The case involved a lease dispute between Hall Street, the landlord, and Mattel, the tenant. After Mattel gave notice of its intent to terminate the lease, Hall Street filed suit contesting Mattel’s right to vacate and sought indemnification pursuant to the parties’ lease agreement. At trial, Mattel won on the termination issue and, after an unsuccessful attempt at mediating the indemnification claim, the parties proposed to the court that they submit the issue to arbitration. The court agreed and the parties drafted an arbitration agreement (approved by the court) which empowered the court to vacate, modify or correct any award issued by the arbitrator where the arbitrator’s findings of facts were not supported by substantial evidence or where the arbitrator’s conclusions of law were erroneous.
The arbitrator ultimately decided for Mattel on the indemnification issue. Pursuant to the parties’ arbitration agreement, Hall Street petitioned the United States District Court for the District of Oregon to vacate the award on the grounds that the arbitrator committed a legal error. The District Court agreed, vacated the award, and remanded for further consideration by the arbitrator. In doing so, the court expressly invoked the standard of review provided for by the parties’ arbitration agreement, relying upon the Ninth Circuit’s decision in LaPine Technology Corp. v. Kyocera Corp., 130 F.3d 884, 889 (9th Cir. 1997), which held that the FAA leaves parties “free…to draft a contract that sets rules for arbitration and dictates an alternative standard of review.” On remand, the arbitrator adopted the District Court’s findings and amended its decision in favor of Hall Street.
After the District Court affirmed the arbitrator’s revised award, Mattel appealed to the United States Court of Appeals for the Ninth Circuit to vacate it, contending that the Ninth Circuit’s en banc decision in Kyocera Corp. v. Prudential-Bache Trade Servs., Inc., 341 F.3d 987, 1000 (9th Cir. 2003), which had recently been rendered, overruled LaPine and held that the portion of the parties’ arbitration agreement providing for judicial review of legal error was unenforceable as a matter of law. The Ninth Circuit reversed in favor of Mattel, finding that “under [Kyocera Corp.] the terms of the arbitration agreement controlling the mode of judicial review [were] unenforceable….”
The United States Supreme Court granted certiorari to determine whether the grounds for vacatur and modification of arbitral awards set forth by Sections 10 and 11 of the FAA are exclusive, or whether parties can agree to an expanded standard of judicial review. The Supreme Court found that the litany of arbitrator misconduct set forth in Sections 10 and 11 of the FAA—“corruption”, “fraud”, “undue means”, “evident partiality”, “material misconduct”, among others—compelled the conclusion that courts could not modify or vacate an arbitrator’s award because of a finding of “legal error.” As such, the court found that the bases provided by Section 10 and 11 of the FAA were the exclusive grounds for vacatur and modification of arbitral awards. The Hall Street Associates decision resolves a division among federal circuits on this issue, as the First, Third, Fourth, Fifth and Sixth Circuits have held that parties may contract to judicial review of arbitration awards beyond that specified in the FAA. Click here to review a copy of the Supreme Court’s decision.
