By Mark Ritchie, Law Office of Mark Ritchie, P.C.
The Ever-Expanding Role of Arbitration
While arbitration has been widely used in England to resolve commercial disputes since the latter part of the eighteenth century, [1] it has struggled to achieve broad acceptance in the United States. Until relatively recent times, arbitration was only common in the context of labor disputes [2] and discrete varieties of business and professional conflicts. Arbitration’s potential remained largely dormant in our nation until the 1980s, when Moses H. Cone Memorial Hospital v. Mercury Construction Corporation [3] and Southland Corporation v. Keating shifted federal law squarely in favor of enforcing arbitration clauses. The use of arbitration clauses has expanded geometrically in the wake of these cases, with such clauses now being included as a matter of course in many types of contracts.[4] In the span of roughly 30 years, these developments have pushed arbitration from relative obscurity into becoming a substantial part of our nation’s current legal landscape.
Despite the growing significance of arbitration, litigators have been slow to accept arbitration due to its perceived disadvantages. While commercial clients are highly attracted to arbitration by the promise of greater speed and reduced costs, litigators continue to view arbitral proceedings with skepticism in light of substantial limitations on discovery, the limited role played by dispositive motions, and the very limited grounds for subsequent appellate review.[5] Over time, arbitration in the U.S. has come to more closely resemble traditional litigation by allowing greater discovery [6] and expanding the role of dispositive motion practice.[7] Still, many litigators view arbitration with some measure of distaste, fueled at least in part by concern that there is no real opportunity for appellate review.
Manifest Disregard: The Standard of Review We Need, But Not the One We Deserve Right Now [8]
Contrary to popular perception, arbitration awards were (until recently) reviewable for manifest disregard of law. Every federal circuit (including the Fifth) [9] adopted some permutation of this standard of review for awards issued under the Federal Arbitration Act (FAA), [10] and the standard was likewise adopted by multiple courts of appeals in Texas to review awards issued under the Texas Arbitration Act (TAA). [11] The contours of this standard of review were succinctly described by the Fifth Circuit in Brabham:
Manifest disregard means more than error or misunderstanding with respect to the law. The arbitrators must have appreciated the existence of a clearly governing principle but decided to ignore or pay no attention to it. Furthermore, the governing law ignored by the arbitrators must be well defined, explicit, and clearly applicable.[12]
When viewed as a tool for increasing confidence in and acceptance of arbitration, the widespread acceptance of this standard is easy enough to understand. By placing such a high burden on the party seeking review, manifest disregard strikes what many deem the right balance between allowing for error correction when arbitrators completely ignore accepted legal standards and affording broad deference to arbitrators’ determinations in the overwhelming majority of cases.[13]
Predictably, this attempt at balance did not last.[14] In Hall Street Assocs., LLC v. Mattel, Inc., the Supreme Court held that section 10 of the Federal Arbitration Act provides the “exclusive” grounds for vacatur of arbitration awards under federal law.[15] Curiously, this decision undermined an earlier decision from the Court responsible for giving rise to the manifest disregard standard in the first place.[16] Perhaps in recognition of this irony, the Court suggested in Stolt-Nielsen S.A. v. AnimalFeeds International Corp. that manifest disregard might continue as a viable standard after Hall Street Associates, either “an independent ground for review[,] or as a judicial gloss on the enumerated grounds for vacatur set forth at 9 U.S.C. § 10.”[17] In light of the Court’s conflicting declarations, there is now a circuit split on whether manifest disregard is still viable.[18]
While the applicability of manifest disregard is the subject of much debate nationally, in Texas the death of manifest disregard as a judicially-created standard is no longer debated at either the federal or state level. The Fifth Circuit has held definitively that manifest disregard is no longer viable, [19] and in Hoskins v. Hoskins the Texas Supreme Court held that the TAA provides an exclusive list of the grounds for reviewing an arbitrator’s awards, which does not include an arbitrator’s manifest disregard of the law.[20] For now, manifest disregard is dead as a judicially-created basis for review of arbitral awards in Texas . . . but that doesn’t mean there aren’t other options available.
