Be Quick-but Don't Hurry: Competing Purposes of the Federal Arbitration Act and Hall Street Associates v. Mattel

• Author: Keith Joseph Fernandez
• Pages: 387-410

The author would like to thank Professor Glenn G. Morris for his insight and guidance. He would also like to thank his parents, Rusty and Darla, and his brother, Kevin, for their love and support.

Page 387

"Be quick-but don't hurry" is an old adage attributed to the great basketball coach, John Wooden.¹ Coach Wooden was likely trying to teach his players to play both fast and confident while avoiding the mistakes that accompany rushing. Though on its face alternative dispute resolution has very little to do with basketball, the aphorism holds form in the context of arbitration. As companies become more specialized and supply chains swell, parties want disputes to be settled quickly and amicably so that their relationships and businesses can continue with minimal disruption.

Enter binding arbitration: the answer to quicker, cheaper dispute resolution. Arbitration's great virtue is in its customization. It can be tailored to be as quick and efficient or as thorough and reaching as the parties desire within the broad confines outlined in statutes that authorize such agreements. Some parties choose to provide for what they have determined to be the best of both worlds: arbitration subject to judicial review for errors of law. These parties wish for a quick, cordial process, but one that is less susceptible to mistaken conclusions of law. They want speed, but not at the expense of the correct outcome. The United States Supreme Court has recently hindered parties from striking their own balance between speed and review by blocking the enforcement of expanded judicial review of arbitral awards in Hall Street Associates v. Mattel, Inc. (Hall Street).²

The purpose of this Note is twofold: first, to give relevant background and history of the circumstances giving rise to the Supreme Court's decision in Hall Street, and second, to take a critical look at the effect of Hall Street on both federal and state arbitration law. Part I of this Note details relevant background information. Part II illustrates the competing lines of jurisprudence leading up to the Hall Street decision. Part III lays out the facts and opinion of the Supreme Court's decision in Hall Street and the California Supreme Court's decision in Cable Connection, Inc. v. DIRECTV. Part IV critically analyzes Hall Street by examining whether it was the right case for this issue. Then, Part V argues that the case has little effect on federal law because of the narrowness of Page 388 the holding. Finally, this Note shows that state arbitration laws will become the focus of more legislative and judicial attention in light of the California Supreme Court's response to the opinion.

I FAA Background: Congress Reacts To Court Hostility Toward Arbitration Agreements

The Federal Arbitration Act (FAA) was created with the central purpose of ensuring "that private agreements to arbitrate are enforced according to their terms."³ This policy is clearly set forth in the substantive portion of the FAA, section 2.⁴ In enacting the FAA to "abrogate the general common-law rule against specific enforcement of arbitration agreements,"⁵ Congress also recognized that the FAA furthers the purposes of both efficiency and expediency.⁶ While the FAA usually serves both speed and party autonomy concurrently, sometimes these purposes come into direct conflict.⁷ The Supreme Court had determined that in such instances, the policy of enforcing agreements controls.⁸

In addition to section 2, the FAA has procedural provisions detailing the process of confirming an arbitral award in federal court.⁹ Section 9 provides that if parties agree that a judgment of the court shall be entered upon the award, an arbitration award "must be confirmed."¹⁰ The only exceptions to this "must confirm" language Page 389 are provided for in sections 10 and 11.¹¹ Section 10 provides that an award may be vacated for the following grounds: (1) the award was procured by corruption, fraud, or undue means; (2) there is evidence of partiality or corruption among the arbitrators; (3) the arbitrators were guilty of misconduct that prejudiced the rights of one of the parties; or (4) the arbitrators exceeded their powers.¹² The section 10 grounds for vacatur are narrow and limited by design to further the policy of keeping courts from using judicial review specifically to prevent enforcement of arbitration agreements.¹³

Section 11 allows a court to modify an award for one of the following reasons: (1) a material miscalculation of the award; (2) the arbitrators awarded on a matter not submitted to them, unless it is a matter not affecting the merits of the decision upon the matter submitted; or (3) the award is imperfect in matter of form not affecting the merits of the controversy.¹⁴ The grounds for modification are also exceptionally narrow, minimizing judicial review of awards to matters of abuse of power or error in calculation.

