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SUPREME COURT DOCKET REPORT
OCTOBER TERM 2007
DECISION ALERT


October Term, 2007 

March 25, 2008


Today the Supreme Court issued one decision, described below, of interest to the business community.


Hall Street Associates, L.L.C. v. Mattel, Inc., No. 06-989 (previously discussed in the May 29, 2007 Docket Report). The Federal Arbitration Act ("FAA") provides an expedited procedure for the judicial review of arbitration awards and specifies a limited set of grounds on which awards can be vacated or modified.  The statutorily enumerated circumstances under which a court may vacate or modify an arbitral award include when the award is procured by fraud or corruption and when an arbitrator is biased, guilty of misconduct, or exceeded his powers.  9 U.S.C. 9-11.  Many arbitration agreements have included clauses providing additional bases for vacatur or modification--for example, clauses allowing vacatur or modification on grounds of legal error--and the courts of appeal have been divided over whether parties may contract for such broader judicial review of arbitration awards.   The Supreme Court today resolved this split, holding that the grounds for review specified in Sections 10 and 11 of the FAA are exclusive, and therefore that the FAA does not provide authority for courts to review arbitration awards on grounds agreed to by contract. 

Today's decision is important to all businesses that use arbitration in their contracts or that are considering whether to submit a dispute to arbitration.  Many businesses that have included provisions for broader judicial review will want to revisit those provisions and to consider their options with respect to future disputes that may arise.  They should also be aware that, as discussed below, the Court's decision may yet leave room for expanded judicial review of arbitration awards outside of the FAA's expedited procedures. 

In Hall Street, petitioner Hall Street Associates and respondent Mattel, Inc. agreed to arbitrate an indemnification claim arising from a lawsuit related to a commercial lease.  The arbitrator entered an award for Mattel.  Hall Street challenged the award in federal court, invoking a clause in the arbitration agreement which provided that the court could vacate the award if the award was legally erroneous or not based upon substantial evidence.  Consistent with then-governing Ninth Circuit precedent, the district court exercised the contractually conferred power to review, vacated the award as legally erroneous, and returned the case to the arbitrator, who subsequently entered an award for Hall Street.  The district court confirmed the new award in large measure.  Both parties appealed, and the Ninth Circuit reversed in favor of Mattel, relying on intervening Ninth Circuit precedent which held that the FAA's enumerated grounds for judicial review of an arbitration award were exclusive. 

In an opinion authored by Justice Souter, the Supreme Court agreed, holding that Sections 10 and 11 of the FAA "provide the FAA's exclusive grounds for expedited vacatur and modification," and that therefore the district court could not give effect under the FAA to the parties' agreement for more substantial judicial review.  Slip op. at 7. 

The Court concluded that the text of the FAA requires that the grounds for judicial review be limited to those specified in the statute.  Specifically, the Court pointed to the procedure for confirmation of an arbitration award outlined in Section 9, which states that a court "must grant" an order confirming an arbitration award "unless the award is vacated, modified, or corrected as prescribed in Sections 10 and 11."  9 U.S.C.  9 (emphasis added).  The Court read Section 9 to constitute an express statutory command to confine review to the grounds "prescribed"  in Sections 10 and 11.  Slip op. at 9.   The Court also underscored that Sections 10 and 11 "address egregious departures from the parties' agreed-upon arbitration," and that "[g]iven this emphasis on extreme arbitral conduct," "review for just any legal error"--as provided in the parties' contractual agreement--is very different from the "detailed categories" of review contemplated by Sections 10 and 11 of the FAA.  Id. at 8-9.

The Court also rejected Hall Street's argument that the Court's precedent had previously recognized "manifest disregard" of the law as an additional ground for review, and that "if judges can add grounds to vacate (or modify), so can parties."  Id. at 7-8 (citing Wilko v. Swan, 346 U.S. 427 (1953), overruled on other grounds by Rodriguez de Quijas v. Shearson/Am. Express, 490 U.S. 477 (1989)).  The Court concluded that Wilko had "expressly reject[ed] just what Hall Street asks for"--namely, "general review for an arbitrator's legal errors"--and that Wilko was vague as to whether "manifest disregard" of law constituted recognition of a new ground for review or was simply intended as a shorthand reference to some or all of the grounds enumerated in Section 10.  Slip op. at 8.  The underlying arbitration did not involve federal statutory claims.

Justice Stevens, joined by Justice Kennedy, dissented, concluding that the "core purpose of the FAA"--ensuring the enforcement of arbitration agreements--made it necessary to enforce parties' "fairly negotiated decisions to provide for judicial review of arbitration awards for errors of law.  Id. at 2 (Stevens, J., dissenting).  Justice Breyer filed a separate dissenting opinion.

In light of Hall Street, all businesses that are parties to arbitration agreements that provide for judicial review on grounds broader than those enumerated in the FAA should examine Hall Street's impact on those provisions.   Parties can no longer use the FAA's expedited judicial review procedures to invoke contractual rights to heightened review.   At the same time, Hall Street did not reach the question whether there are other avenues for broader judicial review.  The Court did "not purport to say that" the FAA "exclude[s] more searching review based on authority outside the statute."  Slip op. at 13.  As the Court explained, "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."  Id.  On this point, the dissenting justices were in accord.  Id. at 4 (Stevens, J., dissenting); id. at 1 (Breyer, J., dissenting).  Businesses should therefore explore the possibility of using state-law procedures to enforce contracts providing for expanded judicial review.

Please feel free to contact Archis Parasharami (202-263-3328) or Evan Tager (202-263-3240) for further information about this case, or for advice about the drafting of arbitration agreements in light of today's decision.



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