Yesterday the Supreme Court rejected the view that parties to an arbitration agreement, at least under the Federal Arbitration Act, can agree to expanded judicial review of the arbitrator's award. See Hall Street Assoc., L.L.C. v. Mattel, Inc., No. 06-989 (U.S. Mar. 25, 2008) (hat tip: SCOTUSblog).

The theory: Expanded judicial review of arbitration awards

Under the Federal Arbitration Act, a court can vacate or modify an arbitration award only in very limited (and usually egregious) circumstances.  There was a split in the circuits, however, whether the parties could agree to judicial review of the award on other grounds.

Personally, I've thought for years that expanded judicial review by agreement would make practical sense. Think about it:

• Absent arbitration, the parties' dispute would end up as yet another burden on the court's docket. The court would be obligated to do all the work, at taxpayers' expense, of managing the pretrial proceedings, conducting a trial, and rendering judgment.

• With arbitration, the parties get the well-known benefits thereof, and all at private expense:
  • a fast-track resolution;
  • the ability to command the arbitrator's attention;
  • an arbitrator (or panel) with more subject-matter expertise;
  • a private proceeding and award.

• From the taxpayer's perspective, if the court is going to have to be involved, it'd be far better for its only job to be that of reviewing the arbitrator's award.

The Supreme Court concluded the statute said otherwise

But in Hall Street Assoc., six of the nine Supremes interpreted the Federal Arbitration Act differently. In an opinion by Justice Souter, they said that the Act was concerned mainly with speedy private resolution of disputes, and that the Act accordingly requires the court to confirm the arbitration award unless one of the very narrow exceptions applies. The opinion says:

 

Instead of fighting the text, it makes more sense to see the three provisions, §§ 9–11, as substantiating a national policy favoring arbitration with just the limited review needed to maintain arbitration’s essential virtue of resolving disputes straightaway.

 

Any other reading opens the door to the full-bore legal and evidentiary appeals that can render informal arbitration merely a prelude to a more cumbersome and time-consuming judicial review process and bring arbitration theory to grief in post-arbitration process.

Id., slip op. at 11 (citations and quotation marks omitted, extra paragraphing added).

The dissent's arguments made sense, but were contrary to the statute

The dissenters (Stevens, Kennedy, Breyer) would have allowed expanded judicial review of arbitration awards on grounds that it made sense to do so. But I think we must reluctantly concede that the majority is reading the statute correctly.

Congressional action coming up?

Congress is already considering the so-called Arbitration Fairness Act of 2007, which according to the Congressional Research Service summary: 

 

Declares that no predispute arbitration agreement shall be valid or enforceable if it requires arbitration of: (1) an employment, consumer, or franchise dispute, or (2) a dispute arising under any statute intended to protect civil rights or to regulate contracts or transactions between parties of unequal bargaining power.

 

Declares, further, that the validity or enforceability of an agreement to arbitrate shall be determined by a court, under federal law, rather than an arbitrator, irrespective of whether the party resisting arbitration challenges the arbitration agreement specifically or in conjunction with other terms of the contract containing such agreement.

Hearings on both the Senate and House (identical) versions of this bill were held last fall.

If the Democrats continue to control Congress, it wouldn't be surprising if they (and their trial-lawyer allies) push, not just to ban mandatory arbitration in certain disputes, but also for an expanded judicial review of other arbitration awards when the parties agree to it.