Sunday, September 13, 2009

White Rabbit

I followed a case down the rabbit hole this weekend. I post here what I have found. It is mildly interesting. It was the strangest thing to read about a case and not be able to look away. For me, I have not spent this much time looking at and studying a domestic case in years. To be honest, my ultimate conclusion is that arbitration laws in the US are very complex and will employ lawyers who work in the area for decades. I have spent a little time with the English Arbitration Act and even less time with the US Federal Arbitration Act (FAA). The case I discuss here is based on the California Arbitration Act (CAA). It is decided by the Supreme Court of California on the narrowest of legal arguments. For those averse to navel gazing, turn back now….

The cases concern the single issue of whether parties to a contract that contains an arbitration clause, can draft that clause to allow for greater judicial review of the ultimate arbitration award, than would be available under the applicable arbitration statute. One of the hallmarks of arbitration is that it is private dispute resolution with limited review by the courts. This is intended to make arbitration a faster dispute resolution method. That is not the case in the states or elsewhere. Increasingly, arbitration cases carry on as long, if not longer, than litigation. That is for various reasons and different ones depending on whether the case is domestic or international. At any rate, these cases surround a very narrow issue that seems to raise all sorts of fundamental questions. Such as, is arbitration about the contract or party autonomy? That is to say, should courts decide these matters focused on upholding contract law principles or the arbitration principle that parties are free to construct arbitration clauses as they see fit for their purposes? Additionally, the in the states with state and federal arbitration laws very similar but with differences there is always the matter of federalism. Frequently, the FAA pre-empts state arbitration laws which keeps matter simply. The California court was able to work around all of these issues and decide a matter that avoided the FAA. It is maverick and I liked the case because of that. Here are the brief details.

In Cable Connection, Inc. v. DirectTV, Inc. (2008) 44 Cal.4th 1334, the Supreme Court of California managed to throw into question the ability of parties to expand by agreement judicial review of arbitral awards where the arbitrators made an error of law. The Supreme Court of the United States had just settled a split in the circuit courts on this matter when it decided Hall Street Associates, L.L.C. v. Mattel, Inc. (2008) 128 S.Ct. 1396. The Court in Hall Street held that under the FAA, and federal law, parties could not agree to expand judicial review of arbitration awards. The Cable Connection decision was limited to arbitration agreements that were governed by the CAA and where the parties had drafted the agreement to provide for expanded judicial review explicitly and unambiguously. Also, such review was only available under the CAA where arbitrators exceeded their powers (CCP §1286.2,) by committing an error of law or legal reasoning.

Both cases involved business contract disputes. While the decision in Cable Connection is fairly limited, it does represent a break in theory with the approach the US Supreme Court was trying to achieve in terms of expanding judicial review. The Hall Street decision did seem intent on keeping all the circuits on the straight and narrow. Before Hall Street only the 7th, 8th, 9th and 10th circuits thought it was NOT OK to expand judicial review by contract. The other circuits approved of it. What I found interesting was that the commentary about both decisions focused on the basic tenets of arbitration like finality of the award, choice of law, and party autonomy. I wondered why no body saw judicial review for legal error as a big vote of no confidence in private arbitrators and their training. Getting the courts to double check on decisions for legal error is a safeguard parties should have. How can arbitration be reasonably restricted in this way?

These cases were interesting and the one matter that I thought merited comment was one article that described the sad condition of state arbitration laws in comparison to the FAA. I must admit, I had not thought about that. It does however seem that California is trying to carve its own way forward by sticking two fingers up to the Supremes-always interesting. However, arbitration awards would need to be very carefully drafted in order to take advantage of the fact that under the CAA parties can expand judicial review by agreement. So lawyers will be fully employed because of this.

Ultimately, after reading around these issues and the cases, I concluded that international disputes that go to arbitration may actually be better off resolving matter in Europe or elsewhere outside the US. Things are messy and complicated here. England, as far as dispute resolution, is looking mighty good in this light. The English Arbitration Act is concise and forward looking in many ways that the FAA can not dream to be in its present state. The FAA is ambiguous and the decisions of the Supreme Court do not help. For example, the Hall Street decision effectively eviscerated the courts decision in Wilko v. Swan, 346 U.S. 427 (1953), Wilko created the policy that arbitration awards could be vacated for manifest disregard of the law. Manifest disregard is not even mentioned in the FAA. These kinds of decisions are a full employment act for international arbitration lawyers.

These cases were decided last year and they do demonstrate the uncomfortable position arbitration continues to be in here. The FAA has not kept up with the times and maybe the states can make a difference but only through the back door at this point.

Derek Scott, Note and Comment: The Zen of Arbitration: Contracting for Judicial Review of Arbitration Awards, 29 Whittier L. Rev., 743 (2008)

Edward Brunet, The Minimal Role of Federalism and State Law in Arbitration, 8 Nev. L. J. 326 (2007)

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