Supreme Court’s Decision In Hall Street Offers Something For Everyone
March 31, 2008
[Image: A supreme pizza with pepperoni, peppers, olives and mushrooms, by Scott Bauer, USDA]
Last week, the U. S. Supreme Court decided the much anticipated arbitration case, Hall Street Associates, L.L.C. v. Mattel, Inc., which I first wrote about when it was argued last November. The question faced by the Court in Hall Street was whether the parties to a dispute governed by the Federal Arbitration Act (“FAA”) could, by agreement, provide for more expansive judicial review of the arbitrator\’s award than the narrow grounds stated in the FAA. In particular, the case involved an agreement that the federal district court could vacate, modify or correct the arbitrator\’s award to correct legal or factual error. The FAA permits an award to be vacated or modified only when it is in excess of the arbitrator\’s authority, or when it results from fraud or arbitrator misconduct.
By a 6-3 vote, the Court held that the statutory grounds for vacating or modifying an arbitration award under the FAA are exclusive, and not subject to expansion by agreement of the parties. The Court thereby resolved a conflict among the circuit courts, and upheld the more “traditional” view of arbitration argued by many, including the American Arbitration Association (“AAA”). This was a good result. It preserved the essence of the arbitration process under the FAA that makes it an attractive alternative to courtroom litigation.
But the Court did not slam the lid on all future use of “enhanced arbitration.” Arbitrations not governed by the FAA may or may not permit the parties to agree upon heightened judicial review, depending on the arbitration statute or rule involved. Even under the FAA, as noted by the National Arbitration Forum (“NAF”), the possibility remains that parties could expressly agree to require the arbitrator to apply the substantive law governing their underlying dispute. Thus, the losing party could attempt to challenge the arbitrator\’s award in court on the grounds that the arbitrator failed to “follow the law,” and thereby acted “in excess of the arbitrator\’s authority.” The distinction between the parties\’ agreement that (a) the arbitrator\’s award will be subject to “enhanced judicial review” (a result not allowed under Hall Street) and (b) the arbitrator\’s award can be vacated for “exceeding the arbitrator\’s authority” if the arbitrator did not follow the law, is a subtle one, to say the least. For a fuller explanation of this theory, see Judge Posner\’s opinion in a case cited by the NAF, Edstrom Industries, Inc. v. Companion Life Insurance Co., 516 F.3d 546, 550 (7th Cir. 2008).
What does this mean for the healthcare lawyer and client considering the use of an arbitration agreement? If you like the idea of “traditional” arbitration, with the scope of discretion, speed and finality that it offers, make your case subject to the FAA and select an arbitrator using rules that are consistent with your expectations.
If you are not comfortable with that scope of arbitral authority, you could attempt to get your case outside the FAA, expressly require the arbitrator to strictly adhere to the applicable substantive law, and require the arbitrator to issue a reasoned award (including findings of fact and conclusions of law). Procedural rule 20 D of the NAF provides that an arbitrator “shall follow the applicable substantive law.” This approach may or may not get you the judicial review you want, but it maintains that possibility, and holds the arbitrator to a tighter standard. It also may slow the process and undercut the finality that traditional arbitration offers.
Finally, if you can\’t live without absolute certainty that your case will be reviewed on the merits by a sitting judge, just skip arbitration and go directly to court. You really didn\’t want to arbitrate anyway.
The beauty of the Hall Street decision is that it leaves parties with this choice. You just can\’t have them all.