June 06, 2018 Articles

Arbitration Agreement Allowing for De Novo Review of an Award Deemed Unenforceable

By Melinda G. Gordon

Citizen Potawatomi Nation and the State of Oklahoma had a tribal-state gaming compact that provided for arbitration of disagreements arising under the compact pursuant to American Arbitration Association (AAA) rules. The parties' arbitration clause permitted either party to bring an action against the other in a federal district court for de novo review of an award.

In Citizen Potawatomi Nation v. Oklahoma, 2018 WL 718606 (10th Cir. Feb. 6, 2018), the U.S. Court of Appeals for the Tenth Circuit invalidated the parties' arbitration agreement and determined that de novo review of an arbitration award in federal court is in contravention of the U.S. Supreme Court decision in Hall Street Associates, LLC v. Mattel, Inc., 552 U.S. 576 (2008). In Hall Street, the Supreme Court precluded the parties to an arbitration agreement from contracting for review of an award beyond the scope set forth under Federal Arbitration Act (FAA) sections 10 and 11. Citizen Potawatomi alerts parties that an arbitration agreement that expands the review of the award beyond what is provided for under the FAA can invalidate the entire agreement.

In Citizen Potawatomi, the parties arbitrated a dispute regarding liquor licensing and an alcohol sales tax. Initially, Oklahoma filed a motion to dismiss the Nation's demand for arbitration, arguing that regulatory disputes between the parties should be adjudicated through administrative proceedings, not arbitration. The arbitrator declined to dismiss the Nation's demand, determining that the matter was arbitrable, and hearings were conducted.

The arbitrator found in favor of the Nation, and the award resulted in the Nation being exempted from $27 million in alcohol sales tax. The Nation moved in federal court to confirm the award. Oklahoma moved to vacate the award, alleging that the arbitrator exceeded his authority and that the state was entitled to de novo review in federal court. The district court, relying on Hall Street, held that parties to an arbitration agreement cannot expand the review of an award beyond what is set forth in the FAA. Citing Hall Street, the district court applied the narrow standard of review articulated in FAA section 10 and confirmed the award. The district court failed to address Oklahoma's argument that the arbitration provision in the compact was invalid if the de novo review provision was found unenforceable under Hall Street.

The Appeal
On appeal, Oklahoma asserted that the district court erred on two grounds. Oklahoma maintained that the district court erred in confirming the award because the award failed to resolve all submitted issues to finality, was fatally vague, and exceeded the arbitrator's powers. Oklahoma also asserted that the district court failed to conduct a de novo review of the merits of the parties' dispute pursuant to the parties' compact. According to Oklahoma, if de novo review is unavailable, the district court should have severed the obligation to engage in binding arbitration from the compact because de novo review is a material aspect of the parties' agreement to arbitrate disputes arising under the compact.

The Tenth Circuit focused on the validity of the compact's requirement to engage in binding arbitration. After an in-depth examination of the compact, the Tenth Circuit determined that the provision for de novo review was material to the parties' agreement to arbitrate disputes and could not be severed from the agreement. According to the Tenth Circuit, under Hall Street, it is clear that the parties may not contract to change the standard of review articulated in section 10 of the FAA. The Tenth Circuit determined that because Hall Street clearly indicates that the compact's de novo review provision is legally invalid and because the obligation to arbitrate is contingent on de novo review, the obligation to arbitrate as set forth in the compact is unenforceable. The Tenth Circuit remanded the matter to the district court for vacatur of the arbitration award. The Tenth Circuit, noting that the parties' arbitration clause derived from Oklahoma's "model tribal gaming compact," declared that addressing this issue has the salutary effect of resolving legal uncertainty for Oklahoma's gaming compacts with other tribes when gaming-related disputes arise.

The Citizen Potawatomi Nation recently announced that it will seek review of the Tenth Circuit's order from the U.S. Supreme Court.

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