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The Federal Arbitration Act (“FAA”) provides four statutory grounds for vacating an arbitration award:

1. where the award was procured by corruption, fraud, or undue means;
2. where there was evident partiality or corruption in the arbitrators, or either of them;
3. where the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy; or of any other misbehavior by which the rights of any party have been prejudiced; or
4. where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made.

In the First, Third, Fourth, Fifth, and Sixth Circuits, however, parties to an arbitration agreement may agree to non-statutory grounds for vacating arbitration awards. Parties in the Ninth and Tenth Circuits, on the other hand, may not make such agreements and are, instead, constrained by the four statutory grounds in the FAA.

This fall, the United States Supreme Court will consider the split in authority in the case of Hall Street Associates, L.L.C. v. Mattel, Inc. In addressing this question, the Court will be confronted with a philosophical dilemma concerning the purpose of the FAA: Is the purpose of the FAA to give effect to the contracting parties’ agreements or is it to encourage the expeditious and efficient resolution of disputes?

The Case

This case arose from a property lease between Petitioner Hall Street and Respondent Mattel, for a property containing a well with water apparently contaminated by trichloroethylene. Hall Street alleged Mattel was required to test the well water for contaminates under the Oregon Drinking Water Quality Act (“ODWQA”), but had failed to do so.

Hall Street filed suit in Oregon state court claiming, among other things, that Mattel be required to indemnify it from all actions by any parties relating to the condition of the property. Mattel removed the case to the United States District Court for the District of Oregon. After an unsuccessful attempt to settle the case through mediation, the parties informed the District Court that they would seek the court’s approval of an agreement to arbitrate and that such agreement would allow for de novo review of the arbitrator’s legal rulings.

The case proceeded to arbitration under the judicially approved arbitration agreement. The arbitrator initially found that Mattel had violated the ODWQA, but that it had not violated any applicable environmental laws. Mattel was not therefore liable to indemnify Hall Street because of a contractual exception that excluded liability if Mattel was in compliance with applicable environmental laws.

Hall Street moved to vacate the arbitrator’s award, seeking de novo review of the arbitrator’s legal conclusion that Mattel’s alleged violation of the ODWQA was not in violation of an applicable environmental law. The District Court ruled that the arbitrator’s conclusion on this point was erroneous. On remand, the arbitrator entered an amended decision in Hall Street's favor based on the District Court’s ruling.

The Appeal

Mattel appealed the District Court’s enforcement of the parties’ agreement that the arbitrator’s conclusion of law could be reviewed de novo, arguing that, under the Ninth Circuit’s en banc decision in Kyocera v. Prudential-Bache Trade Services, Inc., 341 F.3d 987 (9th Cir. 2003), the FAA did not permit judicial review of an arbitrator’s decision beyond the four statutory grounds outlined in the FAA. The Ninth Circuit agreed with Mattel and reversed the District Court’s vacatur of the arbitrator’s initial award, noting that, under Kyocera, the terms of an arbitration agreement controlling the mode of judicial review are unenforceable and severable.
On remand, the District Court once again reversed the arbitrator’s initial award, finding that the arbitrator had exceeded his powers within the meaning of 9 U.S.C. §10 because the award was based on an implausible interpretation of the lease agreement. Mattel again appealed to the Ninth Circuit. The Ninth Circuit once again reversed the District Court, holding that “implausibility” is not a valid ground for voiding an arbitration award under either 9 U.S.C. §§ 10 or 11.

After the Ninth Circuit denied en banc review, Hall Street petitioned the United States Supreme Court for a writ of certiorari. The Court granted review and scheduled to hear arguments this coming fall.

The Issue

The issue before the Court is relatively straight forward—may parties to an arbitration agreement agree to non-statutory grounds for vacating an arbitration award (including de novo review of legal findings)?

The First, Third, Fourth, Fifth, and Sixth Circuits all appear to answer the question in the affirmative. See, e.g., Puerto Rico Telephone Co., Inc. v. U.S. Phone Mfg. Corp., 427 F.2d 21 (1st Cir. 2005), cert. denied, 126 S.Ct. 1785 (2006); Roadway Package System, Inc. v. Kayser, 257 F.3d 287 (3rd Cir. 2001), cert. denied, 534 U.S. 1020 (2001); Syncor Int’l Corp. v. McLeland, 120 F.3d 262 (4th Cir. 1997), cert. denied, 522 U.S. 1110 (1998); Gateway Technologies, Inc. v. MCI Telecommunications Corp., 64 F.3d 993 (5th Cir. 1995); Jacada, Ltd. v. Int’l Mktg. Strategies, 401 F.3d 701 (6th Cir.), cert. denied, 126 S.Ct. 735 (2005).

The Ninth and Tenth Circuits disagree. See Kyocera v. Prudential-Bache Trade Services, Inc., 341 F.3d 987 (9th Cir. 2003) and Bowen v. Amoco Pipeline, Inc., 254 F.3d 925 (10th Cir. 2001).

This simple legal issue, however, is premised on a fundamental philosophical divide concerning the purpose of the FAA. Those courts favoring expanded review of arbitration awards argue that the FAA’s ultimate purpose is to enforce the terms of the arbitration agreement. Those courts with a narrow interpretation of the FAA contend that allowing private parties to contract for broader review standards would “jeopardize the very benefits of arbitration, rendering informal arbitration merely a prelude to a more cumbersome and time-consuming judicial review process.” Kyocera, 341 F.3d at 999.

Impact on International Arbitration

While Hall Street Associates, L.L.C. v. Mattel, Inc. is concerned with a domestic arbitration, the Court's consideration of both the legal and philosophical issues to be determined in this case will also have an impact on international arbitration.

With respect to the narrow legal issue, it is important to note that the FAA has been interpreted to permit vacatur of awards in an international arbitration on the same grounds available in domestic cases, at least where the arbitral award is rendered in the United States, and both the confirmation or vacatur is also sought in the United States. See, e.g., Yusuf Ahmed Alghanim & Sons, W.L.L. v. Toys “R” Us, Inc., 126 F.3d 15 (2nd Cir. 1997). How the Court decides the narrow legal issue will, thus, have an impact on the parties’ choice of situs.

With respect to the broader philosophical issue, the Court’s discussion (and ultimate decision) will impact the view of the United States’ commitment to the expeditious and efficient resolution of commercial disputes.