Expanding Judicial Review of Arbitration Awards: The Uncertainty Continues for Drafters of Arbitration Agreements

Article excerpt

How the California Supreme Court muddied the waters with its decision upholding expanded review in Cable Connection v. DIRECTV.

Much of the arbitration community heaved a sigh of relief when the U.S. Supreme Court held earlier this year in Hall Street Associates, L.L.C. v. Mattel, Inc. (128 S. Ct. 1396, 2008) that the grounds to vacate or modify an arbitration award in the Federal Arbitration Act (FAA) are exclusive; thus, parties cannot agree to allow judicial review of an award for errors or law made by the arbitrator. The decision resolved a split in the federal circuit courts, which have struggled with this issue for more than a decade. But did it finally resolve a drafting problem that has vexed lawyers?

Well, not quite. Five months after the Supreme Court ruled that parties cannot obtain judicial review of the merits of an arbitration award by express agreement, the California Supreme Court ruled in Cable Connection v. DIRECTV (2008 WL 3891556, Aug. 25, 2008) that they could, even when they also agree that their arbitration is governed by the FAA.

The split between federal and California state courts creates risks and opportunities for clients who arbitrate in California. And the tension between these conflicting positions underscores the importance of drafting detailed choice-of-law provisions with compatible forum-selection clauses.

Hall Street Limits Review

In ruling in Hall Street that the FAA prevents parties from contracting for expanded judicial review of arbitral awards, the Supreme Court said that this reading of the FAA was necessary to curtail the "full-bore legal and evidentiary appeals" that often followed a contentious arbitration, which severely undercut arbitration's "essential virtue" of providing a final resolution quickly and efficiently.

The plaintiff in the case, Hall Street, was Mattel's landlord. After years of use by Mattel and prior tenants, the leased property showed high levels of pollutants when environmental tests were conducted. Mattel, the manufacturer of such popular toys as "Hot Wheels" and "Barbie," notified Hall Street that it would be terminating its lease and vacating the premises. Hall Street sued, claiming that Mattel could not terminate its lease. It also sought indemnification under the terms of the lease for the looming environmental cleanup costs. At trial, the court found for Mattel on the issue of termination. The parties agreed to mediate the separate issue of indemnification, but the mediation effort failed. They agreed to arbitrate that issue and so notified the court. Then they drafted an arbitration agreement, which they submitted to the court for approval. Among other things, the arbitration agreement provided that the U.S. district court "shall vacate, modify or correct the arbitration award: (1) either where the arbitrator's findings of fact are not supported by substantial evidence, or (2) where the arbitrator's conclusions of law are erroneous." The court approved the arbitration agreement and entered it as an order.

The arbitrator initially ruled in Mattel's favor, but the award was hardly final since the result was a long succession of appeals, reversals, remands, and then review by the Supreme Court.

As noted above, the Supreme Court concluded that the judicial review clause was unenforceable under the FAA. The decision echoed many of the policies championed by the American Arbitration Association (AAA) in its amicus brief. The AAA argued that eliminating expanded judicial review would be consistent with international trends, which favor reduced judicial intervention. Most importantly, the AAA stressed that to allow expanded judicial review by contract would "eviscerate the principle of finality" in arbitration, and would "likely transform arbitration into traditional litigation." Rather than providing efficient dispute resolution while avoiding the courtroom, arbitration might become just another step in the lengthy litigation process. …