July 30, 2015 Articles

Developments on Judicial Review under the FAA after Hall Street

By Theodore K. Cheng

In Hall Street Associates, L.L.C. v Mattel, Inc., 552 U.S. 576, 581–84 (2008), the U.S. Supreme Court held that the grounds provided under the Federal Arbitration Act (FAA) for vacating or modifying arbitration awards are exclusive and may not be supplemented by an agreement of the parties. In holding that parties cannot contractually expand judicial review of arbitration awards under the FAA beyond what is provided for in the statute, the Court explicitly noted that it was addressing only "the scope of the expeditious judicial review under §§ 9, 10, and 11, deciding nothing about other possible avenues for judicial enforcement of arbitration awards," such as "enforcement under state statutory or common law." Hall St., 552 U.S. at 590. However, the Court also tacitly left open the question of whether parties could increase the level of judicial review or, alternatively, limit the scope of judicial review or even waive or eliminate it altogether. These issues have begun percolating through the circuit courts since Hall Street, and the following decisions illustrate some of these jurisprudential developments.

Increasing the Level of Judicial Review
One interpretation of the language in Hall Street that left open "other possible avenues" for judicial enforcement of arbitration awards under other authority focuses on whether it would permit parties to contractually demand a more searching examination of arbitration awards by a reviewing court. At least one court has disagreed. In Campbell's Foliage, Inc. v. Federal Crop Insurance Corp., 562 F. App'x 828 (11th Cir. 2014), Campbell's, a nursery, purchased a multiple peril crop insurance (MPCI) policy from the Rural Community Insurance Company (RCIC) to insure its crops against any losses caused by excess moisture during the 2008 crop year, which ran from June 1, 2007, through May 31, 2008. MPCI policies are issued pursuant to the terms of the Federal Crop Insurance Act (FCIA), 7 U.S.C. § 1501; underwritten by the Federal Crop Insurance Corporation (FCIC); and managed by the Risk Management Agency of the U.S. Department of Agriculture. In July 2007, following an adverse weather event, Campbell's filed a claim under the policy. The RCIC denied the claim, concluding that the policy was void because of Campbell's failure to pay outstanding premiums for the prior year's policy. In May 2011, Campbell's filed suit for breach of contract and for a declaratory judgment. In response, RCIC moved to compel arbitration under the arbitration clause of the policy. The district court granted the motion after finding that the arbitration clause fell within the FAA and also retained jurisdiction to enforce or vacate any arbitration award. The arbitrator subsequently ruled in favor of the RCIC, determining that Campbell's did not have insurance coverage for the 2008 crop year.

Campbell's thereafter filed a motion to vacate the award, conceding that none of the grounds enumerated in FAA § 10 existed, but contending that the MPCI policy expanded the scope of judicial review. Specifically, section 20(c) of the policy provided: "Any decision rendered in arbitration is binding on you and us unless judicial review is sought in accordance with section 20(b)(3) [of the policy]. Notwithstanding any provision in the rules of [the American Arbitration Association], you and we have the right to judicial review of any decision rendered in arbitration." Campbell's Foliage, 562 F. App'x at 830. Campbell's contended that the foregoing language authorized the court to review the entire award, including all factual and legal determinations made by the arbitrator. The district court, however, denied the motion, finding that the four statutory grounds enumerated in FAA § 10 were the only bases upon which an arbitration award could be vacated. Relying on Hall Street, the court concluded that the judicial review provided in the policy referred to the kind of limited review contemplated by FAA § 10. Thus, because Campbell's had not raised any of the FAA's four statutory grounds for vacatur, the court found that the nursery was not entitled to relief.

On appeal, Campbell's argued that the district court had erred by determining that the four statutory grounds were the only bases on which it could vacate the arbitration award. Specifically, according to Campbell's, because the FCIC had drafted section 20(c) of the policy pursuant to the FCIA, that statutory provision constituted outside authority providing for a more searching review, as contemplated under Hall Street. Characterizing the issue presented as one of first impression nationwide, the Eleventh Circuit disagreed. Although the court acknowledged that section 20(c) was codified in the federal regulations, and that the policy was legally a contract, in its view, the Supreme Court had not intended for a contract to provide an independent basis for the enforcement of an arbitration award. In the appellate court's words, "Parties that want their arbitration agreements enforced by an authority that allows for more expansive judicial review must specifically designate such state statutory or common law alternatives to the FAA in their arbitration agreements." Campbell's Foliage, 562 F. App'x at 832. Here, the FCIC had not designated state or common law as the controlling law for enforcing arbitration awards in section 20(c) of the policy. Consequently, the FAA alone applied to enforce the arbitration agreement in this case, and the district court had not erred by concluding that the four enumerated grounds in FAA § 10—none of which was the basis for Campbell's vacatur motion—were the only ones upon which the award could be vacated.

