Health Law

Supreme Court Holds Arbitration Agreement Under F.A.A.Cannot Be Reviewed For Erroneous Conclusion of Law

By Greg Piche'

There is a growing tendency to incorporate mandatory arbitration clauses in employment and other agreements as an alternative mechanism to resolve disputes. Some arbitration agreements go so far as to self define the scope of judicial review of an arbitrator?s decision. Not infrequently, there is a tension in a case between the equities or basic fairness and the law. An arbitrator, after all, is supposed to be arbitrary. He or she is supposed to quickly and economically cut through the "Gordian knot" of a dispute and do what is right.

If a party to a dispute relies on a point of law in his or her favor, should not the arbitrator be bound to follow the law? In Hall Street Associates, L.L.C. v. Mattel, Inc., 128 S. Ct. 1396 (March 25, 2008), the United States Supreme Court said no, at least under the Federal Arbitration Act, 9 U.S.C.A. § 1 et seq.

In that case, there was a dispute over an environmental indemnification provision in a lease that ended up in a federal district court after removal from an Oregon state court. While in federal court, the parties agreed to submit the issue of indemnification to arbitration to be enforced by the Court. The arbitration agreement provided that the Court "shall vacate, modify or correct any award: i) where the arbitrator?s findings of facts are not supported by substantial evidence, or ii) where the arbitrator?s conclusions of law are erroneous."

The arbitrator decided a key question of law erroneously. Then the fun began in the district and appellate courts. The case moved from the 9th Circuit Court of Appeals to the U.S. Supreme Court where Justice Souter, for the majority, determined that for any arbitration brought under the F.A.A. the standards of review set forth in the F.A.A. itself are the exclusive grounds for review and cannot be modified by the agreement of the parties.

The Court noted that the F.A.A. only provided for review of "egregious departures" from the parties agreed upon arbitration including "corruption," "fraud," evident partiality," "misconduct," "misbehavior," "exceeding powers," "evident material mistake," etc. Justice Souter, applying the rule of ejusdem generis (the specific controls the general), concluded that the F.A.A.?s written standards were exclusive and could not be amended by agreement. Justices Stevens, Kennedy and Breyer dissented. Justice Stevens opined,

In closing the door on contractual modification of the standards of review under the F.A.A., the Supreme Court limited the work load of federal courts by endorsing the speed and arbitrary nature of arbitration proceedings under the F.A.A. Whether states will follow the Supreme Court?s lead in interpreting state arbitration acts is uncertain, although some states, like California, have long held that the concept of arbitration means what it says.

In awarding damages in an arbitration in California, the arbitrator is charged with doing what is fair and equitable in the circumstances regardless of rules governing the court system. See Moncharach v. Heily & Blasé, 832 P2d. 899, 904 (Cal. 1992)(quoting Muldraw v. Norris, 2 Cal. 74, 77 (1852) (arbitrators are not bound to award on principals of dry law, but may decide on principals of equity and good conscience, and make their award ex aequo et bono [according to what is good and just]).

Those entering into arbitration agreements should give careful consideration of whether they are favored more by the concepts of fairness and equity or by the strict application of law. The results of the application of each can be radically different.

Many years ago, the French tried a system of justice that relied solely on the determination of individual judges of right and wrong. The system of "Les bon juges," did not provide the consistency and predictability necessary for an orderly society ("known certainty in the law is the benefit of all"), but perhaps there is a place for it where speed and affordability outweigh the need for oversized and careful consideration.

Full post as published by Healthcare Law Blog on August 11, 2008 (boomark / email).