The advantage of agreeing to the procedural provisions of the FAA is that the action is treated like a motion and not a normal contract action for specific performance.¹⁵ As such, section 9 provides for a streamlined and expedited process for confirmation of an arbitral award. The "[i]f the parties in their agreement have agreed" language allows parties to displace the federal procedure with a state court's procedure.¹⁶ Because the FAA does not provide independent federal court jurisdiction,¹⁷ the vast majority of states have passed some form of the Uniform Arbitration Act (UAA) to allow their courts to confirm arbitral awards.¹⁸ The UAA contains almost identical language as the FAA with respect to grounds for confirmation, vacatur, and modification of awards.¹⁹ Page 390

In front of this historical and legislative backdrop appears Hall Street.²⁰ The Supreme Court granted certiorari in this case in order to resolve a split among the circuits regarding contractually expanded judicial review of arbitration awards.²¹ Because arbitration awards can be vacated or modified only for the narrow reasons laid out in sections 10 and 11 of the FAA, the parties in Hall Street contracted to have their arbitration award subject to modification for an additional ground-error of law.²² Based on precedent alone, it appeared the Supreme Court would enforce the agreement as written.²³ In a surprising about-face, the Supreme Court instead held that the grounds for vacatur and modification under sections 10 and 11 of the FAA are exclusive, thus defeating the contractual intent of the parties.²⁴

II The Controversy Tips Off: Circuits Begin To Split

While there was split authority concerning whether judicial review of arbitration awards could be expanded by contract, a Page 391 majority of circuits had ruled that such expansions were authorized under the FAA.²⁵ In one of the first and most definitive opinions on the subject, Gateway Technologies, Inc. v. MCI Telecommunications Corp., the Fifth Circuit held that parties may contractually modify the standard of review of an arbitration award, stating "[s]uch a contractual modification is acceptable because, as the Supreme Court has emphasized, arbitration is a creature of contract and 'the FAA's pro-arbitration policy does not operate without regard to the wishes of the contracting parties.'"²⁶ The Gateway court noted that "[a]rbitration under the FAA is a matter of consent, not coercion, and parties are generally free to structure their arbitration agreements as they see fit."²⁷ Lastly, the Fifth Circuit pronounced the grounds for vacatur and modification in FAA sections 10 and 11 to be default provisions capable of being expanded by contract.²⁸This reasoning was generally accepted by the Third, Fourth, and Sixth Circuits with little question.²⁹

The First Circuit expanded on the Gateway reasoning in Puerto Rico Telephone Co. v. U.S. Phone Manufacturing Corp.³⁰ The questions presented in Puerto Rico were whether and how parties could contract for expanded judicial review.³¹ The First Circuit concluded that the grounds for vacatur could be expanded by Page 392 contract.³² The court continued, noting the inclusion of a generic choice of law provision did not displace the judicial review limits imposed by the FAA.³³ Finally, the First Circuit declared that in order to achieve displacement of the FAA grounds for vacatur, the agreement must contain "clear contractual language."³⁴

The Ninth Circuit, in Lapine Tech. Corp. v. Kyocera Corp., originally followed the reasoning of the Fifth Circuit.³⁵ The Ninth Circuit said:

Thus, we fully agree with the Fifth Circuit. Federal courts can expand their review of an arbitration award beyond the FAA's grounds, when (but only to the extent that) the parties have so agreed. To do otherwise would make hostility to arbitration agreements erumpent under the guise of deference to the arbitration concept.³⁶

However, in Kyocera Corp. v. Prudential-Bache Trade Services, the Ninth Circuit, en banc, overruled its earlier holding in Lapine.³⁷Finding support in the decisions of the Seventh, Eighth, and Tenth Circuits,³⁸ the court held that parties are able to modify the process of arbitration to best suit their needs but cannot go beyond the grounds for vacatur provided in the FAA.³⁹ In addition to the problems created by the plain language of the FAA, the Ninth Circuit found expanded judicial review unworkable...