Hall Street Associates, L.L.C. v. Mattel, Inc., which the U.S. Supreme Court decided on Tuesday, provides a rather striking example of apparent attorney myopia leading to appellate courts ruling on issues that never should have been presented in the first place.
In many instances, agreements to arbitrate civil disputes are very good things.[1] Arbitration tends to be simpler, quicker and cheaper than resolving disputes via formal litigation. Typically, parties to a contract who want to avoid litigation will include a provision in the written agreement to the effect that any dispute arising under or relating to the contract will be submitted to one or more private arbitrators, selected by the parties, for final and binding resolution.
Back in the day, courts were openly hostile toward private arbitration contracts, so much so that they regularly refused to enforce them. In 1920 the state legislature of New York passed legislation aimed at compelling judicial enforcement of such agreements. Congress followed suit in 1925 with the Federal Arbitration Act (“FAA”), codified at 9 U.S.C. §§ 1-16.
There’s at least one gargantuan risk inherent in arbitration, namely the risk of getting royally screwed over and having no recourse. Arbitrators’ decisions aren’t enforceable all by themselves. If the loser at arbitration refuses to comply, the winner can petition a court for an order confirming the arbitration award. At that point the arbitrator’s decision becomes a court judgment and is enforceable as such.
The FAA provides that a court “must” confirm an arbitration award unless grounds for vacating, modifying or correcting the award exist. 9 U.S.C. § 9. A court may vacate an arbitration award only if: “the award was procured by corruption, fraud, or undue means”; the arbitrator(s) exhibited “evident partiality or corruption”; the arbitrator(s) committed “misconduct” in the form of improperly refusing to postpone a hearing or refusing to consider relevant evidence; or the arbitrator(s) engaged in “other misbehavior” that prejudiced a party’s rights. 9 U.S.C. § 10. A court may “modify[] or correct[]” an award only if the arbitrators: were guilty of “evident material miscalculation of figures or an evident material mistake in the description of any person, thing, or property referred to in the award”; decided “a matter not submitted to them”; or issued an award “imperfect in matter of form not affecting the merits of the controversy.” 9 U.S.C. § 11.
Glaringly absent from the statutory grounds for vacating, modifying or correcting an arbitration award is any provision authorizing a court to correct an arbitrator’s errors of law and/or law application. As the courts have interpreted §§ 10 and 11, such authority is either nonexistent de jure or so ridiculously limited as to be nonexistent de facto.
Therein lies the crap shoot. All too many people who do arbitrations are blithering idiots, and even the very best can make egregious errors of law from time to time. In those cases, the aggrieved party most likely stuck with the arbitrator’s flat-wrong decision thanks to the FAA’s severely restricted rules of judicial review, which are binding on trial courts and appellate courts alike.
Hall St.‘s facts evidence nothing of what’s good about arbitration. Hall St. Associates owned property in Oregon that Mattel leased and used as a manufacturing facility. The lease, which apparently did NOT contain an arbitration clause, provided that Mattel would indemnify Hall St. for any damages arising from the failure of Mattel or predecessor lessees to comply with applicable “environmental laws”. A state agency discovered chemical contaminants on the property, apparently the result of activities conducted by Mattel’s predecessor lessees.
Mattel gave notice of lease termination in 2001. Hall St. responded by filing suit in an Oregon state court: (1) contesting Mattel’s right to terminate the lease; and (2) seeking indemnification for cleanup costs. Mattel removed the case to federal court. The issues were bifurcated and following a bench trial the court ruled in Mattel’s favor on the termination question.
Three years into the litigation, the parties agreed to resolve the indemnity issue via binding arbitration. The trial court approved the parties’ agreement, which included the following provision:
The 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 stipulated standard of judicial review is much broader than that laid out in the FAA. The arbitrator’s findings of fact were subject to “substantial evidence” review, and the parties gave the court plenary power to vacate “erroneous” conclusions of law. That, in essence, is de novo review.
The arbitrator found for Mattel based on the rather boneheaded conclusion that the Oregon Drinking Water Quality Act, the applicable substantive law, wasn’t an “environmental law” for purposes of the lease’s indemnity clause because the statute dealt with human health as opposed to environmental contamination (as if the two were mutually friggin’ exclusive). The trial court, applying the parties’ agreed-upon standard of judicial review, vacated the award. The arbitrator issued a new award, this time for Hall St., based on the trial judge’s conclusion that the Oregon statute at issue qualified as an environmental law.
After much procedural wailing and gnashing of teeth, the U.S. Court of Appeals for the Ninth Circuit held that the parties’ agreement for expanded judicial review of the arbitration award was unenforceable. FAA §§ 10 and 11 provide the exclusive grounds for messin’ with an arbitration award, the Ninth Circuit ruled, and agreements purporting to expand those grounds to include review for substantive legal error are null. The court of appeals ultimately sent the case back to the trial judge with instructions to confirm the original arbitration award for Mattel unless statutory grounds for vacatur, modification or correction existed.
