Imperfect minimalism: unanswered questions in Hall Street Associates, L.L.C. v. Mattel, Inc.

• Author: Ellis, Robert

Benjamin Franklin embodied hope in his question, "When will mankind be convinced, and agree to settle their differences by arbitration?" (1) Arbitration, however, received an icy welcome from the American judicial system. To counteract judicial hostility to arbitration, (2) Congress enacted the Federal Arbitration Act (FAA) in 1925. (3) Although many disputes about the reach of the FAA center on a claim's initial arbitrability, the circuits have split on whether the FAA's post-arbitration judicial review provisions are open to expansion by contracting parties. (4) Last Term, in Hall Street Associates, L.L.C. v. Mattel, Inc., (5) the Supreme Court held that sections 9-11 of the FAA provide the exclusive grounds for expedited judicial review of arbitration awards. (6) In many respects, the Court produced a classic minimalist opinion. The entire opinion, along with the two dissents, spanned a mere ten pages, and the majority's narrow holding avoided deciding potentially divisive issues. But the single issue the Court did resolve raised many new questions. Like Hercules struggling with the Hydra, lower courts now disagree on multiple questions created by the Court's overly narrow opinion. Consequently, Hall Street illustrates the danger of sacrificing clear guidance on the altar of minimalism.

Tenant Mattel leased property for a manufacturing site from landlord Hall Street. (7) The lease contained a clause indemnifying Hall Street for any costs caused by Mattel's failure to follow environmental laws. (8) In 1998, tests of the property's well water revealed high levels of trichloroethylene and other pollutants, and three years later, Mattel gave notice of intent to terminate the lease. (9) Hall Street filed suit in federal court, seeking indemnification for the costs to clean up the polluted property. (10)

The parties proposed to submit the indemnification claim to arbitration. (11) The district court approved and entered the subsequent arbitration agreement as a court order. (12) The agreement provided that "[t]he Court shall vacate, modify or correct any award: (i) where the arbitrator's findings of facts are not supported by substantial evidence, or (ii) where the arbitrator's conclusions of law are erroneous." (13) The arbitrator decided for Mattel, (14) finding that the Oregon Drinking Water Quality Act (Water Act) dealt with human health rather than environmental contamination, and therefore did not trigger the indemnification clause. (15)

The district court vacated the award. (16) Citing the parties' arbitration agreement that authorized judicial review for legal error, the court held that the failure to treat the Water Act as an environmental law constituted legal error that justified vacating the award. (17)

The Ninth Circuit reversed. (18) The court held that a recent circuit case, Kyocera Corp. v. Prudential-Bache Trade Services, Inc., (19) controlled the proceeding. Under Kyocera, "private parties may not contractually impose their own standard on the courts" because the FAA specifies "the exclusive standard by which federal courts may review an arbitrator's decision." (20) The court remanded with instructions to "confirm [the arbitrator's] award, unless the district court determines that the award should be vacated on the grounds allowable under 9 U.S.C. [section] 10, or modified or corrected under the grounds allowable under 9 U.S.C. [section] 11." (21)

On remand, the district court again held for Hall Street. (22) This time, the court vacated the arbitration because the arbitrator's "implausible" interpretation exceeded the arbitrator's powers in violation of section 10. (23) The Ninth Circuit again reversed, holding that "[i]mplausibility is not a valid ground for avoiding an arbitration award." (24)

The Supreme Court affirmed and remanded for resolution of independent issues. (25) Writing for the majority, Justice Souter (26) held that "the text [of the FAA] compels a reading of the [section][section] 10 and 11 categories as exclusive." (27) The Court's analysis focused on whether "the FAA has textual features at odds" with allowing private parties to contract for expanded judicial review. (28) Examining the text, the Court found "nothing malleable about 'must grant,' which unequivocally tells courts to grant confirmation in all cases, except when one of the 'prescribed' exceptions applies." (29) Therefore, regardless of whether the holding would help or hurt the popularity of arbitration, "the statutory text gives us no business to expand the statutory grounds." (30)

Examining the FAA provisions, the Court discerned "a national policy favoring arbitration with just the limited review needed to maintain arbitration's essential virtue of resolving disputes straightaway." (31) The Court cautioned that "[a]ny other reading opens the door to the full-bore legal and evidentiary appeals that can 'rende[r] informal arbitration merely a prelude to a more cumbersome and time-consuming judicial review process.'" (32)

The Court rejected Hall Street's contention that "expandable judicial review authority has been accepted as the law since Wilko v. Swan." (33) Specifically, Hall Street had argued that the Supreme Court in Wilko (34) had recognized "'manifest disregard of the law' as a further ground for vacatur on top of those listed in [section] 10," and "if judges can add grounds to vacate (or modify), so can contracting parties." (35) The Court skeptically characterized the argument as a "leap from a supposed judicial expansion by interpretation to a private expansion by contract." (36) After describing three possible meanings of the "manifest disregard" standard, (37) the Court took no definitive position, saying only that "we see no reason to accord it the significance that Hall Street urges." (38)

Finally, the Court emphasized that in holding sections 10 and 11...