On November 7, 2007, in a case that undoubtedly will influence parties’ decisions to arbitrate rather than litigate, the United States Supreme Court heard oral arguments regarding whether and to what extent a federal court can review or vacate an arbitrator’s award.

In Hall Street Associates v. Mattel, Inc., 196 F. App’x 476 (9th Cir. 2006) (not published), the U.S. Court of Appeals for the Ninth Circuit held, in conflict with several other federal appellate courts, that the grounds for judicial review set forth in the Federal Arbitration Act (FAA) are the exclusive grounds upon which parties may rely in appealing an arbitration award. The case arose out of a property dispute between tenant Mattel, Inc. and landlord Hall Street Associates. Hall Street Associates filed suit seeking a declaratory judgment and damages from Mattel for the cost of cleaning up water contamination at Mattel’s toy manufacturing facility. After litigation began, the parties agreed to arbitrate several disputed issues. To this end, they signed an agreement providing for judicial review of the arbitrator’s decision if it contained erroneous legal conclusions or factual findings—a more expansive scope of review than provided for in the FAA, which limits review to awards procured by corruption, fraud, or undue means; cases in which arbitrators are partial or corrupt, guilty of misconduct, or have exceeded their powers; cases where there is a material miscalculation of figures or mistake in the award; or where the award is imperfect in form. See FAA §§ 10, 11.

After arbitration, both parties sought review of the arbitration award in district court, which amended the award, based on erroneous legal conclusions and factual findings. The Ninth Circuit, relying on Kyocera Corporation v. Prudential-Bache Trade Services, Inc. (decided while Mattel and Hall Street Associates were in arbitration), 341 F.3d 987 (9th Cir. 2003) (en banc), subsequently invalidated the district court’s decision because the parties’ arbitration agreement gave the district court broader review power than granted to it by Sections 10 and 11 of the FAA.

The question on certiorari is whether the grounds outlined in the FAA are the sole permissible bases for reviewing an arbitration award. The Ninth and Tenth Circuits have held, and Mattel contends, that parties cannot contract for judicial review of an arbitration award beyond the limited grounds provided for in the FAA because such broad judicial review makes arbitration merely a precursor, rather than an alternative, to more time-consuming and expensive litigation. By contrast, Hall Street Associates argues, in line with holdings in the First, Third, Fourth, Fifth, and Sixth Circuits, for expanded judicial review and the enforcement of arbitration agreements according to their terms so as to promote freedom of contract.

The outcome of this case likely will affect parties’ decisions to arbitrate rather than litigate. Parties often choose arbitration as a cheaper and quicker alternative to litigation when dealing with contract and commercial disputes, medical malpractice claims, and employment disputes. See, e.g., Alison Grant, Arbitration Replacing Litigation: Companies Want to Avoid Court as Way to Resolve Workplace Issues, Cleve. Plain Dealer, Oct. 30, 2003, at C1; Amy Lynn Sorrel, Arbitrate, Not Litigate: A Growing and Popular Alternative to Lawsuits, Am. Med. News, Aug. 27, 2007, available at http://www.ama-assn.org/amednews/2007/08/27/prsa0827.htm; John R. McGinley Jr., Who Should Decide? The Pros and Cons of Arbitration vs. Litigation, Pittsburgh Post-Gazette, Sept. 17, 2002, at E3.

The Supreme Court may hold that the grounds for judicial review in the FAA are not exclusive, and that parties can draft arbitration agreements to provide for expanded judicial review of an arbitrator’s award. On the other hand, the Court may find that expanded judicial review defeats the very purpose of arbitration and the FAA, and that parties must be bound even by legally erroneous decisions absent corruption, fraud, partiality, or material miscalculation or mistake.

For more information, please contact:

Anthony V. Lupo
lupo.anthony@arentfox.com
202-857-6353

Loni J. Sherwin
sherwin.loni@arentfox.com
202-775-8581