Hall Street Associates, L.L.C. v. Mattel, Inc. (06-989)
Oral argument: November 7, 2007
Appealed from: United States Court of Appeals, Ninth Circuit (August 1, 2006)
FEDERAL ARBITRATION ACT, ARBITRATION, CONTRACT LAW, LEASE AGREEMENT
In 2000, Hall Street Associates filed suit seeking declaratory relief and damages from Mattel, Inc. for its failure to indemnify Hall Street for the cost of cleaning up water contamination at a toy manufacturing facility Mattel leased from Hall Street.� After litigation began, the parties agreed to arbitrate some of the issues in dispute. They signed an agreement allowing either party to appeal the arbitrator's decision in court if it contained errors of law or unsubstantiated findings of fact.� Subsequently, the Ninth Circuit ruled in a separate case that any arbitration provisions giving courts more review power than that granted to them in the Federal Arbitration Act (FAA) were invalid.� Since the provisions of the arbitration agreement between Hall Street and Mattel went beyond those in the FAA, the Ninth Circuit invalidated the District Court's decision to review the arbitrator's findings according to the parties' provisions.� At issue here is whether the FAA provides the sole grounds for judicial review of arbitration awards.� Hall Street maintains that it is consistent with the spirit of the FAA and in the best interests of encouraging arbitration for courts to recognize all grounds for judicial review agreed upon by the parties, whether or not they go beyond those contained in the FAA.� Mattel's position is that the best way to preserve the integrity of arbitration proceedings is to limit the review power of courts to the grounds contained in the FAA. Because the Supreme Court's decision in this case will affect the amount of freedom disputing parties have in crafting their arbitration agreements, ultimately it may affect whether parties choose to undergo the arbitration process at all.
Did the Ninth Circuit Court of Appeals err when it held, in conflict with several other federal Courts of Appeals, that the Federal Arbitration Act ("FAA") precludes a federal court from enforcing the parties' clearly expressed agreement providing for more expansive judicial review of an arbitration award than the narrow standard of review otherwise provided for in the FAA?
Whether the Federal Arbitration Act sets forth the sole grounds for judicial review of arbitration awards, or whether parties may agree on additional and broader grounds for such review.
The present dispute between these parties concerns whether a clause in their arbitration agreement guaranteeing judicial review of an arbitrator's decision is valid under the Federal Arbitration Act (9 U.S.C. �� 1-16) (FAA).� Hall Street Associates owned property leased by Mattel and sought a ruling that Mattel was required to meet various contractual lease obligations.� Hall Street Associates v. Mattel, Inc., 145 F. Supp. 2d 1211, 1213 (D. Ore. 2001).� After the Court for the District of Oregon decided one issue, the parties agreed to arbitrate the remaining issues, including whether Mattel had to meet water testing requirements on the property and indemnify Hall Street for the costs of environmental cleanup.� Brief for Petitioner at 4-7.� The main question concerned Mattel's contractual responsibility for contamination caused by the prior tenant's use of trichloroethylene.� Brief for Respondent at 9-10.��
The arbitrator decided in favor of Mattel, finding it in compliance with all environmental laws pertaining to the leased premises.� Brief for Respondent at 10.� Hall Street appealed the arbitrator's decision to the federal court, as permitted under the arbitration agreement. Brief for Petitioner at 5.� The District Court found that the arbitrator made an error of law in one of its findings for Mattel and remanded to the arbitrator, who then amended his decision to award Hall Street with an indemnity from Mattel.� Id. at 7-9.
After both sides appealed the district court's ruling, the Ninth Circuit invalidated the amended award in accordance with Kyocera Corp. v. Prudential-Bache Trade Services, Inc..� Hall Street Associates v. Mattel Inc., 113 Fed. Appx. 272, 273 (9th Cir. 2004).� In Kyocera the Ninth Circuit held that the grounds set forth in the FAA for judicial review are the sole grounds parties may rely on in appealing an arbitration award.� See 341 F.3d 987, 944 (9th Cir. 2003)(en banc).� Section 10 of the FAA provides that a District Court may vacate an arbitration award when it is "procured by corruption [or] fraud," when there is "partiality or corruption in the arbitrators," when they are "guilty of misconduct," or when they "exceeded their powers."� Under Section 11, a court may modify an arbitration award when there is a "material miscalculation," when the arbitrators rule on a matter outside their scope of authority, or "where the award is imperfect in matter of form."
