Hall Street Associates, L.L.C. v. Mattel, Inc.

Issue Discussed: Judicial Review/Manifest Disregard

Submitted by John R. Cashin

Date Promulgated: March 25, 2008

Issue Decided: The role of the district courts in reviewing arbitration awards under The Federal Arbitration Act. (9 U.S.C. Sect 1 et seq.) may not be modified by contract.

In a case that began as a lease dispute the U.S. Supreme Court in a 6-3 decision ruled that the Federal Arbitration Act’s (FAA) grounds for prompt vacatur, correction or modification of awards are exclusive for parties seeking expedited review under the FAA. Any such judicial review may not be expanded or modified by contract.

Mattel rented property from Hall Street Associates (Hall). The property was used as a manufacturing site. The lease provided that Mattel would indemnify Hall for any costs resulting from the failure of Mattel or any of its predecessor lessees to follow environmental laws while using the premises. In 1998 tests of the well water on the property showed high levels of trichloroethylene (TCE), an apparent residue of the manufacturing process discharged by a predecessor lessee. Mattel issued notice of intent to terminate the lease in 2001. Hall filed suit contesting Mattel’s right to vacate at that time and claiming Mattel was obligated under the lease to indemnify Hall for the clean up costs. Following a bench trial in U.S. District Court for the District of Oregon where Mattel won on the right to terminate, with the consent of the District Court the parties agreed to submit their indemnity claim to arbitration.

The parties signed an arbitration agreement which the court approved and entered as an order. That agreement contained the following provision: “The Court shall vacate, modify or correct any award: (i) where the arbitrator’s findings of fact are not supported by substantial evidence, or (ii) where the arbitrator’s conclusions of law are erroneous.”

The arbitration took place and the arbitrator decided that no indemnity obligation was owed to Hall by Mattel. This decision was based on a determination that the lease obligation to follow the environmental laws did not require compliance with the testing requirements of the Oregon Drinking Water Quality Act. The arbitrator characterized that Act as dealing with human health as opposed to environmental pollution. Hall filed for a District Court Order vacating the arbitrator’s decision on grounds of legal error for failing to treat the Oregon Act as an applicable environmental law within the scope of the lease provision. Applying the standard of review chosen by the parties in the arbitration agreement the court vacated the award and remanded the case for further consideration by the arbitrator.

On remand the arbitrator found the Oregon Act to be an applicable environmental law within the scope of the lease obligation and found Mattel liable for clean up costs. Each party sought modification and again the District Court applied the parties’ agreed standard of review for legal error, correcting the arbitrator’s calculation of interest and otherwise affirming the award in favour of Hall.

Both parties appealed to the Court of Appeals for the Ninth Circuit. Here Mattel changed positions and challenged the District Court’s use of the agreed standard of review of legal error as unenforceable as such a standard is not permissible under sections 10 or 11 of the FAA.. The Ninth Circuit agreed with Mattel citing Kyocera Corp. v. Prudential-Bache Trade Svcs., Inc., 3412 F. 3rd 987, 1000 (2003) holding the terms of the judicial review in the arbitration agreement to be unenforceable. On remand to the District Court the Ninth Circuit instructed the Court to confirm the original award of the arbitrator unless it should be vacated or modified or corrected exclusively under the grounds specified under sections 10 or 11 of the FAA.

On remand the District Court vacated the original arbitration award in favour of Mattel because it rested on an implausible interpretation of the lease provisions and therefore exceeded the arbitrator’s powers. Mattel again appealed and the Ninth Circuit again reversed holding implausibility was not a valid basis for vacating an award under Section 10 of the FAA. The Supreme Court granted certiorari to decide whether the grounds for vacatur and modification provided by sections 10 and 11 of the FAA are exclusive. Justice Souter delivered the opinion of the Court holding that such provisions are the exclusive grounds for vacating, modifying or correcting an arbitration award under the FAA. His opinion was joined by Chief Justice Roberts and Justices Thomas, Ginsburg, Alito and Scalia. Justices Stevens, Bryer and Kennedy dissented.

The Supreme Court based its decision on two principal grounds. First, the Court interpreted the textual content of FAA sections 10 and 11 as the exclusive permissible basis for vacating, modifying or correcting an arbitration award. The Court held such an interpretation was compelled by the provisions of FAA section 9 which instructs that district courts “must grant” an order confirming an arbitration award unless such award is vacated, modified or corrected as prescribed in sections 10 and 11. The Court stated such language “unequivocally tells courts to grant confirmation in all cases, except when one of the “prescribed” exceptions applies.” Slip op. at 10.

The second ground dismissed Hall’s argument that the Supreme Court’s prior decision in Wilko v. Swan, 346 U.S. 427 (1953) added “manifest disregard” of the law as a ground for vacatur. The Court determined that the phrase “manifest disregard” used in Wilko may have merely been a “shorthand” referral to the collective grounds expressed in section 10 of the FAA “rather than adding to them,” and saw no reason to accord that phrase the significance Hall had urged. Slip op. at 8.

The decision revolves a number of contradictory interpretations in the lower federal courts regarding the scope of judicial review of arbitration awards under the FAA..

*John R. Cashin is General Counsel – International Businesses at Zurich Financial Services, Zurich, Switzerland. He is an ARIAS Certified Arbitrator. At Zurich his responsibilities include insurance regulation, claims litigation and arbitration as well as general legal matters in twenty jurisdictions outside of Europe and North America. He joined Zurich in 2004 from the law firm of Stroock & Stroock & Lavan LLP in New York City. Prior to his law firm practice he served as Deputy Superintendent of the New York State Insurance Department and spent twenty years in the reinsurance brokerage business.