The truth behind "final and binding" arbitration: a study of vacated arbitration awards in the New York Appellate Division.

• Author: Skanes, Monica R.

1. INTRODUCTION

   Despite decades of federal and state jurisprudence favoring arbitration as an efficient, economical alternative to the courtroom, recent trends across the New York Supreme Court, Appellate Division suggest that arbitration may not be as "final" or "binding" as it is purported to be. Strict federal and state standards for judicial review of arbitration awards prohibit courts from considering the merits of an arbitration award, even when the award violates the court's sense of justice. These standards were specifically designed to preserve the efficiency and expediency of arbitration by assuring that parties treat arbitration awards as final decisions, not as first steps on the way to the court room. However, there is evidence that New York courts often choose not to leave these awards untouched. This is particularly true in the labor and employment context, despite the fact that under both federal and state law, the standards for vacating labor and employment awards are intended to be stricter than the review of awards generally.

   This comment is designed to outline the strict federal and state standards for vacating arbitration awards, to explore the policy considerations underlying these standards, and to explain both how New York's appellate courts apply these standards, and why their applications might differ from the idealistic notion of "final and binding" arbitration. The comment will begin with a methodology, explaining a study that was conducted specifically to support this comment's thesis. It will identify the source of many of the

   statistical figures used throughout this comment to support conclusions concerning Appellate Division rates of vacatur. Next, the national policy favoring arbitration of contractual disputes will be introduced and compared to New York's policy of judicial deference toward arbitration awards. The benefits of arbitration will also be explored. The comment will then lay out the statutory and common law standards used by federal and New York courts to determine when and under what circumstances arbitration awards may be vacated. These standards will then be compared and contrasted.

   The next part will fully explain the results of the study detailed in the methodology section. It will list the percentage of arbitration awards vacated by the New York Appellate Division's four judicial departments, as identified by a sample study of nearly one hundred and fifty cases over the past ten years. It will specifically identify how many arbitration awards were vacated by each department in these cases. It will also compare vacatur rates in labor-employment cases with vacaturs in other types of cases. Next will be a full explanation of what these figures could actually mean in practice. This section will attempt to explain any potential disconnect between the national policy of deference toward arbitration awards and the actual number of awards being vacated. It will offer explanations for the data, and will postulate as to whether the case study portrays the current state of arbitration accurately.

   Finally, the conclusion will offer different possibilities for the future of arbitration. Specifically, it will explore whether a reinvigorated concept of "final and binding" arbitration awards might restore faith in the arbitral system.

2. METHODOLOGY

   The purpose of this comment is to evaluate New York's treatment of arbitration awards. Although studies have been conducted on the number of arbitration awards vacated in federal courts nationwide, no such study existed for New York courts prior to this comment's publication. Therefore, a study was conducted specifically for the purposes of this comment in order to test some of the hypotheses that the comment was intended to explore.

   The study began with a Westlaw search using the search terms "7511," (1) "vacate," and "arbitration" in different combinations. This

   search was then narrowed to decisions from 1999 to the present, based upon the belief that this timeframe would provide a representative sample. The search was also limited exclusively to voluntary arbitration. (2) From these searches, a database of 146 arbitration awards that had been reviewed by the New York Appellate Division over the past ten years was compiled. (3) For each of the cases, certain data points were recorded in a database. The first information recorded was whether the award had been vacated and, if so, which ground the court used to vacate it. Then it was noted whether the case was a labor and employment case, and whether the employer or union won. Other pertinent recorded information included which department the case came from, what year it was decided, and whether the Appellate Division decisions affirmed lower court decisions or reversed them.

   Once this database was compiled, the total number of arbitration awards was compared to the number of awards vacated. The number of vacated labor-employment related arbitration awards was then contrasted with the percentage of other types of awards that were vacated. Then the percentages of employer wins versus union wins, the percentages of union appeals versus employer appeals, and the success rates of these appeals were recorded in a separate database and compared. (4) Both databases were used throughout this comment to support many of the comment's conclusions about the New York Appellate Division.

