Hall Street Associates, L.L.C. v. Mattel, Inc., (06-989), 170 L. Ed. 2d 254 (oral argument November 7, 2007)(decided March 25, 2008).

Introduction: In a recent decision, the Supreme Court defers to Congress, not private contractual rights regarding arbitration agreements under the Federal Arbitration Act's (“FAA”).

The Facts: Hall Street Associates owned property leased by Mattel and sought a ruling that Mattel was required to meet various contractual lease obligations. Hall Street Associates v. Mattel, Inc., 145 F. Supp. 2d 1211, 1213 (D. Ore. 2001). After the court decided one issue, the parties agreed to arbitrate the remaining issues including whether Mattel had to meet water testing requirements on the property and indemnify Hall Street for the costs of environmental cleanup. The arbitrator decided in favor of Mattel. Hall Street appealed the arbitrator's decision to the federal court, as permitted under the arbitration agreement. The district court found that the arbitrator made an error of law in one of its findings for Mattel and remanded to the arbitrator. The arbitrator amended his decision and required Mattel to indemnify Hall Street.

After a bench trial sustained respondent tenant's (Mattel) right to terminate its lease with petitioner landlord ( Hall Street), the parties proposed to arbitrate Hall Street's claim for indemnification of the costs of cleaning up the lease site. The District Court approved, and entered as an order, the parties' arbitration agreement, which, inter alia, required the court to vacate, modify, or correct any award if the arbitrator's conclusions of law were erroneous. The arbitrator decided for Mattel, but the District Court vacated the award for legal error, expressly invoking the agreement's legal-error review standard and citing the Ninth Circuit's LaPine decision for the proposition that the FAA allows parties to draft a contract dictating an alternative review standard. On remand, the arbitrator ruled for Hall Street, and the District Court largely upheld the award, again applying the parties' stipulated review standard.

After both parties appealed the district court ruling, the Ninth circuit invalidated the amended arbitration award citing Kyocera Corp. v. Prudential-Bache Trade Services, Inc. 341 F. 3d 987, 994 (9 th Cir. 2003)(en banc). The Ninth Circuit held that the case was controlled by its Kyocera decision, which had overruled LaPine on the ground that arbitration-agreement terms fixing the mode of judicial review are unenforceable, given the exclusive grounds for vacatur and modification provided by FAA §§10 and 11. 

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 were "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 "imperfect[ions] in [a] matter of form not affecting the merits."

Question(s) presented

Did the Ninth Circuit Court of Appeals err when it held, in conflict with several other Circuits, that the 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?

The Supreme Court Decision:

Although agreeing with the Ninth Circuit, Justice Souter, writing for the majority, vacated the Ninth Circuit’s opinion and remanded. The Court held that the FAA's grounds for prompt vacatur and modification of awards are exclusive for parties seeking expedited review under the FAA. The Court rejected Hall Street's two arguments to the contrary. First, Hall Street submitted that expandable judicial review has been accepted as the law since Wilko v. Swan, 346 U. S. 427 (1953) Second, Hall Street said that the agreement to review for legal error should prevail because arbitration should be governed under contract law, and the FAA is motivated by a congressional desire to enforce such agreements. Dean Witter Reynolds Inc. v. Byrd, 470 U. S. 213. . This argument failed because, although there may be a general policy favoring arbitration, the FAA has textual features at odds with enforcing a contract to expand judicial review once the arbitration is over. However, in holding the §10 and §11 grounds exclusive with regard to enforcement under the FAA's expedited judicial review mechanisms, the Court decided nothing about other possible avenues for judicial enforcement of awards.

SOUTER, J., delivered the opinion of the Court, in which ROBERTS, C. J., and THOMAS, GINSBURG, and ALITO, JJ., joined, and in which SCALIA, J., joined as to all but footnote 7. STEVENS, J., filed a dissenting opinion, in which KENNEDY, J., joined. BREYER, J., filed a dissenting opinion.

