can be reached at 212-751-2700.

The U.S. Supreme Court's recent decision in Hall Street Associates, L. L. C. v. Mattel, Inc . (Slip Opinion, No. 06-989) had long been anticipated by the litigation and arbitration communities and has been the subject of extensive commentary and debate in the brief period since it was rendered. The issue (which had created a sharp conflict in the Circuits) was whether the standards for judicial review of arbitration awards, as set forth in Sections 9-11 of the Federal Arbitration Act (FAA), could be contractually expanded by the arbitrating parties. More particularly, the question was whether parties could contract to inject traditional grounds for appeal into FAA arbitrations or whether they were limited to what was specifically set forth in Sections 9-11 of the FAA, e.g., 'evident partiality,' 'fraud,' 'corruption,' refusing to hear 'pertinent and material' evidence, and acts exceeding the powers of the arbitrator.

The Hall Street Court held that parties could not contractually expand the standards for judicial review in Sections 9-11 of the FAA. A likely, practical outgrowth of this ruling is that arbitrating parties will also be unable to contractually expand standards for judicial review under most if not all state arbitration statutes. This will make it more difficult for courts to overturn arbitration awards, and raises serious doubts about the continuing vitality of generally accepted decisions which hold that 'manifest disregard of the law' is a separate and distinct ground for challenging an arbitration award under the FAA.

Background

The case arose from a lease dispute between landlord, Hall Street Associates, L. L. C. ('Hall Street') and tenant, Mattel, Inc. ('Mattel'). The leased property had been used for many years as a manufacturing site, and the lease provided that the tenant would indemnify the landlord for any costs resulting from the failure of the tenant or its predecessor lessees to comply with environmental laws while using the premises.

In 1998, the leased property was found to contain high levels of trichloroethylene, which apparently resulted from manufacturing discharges by Mattel's predecessor lessees between 1951 and 1980. The parties agreed to arbitrate their resulting indemnification dispute pursuant to an agreement which was approved and entered as an order by the U.S. District Court for the District of Oregon ('Oregon District Court') and which provided that:

[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: 1) where the arbitrator's findings of facts are not supported by substantial evidence, or 2) where the arbitrator's conclusions of law are erroneous. (Emphasis added.)

Following an arbitration at which Mattel prevailed, the Oregon District Court vacated the award and remanded for further consideration by the arbitrator. In reaching this result, the court expressly invoked the standard of review chosen by the parties in the arbitration agreement, which included review for legal error, and cited LaPine Technology Corp. v. Kyocera Corp. , 130 F. 3d 884, 889 (9 th Cir. 1997), a case subsequently overruled en banc by the Ninth Circuit in Kyocera Corp. v. Prudential-Bache Trade Servs., Inc. , 341 F.3d 987 (2003), for the proposition that the FAA leaves the parties 'free ' to draft a contract that sets rules for arbitration and dictates an alternative standard of review.'

The Oregon District Court's vacating of the award prompted lengthy hearings and appeals in numerous tribunals and courts, culminating in the U.S. Supreme Court's granting certiorari to decide the important issue of whether parties could contractually vary or add to the FAA's standards for judicial review of arbitration awards.

The Basic Holding

The Supreme Court's consideration of the issue before it was rather straightforward. First, the Court acknowledged that 'arbitration is a creature of contract, and that the FAA is 'motivated, first and foremost, by a congressional desire to enforce agreements into which the parties ha[ve] entered.” Dean Witter Reynolds Inc. v. Byrd , 470 U. S. 213, 220 (1985). In the end, however, the Court passed over this consideration in favor of a strict analysis of the wording of the FAA, stating:

Hall Street is certainly right that the FAA lets parties tailor some, even many features of arbitration by contract, including the way arbitrators are chosen, what their qualifications should be, which issues are arbitrable, along with procedure and choice of substantive law. But to rest this case on the general policy of treating arbitration agreements as enforceable as such would be to beg the question, which is whether the FAA has textual features at odds with enforcing a contract to expand judicial review following the arbitration.

Turning to the language of the FAA, the Court first noted that 'Sections 10 and 11 ' address egregious [arbitrator] departures ' [such as] 'corruption,' 'fraud,” etc, and in that context, the court went on to say:

Given this emphasis on extreme arbitral conduct, the old rule of ejusdem generis has an implicit lesson to teach here. Under that rule, when a statute sets out a series of specific items ending with a general term, that general term is confined to covering subjects comparable to the specifics it follows. Since a general term included in the text is normally so limited, then surely a statute with no textual hook for expansion cannot authorize contracting parties to supplement review for specific instances of outrageous conduct with review for just any legal error. 'Fraud' and a mistake of law are not cut from the same cloth.

Even more importantly, the court found the wording of the FAA to be controlling in that: 1) the FAA exclusively limits the grounds for judicial review of arbitration awards to those set forth in Sections 10 and 11; and 2) such exclusive language is entirely inconsistent with any contractual expansion of those grounds for review. As the court stated:

' [E]xpanding the detailed categories [of Sections 10 and 11] would rub too much against the grain of the [Section] 9 language, where provision for judicial confirmation carries no hint of flexibility. On application for an order confirming the arbitration award, the court 'must grant' the order 'unless the award is vacated, modified, or corrected as prescribed in sections 10 and 11 of this title.' There is nothing malleable about 'must grant,' which unequivocally tells courts to grant confirmation in all cases, except when one of the 'prescribed' exceptions applies. This does not sound remotely like a provision meant to tell a court what to do just in case the parties say nothing else.

