Lost in Dicta: The Curious Case of Nonstatutory Grounds of Vacatur in an Era of Ubiquitous Consumer Arbitration.

Date22 March 2019
AuthorRossini, Nicholas A.

"Indeed, short of authorizing trial by battle or ordeal or, more doubtfully, by a panel of three monkeys, parties can stipulate to whatever procedures they want to govern the arbitration of their disputes...." (1)


    Congress passed the Federal Arbitration Act (FAA) in 1925 and it has been construed to liberally endorse and encourage arbitration. (2) Congress designed the FAA "to relieve congestion in the courts and to provide parties with an alternative method for dispute resolution that is speedier and less costly than litigation." (3) It is critical to the FAA's goals to afford deferential judicial review to an arbitrator's findings. (4) Arbitration is inherently undermined when the losing party can relitigate the matter in court. (5) Those who champion arbitration's effectiveness maintain that it has fulfilled the promises set forward by the FAA when it was first enacted. (6) Critics, however, often point to forced arbitration clauses in employment and consumer contracts as stifling the interests of justice. (7)

    The judicial system was always expected to play some role in reviewing arbitration awards, and the FAA contains enumerated grounds for a court to vacate an award. (8) Still, the policies of speed and efficiency at the heart of the FAA are juxtaposed with the American common law tradition of the opportunity for appeal. (9) Wilko v. Swan (10) was the first case where the Supreme Court acknowledged the narrow scope of review of arbitration awards. (11) In the half century since this decision, debate has raged regarding whether Wilko authorizes a nonstatutory ground for vacating an arbitration award for a "manifest disregard of the law." (12) The Supreme Court's attempt to clarify this doctrine in Hall Street Associates, LLC v. Mattel, Inc. (13) resulted in a circuit split over the doctrine's validity as a separate basis to attack an arbitration award. (14)

    Two federal appellate courts maintain a strict reading of Hall Street, holding that the doctrine of manifest disregard is no longer a valid basis for vacating an arbitration award. (15) Another four federal appellate courts held the doctrine lives in one form or another. (16) Curiously, other circuits have opted for a middle ground, acknowledging the doctrine's status to vacate an award as uncertain. (17) While the Supreme Court remains silent, the Fifth Circuit sought to reconcile the longstanding equity rulings with the statutory grounds of vacatur outlined in the FAA. (18)

    The Supreme Court has shown no signs of curtailing the rapid expansion of arbitration into consumer and employment contracts. (19) This resulted in consumer protection groups expressing concern that arbitration has become too far reaching, and potential plaintiffs are being locked out of the courthouse and restricted to a forum where they are at a disadvantage. (20) The simplicity that defined arbitration at the turn of the 20th century has become an effective tool used by corporations to limit their exposure to lawsuits, and courts have liberally endorsed this expansion. (21)

    This Note explores the history of arbitration agreements in the United States, the original goals behind the FAA, and the recent proliferation of arbitration clauses in contracts. (22) Further, it provides some history of early jurisprudence in this field and key decisions that resulted in the development and confusion over nonstatutory grounds to vacate an arbitration award. (23) This Note then examines the Hall Street circuit split and the status of the manifest disregard standard across the federal courts, and how its status mirrors the current situation with judicial challenges to class action arbitration waivers. (24) Next, this Note more closely examines the approach taken by the First and Fifth Circuits, illustrating the confusion federal courts face when attempting to apply the manifest disregard standard in the aftermath of Hall Street. (25) Neither court has convincingly reconciled how a nonstatutory ground of vacatur may be reconciled with the strict reading of the FAA and a liberal approach to American arbitration law. (26)

    This Note argues that the First and Fifth Circuits' approaches to the manifest disregard standard demonstrate its relegation from an applicable common law doctrine to a statutory provision stripping any practical ability to overturn an award. (27) This Note concludes by recognizing the evolution of arbitration beyond the mercantile-focused intent of the FAA's drafters, and acknowledging its expanded use through consumer arbitration requires a presumption-based standard to vacate awards through the use of detailed opinions with modifications to the existing statutory framework. (28)


