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In a case of first impression, the Pennsylvania Superior Court held that a provision for de novo review of an arbitration award is unenforceable under Pennsylvania law.
In Trombetta v. Raymond James Financial Services, Inc., Nos. 1250 WDA 2005, 1347 WDA 2005, 2006 WL 2424873 (Pa. Super. Ct. Aug. 22, 2006), Trombetta sued Raymond James for allegedly mismanaging his investment account. The parties went to arbitration, where the panel rendered an award in favor of Raymond James.
Trombetta challenged the award by seeking judicial review pursuant to the arbitration agreement’s provision for de novo review of arbitrator decisions. The trial court denied de novo review and confirmed the award using a “manifest disregard for the law” standard of review.
On appeal, as an initial matter, the Court concluded that Pennsylvania law, rather than the Federal Arbitration Act (“FAA”), governed the enforceability of the de novo review clause because “standards of review are an inherently procedural mechanism used to facilitate judicial resolution of controversies after the underlying arbitration agreement already has been enforced in accordance with the FAA.”
Faced with a case of first impression, the Court conducted a “careful review” of case law from other jurisdictions and analyzed several Pennsylvania cases discussing judicial review of arbitration awards. Based on this analysis, the Court held that “de novo review clauses contained in arbitration agreements are unenforceable as a matter of law in Pennsylvania.” As such, the Court affirmed the trial court’s denial of de novo review.
Arguing for de novo review, Trombetta cited Pennsylvania case law holding that parties are free to contract for a heightened standard of review pursuant to Pennsylvania’s now-repealed 1927 Arbitration Act. However, as the Court explained, that standard of review allows modification only if the award “is contrary to law and is such that had it been a verdict of a jury the court would have entered a different judgment or a judgment notwithstanding the verdict.” The Court found no authority for expanding “this legislatively prescribed limited legal review to allow expansive de novo review of an arbitration panel’s legal conclusions.”
The Court cited two practical reasons for not enforcing de novo review clause. First, the Court found that de novo review would discourage the use of arbitration by reducing its efficiency. Second, the Court was troubled by the lack of established procedures for de novo review of an arbitration award.
The Court’s opinion closes the door on blanket de novo review of arbitration awards only under Pennsylvania law. This holding does not involve the use of the FAA to review awards. And it does not preclude parties from agreeing that the arbitrator must follow the law, thus ensuring a statutory basis for challenging a legally flawed award – namely, that the arbitrators exceeded their powers. Courts routinely recognize the enforceability of an agreement that the arbitrator must follow the law. See, e.g., LaSalla v. Doctor’s Associates, Inc., 898 A.2d 803, 810 (Conn. 2006) (noting that “parties are free to bargain for whatever terms they choose, including a provision establishing a system of arbitral precedent”); Welch v. Kotch, No. A-0390-05T3, 2006 WL 1506957 (N.J. Super. App. Div. June 2, 2006) (citing agreement that required the arbitrator “to decide issues in accordance with New Jersey law”).
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