Hall Street v. Mattel, and the Problem of Post-Award Litigation
By Marc J. Goldstein
Sixteen months after the Supreme Court’s decision in Hall Street Assocs. v. Mattel, Inc., 128 S. Ct. 1396 (2008), and despite the rivers of “ink” that have flowed in commentary on the implications of the decision, one may seriously ask whether the realm of post-Award judicial proceedings has really changed very much. And one may well ask, should that realm change more dramatically than it already has, and if so, how do we get from here to there?
For those who desire full-bore judicial review on the merits of the decisions of arbitrators, the Hall Street decision is of course a major disappointment. The holding of Hall Street is that in a case to which the Federal Arbitration Act applies, the parties may not by agreement invest the courts with broader powers of review than the FAA prescribes. But even within the four corners of the Court’s opinion, one finds something of a roadmap to expanded judicial review. The parties might agree, said the Court, that any motion to confirm, vacate, modify, or correct the award shall be brought only in the courts of a particular state and shall be determined according to the arbitration law of that state. Find a state whose arbitration law provides for expanded review on the merits, and subscribe. That option was of course widely understood before Hall Street, and I doubt that the decision has provoked a massive flight to state courts in the drafting of arbitration clauses.
Another alternative for expanded review, not discussed in the Hall Street opinion and little discussed in the commentaries, is drafting the arbitration clause to provide for an arbitral appeal panel with powers to review the “trial” arbitrator’s conclusions of law and findings of fact according to an agreed-upon standard.
This option, while legally possible, does require for effective implementation the thoughtful involvement of an arbitration lawyer before signing of the contract. If the parties are otherwise agreeing to arbitrate under a particular set of institutional rules, such as those of the AAA or CPR, to effectuate an agreement for appellate arbitration they must expressly opt out of the rules providing for the finality of the “trial” arbitrator’s award, and provide that such award shall not be final for purposes of any application for judicial relief in respect of the award until the agreed arbitral appellate process has been completed (or the time to invoke it has expired). But arbitral institutions have not leaped into the fray to offer services as administrators of appellate arbitration, or to promulgate rules of arbitral appellate procedure. One might infer from this that not very much of a market for appellate arbitration has emerged. Companies that covet the protection against error of appellate review will generally opt to litigate in the first instance before judicial tribunals.
And so Hall Street does not appear to have wrought any widespread and dramatic changes in the way arbitration clauses are written. But what it may well have done, I believe, is to reinforce a movement, if not a clear trend, away from arbitration and back to the judicial system.
Disgruntled users of arbitration perceive that arbitrators fail to keep control of proceedings, and that arbitral institutions fail to keep control of arbitrators. The result, too often, is a bloated hearing record, too unwieldy for the arbitrator(s) to readily digest, and final awards that are flawed or superficial because the arbitrators’ task is simply too daunting. Corporations that have spent millions in legal fees and arrived at such results are prone to say “never again.”
But so much for the “dark side” of Hall Street and the state of the arbitral process. Within the arbitral community — the group of providers who believe arbitration can and often does produce appropriate outcomes at reasonable cost — the pressing question is whether Hall Street is a step toward the overall reduction of post-award judicial proceedings.
Indications from the decisions of federal appellate courts are that the rate of futile motions to vacate based on alleged manifest disregard of the law has not been affected to any significant degree. In the Second Circuit, the Court’s pre-Hall Street manifest disregard jurisprudence has been “reconceptualized as a judicial gloss” on Section 10(a)(4) of the Federal Arbitration Act. (Stolt-Nielsen SA v. Animalfeeds Int’l Corp., 548 F. 3d 85, 94 (2d Cir. 2008), cert. granted 2009 U. S. LEXIS 4345 (U. S., June 15, 2009)).That section provides that an award may be vacated if the arbitrators exceeded their powers, or so imperfectly executed them that no final and definite award was made. The Second Circuit, by reverse-engineering its manifest disregard jurisprudence into statutory form — taking to heart the Supreme Court’s musing that “maybe” the Court’s original use of the term “manifest disregard” was as a shorthand summary of the statutory criteria — has postponed any fresh judicial thinking within its domain about what “exceeding powers” actually means. In the Ninth Circuit, the position is that the manifest disregard doctrine was regarded, even before Hall Street, as a judicial construction of “exceeding powers,” so that no change in approach is required. So said the Court in the Comedy Club case (Comedy Club, Inc. v. ImprovWest Assocs., 553 F. 3d 1277 (9th Cir. Jan. 29, 2009)), upon remand for reconsideration in light of Hall Street.
