On March 25, 2008, the U.S. Supreme Court decided Hall Street Associates, LLC v. Mattel, Inc., Docket No. 06-989, 2008 WL 762537 (U.S. Supreme Court March 25, 2008) (hereafter, "Hall Street"). By ruling that parties to an arbitration agreement could not agree to expand the scope of District Court review of arbitration awards beyond what is permitted in Sections 9 and 10 of the Federal Arbitration Act (9 U.S.C. Sects. 9 and 10; hereafter, the "FAA"), the Court dramatically limited the ability of those who participate in arbitrations to ensure that the resulting awards comply with applicable law and the terms of the underlying contract. Arguably, the decision could be read to go even further, raising questions about the very existence of the "manifest disregard of the law" standard of review -- the only standard available for attacking the merits of an arbitrator's decision.
We will summarize the facts and holding of the majority decision and the dissents, and then provide practice tips for lawyers in light of the decision.
The Facts
The Hall Street case began as a commercial landlord-tenant dispute between Hall Street Associates LLC, the landlord, and Mattel, Inc., the tenant. Mattel had operated a plant on the leasehold, and tests of the property's well-water showed it was contaminated with trichloroethylene and other pollutants. Under the lease, Mattel was obligated to indemnify Hall Street for any clean-up costs. When Mattel attempted to terminate the lease early, Hall Street sued in the U.S. District Court for the District of Oregon, seeking damages both for the improper termination and for the pollution clean-up.
The trial court apparently bifurcated the case, and first held a bench trial on the lease termination issue. After Mattel prevailed on that point, the court turned to the indemnification claim, sending the parties to a mediation that proved unsuccessful. At that point, the parties agreed to arbitrate. They drew up an arbitration agreement, which the District Court approved and entered as an order. In pertinent part, the agreement stated:
"[t]he United States District Court for the District of Oregon may enter judgment on 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; and (ii) where the arbitrator's conclusions of law are erroneous." (Emphasis added).
Mattel prevailed in the ensuing arbitration, and Hall Street moved to vacate, modify or correct the award on the ground that the arbitrator's decision was erroneous on the law. The District Court agreed, and vacated the award. The Ninth Circuit reversed, claiming that the District Court lacked the authority under the FAA to vacate an award for any reason than those set forth in the statute (e.g., bias, prejudice, exceeding powers, etc.), and that the parties could not contract to expand that authority. The Supreme Court accepted certiorari.
The Supreme Court's Ruling
The Supreme Court agreed with the Ninth Circuit's ruling by a 6-3 vote (though vacated and modified for other reasons), with the majority decision by Justice Souter. The opinion focuses intensively on the language of Sections 9, 10 and 11 of the FAA, particularly (a) the phrase in Section 9 that allows arbitral awards to be vacated, corrected or modified only "as prescribed"; and (b) the list of specific grounds for vacatur set forth in Section 10(a). After noting that the Circuits had split on the issue of whether the parties could contract to expand the list of grounds for vacating an award, the Court turned to Hall Street's main arguments in support of enforcing the broad scope of review in the parties' agreement.
Hall Street's main contention is that arbitration is a creature of contract, and that the FAA's principal purpose was to enforce arbitration agreements into which parties have entered. But after noting that the parties to arbitration agreements have the ability to tailor some features of their agreements to their needs (e.g., to determine the number of arbitrators, the place of arbitration, the subject of arbitration, etc.), that does not mean the FAA permitted the parties to determine every facet of arbitration, including the scope of judicial review. To the contrary, the Court found that the statutory language compelled the conclusion that the review categories in Sections 10 and 11 of the FAA were "exclusive." The items listed -- "corruption," "fraud," "misconduct," "evident partiality," etc. -- "address egregious departures," not garden variety legal errors, and there is no "textual hook" for expanding review beyond that. Also, Section 9 says a court "must grant" confirmation unless the award is "vacated, modified or corrected as prescribed in Sections 10 and 11." This language, said the Court, "unequivocally tells courts to grant confirmation in all cases, except when one of the 'prescribed' exceptions applies." There was, in short, no indication that Congress intended the list of grounds for vacatur to be a default provision subject to amendment by the parties.
The Court noted that while amici supporting Hall Street's position said that "parties will flee from arbitration if expanded review is not open to them," those supporting Mattel said the opposite. The Court responded to all of this by saying: "We do not know who, if anyone, is right, and so cannot say whether the exclusivity reading of the statute is more of a threat to the popularity of arbitrators or to that of courts. But whatever the consequences of our holding, the statutory text gives us no business to expand the statutory grounds."
Crucially, the Court did not confine its ruling to the scope of review. Hall Street had focused on a particular section of a 55-year-old decision, Wilko v. Swan, which had specifically noted that "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." This, Hall Street claimed, showed the FAA review standards could be expanded. The Court was not so sure. In a slightly confusing passage, the Court responded to this argument by saying the Wilko language was unclear: maybe it was intended to create a new ground for review, but maybe "it merely referred to the Section 10 grounds collectively" or was shorthand for Section 10(a)(3) ["guilty of misconduct"] or 10(a)(4) ["exceeded their powers"]. This could simply be a way of refusing to "accord [the language] the significance that Hall Street urges." It could also be a way of calling into question the entire "manifest disregard" concept. Only future cases will tell us.
