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Arbitration has long been touted as a cure for crowded court dockets, but a growing disenchantment among attorneys and their clients is causing concern about the scope of court involvement in arbitration review. The hot-button issue is whether parties can contract to expand the judiciary’s ability to review arbitration awards under the Federal Arbitration Act (FAA). Statistical and anecdotal evidence suggests that arbitration is becoming more prevalent. The American Arbitration Association has reported that its caseload doubled between 1997 and 2004. See, e.g., Lou Whiteman, “Fall from Grace: GCs Begin to See Arbitration’s Warts,” Daily Bus. Rev., Sept. 12, 2006, at A14. (The trend is clear even though the numbers have fallen slightly since then. See American Arbitration Association, 2005 President’s Letter and Financial Statements, at 8, available at www.adr.org/si.asp?id=2599.) Arbitration supporters see this growth as proof of arbitration’s benefits. They contend that it is faster, cheaper, more informal, more flexible, less hostile and more private than traditional litigation. There has been, however, a parallel growth in disenchantment with arbitration. Arbitration critics have noted that commercial arbitrations have become more costly and time-consuming than traditional litigation, and that arbitrators, who are on a time clock and do not have crowded trial dockets to manage, have little incentive to streamline the process and minimize costs. See, e.g., Barry Richard, “Arbitration Clause Risks,” NLJ, June 14, 2004, at 15. Critics also complain about the quality of arbitration decisions. Increasingly, parties are expressing a lack of “confidence that arbitrators’ decisions will be as objective, predictable and correct” as decisions reached through traditional litigation. Stephen A. Hochman, “Judicial Review to Correct Arbitral Error-An Option to Consider,” 13 Ohio St. J. on Disp. Resol. 103, 104 (1997). Traditionally, judicial review of arbitration awards has been very limited. See, e.g., ARW Exploration Corp. v. Aguirre, 45 F.3d 1455, 1462 (10th Cir. 1995) (describing the standard as “among the narrowest known to the law”). Courts have explained 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.” Kyocera Corp. v. Prudential-Bache Trade Servs. Inc., 341 F.3d 987, 998 (9th Cir. 2003) (en banc). Review is so limited that federal courts have said that they cannot vacate an arbitration award for even clear or gross errors of fact or law. See, e.g., Gingiss Int’l Inc. v. Bormet, 58 F.3d 328, 333 (7th Cir. 1995). This standard obviously can be disconcerting for a party that followed the law and complied with its contract, only to lose on the merits with no recourse to appeal. It would be doubly disconcerting if the arbitration was more costly and time-consuming than traditional litigation. Increasingly, parties to arbitration contracts are concluding that there needs to be some kind of check on arbitrariness. Their solution often takes the form of contract language expanding the scope of judicial review. Questions about the enforceability of such language under the FAA have resulted in a circuit split. The 1st, 3d, 4th and 5th U.S. circuit courts of appeals have found that parties can contract for heightened judicial review of arbitration awards under the FAA. The 5th Circuit was the first to rule, approving arbitration-clause language that “errors of law shall be subject to appeal.” Gateway Techs. Inc. v. MCI Tel. Corp., 64 F.3d 993, 996-97 (5th Cir. 1995). The 5th Circuit later enforced contract language that “the standard of review to be applied to the arbitrator’s findings of fact and conclusions of law will be the same as that applied by an appellate court reviewing a decision of a trial court sitting without a jury.” Hughes Training Inc. v. Cook, 254 F.3d 588, 590, 593 (5th Cir. 2001). In another case, the 5th Circuit approved contract language that “each party shall retain his right to appeal any questions of law,” although the court held that this meant pure questions of law and did not include mixed questions of law and fact. Harris v. Parker Coll. of Chiropractic, 286 F.3d 790, 793-94 (5th Cir. 2002). The 4th Circuit enforced contract language that the “arbitrator shall not have the power to commit errors of law or legal reasoning, and the award may be vacated or corrected by judicial review for any such error.” Syncor Int’l Corp. v. McLeland, No. 96-2261, 1997 WL 452245, at *6 (4th Cir. Aug. 11, 1997) (unpublished). Finally, the 1st and 3d circuits have stated generally that the parties can contract for a standard of review other than the standards in the FAA. Puerto Rico Tel. Co. v. U.S. Phone Mfg. Corp., 427 F.3d 21, 31 (1st Cir. 2005); Roadway Package Sys. Inc. v. Kayser, 257 F.3d 287, 288, 293 (3d Cir. 2001). In each case, however, the court found that the contract language was not clear and explicit enough to create a different standard. By contrast, the 7th, 8th, 9th and 10th circuits have declared that parties cannot contractually expand judicial review of arbitration awards. The 7th Circuit was the first to say so, albeit in dictum. Chicago Typographical Union v. Chicago Sun-Times Inc., 935 F.2d 1501, 1505 (7th Cir. 1991) (stating that parties cannot contract for judicial review of the soundness of an award). The 8th Circuit expressly declined to reach the issue, but warned that it is not a “foregone conclusion” that parties can contractually expand the court’s role. UHC Mgmt. Co. v. Computer Sciences Corp., 148 F.3d 992, 997 (8th Cir. 1998). The 10th Circuit refused to enforce contract language that the parties could appeal “on the grounds that the award is not supported by the evidence.” Bowen