Hall Street v. Mattel

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Authorship: This page is maintained by Christian Davis, a law student at Georgetown University. He was a summer associate at Akin Gump in 2007.

1 Briefs and Documents
2 Pre-Argument Articles
- 2.1 Argument Preview
3 Oral Argument Recap
4 Opinion Analysis
5 Links and further information

[edit] Briefs and Documents

Docket: 06-989

Oral Argument: Transcript

Judgment: VACATED and REMANDED in an opinion by Justice Souter.

[edit] Pre-Argument Articles

[edit] Argument Preview

On May 29, 2007, the Supreme Court granted certiorari in Hall Street Associates v. Mattel, Inc.. The question presented in this case is whether “the Ninth Circuit erred when it held, in conflict with several other federal Courts of Appeal, that the Federal Arbitration Act (“FAA”) precludes a federal court from enforcing the parties’ clearly expressed agreement providing for more expansive judicial review of an arbitration award than the narrow standard of review otherwise provided for in the FAA.”

[edit] Background

This case arose out of a property lease between tenant Mattel Inc. and Hall Street, Associates, Mattel’s landlord. The well-water on the property was badly contaminated, and no testing – which was apparently required under the Oregon Drinking Water Quality Act (“ODWQA”) – had taken place. Hall Street filed suit against Mattel in Oregon state court seeking declaratory relief, injunctive, relief, and damages for the contamination. It alleged, amongst other things, that the lease required Mattel to indemnify it from all actions relating to the condition of the property. Relying on diversity jurisdiction, Mattel removed the case to federal district court.

After taking a separate issue to trial, the parties submitted, and the court approved, an agreement to arbitrate the remainder of the case. The agreement provided for de novo judicial review of the arbitrator’s legal rulings – a more expansive scope of review than provided by the FAA, which limits review to: (1) awards procured by corruption, fraud, or undue means; (2) cases in which the arbitrators are obviously partial or corrupt; (3) where there is misbehavior prejudicing a party’s rights; and (4) where the arbitrators exceeded their power, or so imperfectly executed their power that no “mutual, final, and definite award” was made.

The arbitrator ruled that Mattel need not indemnify Hall Street. Underlying this decision was the finding that Mattel had not violated “any applicable environmental laws,” an exception to the indemnity requirement under the property lease. Hall Street moved to vacate the proceeding in district court. The court granted the motion and remanded the case to the arbitrator, deeming erroneous the arbitrator’s conclusions that the ODWQA was not an applicable environmental law and that the exception to indemnification applied. Consequently, the arbitrator ruled in Hall Street’s favor, and the district court upheld the award.

On appeal, the Ninth Circuit reversed the district court’s decision vacating the initial arbitral award, reasoning that the arbitration agreement’s provision expanding judicial review was unenforceable. On the Ninth Circuit’s view, courts must enforce an arbitration award “unless [they] determine[] that the award should be vacated [modified or corrected] on the grounds allowable under [the FAA].” Again, the trial court vacated the initial arbitral decision, ruling that the arbitrator exceeded his power within the FAA with an “implausible interpretation of the contract.” The Ninth Circuit reversed this decision, holding that “implausibility is not a valid ground for voiding an arbitration award” under the FAA. Hall Street sought an en banc review of the Ninth Circuit’s opinion, which was denied.

[edit] Petitions for Certiorari

Hall Street sought certiorari on the question of whether the grounds outlined in the FAA are the only permissible bases for reviewing an arbitral award. It emphasized the division among the Courts of Appeals with regard to the question presented. Both the Ninth and Tenth Circuits have held that parties cannot agree to judicial review beyond the narrow grounds provided in the FAA. These courts reason that “[b]road judicial review of arbitration decisions could well jeopardize the very benefits of arbitration, rendering informal arbitration merely a prelude to a more cumbersome and time-consuming judicial review process.” On the other hand, the First, Third, Fourth, Fifth and Sixth Circuits have decided just the opposite. These courts generally reason that “the central purpose of the FAA is to ensure that private agreements to arbitrate are enforced according to their terms."

