The United States Supreme Court has recently agreed to address the question of whether parties may contractually agree to alter the standard for reviewing arbitration awards. Because so many business contracts, software licenses, and other agreements now include provisions requiring the parties to submit their dispute to binding arbitration instead of filing a lawsuit, business should pay careful attention to this case, as the court’s decision will have significant implications. The court will decide whether the parties to an arbitration agreement have the freedom to contract for meaningful review of an arbitration award in a court. This will be particularly significant if the decision to agree to arbitration was premised on the availability of meaningful judicial review after an arbitration award has been made.
By statute, such review is not now available, and parties who consent to arbitration will find themselves at the mercy of the arbitrator, whose decision, as a practical matter, is unreviewable. Under the Federal Arbitration Act, which applies if an agreement containing an arbitration clause involves interstate commerce, an arbitrator’s decision may only be vacated, modified, or corrected by a court under very limited, rarely applicable circumstances. See 9 U.S.C. § 10 & 11. Indeed, under the FAA, an arbitration award will still be confirmed and converted into an enforceable judgment even if the award was based on clear legal or factual errors. See Kyocera Corp. v. Prudential-Bache Trade Servs., Inc., 341 F.3d 987, 994 (9th Cir. 2003) (en banc). Many states have enacted similar provisions limiting the scope of review of arbitration awards for agreements governed by state law.
In an attempt to avoid this potentially frightening result and create an opportunity for meaningful review of an erroneous arbitration awards, businesses have begun to include in their arbitration agreements provisions purporting to establish different standards under which an award will be reviewed. For instance, the parties to an agreement may specify that an arbitration award is reviewable for legal errors or must be supported by substantial evidence. It is not clear, however, that such provisions are enforceable. The Ninth and Tenth Circuits have held that parties may not expand the judicial review provisions found in the FAA, reasoning that allowing such an expansion would threaten the independence of arbitration. See Kyocera, 341 F.3d at 998; Bowen v. Amoco Pipeline, Inc., 254 F.3d 925, 936 (10th Cir. 2001). California courts have similarly held that under the FAA and the California arbitration statutes, an agreement to expand judicial review is unenforceable, though the California Supreme Court is currently considering the validity of those decisions. See Cable Connection, Inc. v. Directv, Inc., 53 Cal.Rptr.3d 318 (Cal. 2006). In contrast, the First, Fourth, Fifth, and Sixth Circuits have held that parties may contract for more expansive judicial review, concluding that the parties’ agreement with respect to arbitration must be enforced.
The Supreme Court has now granted certiorari in a case presenting the issue of whether such contractual provisions are enforceable. On May 29, 2007, the court granted the petition in Hall Street Assoc. v. Mattel, Inc., No. 06-989. The court will address the specific question of whether the Ninth Circuit erred when it held that the FAA “precludes a federal court from enforcing the parties’ clearly expressed agreement providing for more expansive judicial review of an arbitration award than the narrow standard of review otherwise provided for in the FAA.” The case will not be set for argument until the next court term, which begins in October 2007. In the meantime, businesses concerned about the limited reviewability of arbitration awards should still consider including clauses providing for expanded judicial review. Given that such provisions may be invalidated, however, businesses may want to re-examine whether they really want to agree to arbitration in the first place, knowing that an erroneous decision by an arbitrator may be the final word.