3. THE POLICY OF JUDICIAL DEFERENCE TO ARBITRATION

   The federal policy favoring arbitration as a method of resolving disputes was formally adopted by the United States in 1925 with the passage of the Federal Arbitration Act ("FAA"). (5) Congress enacted the FAA "to reverse longstanding judicial hostility to arbitration agreements," (6) and to solidify a "national policy favoring [arbitration] and plac[ing] arbitration agreements on equal footing with all other contracts." (7) The FAA stands in stark contrast to the

   Law and Rules ("CPLR"). N.Y. C.P.L.R. 7511 (McKinney 2006).

   former national policy against arbitration, stemming from English common law, which fostered public mistrust and judicial detestation of the arbitration process, and created significant barriers to parties utilizing arbitration as an alternative to litigation in the United States. (8) Since the FAA's enactment, both federal and state courts have repeatedly reinforced the national policy favoring arbitration, and have significantly expanded the use of arbitration by holding that arbitrators' decisions should not only be respected, but are entitled to the utmost deference. (9)

   Federal policy mirrors New York State law. As recently noted by the U.S. Supreme Court, the FAA was modeled after New York's arbitration statute, enacted in 1920, which provided nearly identical grounds for vacatur of arbitration awards as the later-adopted FAA text. (10) The New York Court of Appeals has declared that New York State's firmly established public policy favors arbitration as an expeditious and economical alternative to the judicial forum for the resolution of disputes. (11) In line with this policy, the Court has held that judicial intervention in arbitration matters "prolongs litigation, and defeats ... two of arbitration's primary virtues, speed and finality." (12)

   With regard to arbitration clauses that have been freely negotiated by the parties, the Court of Appeals has held that arbitration is a "creature of contract" that allows parties to substitute a different method for resolving their disputes. Therefore, it has "long been the policy of the law [for courts] to interfere as little as possible with the freedom of consenting parties to achieve that objective." (13) This deference to arbitration includes allowing the parties to freely choose an arbitrator, or to create a procedure by which the arbitrator may be chosen, subject to limited exceptions. (14) Additionally, in the area of labor-management relations, particularly in the public sector, "arbitration is so preferable a means of settling labor disputes that it can be said that

   public policy impels its use." (15)

4. BENEFITS OF ARBITRATION

   Among the acknowledged advantages of arbitration over judicial litigation are economy, informality, speed, privacy, and the specialized expertise of the arbitrators. (16) Arbitration is intended to lead to a final and binding decision that alleviates or minimizes the parties' need to take their disputes to court for resolution. (17) The U.S. Supreme Court, quoting the House Report for the FAA, expressly noted that:

   The advantages of arbitration are many: it is usually cheaper and faster than litigation; it can have simpler procedural and evidentiary rules; it normally minimizes hostility and is less disruptive of ongoing and future business dealings among the parties; [and] it is often more flexible in regard to scheduling of times and places of hearings and discovery devices. (18) Voluntary arbitration is "often described as everything civil litigation is not." (19) The nature of arbitration varies greatly depending upon what the parties to the particular contract decide to make of it. (20) Parties may choose an informal process that allows them to avoid costly and time-consuming motion practice and discovery, or they may choose to follow the formal rules of evidence and trial procedure, depending upon the particular needs of the parties. (21) Arbitration is flexible and can be tailored to fit the parties' needs in a way that the rigid structure of litigation simply cannot.

   Additionally, the parties are able to choose arbitrators who have specialized knowledge and expertise in the fields of law in which the parties are dealing. (22) Parties to a commercial contract are able to choose an arbitrator who understands the normal dealings, vocabulary, and customs of the industry, which makes the

   arbitrator better suited to decide the issue than a lower court judge who may lack the particularized knowledge and business experience necessary to exact a...