Mattel argued that certiorari was not warranted for several reasons. First, “even if expanded review were allowed as Hall Street requests, the result would be the same judgment against it.” It contended that the real issue in the case is the causation of and contribution to the contamination. Moreover, the arbitrator correctly interpreted the contract and determined the intent of the parties. In any event, Mattel asserted, Hall Street failed to show any damages and therefore is not entitled to any relief. Second, Mattel asserted that Hall Street failed to preserve its arguments for Supreme Court review. Third and finally, Hall Street has “unclean hands” because it is an empty corporate shell that has disposed of its assets. In sum, Mattel concluded, this was not an appropriate case to address the question presented.

[edit] Merits Briefs

After the Court granted certiorari, petitioner asserted in its merits brief that the FAA does not prevent the courts from enforcing an arbitration agreement that stipulates judicial review of an arbitral award for legal error. Accordingly, there is nothing in the statute or legislative history that limits judicial review to the explicit provisions of the FAA. Relying largely on the Supreme Court case Volt Information Services, Inc. v. Board of Trustees of Leland Stanford University, petitioner asserts that the FAA allows parties to make their own procedural rules for arbitration and create exceptions to court confirmation of arbitral awards. The only requirement is that the alterations do not usurp the policies of the FAA and are consistent with the court’s normal judicial functions. Petitioner contends that the primary purpose of the FAA is to ensure that “private agreements to arbitrate are enforced according to their terms” even though those terms may deviate from the FAA’s statutory provisions. In essence, “[a]rbitration under the Act is a matter of consent, not coercion.” Additionally, the federal district courts already have jurisdiction over this matter and regularly review decisions based on legal error, e.g. reviewing magistrate’s decisions under FRCP 72(b). Thus, the judicial review for legal error is also consistent with normal court functions.

Petitioner then proceeds to address the policy argument of judicial economy. It proposes that parties will be more likely to enter into arbitration agreements when they know that the decision will be free from legal error and will be enforced according to the terms of their agreement. By allowing the parties to stipulate their arbitral terms, including judicial review for legal error, the Court is promoting arbitration and reducing the burden on federal courts. Furthermore, even if the Court thought that judicial review for legal error hindered judicial efficiency, this alone would not warrant overturning the clear terms of the agreement. In sum, the policy considerations, express terms of the FAA, and the case law require that an arbitration agreement providing for judicial review of arbitral awards for legal error be enforced according to its terms.

The respondent’s brief contends that the text, structure, and history of the FAA require that §§10 and 11 are the exclusive grounds for vacating a arbitral award. The central argument is that the permissible grounds for review are clear and detailed, and do not serve as a “default” list for judicial review. “Congress knew how to create a default rule in the FAA and did so in more than one instance [§§ 5 and 9], but did not do so with regard to the grounds of denial of an application to confirm award.” Respondent also points to the legislative history of the FAA. It contends that the drafters consciously limited judicial review of an arbitral award to the explicit provisions of §§ 10 and 11. Additionally, it asserts that the cases on which petitioner relies, Wilko v. Swan and Volt, are not on point and do not support expanded judicial review.

Respondent also contends that the petitioner’s argument misinterprets § 9 of the FAA. Private parties cannot dictate the federal law that courts apply and cannot control the court’s exercise of equitable authority. There is no other type of contract that would allow parties to exercise this dominion over the court. Rather, the law is well-settled that private parties cannot control court functions. Respondent also questions the constitutional validity under Article III of the petitioner’s contention and asserts that petitioner’s “normal judicial functions” argument is an attempt to mask a logically flawed line of reasoning.

Finally, respondent argues that allowing parties to expand judicial review of arbitral awards to include review for legal error would be contrary to the purpose of the FAA. It contends that this would create “burdensome confusion” in arbitration and courts because there would be no finality and arbitration would be no more than a prelude to litigation. Such a holding would also require all arbiters to “show their work,” which could be very time consuming and inefficient. Moreover, parties can already agree to appellate arbitration to protect against anomalous decisions. This review for legal error is widely available and would provide sufficient protection from legal errors.

[edit] Oral Argument Recap

Soon after petitioner’s attorney, Carter Phillips, began presenting his argument, Justice Ginsberg interjected to ask whether expanded judicial review should extend to de novo review. Phillips responded that dictating the standard of review would intrude further into judicial functions than is required here - even though the FAA has a strong preference for party autonomy, there are limits. Justice Kennedy wondered where the line should be drawn between a preference for party autonomy and interference with the functions of the court. Phillips answered that he was not arguing for an “extreme approach” whereby the court would be “either flipping a coin or looking at the entrails of dead birds for the basis of a decision.”

