Thursday, December 19, 2013
Yesterday, Professor Cleveland posted about a 9th Circuit ruling which underscored the premise that freedom of contract does not extend to reducing or eliminating federal court jurisdiction to review arbitral awards pursuant to FAA § 10. Last week, our friends at ADR Prof Blog posted about how mandatory arbitration seems to amount to claim suppression. This is especially true when one considers consumer arbitration of relatively nominal dollar value claims. Because 90% of arbitration clauses limit or outright prohibit class arbitration, most people will simply walk away from the claim rather than deal with the process. Claim suppression realized.
While I commend the 9th Circuit for disallowing parties to contractually reduce a court's ability to review an arbitral award, I believe that the basis for vacatur under FAA § 10 (arbitrator corruption, fraud, misconduct, exceeding or imperfectly executing powers) is too limiting in itself. Essentially, a party needs to show that the arbitrator "manifestly disregarded the law" in order to succeed in getting an award vacated (note that some consider this a disfavored common law reason for vacating an award, but the Supreme Court in Hall Street did not specifically eviscerate this as a reason and, as such, it is still used by some circuits).
Manifest disregard of the law - as well the reasoning articulated in § 10 - is tantamount to an abuse of discretion standard of review. When appellate courts are reviewing an award under this standard of review, the court is not to substitute its opinion for that of the decision-maker and the award is to be upheld absent the ability to show that no reasonable person would have reached such a conclusion. Obviously, this is a huge and almost impossible burden for an appellant to meet.
As it relates to arbitration, having such a limiting standard of review is exacerbated by the fact that arbitrators are encouraged by the American Arbitration Association (AAA) not to provide written opinions in order to prevent the possibility that the award will be overturned on appeal. This disadvantages appellants in an appeal from an arbitral award much greater than appellants from a trial/district court decision, the latter generally being the recipients of both a reasoned opinion from the lower court judge and a de novo standard of review on appeal.
During the golden days when arbitration was a contracted process agreed upon by businesses to resolve commercial disputes, the stringent standard of review made sense. This fits the mold of freedom of contract, especially when two parties with assumedly equal bargaining power agreed to the terms of the contract. But now that arbitration has encroached upon the world of consumer and employee contracts, involving statutory rights, waivers of class actions, and seemingly impairing the rights of individuals with little to no bargaining power, perhaps the standard of review should be revisited.
The Arbitration Fairness Act of 2011 (reintroduced in May 2013), does not appear to be headed for enactment anytime soon. This Act would invalidate pre-dispute arbitration agreements involving consumer and employee matters. A less radical approach might be to simply require that the appellate review of these disputes must be de novo. While this is just food for thought, it is unlikely the current Congress will be willing to dine on it anytime soon.