Client Bulletin #386

4.1.08

For PDF version of this Client Bulletin, click here.

The United States Supreme Court has ruled clear legal error by an arbitrator cannot be used by a court to set aside the award, even if the parties had expressly agreed to allow the court to review the award for clear legal error. In Hall Street Associates, LLC v. Mattel, Inc., the Supreme Court said that parties to an arbitration agreement cannot expand the courts' power to review private arbitration awards as granted by the Federal Arbitration Act.

Hall Street and Mattel reached an agreement to arbitrate a dispute while litigation about the dispute was going on in federal court, and the court approved the agreement. The parties, represented by counsel, agreed to take the dispute to private arbitration and expressly agreed the federal court could and would review the arbitrator's award to ensure compliance with federal law. The dispute was arbitrated, and Mattel won. Hall Street asked the district court to review the award for compliance with federal and state environmental laws. The district court concluded the arbitrator committed a clear legal error and set aside the award. The second time around the arbitrator got it right, apparently, and ruled for Hall Street. Mattel took the case back to the district court and eventually to the U.S. Court of Appeals for the Ninth Circuit (Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon, Washington, Guam, and Northern Mariana Islands), arguing that the district court did not have the power to review the award for legal error under the Federal Arbitration Act. Mattel, "switching horses," presented this argument even though it had expressly agreed to that term in the arbitration agreement. The Supreme Court agreed with Mattel.

This decision is extremely important for anyone who is considering or is party to an agreement for arbitration. Many employers have adopted agreements requiring arbitration of employment disputes, sometimes without thinking through the advantages and disadvantages. The courts have set aside arbitration agreements because employees had to bear too much of the costs, because the method for selecting the arbitrator was deemed unfair by the court, because the remedies the arbitrator could award were too limited, and because the employee didn't really understand what he was agreeing to when he signed the agreement. All these things, and others, need to be considered. This case illustrates another important consideration.

After Hall Street, courts will remain entitled to set aside arbitration awards on a number of very limited grounds set forth in the Federal Arbitration Act. The Supreme Court also left open the possibility that the Hall Street agreement might be enforceable because the district court had approved it. Finally, state laws may provide for more expansive judicial review. However, such agreements are not enforceable under the FAA as a matter of mere “contract,” and the narrow grounds on which court review is allowed will not resolve the recurring issue in arbitration regarding the extent to which the arbitrator must follow the law.

Although this seems like it should be pretty simple — of course the arbitrator has to follow the law — it is not. The question is, "Who will decide whether the arbitrator followed the law?" One of the serious disadvantages of arbitration for both parties is that the process, by definition, provides that one person who is usually selected at random and is unknown to either party will make a decision from which there is no appeal. This decision makes that disadvantage even more serious because now the federal courts cannot review the arbitrator's decision for clear legal error even if the parties have agreed to exactly that type of review. So, even if the arbitrator disregards the law, and even if that is obvious, the party losing the arbitration will normally have no ability to obtain judicial review, at least not in federal court.

What does this mean for you? It means you need to seriously consider whether you want to arbitrate your employment (or any other) kinds of disputes. Employers should not adopt arbitration agreements without carefully considering the many risks associated with arbitration. If the arbitrator decides it is not permissible to fire an employee because of drug use that clearly is illegal, and the employer wants to have a federal court review that decision to see whether it is consistent with public policy, this case says the employer is out of luck. The employer may have some other recourse, but obtaining judicial review of such a decision is now not going to happen.You may decide arbitration is preferable to court litigation for any number of reasons, but just make sure it is the product of carefully considered decision making.

Constangy, Brooks & Smith, LLC has counseled employers, exclusively, on labor and employment law matters since 1946. The firm represents Fortune 500 corporations and small companies across the country. More than 100 lawyers work with clients to provide cost-effective legal services and sound preventive advice to enhance the employer-employee relationship. Offices are located in Georgia, South Carolina, North Carolina, Tennessee, Florida, Alabama, Virginia, Missouri, and Texas. For more information about the firm's labor and employment services, visit www.constangy.com, or call toll free at 866-843-9555.

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