Arbitration may offer a beneficial alternative to litigation by offering faster and less expensive resolution to disputes. There are, however, certain risks inherent in arbitration. Chief among these risks is the possibility that the arbitrator may disregard the law in favor of a factual or subjective analysis, or even make an award that is contrary to established law. In addition, the parties to an arbitration have few bases to have a court review the merits of an arbitrator’s decision. An arbitration award may be reviewed and vacated or modified by a court on limited grounds: where the arbitrators “exceeded their powers,” demonstrated “manifest disregard for the law,” or participated in some type of fraud or corruption such as exhibiting “evident partiality.” Generally speaking, these grounds afford little hope for relief to a party dissatisfied with an arbitration award on the basis that the arbitrator failed to follow the letter of the law. Some parties are now looking to expand the avenues of review by including in their arbitration agreements a contractual expansion of a court’s authority to review the arbitration award and the bases for such review. In particular, many have expressed a desire to have a court review the propriety of an arbitrator’s legal rulings.
On March 5, 2007, we addressed this important issue in connection with the debate of arbitration versus litigation: the ability to contract for expanded judicial review of arbitration awards beyond the review established by the Federal Arbitration Act, state arbitration statutes, and case law. Our previous legal alert highlighted the split among federal circuits with respect to this issue. The First, Third, Fourth, and Fifth Circuits embrace the ability to contractually expand review of arbitration awards; the Ninth and Tenth Circuits refuse to allow expanded review; and the Second, Sixth, Seventh, Eighth, and Eleventh Circuits have not decided the issue (though the first language supporting the expansion of review comes from a district court in the Second Circuit, and the Seventh and Eighth Circuits have indicated disfavor of expansion and suggested that they would follow the Ninth and Tenth Circuits).
On May 29, 2007, the United States Supreme Court granted a writ of certiorari to review an unpublished decision by the Ninth Circuit Court of Appeals in Hall Street Associates, LLC v. Mattel, Inc., No. 06-989. In Hall Street, the parties entered into an agreement to arbitrate following Mattel’s removal of Hall Street’s state court suit to federal court. The parties’ arbitration agreement provided that a court could review the arbitrators’ award without deference to the arbitrators’ factual and legal conclusions. Ultimately, the district court upheld the arbitration award after remanding a previous award due to a “legally erroneous” finding by the arbitrator. The Ninth Circuit reversed and remanded, relying on precedent in that Circuit that the parties could not contractually expand judicial review of the arbitration award. Hall Street sought certiorari to have the Supreme Court resolve this conflict in Circuit authority. The Supreme Court will now review the Circuit split regarding the ability to contract for expanded judicial review of arbitration awards. Arguments are expected in the fall.