The United States Supreme Court has held that the statutory grounds for vacating or modifying an arbitration award under the Federal Arbitration Act (FAA) are exclusive. Accordingly, parties cannot obtain heightened judicial review under the FAA by drafting an arbitration agreement that supplements the statutory grounds for vacatur. However, the Court allowed for the possibility that heightened review of arbitration awards may be available outside of the FAA.

In Hall Street Associates, L.L.C. v. Mattel, Inc., No. 06-989, 2008 WL 762537 (Mar. 25, 2008), Mattel leased a manufacturing site from Hall Street. Following the discovery of environmental contamination, Mattel notified Hall Street of its intent to terminate the lease.

Hall Street subsequently filed a lawsuit, contesting Mattel's termination of the lease and seeking indemnification for clean-up costs. After the district court resolved the termination issue in Mattel's favor, the parties agreed to submit the indemnification dispute to arbitration under an agreement providing that "[t]he 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 arbitrator decided the indemnification dispute in Mattel's favor based on his conclusion that the Oregon Drinking Water Quality Act is not an environmental law. Hall Street filed a motion to vacate the award, arguing that the arbitrator's conclusion of law was erroneous. The district court vacated the award and remanded the matter to the arbitrator.

On remand, the arbitrator issued an award in Hall Street's favor. The district court upheld the substance of the second award, but on appeal, the Ninth Circuit Court of Appeals held that the arbitration agreement's provision for judicial review for errors of law was unenforceable based on the Ninth Circuit's en banc decision in Kyocera Corp. v. Prudential-Bache Trade Services, Inc., 341 F.3d 987 (9th Cir. 2003).

The Supreme Court granted certiorari "to decide whether the grounds for vacatur and modification provided by §§ 10 and 11 of the FAA are exclusive." As the Court noted, there has been a circuit split on this issue.

Hall Street raised two essential arguments in support of its position that the FAA grounds for vacatur/modification are not exclusive. First, Hall Street pointed out that "manifest disregard of the law" widely regarded as basis for vacatur is not among the statutory grounds. In rejecting this argument, the Court suggested, without directly stating, that "manifest disregard" fits within the statutory framework as an instance of either arbitrator misconduct or an arbitrator exceeding their powers.

Second, Hall relied on the freedom of contract principles underlying the FAA in arguing for the enforceability of the agreement's judicial review provision. The Court rejected this argument on the basis that freedom of contract can not override the statutory text. Specifically, the Court reasoned that the language of section 9
requiring award confirmation "unless the award is vacated, modified, or corrected as prescribed in sections 10 and 11" "carries no hint of flexibility." Similarly, the Court relied on the principle of ejusdem generis in concluding that vacatur under the FAA requires something more egregious than legal error.

Based on the statutory language, the Court held that sections 10 and 11 "provide the FAA's exclusive grounds for expedited vacatur and modification." However, the Court allowed for the possibility that some authority outside the FAA could pave the way heightened judicial review. Since this issue was not addressed by the lower courts, the Court remanded the case with instructions to address the availability of heightened review under the case management authority derived from Rule 16 of the Federal Rules of Civil Procedure.

There were two dissenting opinions. Justice Stevens authored a dissenting opinion, joined by Justice Kennedy, stating that sections 10 and 11 "are best understood as a shield meant to protect parties from hostile courts, not a sword with which to cut down parties' 'valid, irrevocable and enforceable' agreements to arbitrate their disputes subject to judicial review for errors of law." Justice Breyer authored a dissenting opinion concluding that remand was unnecessary since all of the justices agreed that the FAA does not entirely foreclose the judicial review called for by the parties' agreement.

The Court's decision leaves behind an important question: Setting aside the "manifest disregard" standard, which some courts have already pigeonholed into the FAA, see, e.g., U.S. ex rel. Watkins v. AIT Worldwide Logistics, Inc., 441 F.Supp.2d 762 (E.D. Va. 2006), what is the status of other vacatur grounds that courts have treated as non-statutory?

For example, under the FAA, can a court vacate an arbitration award on the ground that it violates public policy? The answer, of course, turns on whether public policy fits within the statutory framework of the FAA. Cf. K.R. Swerdfeger Construction, Inc. v. Board of Regents, 142 P.3d 962, 967 (N.M. Ct. App. 2006) ("Our case law does not support KRSC's argument that broad notions of public policy inform the determination of whether arbitrators 'exceeded their powers' within the meaning of [the UAA].")

In a similar vein, the Court's decision leaves room for parties to guard against legal error so long as they do so within the statutory framework of the FAA. Specifically, parties can guard against legal error by agreeing that the arbitrator must follow the law a la Rule 20(D) of the National Arbitration Forum Code of Procedure.

That way, if the arbitrator disregards or misapplies the law, the award is subject to vacatur on the ground that the arbitrator exceeded his powers. See, e.g., KeyClick Outsourcing, Inc. v. Ochsner Health Plan, Inc., 946 So.2d 174 (La. Ct. App. 2006) (finding that arbitrator exceeded his powers by misapplying the law where the arbitration agreement provided that "[t]he arbitrator shall have no authority to make material errors of law"). Judge Posner recently distinguished this method of obtaining heightened review from the one at issue in the Mattel case. See Edstrom Industries, Inc. v. Companion Life Insurance Co., 516 F.3d 546, 550 (7th Cir. 2008) ("The question in our case is different [from the question in Mattel]. It is whether the arbitrator can be directed to apply specific substantive norms and held to the application.").

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