On May 29, 2007, the Supreme Court granted certiorari in Hall Street Associates v. Mattel, Inc.. The question presented in this case is whether "the Ninth Circuit erred when it held, in conflict with several other federal Courts of Appeal, that the Federal Arbitration Act ("FAA") precludes a federal court from enforcing the parties' clearly expressed agreement providing for more expansive judicial review of an arbitration award than the narrow standard of review otherwise provided for in the FAA."

Background

This case arose out of a property lease between tenant Mattel Inc. and Hall Street, Associates, Mattel's landlord. The well-water on the property was badly contaminated, and no testing "“ which was apparently required under the Oregon Drinking Water Quality Act ("ODWQA") "“ had taken place. Hall Street filed suit against Mattel in Oregon state court seeking declaratory relief, injunctive, relief, and damages for the contamination. It alleged, amongst other things, that the lease required Mattel to indemnify it from all actions relating to the condition of the property. Relying on diversity jurisdiction, Mattel removed the case to federal district court.

After taking a separate issue to trial, the parties submitted, and the court approved, an agreement to arbitrate the remainder of the case. The agreement provided for de novo judicial review of the arbitrator's legal rulings "“ a more expansive scope of review than provided by the FAA, which limits review to: (1) awards procured by corruption, fraud, or undue means; (2) cases in which the arbitrators are obviously partial or corrupt; (3) where there is misbehavior prejudicing a party's rights; and (4) where the arbitrators exceeded their power, or so imperfectly executed their power that no "mutual, final, and definite award" was made.

The arbitrator ruled that Mattel need not indemnify Hall Street. Underlying this decision was the finding that Mattel had not violated "any applicable environmental laws," an exception to the indemnity requirement under the property lease. Hall Street moved to vacate the proceeding in district court. The court granted the motion and remanded the case to the arbitrator, deeming erroneous the arbitrator's conclusions that the ODWQA was not an applicable environmental law and that the exception to indemnification applied. Consequently, the arbitrator ruled in Hall Street's favor, and the district court upheld the award.

On appeal, the Ninth Circuit reversed the district court's decision vacating the initial arbitral award, reasoning that the arbitration agreement's provision expanding judicial review was unenforceable. On the Ninth Circuit's view, courts must enforce an arbitration award "unless [they] determine[] that the award should be vacated [modified or corrected] on the grounds allowable under [the FAA]." Again, the trial court vacated the initial arbitral decision, ruling that the arbitrator exceeded his power within the FAA with an "implausible interpretation of the contract." The Ninth Circuit reversed this decision, holding that "implausibility is not a valid ground for voiding an arbitration award" under the FAA. Hall Street sought an en banc review of the Ninth Circuit's opinion, which was denied.

Petitions for Certiorari

Hall Street sought certiorari on the question of whether the grounds outlined in the FAA are the only permissible bases for reviewing an arbitral award. It emphasized the division among the Courts of Appeals with regard to the question presented. Both the Ninth and Tenth Circuits have held that parties cannot agree to judicial review beyond the narrow grounds provided in the FAA. These courts reason that "[b]road judicial review of arbitration decisions could well jeopardize the very benefits of arbitration, rendering informal arbitration merely a prelude to a more cumbersome and time-consuming judicial review process." On the other hand, the First, Third, Fourth, Fifth and Sixth Circuits have decided just the opposite. These courts generally reason that "the central purpose of the FAA is to ensure that private agreements to arbitrate are enforced according to their terms.”

Mattel argued that certiorari was not warranted for several reasons. First, "even if expanded review were allowed as Hall Street requests, the result would be the same judgment against it." It contended that the real issue in the case is the causation of and contribution to the contamination. Moreover, the arbitrator correctly interpreted the contract and determined the intent of the parties. In any event, Mattel asserted, Hall Street failed to show any damages and therefore is not entitled to any relief. Second, Mattel asserted that Hall Street failed to preserve its arguments for Supreme Court review. Third and finally, Hall Street has "unclean hands" because it is an empty corporate shell that has disposed of its assets. In sum, Mattel concluded, this was not an appropriate case to address the question presented.

Merits Briefs

After the Court granted certiorari, petitioner asserted in its merits brief that the FAA does not prevent the courts from enforcing an arbitration agreement that stipulates judicial review of an arbitral award for legal error. Accordingly, there is nothing in the statute or legislative history that limits judicial review to the explicit provisions of the FAA. Relying largely on the Supreme Court case Volt Information Services, Inc. v. Board of Trustees of Leland Stanford University, petitioner asserts that the FAA allows parties to make their own procedural rules for arbitration and create exceptions to court confirmation of arbitral awards. The only requirement is that the alterations do not usurp the policies of the FAA and are consistent with the court's normal judicial functions. Petitioner contends that the primary purpose of the FAA is to ensure that "private agreements to arbitrate are enforced according to their terms" even though those terms may deviate from the FAA's statutory provisions. In essence, "[a]rbitration under the Act is a matter of consent, not coercion." Additionally, the federal district courts already have jurisdiction over this matter and regularly review decisions based on legal error, e.g. reviewing magistrate's decisions under FRCP 72(b). Thus, the judicial review for legal error is also consistent with normal court functions.

Petitioner then proceeds to address the policy argument of judicial economy. It proposes that parties will be more likely to enter into arbitration agreements when they know that the decision will be free from legal error and will be enforced according to the terms of their agreement. By allowing the parties to stipulate their arbitral terms, including judicial review for legal error, the Court is promoting arbitration and reducing the burden on federal courts. Furthermore, even if the Court thought that judicial review for legal error hindered judicial efficiency, this alone would not warrant overturning the clear terms of the agreement. In sum, the policy considerations, express terms of the FAA, and the case law require that an arbitration agreement providing for judicial review of arbitral awards for legal error be enforced according to its terms.

The respondent's brief contends that the text, structure, and history of the FAA require that §§10 and 11 are the exclusive grounds for vacating a arbitral award. The central argument is that the permissible grounds for review are clear and detailed, and do not serve as a "default" list for judicial review. "Congress knew how to create a default rule in the FAA and did so in more than one instance [§§ 5 and 9], but did not do so with regard to the grounds of denial of an application to confirm award." Respondent also points to the legislative history of the FAA. It contends that the drafters consciously limited judicial review of an arbitral award to the explicit provisions of §§ 10 and 11. Additionally, it asserts that the cases on which petitioner relies, Wilko v. Swan and Volt, are not on point and do not support expanded judicial review.

Respondent also contends that the petitioner's argument misinterprets § 9 of the FAA. Private parties cannot dictate the federal law that courts apply and cannot control the court's exercise of equitable authority. There is no other type of contract that would allow parties to exercise this dominion over the court. Rather, the law is well-settled that private parties cannot control court functions. Respondent also questions the constitutional validity under Article III of the petitioner's contention and asserts that petitioner's "normal judicial functions" argument is an attempt to mask a logically flawed line of reasoning.

Finally, respondent argues that allowing parties to expand judicial review of arbitral awards to include review for legal error would be contrary to the purpose of the FAA. It contends that this would create "burdensome confusion" in arbitration and courts because there would be no finality and arbitration would be no more than a prelude to litigation. Such a holding would also require all arbiters to "show their work," which could be very time consuming and inefficient. Moreover, parties can already agree to appellate arbitration to protect against anomalous decisions. This review for legal error is widely available and would provide sufficient protection from legal errors.

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