The Ninth Circuit struck down the District Court's review of the parties' arbitration agreement because the grounds for review went beyond those contained in Sections 10 and 11 of the FAA.� See Hall Street Associates, 113 Fed.Appx. at 273, n. 3 (quoting Kyocera, 341 F.3d at 994).� The court remanded the case to the District Court with an instruction to confirm the arbitrator's initial award unless it found reasons to vacate or modify it under the FAA.� Id. at 273.� The District Court again failed to enforce the initial award, finding the arbitrator's interpretation of applicable environmental laws "implausible."� Hall Street Associates v. Mattel Inc., 196 Fed.Appx. 476, 477 (9th Cir. 2006).� On appeal, the Ninth Circuit found that since "[i]mplausibility is not a valid ground for avoiding an arbitration award under either 9 U.S.C. �� 10 or 11" the District Court's decision was in error.� Id. at 477.� The case was again remanded with instructions for the District Court to enforce the original award in favor of Mattel.� Id. at 479.�
After the Ninth Circuit refused to grant en banc review of its decision, Hall Street filed a petition for writ of certiorari to the Supreme Court, which it granted on May 29, 2007.� Brief for Petitioner at 11-12.� ��
The central argument in this case is whether the grounds for judicial review of arbitration awards set forth in the Federal Arbitration Act are the exclusive grounds parties may rely on in seeking review of an arbitrator's findings.� Mattel argues that allowing a court to vacate or modify an award according to the agreement between the parties involved would violate the terms of the FAA and lead to confusion in the judicial system.� Brief for Respondent at 19-21.� Hall Street contends that it is in furtherance of the goals of the FAA to allow parties to stipulate to expanded grounds for judicial review beyond those contained in the Act.� Brief for Petitioner at 13.
The outcome of the parties' dispute in this case may influence the continued use of arbitration, which is an increasingly popular alternative to litigation in a variety of areas.� Contract disputes concerning leases like the one in this case are frequently submitted to arbitrators, as are medical malpractice claims, disputes between companies and labor unions, employment discrimination claims, and more.� American Medical News, "Arbitrate, Not Litigate: A Growing And Popular Alternative To Lawsuits," Aug. 27, 2007; msnbc.com, "Delta Pilots Make Case At Arbitration Hearing."� According to the National Arbitration Forum, the Federal Trade Commission, and organizations that arrange for and facilitate alternative dispute resolution, this is because arbitration is a quick, easy and cost-effective substitute to litigation.� It is desirable, in part, because of its semi-legal nature - just as they can in court, parties using an arbitrator are given the opportunity to appear at hearings, present evidence, call witnesses, and cross-examine opposing parties.� Federal Trade Commission Facts for Consumers: Mediation and Arbitration.� However, while litigation in court may take months or years and cost thousands of dollars, arbitration may be significantly quicker and less costly precisely because the formalities and complexities inherent in an adversarial trial system are not part of the process.� For example, the Federal Mediation and Conciliation Service's average charge for performing arbitration in 2006 was under $4000, and the average time to resolve a dispute was just four days.�
Indeed, when Congress passed the FAA in 1925, it intended to recognize arbitration agreements as valid contractual provisions and to make clear its policy favoring arbitration as an alternative to judicial review of disputes.� Congressional Research Service Report for Congress, "The Federal Arbitration Act: Background and Recent Developments" (2003), p. 2-3.� Interestingly, parties on both sides of this case claim that their position is truly "pro-arbitration."� For example, an amicus brief filed by the United States Council for International Business in support of Mattel maintains that since the "finality of arbitration awards and freedom from judicial interference" are the underlying goals of the FAA and of arbitration in general, disallowing parties to contract for increased judicial review of arbitration awards is in accordance with the purposes of the FAA.� An opposing brief filed by the Pacific Legal Foundation reasons that since freedom of contract is the guiding principle of the FAA, it necessarily follows that whatever grounds for judicial review� parties choose to include in their arbitration agreement should be recognized and enforced by the courts.� Brief Amicus Curiae of Pacific Legal Foundation in Support of Petitioner.
Some in favor of allowing parties to contract for expanded judicial review of arbitration agreements maintain that closing off this option would result in a violation of freedom of contract, since a decision limiting judicial review to the provisions of the FAA would render many arbitration agreements unenforceable in that respect.� Brief of CTIA - The Wireless Association as Amicus Curiae in Support of Petitioner at 2-3.� They also allege that this will undermine the FAA's purpose of encouraging arbitration, since many companies facing the potential for significant financial loss will not be willing to face the risk that an arbitrator will make a mistake without a guarantee of judicial review.� Brief of Amici Curiae New England Legal Foundation and National Federation of Independent Business Legal Foundation at 13-14.
