Hall Street v. Mattel and Vacating Arbitration Awards

This really is an exciting and simple-to-understand case if you just can get over the prejudice that judicial review of arbitration awards must be dull stuff. In fact, this case probes one of the great unsolved issues of modern law--and that is the way that the "new" system of mediation and arbitration "connects" with the "old" system of court litigation. Well, of course the "old" system still exists, but as anyone who has hung around law for a while knows, the "preferred" method for resolving disputes now is through mediation or arbitration. But the "great unsolved question" relates to how courts might review decisions of arbitrators when one of the parties is dissatisfied with arbitral decisions. According to the law that governs this question, the Federal Arbitration Act of 1925 (9 USC sec. 1 et seq.), courts are only supposed to review arbitration awards in the narrowest of circumstances. I will quote here the "narrow" circumstances, because that is precisely what is at issue in this case. The reference is to 9 USC sec. 10.

"(a) In any of the following cases the United States court in and for the district wherein the award was made may make an order vacating the award upon the application of any party to the arbitration--

(1) where the award was procured by corruption, fraud, or undue means;

(2) where there was evident partiality or corruption in the arbitrators, or either of them;

(3) where the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy; or of any other misbehavior by which the rights of any party have been prejudiced; or

(4) where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made."

Now, let's get to the facts.

Some Relevant Facts

This case has been dinking around in the court and arbitral system for at least 7 years, which isn't too long by today's standards. It all happened about two miles from where I used to live on the West Side of Portland, OR. Mattel leased land from Hall Street Associates. There was contamination on the property during Mattel's leasehold. Mattel wanted out of the lease. Hall sued on a number of grounds in state court. Mattel removed the suit to federal court. At the federal district court both parties asked the judge if they could work out an arbitration agreement and then proceed to arbitration, with the legal conclusions of the arbitrator subject to district court review. The judge permitted this. He did this based on a 1997 opinion of the 9th Circuit allowing expanded judicial review of arbitration decisions. So, the parties proceeded to arbitration.

The arbitral decision of January 2002, however, came to legal conclusions that the federal district judge concluded were just flat-out wrong (to the effect that environmental laws don't apply to Mattel's environmental contamination). So, the judge granted Hall Street's motion to vacate the award and send it back to the arbitrator with guidance on how to apply the law. The arbitrator then complied with the district court judge, which led to a victory for Hall--of over $500,000. After some further wrangling, the victory for Hall was upped to more than $800,000.

Now, of course, Mattel was pissed off. So, Mattel appealed to the 9th Circuit, arguing that under the FAA there are only narrow grounds for a court to review arbitration agreements, and getting the law wrong was not one of them. You might think, "Well, the 9th Circuit will slam dunk this case down Hall's throat because it allowed, in 1997, expanded judicial review of arbitration awards." Of course, you would both be right and wrong. That was what the 9th Circuit believed in 1997 but by 2003, the year before this case got to them, they had changed their tune. Now, with the 9th Circuit being divided almost right down the middle, it concluded that, after all, courts really can't review arbitration awards, except on the very narrow grounds, most of which are listed in the bolded section 10 above. Being a jerk, being a legal neophyte, applying a completely incorrect reading of the law--under the 9th Circuit's new (2003) standard, none of these would allow for judicial review of arbitral decisions. So, what happened?

What Happened at the 9th Circuit

So, the 9th Circuit, in 2004, decided that they now agreed with Mattel--that a district court really couldn't overrule the arbitrator's erroneous legal conclusions, despite the fact that their arbitration agreement said he could and that the law at the time of the arbitration was that he could do so. They vacated Judge Jones' decision sent the case back to the now increasingly hapless Judge Jones, and told him to look at it only from the perspective of sec. 10-11 of the Arbitration Act (sec. 10 was the important one). Judge Jones gave it a good hard look in 2005 and decided he was right after all--and that the arbitrator's dumb legal conclusions acted as sort of "exceeding powers" of subsection 4 in the bolded law above. Thus, award confirmed.

But then it came back to the 9th Circuit, which slapped Judge Jones around again and declared that he was wrong, and that his review of the arbitral decision was incorrect. Then, Hall appealed to the Supreme Court for help. And we have this case.

Conclusion

So, the Supreme Court needs to decide whether private parties can agree to broader review of arbitral decisions by the federal courts than the FAA permits. It is as simple as this. But I love the facts and procedure of our case, don't you?

3169