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Hall Street Associates and the Federal Arbitration Act: Toward the Eventual Arbitration of Legal Questions With Factual Issues

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Hall Street Associates and the Federal Arbitration Act: Toward the Eventual Arbitration of Legal Questions With Factual Issues

by George B. Murr & James. E. Smith

In March of 2008, the U.S. Supreme Court ruled in a 6-3 decision that the Federal Arbitration Act does not allow a federal court to consider and decide issues of law as part of its confirming an arbitration award. Hall Street Associates, L.L.C. v. Mattel, Inc., 552 U.S. (2008), No. 06- 989, slip op. at 1-2 (U.S. March 28, 2008) (Souter, J.). Despite the traditional deference afforded to the contracting parties' arbitration agreement, the Supreme Court held that the specific language of the Federal Arbitration Act simply does not allow a federal court to do anything other than either confirm the arbitration award or vacate, modify or correct it where there has been "egregious departures from the parties' agreed-upon arbitration," such as "corruption," "fraud," "evident partiality," "misconduct," or "misbehavior." Id. at 9. Accordingly, the language of the Federal Arbitration Act does not afford the federal court "review for just any legal error." Id. Concluding, the majority recognized the potential need for having the courts decide the law, but stated that, "whatever the consequences of our holding, the statutory text gives us no business to expand the statutory grounds." Id. at 12.

In dissent, Justices Stevens, Kennedy and Souter took issue with the narrow and constricted view taken by the majority and deferred to the overall policy and purpose underlying the Federal Arbitration Act; the dissents essentially and forcefully contend that, although the statutory language in the Federal Arbitration Act may not specifically address a federal court's review of strictly issues of law, neither does it specifically prohibit such review:

Today ... the Court holds that the [Federal Arbitration Act] does not merely authorize the vacation and enforcement of awards on specified grounds, but also forbids enforcement of perfectly reasonably judicial review provisions in arbitration agreements fairly negotiated by the parties and approved by the district court. Because this result conflicts with the primary purpose of the [Federal Arbitration Act] and ignores the historical context in which the Act was passed, I respectfully dissent.

See id. at 1 (Stevens, J., dissenting). Further, "[g]iven th[e] settled understanding of the core purpose of the [Federal Arbitration Act], the interests favoring enforceability of parties' arbitration agreements are stronger today than before the [Act] was enacted. As such, there is more -- and certainly not less -- reason to give effect to the parties' fairly negotiated decisions to provide for judicial review of arbitration awards for errors of law." Id. at 2.

The case sets up the classic confrontation between strict statutory interpretation and fundamental legal purpose and policy. At times, the majority sounds sympathetic to the contracting parties (and to the dissent), but, at the same time, apologetically hamstrung by the statutory language. See id. at 9 (Souter, J.) ("But to rest this case on the general policy of treating arbitration agreements as enforceable as such would be to beg the question, which is whether the FAA has textual features at odds with enforcing a contract to expand judicial review following the arbitration."). In the aftermath of Hall Street Associates, Congress may reconsider the language of the Federal Arbitration Act and both the positive and negative aspects of allowing judicial review of legal issues as part of confirming an arbitration award, even possibly having a committee appointed from the federal bench and bar to consider and report on such aspects of arbitration.

Hall Street Associates illustrates both the beneficial and detrimental aspects of allowing district courts to consider and review matters of law arising out of an arbitration. On the positive side, allowing the courts to opine on issues of law ensures that a consistent body of law is established and enforced both in the established case law and in the arena of arbitration. Contracting parties require some precedent in order to assess and assign risk in drafting their agreements. Having an arena of dispute resolution developing law outside of and unbeholden to such precedent creates confusion and undermines public policy grounded in the contours of established precedent formulated by both the judiciary and the legislative branch of government. As the dissent forcefully argues, it also supports the policy in allowing contracting parties to freely negotiate their own dispute resolution and concomitant risks. This policy has become more and more important. See id. at 1-2 (Stevens, J., dissenting).

On the negative side, involving the district courts more in arbitration defeats its purpose of lessening the case load burden of litigation on the courts by having the parties resolve their issues in alternative dispute resolution. See Hans Smit, 17 AM. REV. INT'L ARB. 513, 514 (2008) (noting that "contractual expansion of judicial review of arbitral awards beyond the limits legislatively defined would tend to transform arbitration in exchange for litigation into arbitration in exchange for arbitration cum litigation."). Further, allowing the parties to assign the courts judicial review may open a Pandora's Box enmeshing the courts not only in arbitrated issues between the parties, but in deciphering such agreements to determine what aspects are subject to judicial review and what aspects are not. In some sense, it is allowing parties to determine the courts' jurisdiction, although clearly that is not too far removed from what a district court does in construing arbitration agreements virtually every day.

Any amended statute will have to limit such confusion by specifically addressing which issues may be assigned for judicial review by the parties. It should also allow the district court the right not to decide issues that it does not see as dispositive to the arbitrated issues. Since the district court already has the case before it, considering whether there are concomitant legal issues set forth in the arbitration agreement may not significantly increase the litigation load. The court has to decide the issues before it regardless. In the event that there is some confusion by the parties or the arbitrator regarding what issues the court is to decide or whether or not they are actually issues of law (as opposed to issues of fact), the district court may simply abstain. The long-term impact of such an amendment may pay a dividend as arbitrating parties conduct discovery – the most burdensome and expensive part of litigation – and trial – possibly the most burdensome part on the courts – in arbitration and outside of the courts.

Yet the procedure put in place by such an amendment still preserves the role of the courts in deciding issues of law in published opinions that act as legal precedent. Despite the apparent reluctance by many to allow the district courts to become more involved in an arbitration, this may be a situation where some small amount of increased involvement will result in greater returns and, ironically, becoming less involved as the process is put in place. Two states have experimented with such procedures. New Jersey has allowed parties to expand the scope of judicial review of an award by expressly providing for such expansion. See N.J. STAT. ANN.

§2A:23B-4(c); Aaron S. Bayer, et al, Arbitration After Hall Street at 46, FOR THE DEFENSE (November 2008) ("Bayer"). Similarly, the California Supreme Court has held that Hall Street Associates does not prevent a court from reviewing the legal aspects of an arbitration award outside of the Federal Arbitration Act. See Cable Connection, Inc. v. DIRECTV, Inc. 190 P.3d 586 (Cal. 2008); Bayer at 46.

It is also important to examine how Hall Streets Associates, L.L.C. may impact international arbitration. The grounds upon which foreign courts may enforce or refuse to enforce an arbitration agreement may be more or less expansive than that of the Federal Arbitration Act. Particularly for foreign or international parties arbitrating or enforcing an arbitration agreement in the U.S., it may be important to ensure that whichever jurisdiction's law is agreed upon is correctly applied. Cf., Annemarie Ellig, Rebecca Lanctot, A Decision Looms: How Passage of the United States Arbitration Fairness Act of 2007 Would Contradict Principles Underlying the New York Convention and Affect the United States' Role in International Commerce, 12 VINDOBONA J. OF INT'L COM. L. & ARB. 249, 259 (2008) (noting possible impact upon enforcement of international arbitration agreements in U.S. courts). Simply leaving it to an arbitrator, without resort to review, may not be sufficient. U.S. courts already have in place conflicts of law jurisprudence in place and may examine and apply foreign law. And whether or not the court is to do so is still an issue left to the contracting parties in drafting and negotiating their arbitration agreement. This may be yet one more reason for clarification to be made by amendment to the Federal Arbitration Act.