Deal--Or No Deal

Having recently heard arguments in Hall Street v. Mattel, the U.S. Supreme Court is poised to decide the most important case in years involving private arbitration. The issue: whether companies can agree to judicial review of arbitration awards that is much broader than that provided by the Federal Arbitration Act.

By Philip G. Kircher

All eyes in the world of alternative dispute resolution are on this case.

Hall Street Associates, a commercial landlord, filed suit in Oregon against its tenant, Mattel Inc. While the case was still pending in court, the parties agreed to arbitrate. Under the Federal Arbitration Act, arbitration awards can be judicially vacated only when the award is the result of corruption, fraud or arbitrator misconduct. Findings of fact made by arbitrators and application of the law to those findings cannot be reviewed by the courts. That is why most arbitration awards are final and "nonappealable."

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Here, however, Hall Street and Mattel--with the trial court's blessing--agreed that the final arbitration award in their case could be reviewed by the courts. They concurred the court could vacate, modify or correct any award, where the arbitrator's findings were not supported by substantial evidence or the arbitrator's conclusions of law were erroneous.

The arbitrator issued an award favoring Mattel. The federal trial court in Oregon vacated that award based on the expanded scope of review in the parties' agreement. The federal circuit court of appeals in California then reversed and ordered that the original award be enforced because none of the narrow grounds for review under the act were applicable.

However, the federal circuit court of appeals' decision was at odds with decisions on the same issue from other circuit courts. Therefore, to resolve this intercircuit split of authority, the Supreme Court agreed to hear the case.

Hall Street argues the Federal Arbitration Act is permissive and not mandatory, and parties should be able to expand judicial review of arbitration awards if they do so in clear contractual language. Hall Street contends, indeed, that the primary purpose of the act is to ensure that private arbitration agreements are enforced.

On the other hand, Mattel stresses the act provides the exclusive grounds for judicial review of arbitration awards, further arguing that enforcing expanded judicial review contracts undermines the efficiency and finality of arbitration awards. Mattel also reasons that private parties should not be permitted to contract for federal jurisdiction over their disputes.

This is a very important case for big business (and little business). Last year, in this column, I wrote about the pros and cons (mostly cons) of private arbitration and how arbitration has developed certain unattractive features. I argued that a better method of dispute resolution was the nonjury court trial.

Smart money says the Supreme Court will affirm the decision of the circuit court of appeals. (While this Supreme Court has demonstrated a tendency toward deciding cases to diminish--and not expand--federal jurisdiction over disputes, it has also shown a leaning toward enforcing private contracts and giving big business flexibility to decide how to resolve their disputes).

And, if it does, there will be an arbitration dispute resolution model available that will closely mimic the nonjury trial. What business will gain is expanded judicial review, a much needed mechanism to protect against completely off-the-wall arbitration decisions that sometimes occur. That's a deal worth making.

PHILIP G. KIRCHER is co-chairman of the commercial litigation department at the law firm of Cozen O'Connor.

January 1, 2008

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