From the Employer's Perspective:

The Mattel decision deals a blow to employers who included provisions in their arbitration agreements for expanded judicial review because of concerns associated with arbitration's traditional limited scope of review. By ruling the FAA's grounds for vacating or modifying an award are exclusive and cannot be expanded by agreement of parties, the Court resolves the uncertainty in the Circuits but disappointingly undermines principles of party autonomy in drafting arbitration agreements. Whether such clauses are now severable or render an entire agreement unenforceable will have to be determined under state laws. It is noteworthy that the case involved a post-dispute arbitration agreement between commercial parties with equal negotiating power, and not the so-called take-it-or-leave-it scenario which the plaintiff's bar finds objectionable. It now appears that if you want the relative speed, informality and efficiency of arbitration (and limited review should reduce time and costs), either side is pretty much going to have to live with the results. Consequently, the importance of selecting arbitrators with specialized experience and knowledge becomes even more paramount, particularly, in high stakes disputes.

The Court did leave open some interesting questions. First is the question of whether refusal to enforce an award because it is "in manifest disregard of the law" remains a viable basis for vacating an arbitration award. In rejecting Hall Street's argument for expanded judicial review based on the Court's prior reference to "manifest disregard," the Court did not directly answer whether the doctrine was a new ground for review or shorthand for the Section 10 grounds. Undoubtedly, this issue will be hotly contested in those jurisdictions which have adopted "manifest disregard." Also, left open was the possibility that parties could pursue expanded judicial review under state statutory or common law, although in many states, such as California, judicial review is similarly limited.

Whether the risks associated with award finality outweigh the benefits of arbitration such that arbitration becomes less appealing to employers remains to be seen. If so, ironically one of the arguments against expanded judicial review--additional work for the courts--would result because of more court litigation. One thing seems clear: the federal legislative efforts to bar pre-dispute mandatory arbitration agreements in non-union settings will continue.

From the Employee's Perspective:

Plaintiff's lawyers have long argued that mandatory pre-dispute arbitration clauses should not be enforceable in employment disputes; in part because of the limited right to review by the courts. To that end, if this decision discourages employers from requiring such clauses, it may be considered a "win" for employees. Of course, this decision will also affect arbitration agreements entered into after a dispute arises, but at least then the parties are negotiating about a definable issue, knowing they will have limited rights to appeal.

On the other hand, if employers mandate arbitration because of the lower cost, time, and effort required to defend these action, this decision will not have any effect on their likelihood to continue to mandate arbitration. For employees who are required to arbitrate disputes, this decision limits their right to appeal an arbitration award just as it affects the employer's right. The difference is that the employer has made the choice to require arbitration. The lack of power of employees to refuse or negotiate arbitration clauses combined with limited review of arbitration awards leaves employees with little protection.

This decision also leaves open the issue of whether parties can contract for review under state statutory or common law, which could lead to review by state court judges who may be less familiar with federal employment laws than the arbitrators whose decisions they are reviewing.

A final issue, yet to be decided, is the effect of this decision on the "manifest disregard" analysis first described in Wilco v. Swan. . The Supreme Court implied but did not specifically hold that manifest disregard is not an additional standard for review under the FAA, but instead is simply part of the existing review allowed under 9 U.S.C.§§10 and 11. Will courts use this decision to limit review only to the most extreme cases? Will they stop reviewing awards for violations of public policy or other grounds? How this part of the decision will affect employee's rights remains to be seen.

Link to the Supreme Court Opinion:

www.supremecourtus.gov/opinions/07pdf/06-989.pdf

Contributing Authors

William M. Kinney, Lewis, Overbeck & Furman, LLP, Chicago, IL
Mr. Kinney advises employee benefit plan trustees and fiduciaries. He is an ABA Young Lawyers Division Fellow currently appointed to the Employee Benefits Committee of the ABA Section of Labor and Employment Law.

Andrea Doneff, Buckley & Klein, LLP, Atlanta, Georgia
Ms. Doneff represents individuals in employment disputes and negotiates employment agreements and severance packages. She is co-chair of the Alternatives to Litigation subcommittee of the Employee Rights and Responsibilities standing committee for ABA's Section of Labor and Employment Law. She is also on the J.A.M.S. panel of mediators and arbitrators.

T. Warren Jackson, DIRECTV Inc.,
Mr. Jackson is Vice President and Associate General Counsel to DIRECTV and advises the company on employment and other legal matters. Mr. Jackson is a member of the ABA Section of Labor & Employment Law and of the Employment Rights and Responsibilities Committee. He is also a member of The College of Labor and Employment Lawyers.