Manifest Disregard Argument

In Hall Street , petitioner argued that Wilko v. Swan , 346 U.S. 427, 74 S. Ct. 182, 98 L. Ed. 168 (1953) expressly authorized expansion of the standards for review set forth in the Federal Arbitration Act. The basic holding of Wilko (which was subsequently overruled) was that Section 14 of the Securities Act of 1933 voided any agreement to arbitrate claimed violations of that Act. In the course of explaining that the limited power to vacate an arbitration award would undermine the buyer protections of the Securities Act, the Wilko Court made the following statement, on which the Hall Street petitioner subsequently relied:

The interpretations of the law by the arbitrators in contrast to manifest disregard [of the law] are not subject, in the federal courts, to judicial review for error in interpretation. (Emphasis added.)

The Hall Street petitioner argued that the foregoing statement recognized 'manifest disregard of the law' as a further ground for vacating arbitration awards, in addition to those listed in Section 10 of the FAA and, as a result, the grounds set forth in Section 10 could not possibly be exclusive. The Hall Street court rejected this argument for a number of reasons, including the following: 1) Wilko involved a supposed judicial expansion of the FAA through interpretation, whereas Hall Street involved an attempted private expansion by contract; and 2) the statement in Wilko expressly rejected precisely what the petitioner in Hall Street was seeking, i.e., general appellate review of an arbitrator's legal errors. Significantly the Hall Street Court went on to make the following additional observation about Wilko:

Then there is the vagueness of Wilko's phrasing. Maybe the term 'manifest disregard' was meant to name a new ground for review, but maybe it merely referred to the [Section] 10 grounds collectively, rather than adding to them ' Or, as some courts have thought, 'manifest disregard' may have been shorthand for [Section] 10(a)(3) or [Section] 10(a)(4), the subsections authorizing vacatur when the arbitrators were 'guilty of misconduct' or 'exceeded their powers.' ' We, when speaking as a Court, have merely taken the Wilko language as we found it, without embellishment ' and now that its meaning is implicated, we see no reason to accord it the significance that Hall Street urges.

The above-quoted language appears to open the door for future elimination or at least severe erosion of the 'manifest disregard,' standard for review of arbitration awards. Such an occurrence would mark a watershed change in the law of arbitration. While courts since Wilko have differed widely on the meaning of 'manifest disregard,' they have been quite uniform in holding that the phrase itself represents an independent ground for judicial review of arbitration awards. If 'manifest disregard' were no longer an accepted standard for review, that would vastly change the arbitration landscape and (for better or for worse) would greatly increase the difficulty of vacating arbitration awards.

Possible Limitations on Hall Street

The Hall Street court noted that the applicable arbitration agreement was 'entered into in the course of district-court litigation, was submitted to the Oregon District Court as a request to deviate from the standard sequence of trial procedure, and was adopted by the District Court as an order.' On that basis, the court raised at least the possibility that the appellate standard in the arbitration agreement might ultimately be upheld 'as an exercise of the District Court's authority to manage its cases under Federal Rule of Civil Procedure 16 ' .' While an interesting twist, this possible exception to the court's ruling is unlikely to evolve into one of broad applicability.

Perhaps more importantly, the Court carved out the following additional limitation on its basic ruling:

In holding that [Sections] 10 and 11 provide exclusive regimes for the review provided by the statute, we do not purport to say that they exclude more searching review based on authority outside the statute as well. The FAA is not the only way into court for parties wanting review of arbitration awards: they may contemplate enforcement under state statutory or common law, for example, where judicial review of different scope is arguable. But here we speak only to the scope of the expeditious judicial review under [Sections] 9, 10 and 11, deciding nothing about other possible avenues for judicial enforcement of arbitration awards.

In the end, the court's 'state law' limitation may have little practical effect. Thus, for example, the grounds for review in Section 23 of the Revised Uniform Arbitration Act (RUAA) appear to be just as surrounded by words of exclusivity as the standards for review in Section 10 of the FAA.

Further, the year 2000 Commentary to Section 23 indicated that: 1) The drafters specifically considered inclusion of a provision that 'the parties could 'opt in' to judicial review of arbitration awards for errors of law or fact or any other grounds not prohibited by applicable law.' In the end, however, Section 23 contained no such language; and 2) only a few state courts had addressed the contractual expansion of statutory standards for review of arbitration awards, and those few decisions were 'split,' with only one upholding such contractual expansion.

Policy Considerations

In the final analysis, it appears that Hall Street cut back substantially, if not almost entirely on contractual expansion of statutory grounds for judicial review of arbitration awards. While the Hall Street Court heard extensive argument from both sides about the policy ramifications of its upcoming decision, it ultimately eschewed most such considerations in favor of a strict reading of Sections 9-11 of the FAA. The court, however, did pause at one point to note that there is a real, fundamental difference between arbitration and litigation and that its decision was in furtherance of maintaining the simplicity and cost-effectiveness of arbitration, as opposed to litigation:

Instead of fighting the text [of Sections 9-11], it makes more sense to see the three provisions ' as substantiating a national policy favoring arbitration with just the limited review needed to maintain arbitration's essential virtue of resolving disputes straightaway. Any other reading opens the door to the full-bore legal and evidentiary appeals that can 'rende[r] informal arbitration merely a prelude to a more cumbersome and time-consuming judicial review process,' ' and bring arbitration theory to grief in [the] post-arbitration process. (Citations omitted.)

It appears that Hall Street's preclusion of expanded judicial review of most if not all arbitration awards, coupled with preservation of the parties' right to expanded internal review before a second panel of arbitrators strikes a proper balance between a norm of cost-effective arbitration, on the one hand and on the other, the parties' need to preserve certain procedural rights (including a right to a comprehensive appeal) in relatively rare instances involving exceptionally complex and extended arbitrations.

John Wilkinson is a neutral with JAMS, The Resolution Experts (New York). He can be reached at 212-751-2700.