State contract law was a primary concern for the Court, particularly Chief Justice Roberts. Why couldn’t Hall St. forgo the FAA and simply enforce the agreement as a contract? Phillips responded that his client seeks the benefit of the efficiency that the FAA attempts to promote.

As the possibility of multiple sources authorizing the arbitral agreement arose, Justice Breyer became concerned. None of the authority was very clear and the open questions could make this “the case of the century” or at least one that could last a century - Phillips quipped that he only desired the “case of the day.” Returning to seriousness, petitioner’s counsel pointed to § 2 as the authorization for the arbitral agreement, but also Justice Story’s nearly two-century-old opinion authorizing a common law notion of restricted arbitration.

Focusing on the FAA, Justice Souter centered his questions on § 9. Why should the court overlook the plain language and “deliberate choice” in language of § 9 that make it restrictive? Phillips answered that § 9 does not control this matter because of the “if clause.” The section states that “if the parties in their agreement have agreed that a judgment of the court shall be entered upon the award…” Petitioner claims that they did not agree because they only consented “on the basis of whether there was a non-erroneous declaration of law by the arbitrator.” Since the agreement is outside § 9, § 2 and its emphasis on the parties’ intent, which has been recognized as the single most important objective of the FAA, controls.

Addressing the statutory predecessors, Phillips dismissed the discussion of the Illinois and New York models as a “red herring.” As Justice Scalia opined, both of the state arbitration laws contain default rules for judicial review; Scalia also stated that none of the cases that the respondent had cited were “in the teeth of an arbitration agreement that said something differently.” Ginsberg said that §§ 10 and 11 do not read like default rules. Phillips reminded, however, that the court had twice ruled that these lists were non-exhaustive – see Wilko (manifest disregard) and W.R. Grace (public policy).

Respondent’s attorney, Beth Brinkmann, began her argument by claiming that petitioners were attempting to insert a new provision into the FAA. Scalia wasted no time in asking her how she explained Wilko’s “manifest disregard” exception. Brinkmann answered that this exception already existed in § 10(a)(4) and the other legal issues in Wilko left the impression that “manifest disregard” was outside of § 10. Respondent also dismissed the public policy exception as either covered by § 2 or by applicable state contract law.

The Chief Justice then steered the debate back toward his theme: why should the FAA be applied instead of state contract law? Respondent’s counsel cited finality and reduced cost of litigation as support for enforcing this case under the FAA. This conversation returned Breyer to his concern about multiple authorities of law. If the state fails to enforce the contract, then the question arises of whether federal judges can “peel off bits of cases and decide them in different ways.” This mess could lead to his “trial of the century.”

Souter also took the opportunity to return to his theme of the day: § 9. Responding to petitioner’s argument, Brinkmann asserted that the point was moot since the 9^th Circuit had severed the “judicial review for legal error” clause from the arbitration agreement. Therefore, the clause no longer existed to invalidate confirmation under § 9 and bring the agreement under § 2.

The discussion then focused on the respondent’s policy arguments. Justice Stevens wondered why review for legal error would be so harmful. Brinkmann stated this expansion would undermine the efficient streamlined enforcement of the FAA. Looking for proof, Breyer queried whether a natural experiment existed in either labor arbitration, which is outside the FAA, or in circuits adhering to respondent’s interpretation of the FAA. Admitting ignorance to the workings of labor arbitration, she responded that there has yet to be widespread use of expanded judicial review under the FAA. However, this “hybrid animal” outside the FAA was simply waiting to be born from a Supreme Court ruling.

Scalia inquired why the court could not simply limit the breadth of the FAA. Appealing to Scalia’s disdain for judicial activism, Brinkmann responded that the court should defer to Congress for such decisions. Otherwise, a new federal common law would be bred.

On rebuttal, Phillips framed the question as a matter of where the burden lay at the outset of this arbitration controversy. Should petitioner have to find authorization for the arbitral agreement or rather, does the respondent need to find something in the FAA that precludes enforcement? Petitioner, predictably, placed this burden on the respondent. Addressing respondent’s severability argument, Phillips answered that since the court is reviewing the initial decision over the arbitration agreement, you need not arrive at the severability decision.