Opponents of this view argue that much of the efficiency associated with choosing arbitration instead of litigation is due to its finality and expediency, which are both the result of allowing one impartial person to make both findings of fact and findings of law.� Brief for United States Council for International Business as Amicus Curiae in Support of Respondent at 4-5.� They allege that allowing for expanded judicial review will defeat arbitration's purpose, since most likely it will become a precursor to instead of a replacement for litigation.� Id. at 6.� Moreover, as evidenced by the complex procedural posture of this case, the litigation following such review will be complex and time-consuming.� Brief of Amicus Curiae American Arbitration Association in Support of Affirmance, at 11.
At the heart of this case is how the Court can and should construe the FAA to perform its intended function: to encourage the use of arbitration.� The Court may find that the best way to do this is to defer to the intentions of the parties involved with regards to arbitration review.� Alternatively, it may find that encouraging arbitration means requiring parties to risk being bound by an arbitrator's decision unless there is corruption, partiality, material miscalculation or some other clear mistake.� Whatever the outcome, the Court's decision on the issue will have an enormous affect on whether parties are willing to undergo the arbitration process.
Statutory Text of the Federal Arbitration Act
Mattel's relatively straightforward statutory argument centers around the idea that ordinary rules of interpretation dictate a narrow reading of sections 10 and 11 of the Federal Arbitration Act.� Section 9 of the FAA states that if parties apply to the court for an order confirming an arbitration award, "the court must grant such an order unless the award is vacated, modified, or corrected as prescribed in sections 10 and 11 of this title."� Federal Arbitration Act, 9 U.S.C. � 9.� Mattel contends that this language clearly indicates that an arbitration award can only be vacated under the narrow grounds listed in sections 10 and 11.� Brief for Respondent at 21.� It argues that every word in a statute must be construed to have meaning under normal rules of statutory interpretation, and that the reference to sections 10 and 11 would be meaningless if Congress intended a court to use other grounds to change an arbitration award.� Id. at 22.� Mattel also points to Section 2 of the FAA, which refers to agreements to "settle [a controversy] by arbitration."� Federal Arbitration Act, 9 U.S.C. � 2.� According to Mattel, this section is meaningless if a court is permitted to review an arbitration award for legal or factual error, since then "the arbitration 'settles' nothing" and instead becomes "a mere dress rehearsal for litigation."� Brief for Respondent at 26.�
Hall Street Associates ("Hall Street") claims that the statutory text of the FAA is not as clear as Mattel argues, since sections 10 and 11 do not explicitly prohibit parties from agreeing to additional grounds for judicial review of an arbitration award.� Brief for Petitioner at 19 - 20.� It maintains that the FAA, viewed as a whole, actually supports the argument that parties may agree to have a court review an arbitration award for legal error.� Id. at 19.� For example, section 9 of the FAA states that if the parties have agreed and applied to the court to enter an order confirming an arbitration award, then the court must do so.� Federal Arbitration Act, 9 U.S.C. � 9.� Since the court's authority to enter a confirmation order is conferred by the parties, Hall Street argues that section 9 conversely "confers parties with the authority to determine the circumstances under which a court may not enter judgment on an award."� Brief for Petitioner at 23.� Hall Street also contends that section 2, which states that an arbitration agreement "shall be valid, irrevocable and enforceable" unless there are grounds for revocation in contract law, contains a presumption of the enforceability of arbitration agreements.� See Brief for Petitioner at 23, quoting 9 U.S.C. � 2.� It argues that this principle of enforceability indicates that parties to an arbitration agreement are free to supplement sections 10 and 11 with additional grounds for judicial review.� Brief for Petitioner at 21 - 22.� Hall Street also claims that since there are other "default" rules in the FAA which parties may supplement, it may also supplement the terms under which a court can review an arbitration decision.� Id. at 25 - 26.� However, Mattel argues that because Congress knew how to and did create a default rule in other instances, it demonstrated an unwillingness to do so with regard to grounds for judicial review.� Brief for Respondent at 22.�
Hall Street also cites previous Supreme Court cases which seem to recognize standards of review in arbitration awards that are not found within the FAA.� Brief for Petitioner 25 - 28.� For example, in Volt Information Sciences v. Board of Trustees of Leland Stanford Junior University, the Court ruled that it was permissible for the lower court to follow California law in staying an arbitration until related litigation was resolved, although the FAA provides the opposite.� 489 U.S. 468 (1989).� The Court stated that "there is no federal policy favoring arbitration under a certain set of procedural rules; the federal policy is simply to ensure the enforceability, according to their terms, of private agreements to arbitrate."� Id. at 476.� However, as Mattel points out, Volt involved a conflict between federal law in the FAA and California state law, as opposed to the current case which involves a conflict between federal law and a private agreement between two parties.� Brief for Respondent at 33.� Mattel criticizes Hall Street for essentially seeking the Court's "sanction to be its own sovereign" by allowing it to establish its own standard of review.� Id. at 33.� In addition, Mattel claims that the cases relied upon by Hall Street all involved disputes over the arbitration procedures-"whether or when an arbitration will proceed before an arbitrator"-as opposed to the current dispute over the grounds upon which a court can confirm or vacate an arbitration award.� Id. at 34.�
Legislative History of the Federal Arbitration Act
In order to interpret the statutory language, the Court most likely will examine the legislative history and Congressional intent behind the formation of the Federal Arbitration Act.