An approach holding more potential for actual change in the legal landscape is that taken by the 5th Circuit in Citigroup Global Markets Inc. v. Bacon, 562 F. 3d 349 (5th Cir. 2009). The Court observed that, as a result of Hall Street, “the term itself [manifest disregard], as a legal term of art, is no longer useful in actions to vacate arbitration awards.” This approach strikes me as the most jurisprudentially sound, and also as the one most likely to force courts to develop “exceeding powers” jurisprudence systematically and on a case-by-case basis. It is jurisprudentially sound because it builds upon the Supreme Court’s most direct declarative statement in Hall Street about the Court’s original use, in Wilko v Swan, 346 U. S. 427 (1953) of the expression “manifest disregard.”. The Court said in Hall Street that, in its own jurisprudence, it has simply “taken the Wilko language as we found it, without embellishment.” (128 S. Ct. at 1404).
And if the Supreme Court has, for the moment at least, reduced “manifest disregard” to the status of a tantalizing phrase of undetermined meaning in a 56-year-old overruled decision, then lower courts are well-advised to approach “exceeding powers” challenges to arbitral awards without reference to a discredited body of non-statutory jurisprudence built up over five decades, from the humble(d) origins of that rhetorical flourish in Wilko.
The utility of discarding “manifest disregard” as a legal term of art should not be underestimated. Despite repeated judicial pronouncements limiting the doctrine, the words themselves have tempted generations of American litigators to seek judicial review of allegedly erroneous arbitral conclusions of law, conflating in their arguments “manifest” with “obvious” and “disregard” with “error.” This occurred despite the fact that, in its original incarnation in Wilko, “manifest disregard” was plainly used to refer to something that was not judicial review of arbitral awards for legal errors: ” [T]he interpretations of the law by the arbitrators in contrast to manifest disregard are not subject, in the federal courts, to judicial review for error in interpretation.” (Wilko, 346 U. S. at 436-37).
One might hope for the development of a nationally-consistent body of Section 10(a)(4) jurisprudence that arbitrators exceed their powers only when (1) their actions are not even arguably in furtherance of the contract that empowers them, (2) they purport to rule on the merits in a case over which they do not have jurisdiction, or (3) they purport to act at a time when they have exhausted their powers, and become functus officio, by rendering a final award in a case, or on an issue or issues in the case.
But even a well-developed and predictable body of law about when arbitrators exceed their powers, and the expulsion of “manifest disregard” from the legal lexicon, will not deal with the fundamental problem. That problem is that post-award judicial proceedings cost a great deal and take a long time, and there is no provision in the Federal Arbitration Act for recovery of costs and attorneys’ fees by the prevailing party in post-award litigation. In my view it is long past the time when the English Rule rather than the American Rule should govern in proceedings under the FAA. The access-to-justice rationale that provides the historical justification for the American Rule should not apply where the parties have agreed, or adopted rules of arbitration that provide, that the arbitration winner shall or may in the arbitrator’s discretion recover legal fees from the loser. The FAA should provide that the rule on fee-shifting in post-award proceedings shall be what the parties have agreed, or if the clause is silent, then the same fee-shifting agreement or rule that governed the arbitral proceedings pre-award shall also govern any litigation post-award.
Such an amendment to the Act offers the best prospect to contain the epidemic use of post-award proceedings by well-financed parties to leverage settlements for less than the sums awarded against them by the arbitrators.
Marc J. Goldstein is a litigator and arbitrator based in New York. He has practiced independently since 2007, after 27 years spent mainly in a large international law firm. He concentrates his practice on international commercial disputes. He is a Fellow-Elect of the College of Commercial Arbitrators and a Fellow of the Chartered Institute of Arbitrators, and is on the international arbitrator rosters of the ICDR, CPR, SIAC, WIPO and CIDRA. He is a member of the North American Arbitration Committee of the ICC. He is also on the mediation panel of the New York Supreme Court Commercial Division. His widely-read Arbitration Commentaries can be found at http://arbblog.lexmarc.us.