[edit] Opinion Analysis

In a 6-3 opinion, the Supreme Court ruled that the Federal Arbitration Act contains the exclusive grounds for promptly vacating or modifying an arbitral award. Justice Souter’s opinion rejects petitioner’s argument that parties may contractually agree to expanded grounds of review. However, the Court vacated the judgment and remanded the case for proceeding consistent with the opinion. Justice Kennedy joined Justice Stevens’s dissenting opinion while Justice Breyer dissented separately.

The Court begins by rejecting Hall Street’s two principal arguments for expanding the grounds of review. First, in the Court’s view, petitioner misinterprets its decision in Wilko v. Swan. While conceding that the case does contain “some language arguably in favor of Hall Street’s position,” the Court emphasizes that “arguable is as far as it goes.” Wilko does not explicitly expand the grounds for vacatur beyond the statute, but instead expressly rejects the type of expansion that petitioner seeks – that is, general review for legal error. Furthermore, the term “manifest disregard” is vague, and could well just be shorthand for the statutory grounds – i.e., when the arbitrators are “guilty of misconduct” or “exceeded their powers.”

The Court also rejects petitioner’s contract argument. Though recognizing the FAA’s general policy towards enforcing tailored agreements, the Court moves on to analyze whether the statutory text compels exclusive grounds of review. Souter notes that the text specifically includes statutory grounds that emphasize extreme arbitral conduct. Relying on the maxim of statutory interpretation ejusdem generis – “when a statute sets out a with a general term, that general term is confined to covering subjects comparable to the specifics it follows” – the Court explains that because the statute includes “no textual hook for expansion,” the parties cannot expand review to any legal error when the specific statutory instances are only for outrageous conduct. “‘Fraud’ and mistake of law are not from the same cut of cloth.” Moreover, the Court notes that § 9 does not hint of any flexibility in the confirmation unless a “prescribed” exception applies.

The Court instead views Sections 9 through 11 as stating a policy in favor of enforcing arbitration with limited judicial review. “Any other reading opens the door to the full-bore legal and evidentiary appeals that can ‘rende[r] arbitration merely a prelude to a more cumbersome and time-consuming judicial review process.” Justice Souter does not divine whether this holding will cause an exodus from either arbitration or the courts. Rather, based on the text, the Court has “no business to expand the statutory grounds.” Additionally, the opinion is quick to remind that this ruling speaks only to review under the FAA. Other enforcement options are available to parties, i.e., state courts and the common law.

In dicta, the Court took a moment to expound on another avenue that may have been open to the petitioner. Because the parties, during the course of litigation, submitted the arbitral agreement to the district court, which adopted the agreement as an order, the Court pondered in oral arguments whether the agreement should be treated as “an exercise of the District Court’s authority to manage its cases under [FRCP] 16.” The Court ultimately declined to resolve this case management issue, but it did note that it was an open question for the district court to consider on remand.

In his dissent, Justice Stevens argues that the majority opinion “conflicts with the primary purpose of the FAA and ignores the historical context in which the Act was passed.” Section 2 of the FAA makes arbitral agreements “valid, irrevocable, and enforceable,” which was a departure from the common law and the core purpose of the statute. Therefore, Justice Stevens argues, the Court should err on the side of enforcing the terms of a negotiated agreement.

Justice Stevens deems unpersuasive what he regards as the Court’s two principal reasons for reaching their result. First, he rejects the notion that the litigants and Congress engaged in a quid pro quo conditioning expedited enforcement on acceptance of limited judicial review. Second, he also rejects the Court’s statutory analysis as a “wooden application of ‘the old rule of ejusdem generis.’” To negate both reasons, his dissent relies on the § 2 purpose of the statute and the historical context in which it was legislated. In his view, this case is an opportunity for the court to favor the freedom of the parties to set the terms of their agreement.

In his dissent, Justice Breyer focuses on whether the FAA “precludes” a federal court from enforcing the agreement. In his opinion, both the majority opinion and Justice Stevens’s dissent agree that the FAA does not preclude enforcement of the agreement. Therefore, because the agreement is enforceable, he would remand the case to the court of appeals with instructions to “affirm the District Court’s judgment enforcing the arbitrator’s final award.”