On March 25, 2008, in Hall Street Assoc., L.L.C. v. Mattel, Inc. (No. 06-989), 76 U.S.L.W. 4168, the US Supreme Court resolved a split in the federal circuits and held that the limited judicial review provisions of the Federal Arbitration Act (FAA) are exclusive. This decision renders unenforceable most arbitration agreement terms that provide standards of judicial review broader than the narrow standards set forth in the FAA.

The FAA, 9 U.S.C. § 1 et seq (2000 ed. & Supp V) provides a streamlined process of judicial review of arbitration awards and sets forth narrow grounds on which a court may decline to enforce an award. Those grounds do not, by their terms, include errors of law and most errors of fact made by the arbitrator. Accordingly, the parties in Hall Street entered into an arbitration agreement that provided for expanded judicial review to permit vacation, modification, or correction of the arbitration award where the arbitrator’s findings of fact are not supported by substantial evidence or where the arbitrator’s conclusions of law are erroneous.

In reviewing the validity of the judicial review provision, the Supreme Court rejected the arguments of Hall Street and several amici that arbitration is a creature of contract and that the FAA represents a federal policy in favor of enforcing the parties’ arbitration agreements. The Court found that this policy argument reads too much into the Act and conflicts with the Act’s text, which permits overturning an award only in the event of “egregious departures from the parties’ agreed-upon arbitration.” Expansion to other grounds would also be contrary to the mandatory provisions of section 9 of the Act, which provides that a reviewing court “must” confirm the award unless doing so is proscribed by one of the narrow grounds set forth in sections 10 and 11 of the Act.

Although the Court made clear that expanded review is no longer available under the FAA, it left open for consideration a related but independent issue. The Hall Street parties agreed to arbitration in the course of a pending federal district court litigation. The arbitration agreement, including its judicial review provision, was submitted to the trial court as a “request to deviate from the standard sequence of trial procedure, and was adopted by the District Court as an order.” Accordingly, the Court remanded the case for a determination of whether the specific agreement at issue should be treated as an exercise of the trial court’s authority to manage its cases, an issue the Court saw as independent of the FAA. It remains to be seen how that issue will be resolved, but it is not one that is likely to arise often in the future.

Arbitration and litigation each have their advantages and disadvantages as a means of dispute resolution. Arbitration is a popular method for resolving a broad variety of disputes and may be particularly well suited for many kinds of cases, especially those in which it is more important to reach a quick decision than necessarily the “right” decision. For some types of disputes, however, such as those involving “bet the company” disputes, preservation of a right to full judicial review may outweigh the benefits of arbitration. Parties should carefully consider the numerous pros and cons of arbitration and litigation at the time they enter into any dispute resolution agreement or agreement provision.

For more information, please contact Ralph Taylor. Mr. Taylor has over 32 years of experience in litigation and alternative dispute resolution. He regularly advises clients on the advantages and disadvantages of various dispute resolution alternatives and the drafting of appropriate dispute resolution agreements.

Ralph A. Taylor, Jr.
taylor.ralph@arentfox.com
202.775.5713