Waiving or Eliminating Review by Contract
In contrast to an attempt to increase the level of judicial scrutiny, parties may try to contractually waive or eliminate altogether the statutory grounds for vacatur under the FAA by agreeing that the award will be "final, binding, and non-appealable" in their arbitration clauses. Such language has two possible constructions. First, it could be understood to divest the federal courts of jurisdiction to review the arbitration award on any ground, including those enumerated in FAA § 10. See, e.g., Bowen v. Amoco Pipeline Co., 254 F.3d 925, 931 (10th Cir. 2001) (noting in dicta that "parties to an arbitration agreement may eliminate judicial review by contract"). Second, language waiving or eliminating review under the FAA could be understood to preclude only federal court review of the merits of the arbitrator's decision, and not to eliminate the parties' right to seek review of the decision under FAA §§ 9–11. See, e.g., Southco, Inc. v. Reell Precision Mfg. Corp., 331 F. App'x 925, 926–28 (3d Cir. 2009) (holding that a clause providing that the arbitration is "final, binding and non-appealable . . . without any right by any party to a trial de novo . . . signifies that the parties to the contract may not appeal the merits of the arbitration; not that the parties agree to waive a right to appeal the district court's judgment confirming or vacating the arbitration decision"); Rollins, Inc. v. Black, 167 F. App'x 798, 799 n.1 (11th Cir. 2006) ("A 'binding, final, and non-appealable' arbitral award does not mean the award cannot be reviewed. It simply means the parties have agreed to relinquish their right to appeal the merits of their dispute[.]"); Hoeft v. MVL Grp., Inc., 343 F.3d 57, 63–66 (2d Cir. 2003) (holding that an arbitration clause providing that the award "shall be binding and conclusive upon each of the parties hereto and shall not be subject to any type of review or appeal whatsoever" could not deprive the federal courts of their statutory and common law authority to review both the substance of the awards and the arbitral process for compliance with FAA § 10), overruled on other grounds by Hall Street Assocs., L.L.C. v. Mattel, Inc., 552 U.S. 576 (2008).

The Ninth Circuit recently weighed in on this developing jurisprudence in the context of an appeal by the plaintiffs' counsel in a wage-and-hour multidistrict class action from the district court's confirmation of an arbitration award allocating their attorney fees and denial of their motion to vacate the award. Specifically, the court addressed a question of first impression in that circuit, namely, the enforceability of a nonappealability clause in an arbitration agreement that eliminated all federal court review of arbitration awards, including review under FAA § 10. See In re Wal-Mart Wage & Hour Emp't Practices Litig., 737 F.3d 1262 (9th Cir. 2013). (In a separate opinion issued the same day, the Ninth Circuit affirmed the district court on the merits, namely, its confirmation of the arbitration award and denial of the motion to vacate. See In re Wal-Mart Wage & Hour Emp't Practices Litig., 550 F. App'x 373 (9th Cir. 2013).) There, the parties to the litigation had participated in a mediation that resulted in a global settlement of all claims, along with an agreement that any fee disputes among the plaintiffs' counsel would be subject to arbitration. Although the settlement agreement was approved by the district court and affirmed on appeal, the relationships among the plaintiffs' counsel had deteriorated over the proper allocation of the fee award. Unable to resolve their dispute, they submitted it to "binding, non-appealable arbitration" before the arbitrator, as provided in the settlement agreement. The arbitrator issued an opinion allocating the fee award among the various counsel, and the district court subsequently confirmed that award.

On appeal, the Ninth Circuit addressed the construction of the phrase "binding, non-appealable arbitration," holding that the statutory grounds for vacatur under the FAA may not be waived or eliminated by contract. Hewing to the text of the statute, the court determined that it "compels the conclusion that these grounds are not waivable, or subject to elimination by contract." In re Wal-Mart Wage & Hour, 737 F.3d at 1267. In the court's view, the statute—which mandates that a court "must" confirm an arbitration award unless, among other things, it is vacated under FAA § 10—"'carries no hint of flexibility' and 'does not sound remotely like a provision meant to tell a court what to do just in case the parties say nothing else.'" In re Wal-Mart Wage & Hour, 737 F.3d at 1268 (quoting Hall St., 552 U.S. at 587). The court also concluded that permitting parties to contractually eliminate all judicial review of arbitration awards would frustrate Congress's attempt to ensure a minimum level of due process for the parties to an arbitration.

Campbell's Foliage essentially represented a party's attempt to expand the bases for review under the FAA, although the argument was couched in terms of increasing the level of judicial scrutiny over arbitration awards. As the Eleventh Circuit concluded in that case, a court may construe such attempts to run afoul of Hall Street. In re Wal-Mart Wage & Hour may also likely demonstrate that courts are not receptive to the concept of parties contractually waiving or eliminating altogether the statutory grounds for vacatur under the FAA, which appears to deprive federal courts of their core review function over arbitration awards under the statute. In Hoeft, the Second Circuit held that the grounds for vacatur in FAA § 10 "represent a floor for judicial review of arbitration awards below which parties cannot require courts to go, no matter how clear the parties intentions." 343 F.3d 57, 64 (2d Cir. 2003). It is left to the decisional law in the federal courts to provide the contours for precisely what types of outside authority parties can rely upon, if any, to modify the grounds for vacating an arbitration award.

Keywords: litigation, ADR, alternative dispute resolution, arbitration, award, contract, judicial review, vacatur, modify, expand, increase, limit, waive, eliminate

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