Tuesday, March 25, 2008

Hall Street v. Mattel and the Future of Arbitration

Supct Although this isn't an employment law case, the Supreme Court handed down an opinion today in Hall Street v. Mattel that may have important ramifications for arbitration of disputes involving employment discrimination and other statutory rights. Hall Street Associates, L.L.C. and Mattel entered into an arbitration agreement after a dispute had arisen and been partially litigated. The district court approved the agreement, which stated, in part:

[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 scope of this review is more searching than the review provided by the Federal Arbitration Act (FAA), which allows an award to be vacated where procured by corruption, fraud, or undue means, where there was evident partiality or corruption in the arbitrator, where the arbitrator was guilty of misconduct in not postponing the arbitration or refusing to hear evidence, or 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." These are pretty narrow grounds.

The Ninth Circuit had held that the provision that expanded review was unenforceable because it exceeded the review provided for by the FAA (the circuits were split), and the Supreme Court affirmed. In an opinion by Justice Souter, the Court held that the language of the FAA demonstrated that the review it provided was exclusive, which meant that the parties could not contract for greater review. Although the Court suggested that because this was arbitration approved by the District Court that such an agreement could be construed as an order for court annexed arbitration, something the court might due under Fed. Civ. P. R. 16, which allows district courts to enter orders to manage its cases, which would not necessarily be subject to the same limitation. The Court declined to construe this agreement in this manner in this case.

Stevens dissented, and Kennedy joined that dissent. Stevens looked primarily to the purpose of the FAA, which was to allow parties to privately determine how disputes should be resolved without complying strictly with most of the traditional processes of the courts. That the Court should now say that the statutory language does not allow the parties to contract for these processes turns the FAA on its head.

Rick is much more of an expert on arbitration, so he may correct me, but the result here seems surprising and seems somewhat troubling to me. Could arbitration agreements that provide for court-like procedural protections violate the FAA? Maybe the distinction would be that review is clearly provided for by the FAA, while it is nearly silent on what an arbitration agreement might contain. The only provision that governs the content provides a default rule for selection of the arbitrator, but it explicitly allows the parties to contract for a different procedure. Additionally, the FAA explicitly provides that arbitration contracts will not be enforced if doing so would would violate the law of contracts. Still, viewing the FAA as a ceiling rather than a floor for the procedures used in arbitration and requiring that ceiling to remain well below the procedures a court would use might cast some doubt on decisions that have refused to enforce agreements for not providing enough procedures to satisfy due process.



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» Legal Rights That Are Protected In Courts, May Well Be Lost In An Arbitration from Boston ERISA Law Blog
I havent commented in the past on this, because there was too much else going on directly on point with ERISA. However, as many of you may know, the Supreme Court issued an opinion a week or two back in... [Read More]

Tracked on Apr 7, 2008 10:13:37 AM


I had mixed feelings about this issue and still don't have a strong opinion, but I don't think the decision is either surprising or worrisome.

The crux is that the FAA contains a very narrow list of grounds for vacating an arbitration award. The parties to this case attempted to expand that list — that is, they tried to change the district court’s jurisdiction. I can see why the majority rejected that attempt, even though I can also appreciate the dissent’s notion that the real thrust of the FAA is to enforce private agreements and to protect them from uninvited judicial interference.

One possible explanation for the Court’s narrow interpretation could be a subsidiary issue. In addition to the statutory grounds in Sec. 10, many courts have created extra-statutory grounds for overturning awards, chiefly “manifest disregard of the law” and public policy. That development is highly controversial. The Court hasn’t directly addressed it. In this decision, however, the majority gives some strong hints that the statutory list is exclusive. It suggests that “manifest disregard” is nothing more than the cumulative effect of the listed factors (a theory that would be very hard to explain) or a short-hand reference to some of those specific factors.

If that reading of the opinion is correct, the result would be to narrow the scope of judicial review in practice, not merely to prevent the parties from expanding the scope of judicial review.

Posted by: Dennis | Mar 25, 2008 10:55:56 AM

The case was perfectly set to go the other way because it was a post-dispute agreement to arbitrate some of the issues in ongoing litigation. In other words, it was a real, voluntary agreement to arbitrate a dispute that in fact was bargained by the parties. That the Court found this to violate the FAA is just the most recent example of a long line of cases interpreting the FAA as something that has little to do with voluntary agreements to arbitrate. Instead, the FAA has been transformed into a way to sweep court dockets, even in face of the real choice of parties who really agreed to arbitrate.

It is more than a little ironic that, at common law, agreements to arbitrate were unenforcible so that courts could hear cases and now the FAA has been construed to come full circle to make unenforcible agreements to arbitrate that provide for access to court for judicial review.

The FAA should be repealed and replaced with a new statute that rejects the entire gloss the Supreme Court has put on the FAA and, instead, simply makes real, voluntary agreements to arbitrate enforcible in the federal courts. In other word, readopt the original FAA, stripped of its misconstruction by the Supreme Court.

Posted by: Mike Zimmer | Mar 25, 2008 8:19:42 PM

I fear that Mike reads more into Hall Street than is really there. The Court would have been perfectly willing to enforce this "real, voluntary agreement to arbitrate a dispute that in fact was bargained by the parties" if it had not tried to expand the district court's jurisdiction beyond that specified in the statute. Reasonable people can disagree about whether the Sec. 10 list of grounds for vacatur should be read as exclusive --- as I wrote, I have mixed feelings myself --- but reading this 6-3 decision (written by Souter with Ginsburg joining the majority!) as part of some nefarious scheme to rewrite the FAA is a little over-heated. Take a few deep breaths and get a good night's sleep, Mike, and you'll feel better in the morning.

Posted by: Dennis | Mar 26, 2008 6:22:23 AM

I'm no labor and employment lawyer, but another important facet of the case is whether it does away with all non-statutory grounds for vacatur, including "manifest disregard of the law" and "violation of public policy," the latter of which has been used to vacate arbitration awards in the employment context. The sweeping language used in the majority opinion arguably throws those babies out with the bathwater.

Posted by: D. Todd Smith | Mar 26, 2008 6:43:24 AM

It is hard to argue with the Supremes here given the mandatory language it cites to in the FAA. The more interesting question is whether the result would be the same in labor arbitration. I think not.
For those interested, I provide more details on my March 26, 2008 blog posting as well as a link to a law review article I wrote about this very issue.
Mitch Rubinstein
Adjunct Prof, St. John's Law School and New York Law School

Posted by: Mitchell Rubinstein | Mar 26, 2008 7:40:27 AM

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