US Supreme Court Holds FAA provides "Exclusive Regime" for Review

JUDICIAL REVIEW OF ARBITRATION AWARDS: U.S SUPREME COURT HOLDS FAA PROVIDES “EXCLUSIVE REGIME” FOR REVIEW

More and more, arbitration panels are resolving business litigation — instead of judges and juries. Traditionally, the panels’ decision has been the “end of the road” for the parties, with very limited right of appeal and judicial review under the Federal Arbitration Act (“FAA”). For example, Section 10 of the FAA allows vacating an award if it was procured by corruption, fraud, or undue means, and where the arbitrators were guilty of misconduct or exceeded their powers, and Section 11 allows modifying an award if there was an “evident material miscalculation” or “evident material mistake.” Not surprisingly, some parties attempted to expand the scope of judicial review for an award under the FAA in their arbitration agreements.

In Hall Street Associates, L.L.C. v. Mattel, Inc., however, the U.S. Supreme Court recently held that Sections 10 and 11 of the FAA provide the exclusive regimes for the review provided by the statute for expedited vacatur and modification of arbitration awards under the FAA.

The case involved a lease agreement between Hall Street and Mattel. In the agreement, Mattel agreed to indemnify Hall Street for any costs resulting from Mattel’s or any prior tenant’s failure to follow environmental laws while leasing the premises. During Mattel’s tenancy, tests revealed the prior tenant had contaminated the property’s water well with various environmental pollutants. Mattel subsequently entered into a consent agreement with the Oregon Department of Environmental Quality to cleanup the property it had leased from Hall Street. Soon thereafter, Mattel gave notice to Hall Street that it was terminating the lease.

Hall Street sued Mattel in federal court in Oregon, claiming it improperly had terminated the lease and was obligated to indemnify Hall Street for costs associated with the environmental cleanup. After Mattel prevailed on the termination issue, the parties unsuccessfully attempted to mediate the indemnification issue — which they ultimately agreed to submit to arbitration. The parties drafted an arbitration agreement which the federal court approved and entered as an order. In relevant part, the arbitration agreement provided that the district 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.”

The arbitrator first ruled for Mattel. Hall Street filed a motion to vacate or modify the arbitration award. Pursuant to its authority under the district court-approved arbitration agreement between the parties, the federal district court vacated the award based on legal error by the arbitrator. On appeal, the Ninth Circuit held the provisions in the parties’ arbitration agreement which expanded judicial review beyond the grounds specifically enumerated in the FAA were unenforceable, because (1) the FAA does not allow courts to modify or vacate awards for legal error, and (2) parties cannot contractually expand the FAA’s exclusive grounds for modification and vacatur. The U.S. Supreme Court agreed with the Ninth Circuit, reasoning that “[i]nstead of fighting the text, it makes more sense to see the three provisions, §§9-11, as substantiating a national policy favoring arbitration with just the limited review needed to maintain arbitration’s essential virtue of resolving disputes straightaway.” Of note, the Court limited its decision to arbitration agreements under the FAA.

If you would like a copy of this opinion, or more information on the topic, please contact the Business Litigators at Clouse Dunn LLP at [email protected].