Back in 2008, the Supreme Court held in Hall Street Associates, L.L.C. v. Mattel, L.L.C. that parties to an arbitration agreement subject to the Federal Arbitration Act (FAA) cannot agree to empower a federal court with more searching judicial review than section 10 of that Act specifies. According to the Ninth Circuit, just as the FAA doesn’t allow parties to contract for expanded judicial review of arbitral awards, it also forbids parties from contracting for narrower judicial review. The case therefore provides important guidance for parties crafting arbitration agreements.
Here’s some background. Section 10(a) permits a court to vacate an arbitration award only if (1) the award was procured by fraud, corruption, or other chicanery; (2) the arbitrators were biased or corrupt; (3) the arbitrators denied due process through such misconduct as refusing to postpone a hearing for demonstrated cause or excluding material evidence; or (4) the arbitrators exceeded their powers or issued a defective, indefinite award. Most courts (including the Ninth Circuit) add manifest disregard for the law as a fifth ground (or as a gloss on the exceeding-powers ground in section 10(a)(4)). Under Hall Street, the grounds for vacating an arbitration award that are specified in section 10 cannot be expanded by contract.
The Ninth Circuit held this week that a contract cannot eliminate or waive those specified grounds, either. The decision, In re Wal-Mart Wage & Hour Employment Practices Litigation, addressed a dispute among class counsel who had settled a case with Wal-Mart, and had provided that they would arbitrate their respective entitlements to fees. The counsel who got the short end of the arbitration sought unsuccessfully to have a district court vacate the arbitral award, and then appealed to the Ninth Circuit.
The winners of the arbitration tried to have the appeal dismissed outright by arguing that the courts lacked jurisdiction to vacate the award because the agreements provided for “binding, non-appealable arbitration.” The Ninth Circuit held that the contract language could not preclude review of the vacatur factors in section 10(a). Relying on Hall Street, the Ninth Circuit reasoned that the mandatory language of section 9—that a court must enter an order confirming an arbitration award unless the award is vacated or modified under section 10—did not permit a court to overlook the section 10 standards, no matter what the parties’ agreement might say. Accordingly, the Ninth Circuit construed the agreement language narrowly to foreclose review only of the substance of the award. In an unpublished memorandum, the court affirmed the order confirming the award.
In an interesting aside, the Ninth Circuit said that it was not addressing whether parties could waive appellate judicial review so long as the agreement provided by section 10 review by the district court. The Wal-Mart appellee argued that the effect of the non-appealability clause at issue did exactly that, but the Ninth Circuit held that the clause’s plain language applied to all levels of judicial review. In the future, perhaps some doughty enterprise will test the enforceability of a clause explicitly drawing the line at district-court review, without review by the court of appeals.