v. Amoco Pipeline Co., 254 F.3d 925, 930, 931-37 (10th Cir. 2001). Finally, the 9th Circuit reached the issue under interesting circumstances. In 1997, 10 years after arbitration was originally compelled, a 9th Circuit panel agreed with the 5th Circuit and approved contract language allowing the court to vacate an award in which “the arbitrators’ findings of fact are not supported by substantial evidence” or “the arbitrators’ conclusions of law are erroneous.” LaPine Tech. Corp. v. Kyocera Corp., 130 F.3d 884, 887-91 (9th Cir. 1997), overruled sub nom. by Kyocera Corp. v. Prudential-Bache Trade Servs. Inc., 341 F.3d 987, 997-1000 (9th Cir. 2003) (en banc). On remand, applying the contractual standard of review, the district court confirmed the arbitration award against Kyocera. A 9th Circuit panel affirmed, but the appellate court later granted Kyocera’s request for rehearing en banc. In 2003, 16 years after arbitration was originally compelled, the en banc court again affirmed the arbitration award, but used the opinion to “correct the law of the circuit regarding the proper standard for review of arbitral decisions under the [FAA].” Kyocera, 341 F.3d at 994. The en banc court overruled LaPine, and held that parties cannot contractually expand judicial review. Interestingly, the en banc court addressed this issue even though both parties agreed that the original LaPine decision should not be overruled. FAA exclusivity Those opposing expanded review of arbitration awards typically argue that a court must confirm an award unless there is an applicable statutory ground to vacate or modify it. See 9 U.S.C. 9. Thus, they argue that the FAA creates exclusive grounds for vacating or modifying an award. See id. �� 10, 11. They argue that private parties cannot expand federal jurisdiction, or interfere with the judicial process by contract. Proponents of expanded review counter that the FAA does not create jurisdiction. Instead, there must be an independent basis for federal jurisdiction. Proponents argue that modifying the standard of review in a case in which the court already has jurisdiction does not create jurisdiction by contract. Proponents also argue that FAA �� 10 and 11 do not say that the listed grounds for modifying or vacating an award are exclusive. As evidence of this, they note that courts have created common law grounds for vacating arbitration awards. If courts can create nonstatutory grounds for review, why can’t the parties? And there are other ways in which parties “interfere” with the judicial process. Parties can contractually specify what venue is permitted, what law applies and what damages are awardable. Proponents therefore argue that it is not a foreign concept for the parties to contractually specify the grounds for reviewing the arbitration award that results from the contract. A second major argument made by opponents of expanded review is that it undermines the asserted benefits of arbitration-speed, cost and finality-by adding another layer to the litigation. Presumably, having selected the arbitrators and the arbitration procedures, parties accept the risk of an imperfect decision and should be bound by the award. Proponents counter that the purpose behind the FAA was to require courts to honor parties’ arbitration contracts, and judicial review is not a form of interference when the parties invite that review. Finally, proponents argue that arbitrators will tend to be less arbitrary when they know that their decisions are subject to greater scrutiny. There are other arguments for and against expanded judicial review of arbitration awards. For example, opponents contend that one benefit of arbitration is that arbitrators who are experts in a particular industry can make better decisions and fashion creative remedies appropriate to the industry. Proponents counter that it is precisely those “creative” remedies that they fear. Opponents argue that it impairs the integrity of the judicial system to require courts to review awards under a limited record and unfamiliar standards of review. Proponents counter that the challenging party will presumably lose if the record is inadequate, and that parties are not likely to choose unfamiliar standards of review. Also, as 9th Circuit Judge Alex Kozinski noted, courts do not have to approve unusual standards such as “flipping a coin or studying the entrails of a dead fowl.” LaPine, 130 F.3d at 891 (Kozinski, J., concurring). Because the policy favoring arbitration is partly intended to reduce judicial workloads, it appears that some courts view expanded judicial review as a threat. Proponents counter that reviewing an arbitration award is less work than trying the case in the first place. Absent expanded judicial review, more parties might opt out of arbitration, resulting in an unintended increase in judicial workloads. The debate appears to encompass two opposing schools of thought. Opponents espouse a strict reading of the FAA, under which exclusive grounds for review promote finality of arbitration awards. Proponents believe that the overriding purpose of the FAA is to enforce the parties’ contract, including their contractually chosen standards of review. Ultimately, either Congress or the Supreme Court will have to resolve this policy debate. Until the FAA is amended, or the circuit split is resolved, the controversy surrounding the enforceability of contractually expanded review could create a growing reluctance to agree to arbitration clauses. Scott P. Stolley is a partner in the Dallas home office of Thompson & Knight. He is board certified in civil appellate law by the Texas Board of Legal Specialization. He can be contacted at [email protected].

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