    1. The Freedom of Contract and the Accessibility of Judicial Review

      Commercial arbitration has been common since the late Middle Ages as a voluntary alternative to litigation. (29) The practice is the resolution of a dispute between parties to a contract decided by an impartial third party. (30) Arbitration was prevalent in nineteenth century America and was a particularly attractive option for merchants to resolve professional disputes. (31) Before 1920, courts tended to enforce awards granted through arbitration, but not agreements to compel arbitration. (32) Tension existed on the question of whether citizens could, by contract, preemptively sever their rights to access the courts. (33) The Supreme Court made it clear that arbitration awards could be properly reviewed for any "such reasons as are sufficient in other courts," including "manifest mistake of law." (34)

      At the turn of the twentieth century, professional societies that sought to greatly expand arbitration's prevalence in commercial disputes targeted statutory reform. (35) The reformers' critical goal was to eliminate revocability rules regarding existing and future disputes through arbitration. (36) Their efforts culminated in 1920, with New York becoming the first state with an enumerated arbitration statute, making future agreements irrevocable and fully enforceable. (37) New York courts then had the authority to stay a judicial proceeding or compel parties to arbitration, per the terms of the agreement. (38)

      The federal government sought to improve perceived judicial hostility toward arbitration, at the time embodied by the ouster doctrine, and to make arbitration a reliable dispute resolution mechanism for parties seeking to avoid litigation. (39) The ouster doctrine provided courts with the ability to strictly construe arbitration agreements as removing valid claims from a court of competent jurisdiction. (40) Reforms reached the federal government upon the FAA's passage, with judicial deference to valid awards being adopted on the national level. (41) Notably, the federal courts were required to confirm a valid arbitration award unless it met the enumerated requirements to vacate. (42)

      By the end of the 1920s, numerous trade associations required members to submit disputes to arbitration panels instead of the judicial system. (43) Under these modern arbitration statutes, courts were required to treat the agreements as valid contracts and keep judicial review of awards as narrow as possible. (44) The FAA also had the far-reaching effect of preempting all inconsistent state law barring arbitration of certain claims. (45) In Southland Corp. v. Keating, (46) the Supreme Court held that the Act preempted conflicting state law, despite the absence of an express preemption clause. (47) The FAA also provided the structural and substantive framework for the Uniform Law Commission's Uniform Arbitration Act (UAA), upon which forty-nine states have based their own arbitration statutes. (48)

      In the 1980s, the Supreme Court stated with clarity that federal policy favored using arbitration to resolve disputes. (49) The FAA's chief directive, supported by the commercial efforts to ensure its adoption, mandates the recognition and enforcement of arbitration awards. (50) The federal policy favoring arbitration is embodied by [section] 2 of the FAA. (51) Applying contractual principles to arbitration agreements permits the raising of state common-law defenses, such as fraud and unconscionability, to invalidate such agreements. (52)

      The use of arbitration clauses has expanded greatly in the past several decades. (53) Modern society and services--such as credit cards, cellular phones, and social media--all require the user to sign contracts with arbitration clauses. (54) These clauses often contain language that restricts a user to resolving disputes through individualized arbitration. (55) These clauses essentially act as waivers on class action lawsuits, forcing individuals to fight against multibillion dollar corporations in arbitration rather than in court. (56) Corporations adopt an argument similar to the trade associations that championed the FAA--that arbitration allows for the easy resolution of grievances without overburdening the courts. (57) This argument has received significant traction; current research shows in thirty-five states in 2014 alone, 134 out of 162 cases were resolved in favor of the corporation. (58)

    2. A Historical Fight for Finality: Wilko through Hall Street

      With the enforceability of arbitration clauses a settled area of the law, the scope of judicial review became a target for early arbitration critics. (59) In Wilko, the Supreme Court refused to allow for the arbitration of a claim brought under the Securities Act of 1933, labeling arbitration an inferior form of dispute resolution for substantive claims. (60) While the Court would later overrule itself with regards to this conclusion, the legacy of Wilko remains the creation of "manifest disregard of the law" as a nonstatutory ground to vacate an arbitration award. (61)

      The Supreme Court's opinion in Wilko suggested--in dicta--that the narrow scope of review afforded to the courts through the FAA was insufficient for all...

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