• Supreme Court Rules on Arbitration Agreements
  • June 21, 2008 | Author: Heather A. Hoyt
  • Law Firm: Pepper Hamilton LLP - Berwyn Office
  • The U.S. Supreme Court handed down an opinion that may have important ramifications for employers and others who use arbitration agreements to resolve disputes. Although technically not an employment law case, the decision sets some important limits on how arbitration decisions are appealed.

    The Federal Arbitration Act, which governs many arbitration agreements, favors the voluntary use of arbitration to resolve disputes. In the recent decision of Hall Street Associates LLC v. Mattel Inc., a majority of the justices ruled that the Federal Arbitration Act does not allow for expandable judicial review of an arbitrator’s legal errors. In the 6-3 ruling, the Court held that the Federal Arbitration Act’s review provisions were meant to be exclusive, and therefore the parties could not contract to broaden the grounds for vacating or modifying an arbitral award.

    The Case: Hall Street Associates, a landlord, and Mattel, Inc., a tenant, were involved in a dispute over who would bear the clean up costs associated with environmental contamination from an industrial solvent. Hall Street wanted to make the toy company pay for the property cleanup.

    Although the lease did not contain an arbitration provision, the parties decided to resolve their dispute by arbitration, as the parties were already in federal court in Oregon. The district court approved the arbitration agreement, which included this language:

    [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: (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 issued an award in favor of Mattel, and Hall Street requested that the district court review the award, alleging that the arbitrator had committed legal errors. Using the expanded review provided in the arbitration agreement, the district court found the arbitrator had committed an error of law, vacated the award, and sent the case back to the arbitrator.

    The arbitrator then reached a different conclusion and issued an award in favor of Hall Street this time. The district court upheld this award, and Mattel appealed to the Ninth Circuit Court of Appeals. The court of appeals reversed the district court, siding instead with Mattel. The court of appeals held that the parties’ arbitration agreement, which expanded the availability of judicial review, was unenforceable under the Federal Arbitration Act. Hall Street sought review by the Supreme Court.

    In an opinion written by Justice David Souter, the Supreme Court agreed with the Ninth Circuit Court of Appeals that the grounds for vacating or modifying arbitrations awards provided by the Federal Arbitration Act are exclusive.

    Appeals under the Arbitration Act: The Federal Arbitration Act allows an award to be vacated:

    • where procured by corruption, fraud, or undue means
    • where there was evidence of arbitrator partiality or corruption
    • where the arbitrators wrongfully refused to postpone the hearing, to hear evidence pertinent and material to the controversy, or were guilty of any other misbehavior by which the rights of any party have been prejudiced
    • where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made.

    An arbitration also may be corrected or modified under the Federal Arbitration Act where there was an evident material miscalculation of figures or an evident material mistake in the description of any person, thing, or property referred to in the award; where the arbitrators have issued an award on a matter not submitted to them, or where the award is imperfect in matter of form not affecting the merits of the controversy.

    What the Decision Means: The opinion in Hall Street v. Mattel makes clear that any similar arbitration clauses providing for expanded judicial review are unenforceable. Federal courts are limited to the rather narrow grounds provided for in the Federal Arbitration Act when a party requests that an arbitration award be vacated or modified.

    In light of the Hall Street v. Mattel decision, companies should review their arbitration procedures to make sure that those procedures do not provide for judicial review beyond the scope of the Federal Arbitration Act. It is unknown if this Supreme Court decision will have repercussions in the area of employment arbitrations. Will companies that might otherwise choose arbitration to resolve a range of employment disputes be moved to shy away from arbitration agreements if they cannot contract for a more expanded judicial review?

    The holding in Hall Street v. Mattel in no way ends all arbitration award appeals, but does reinforce the principle that arbitration is final, without much room for appeal.