Despite agreeing with Mattel's position, the Court vacated the Ninth Circuit decision because the arbitration agreement in this case had been approved by the District Court, and its enforcement might fall within the Court's powers under Fed. R. Civ. P. 16. The Court asked that issue to be addressed on remand.
Practice Tips
Although the Court rejected the use of clauses that allowed District Courts to review arbitral awards for legal errors, it did not foreclose other avenues to obtain legal review. One possibility, the subject of a case currently before the Second Circuit, is to draft arbitration clauses to require arbitrators to follow applicable law and the terms of the contract. This may permit the parties to argue that an arbitrator who imposes remedies not permitted by law or the contract to claim that the arbitrator "exceeded his powers," and thus to bring court review of the legal basis of the award safely within Section 10(a)(4) of the FAA.
Also, the Court raised the possibility that a provision permitting judicial review could be enforced in state court in accordance with state law -- somehow outside the FAA. "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." The Court left unclear, however, how this squares with Section 2 of the FAA, which states that all arbitration agreements involving interstate commerce fall under the exclusive jurisdiction of the FAA. Certainly, the Court made clear that Hall Street was an FAA case. But the parties might state in their arbitration agreements that arbitral review is not intended to be exclusive of available state remedies, or to otherwise agree to enforcement of the review provisions under state law. This approach is not likely to succeed, but at least some members of the Court seem to think it should.
There are, in short, no clear ways to ensure that an arbitrator will follow the law or the contract. Those who draft arbitration clauses must always make clear to their clients that once a case goes into arbitration, the outcome becomes a crap shoot, with little to ensure that the contract the client thought he or she entered will be enforced in accordance with its terms.
* * * * * * * * * * * * * * *Ronald C. Minkoff
Ronald C. Minkoff is a partner in the Litigation Group of Frankfurt Kurnit Klein & Selz. He handles a wide variety of commercial litigation, both simple and complex, including business break-ups, partnership disputes, securities lawsuits, and domestic and international trade disputes. He has conducted many successful trials and arbitrations and engineered numerous cost-effective settlements. Mr. Minkoff was recently named a fellow of the prestigious Litigation Counsel of America. He was also named a New York-area “Super Lawyer” for Business Litigation work by Law and Politics magazine in 2007 and 2006.
Mr. Minkoff represents businesses and individual professionals and executives. He currently represents securities professionals being sued by customers for losses in energy, dot.com, and telecommunications stocks. He represents several law firm partners in partnership disputes. And he represents an internationally known petrochemist in an oil and gas venture dispute. In the past, Mr. Minkoff served as lead counsel and successfully defended 40 garment manufacturers against civil fraud allegations by a well-known factor. He won dismissal of a RICO and antitrust lawsuit brought against several stamp auction houses; and he represented the Republic of Ecuador in a class-action lawsuit brought by Ecuadorian citizens against Texaco for alleged environmental damage.
Mr. Minkoff is also one of New York State’s leading practitioners in the field of attorney ethics and professional responsibility, representing attorneys in a wide variety of matters including partnership disputes, disciplinary cases, and malpractice and intentional tort actions. He is Adjunct Professor of Professional Responsibility at Brooklyn Law School, Chair of the Joint Subcommittee on the Model Code of Judicial Conduct of the New York City Bar, a member of the American Bar Association Standing Committee on Professionalism, and a past President of the Association of Professional Responsibility Lawyers. He is a member of the Media Law Resource Center (MLRC) ethics committee and has written extensively for the New York Professional Responsibility Report, The Professional Lawyer, The New York Law Journal, and other publications. Mr. Minkoff is a frequent lecturer on the law of lawyering -- including the attorney-client privilege, New York Judiciary Law § 487 claims, the ethical duties of lawyers serving as directors, multijurisdictional practice, and the obligations of departing law partners.
Mr. Minkoff has his J.D. Degree from Columbia Law School, Class of 1980. He was an attorney at the Nassau County Legal Aid Society (1980-83), and was associated with Obermaier Morvillo & Abramowitz, P.C. (1983-85) and Owen & Fennell (1985-87). Mr. Minkoff was a member of Fennell & Minkoff (1987-94) and Beldock Levine & Hoffman (1994-2001) before joining Frankfurt Kurnit.
Representative cases: Conopco, Inc. v. Wein, 2007 U.S. Dist. LEXIS 46945 (S.D.N.Y. 2007); Trepel v. Dippold, 2006 U.S. Dist. LEXIS 78050 (S.D.N.Y. 2006); Jota v. Texaco, Inc., 157 F.3d 153 (2d Cir. 1998); Katz v. Feinberg, 2003 U.S. Dist. LEXIS 12975 (S.D.N.Y. 2003); Tosto v. Zelaya, 2003 U.S. Dist. LEXIS 8085 (S.D.N.Y. 2003); Stolow v. Greg Manning Auctions, Inc., 258 F.Supp.2d 236 (S.D.N.Y. 2003); Profile Pub. & Mfg. Corp. v. Musicmaker, Inc., 242 F. Supp. 2d 363 (S.D.N.Y. 2002); Feinberg v. Katz, 2002 U.S. Dist. LEXIS 13771 (S.D.N.Y. 2002); L&R Exploration Venture v. Grynberg, 301 A.D.2d 385 (1st Dep’t 2003).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