Hall Street states that Congress's intent in passing the FAA in 1925 was to "reverse the longstanding judicial hostility to arbitration agreements" and "to place arbitration agreements upon the same footing as other contracts."� Brief for Petitioner at 17, quoting Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 24 (1991).� The Supreme Court further explained that the purpose of the FAA is to ensure that "arbitration agreements, like other contracts, are enforced according to their terms."� Brief for Petitioner at 32, quoting First Options of Chicago v. Kaplan, 514 U.S. 938, 947 (1995).�
Mattel, on the other hand, argues that in passing the FAA, Congress implicitly rejected Hall Street's argument that parties should be permitted to determine the level of judicial review given to an arbitration award.� Brief for Respondent at 27.� Prior to the enactment of the FAA in 1925, a national movement had begun to encourage states to modernize their arbitration laws.� Id. at 27.� The states divided over a number of issues, including the grounds under which a court could review or change an arbitration award.� Id. at 27.� Many states, including Illinois, enacted laws that allowed a court to review an arbitration award for legal error.� Id at 27.� However, Congress chose instead to fashion the FAA after New York's arbitration law, which did not allow review for legal error; indeed, New York courts had already determined that an arbitrator's conclusions of law could not be reviewed by a court.� Id. at 27 - 29.� Since the language in sections 9, 10, and 11 of the FAA is "virtually identical" to that in the New York arbitration statute, Mattel argues that Congress intended the FAA to assume the same meaning as New York's law-that arbitration awards will not be reviewed for legal error by a court.� Id. at 28.
Policy Arguments - Judicial Integrity and The Encouragement of Arbitration
Hall Street claims that permitting parties to agree to have an arbitration award reviewed by a court for legal error is consistent with freedom of contract policies, and will encourage the use of arbitration, which will ultimately reduce the burden on courts.� Brief for Petitioner at 38.� If parties to litigation can be assured of protection against legally erroneous awards, they will be more likely to enter into arbitration, which will reduce the amount of time courts must litigate factual disputes and allow judges to concentrate on actual disputes of law.� Id. at 38 - 40.�
Mattel claims that expanded judicial review would undermine the time and cost savings that arbitration is meant to afford, thereby making it less efficient and actually increasing the burden on the courts.� Brief for Respondent at 44.� They argue that alternatives exist for protecting parties against erroneous rulings by an arbitrator, such as appellate arbitration services where a different arbitrator will fully review the initial arbitration award under any standard the parties choose.� Id. at 48 - 49.�
In addition, Mattel is concerned that allowing parties to determine the level of review will compromise the integrity of the judiciary.� Id. at 36.� It points out that courts are not "bound by stipulations by the parties as to what federal law is," and that allowing this type of agreement would empower the parties "to dictate the workings of a court in a manner that no party to any other type of contract is entitled."� Id. at 36.� Hall Street responds that since the FAA is not a jurisdictional statute, a federal court considering an FAA claim must have an independent jurisdictional basis to litigate the parties' claims.� Brief for Petitioner at 35.� Thus, it argues, since the parties already have a right to argue their case in federal court, it would lessen the burden on the court to engage in judicial review of arbitration error instead of full adjudication of the entire matter.� Id at 35 - 36.�
Mattel further argues that Hall Street's argument does not establish a clear limit as to what a court may be required to do under a particular arbitration agreement.� Brief for Respondent at 38.� For example, parties could agree to have a court review an arbitration award de novo, or they could agree to choose their own standard for appellate review; they could even require a court to confirm an award despite statutory grounds for vacating, such as corruption or bias.� Id. at 39 - 40.�
The outcome of Hall Street Associates v. Mattel will determine the extent to which arbitrating parties are limited by the statutory provisions of the Federal Arbitration Act.� A decision for Hall Street will encourage freedom of contract policies by permitting parties to stipulate in their arbitration agreements as to the level of judicial review they can request a federal court to give to the arbitrator's award.� On the other hand, a decision for Mattel will limit the standards under which a federal judge can review or vacate an arbitration award to those specified in the FAA, which may discourage parties from arbitrating for fear being bound by a legally erroneous decision.
Edited by: Cecelia Sander
- Legal Information Institute: Alternative Dispute Resolution Overview
- Securities and Exchange Commission: Arbitration Overview
- Federal Mediation and Conciliation Service