Awhile back I blundered across several trial court and Ninth Circuit opinions in Hall St. while doing research for a rather contentious arbitration dispute my boss was involved in. I also found the U.S. Supreme Court’s order granting certiorari (pdf, 1 page) on the issue:
Did the Ninth Circuit Court of Appeals err when it held, in conflict with several other federal Courts of Appeals, that the Federal Arbitration Act (“FAA”) precludes a federal court from enforcing the parties’ clearly expressed agreement providing for more expansive judicial review of an arbitration award than the narrow standard of review otherwise provided for in the FAA?
After reading the lower court opinions and the cert order, I couldn’t help but ask myself, “How in the mule-fellating hell does this case have ANYTHING to do with the FAA?” After all, there was no arbitration clause in the lease, a fact that rendered irrelevant the FAA’s requirement that courts enforce arbitration agreements. And the stipulation to arbitrate came three years into a contentious and no doubt exceptionally expensive lawsuit, which pretty much forcibly buggers the public policy of encouraging quick and economical dispute resolution via arbitration.
More important, the parties agreed to arbitrate in the course of ongoing litigation and submitted the agreement to the court, which entered an order approving it. Under those circumstances, why isn’t the order approving the stipulation enforceable as a case management order per Rule 16 of the Federal Rules of Civil Procedure? The order approving the parties’ agreement also appears enforceable under the federal Alternative Dispute Resolution Act.
I was more than a little skeeved to discover that a Shrub appointee, Chief Justice Roberts, expressed a similar concern during oral argument. The Chief wondered whether the agreement for expanded judicial review was enforceable as a simple matter of “state contract law,” regardless of what the FAA had to say. That concern raised enough eyebrows that the Court ordered additional briefing on the issues:
(1) Does authority exist outside the Federal Arbitration Act (FAA) under which a party to litigation begun without reliance on the FAA may enforce provision for judicial review of an arbitration award?
(2) If such authority does exist, did the parties, in agreeing to arbitrate, rely in whole or part on that authority?
(3) Has petitioner [Hall St.] in the course of this litigation waived any reliance on authority outside the FAA for enforcing the judicial review provision of the parties’ arbitration agreement?
SCOTUS ultimately decided only the issue originally presented to it, holding (6-3) that parties may not alter by agreement the grounds set forth in FAA §§ 10 and 11 for vacating, modifying or correcting an arbitration award. The Court punted on the supplemental briefing issues, shipping the case back for consideration of whether any non-FAA basis for enforcing the agreement exists and, if so, whether Hall St. waived its right to rely on any such basis by not raising it in the trial court.
Professor Sarah Cole of Ohio State’s Moritz College of Law provides some interesting and incisive commentary on Hall St. here and here. Professor Cole opines — correctly, IMO — that Hall St. officially kills most nonstatutory bases for vacating an arbitration award mentioned in federal court decisions (“totally irrational,” “public policy” and “arbitrary and capricious”). She also has some interesting commentary regarding the fate of the Court’s [in]famous “manifest disregard” of the law dictum from Wilko v. Swan, 346 U.S. 427 (1953), overruled on other grounds, Rodriguez de Quijas v. Shearson/American Express, Inc., 490 U.S. 477 (1989).
For me, though, Hall St. is noteworthy not so much for the ruling but for how it got to SCOTUS in the first place. In moving to vacate the original arbitration award, Hall St.’s lawyers rode their best horse, namely the agreement allowing full review for legal errors. By way of opposition, Mattel rode its best horse, namely the argument that the FAA supplies the exclusive grounds for vacating an arbitration award. From that point on, everyone (courts and lawyers alike) focused exclusively on what the FAA does or doesn’t allow. The participants appear to have looked right past an argument that, to a procedure geek at least, jumps off the page and to my eye looks like a slam dunk for Hall St., namely that the court-approved stipulation is enforceable independent of the FAA per the ADR Act and Civil Rule 16.
Would the petitioner have won in the lower courts had its attorneys not developed FAA tunnel vision? There’s no way to tell, of course, but I suspect so. In that event, this case likely wouldn’t have aroused much interest from SCOTUS at all, certainly not the four votes worth of interest required for a grant of certiorari.
As matters now stand, though, there’s a substantial likelihood that Hall St. will lose. The lower courts are surely anxious to be done with this case, which renders Mattel’s chances of succeeding with a waiver argument on remand pretty damn good.
Lesson for n00b lawyers (all lawyers, for that matter): never let the other side dictate the terms of the debate. Analyze the issues. Look hard for alternative arguments. They’re there. If you can’t see any alternatives yourself, get help. Consider the alternatives thoroughly before rejecting them.
[1] I’m speaking here of real arbitration agreements, the sort reached as the result of arm’s length bargaining among parties of relatively equal strength. Arbitration clauses slipped into credit card agreements or insurance policies that the customer sees only after signing up are a whole ‘nother kettle o’ fish.
Subject to Complete Defeasance 