When One Door Closes, Another Opens – Providing for Appellate Review in the Arbitration Clause Itself
In Nafta Traders, Inc. v. Quinn, [21] the Texas Supreme Court was faced with the question of whether parties could contractually agree to judicial review of an arbitration award for reversible error. The Nafta Traders court focused its analysis on the TAA’s provision applicable to instances in which the arbitrators exceed their powers, using this as a springboard to criticize a gap in the analysis of the equivalent FAA provision set forth in Hall Street Associates:
Yet the Supreme Court, in holding that under FAA the grounds for vacating, modifying, or correcting an arbitration award cannot be expanded . . . did not discuss section 10(a)(4), which like section 171.088(a)(3)(A) of the TAA, provides for vacatur “where the arbitrators exceeded their powers.” The omission appears to us to undercut the Supreme Court’s textual analysis. When parties have agreed that an arbitrator should not have authority to reach a decision based on reversible error—in other words, that an arbitrator should have no more power than a judge—a motion to vacate for such error as exceeding the arbitrator’s authority is firmly grounded in the text of section 10.[22]
The Nafta Traders opinion dedicates several pages to analyzing and systematically dismissing both Hall Street Associates’ textual and policy analysis, ultimately finding no convincing reason not to allow parties to agree to expanded judicial review of arbitration awards.[23] So long as the parties’ agreement is not subject to the FAA, the parties are entirely free to agree to whatever degree of appellate review they desire. Those drafting contractual provisions for such review should take care to bear the following points in mind:
- Because the FAA does not permit contractual agreements for judicial review, anyone drafting an arbitration clause with an eye toward providing for expanded judicial review should be mindful of federal preemption. The clause should be drafted to ensure that the TAA applies to the agreement, and also should provide that judicial review of any award is premised on limitations of the arbitrators’ authority. Counsel drafting these clauses should pay particular attention to the analysis provided in Volt Information Sciences, Inc. v. Board of Trustees of Leland Stanford Junior University, [24] Nafta Traders, [25] and Denbury Onshore, LLC v. Texcal Energy South Texas, L.P.[26]
- Under Nafta Traders, the parties are free to agree to full judicial review (starting with the trial court) of the arbitration award, in the same manner as any other judicial decision.[27] That being said, entitlement to full judicial review is still contingent on creating a sufficient record of the arbitral proceeding, with appropriate steps taken by counsel at the proceeding to preserve error.[28]
- Instead of proceeding through the judicial system, many arbitral institutions (including JAMS [29] and AAA [30]) now provide an optional appellate procedure that parties can invoke in their arbitration clauses. Proceeding with appellate review through an arbitral institution may allow for faster determination, but it is also likely to be more expensive. It also has no chance of producing an opinion with precedential value.
There is no disputing the fact that more and more disputes are ultimately destined for arbitration, but until the issue is addressed at the contract-drafting stage, cases where we might otherwise be able to offer assistance will simply not be subject to substantial appellate review. It is clear that everyone is keenly interested in appellate review once things go wrong, but it is key for everyone to understand that such review is something the parties must agree to well before it is actually needed. Given that many of our transactional colleagues may not be especially concerned about carefully drafting arbitration clauses that provide for appellate review consistent with current law, [31] we should be working to educate everyone on this issue so they can take appropriate action.
[1] Commercial arbitration was used to resolve controversies between medieval merchants in fairs and marketplaces in both England and on the European continent, but it wasn’t until enactment of the English Arbitration Act of 1889 that arbitration came into common use as a tool for resolving commercial disputes in general. Arbitration, Encyclopedia Britannica, https://www.britannica.com/topic/arbitration (last checked Mar. 7, 2018).
[2] For extensive discussion of the history and development of labor arbitration in the first half of the twentieth century, see Morton Gitelman, The Evolution of Labor Arbitration, 9 DePaul L. Rev. 181 (Spring-Summer 1960).
[3] 460 U.S. 1. In Moses H. Cone, the Court held that state policies disfavoring arbitration could not prevail in the face of the contrary intent behind the Federal Arbitration Act, which the Court interpreted as mandating “a liberal federal policy favoring arbitration” and requiring that “any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration.” Id. at 24-25.
[4] “The use of arbitration clauses has exploded in the last thirty years, and such clauses are routinely inserted by corporations into employment agreements, consumer contracts, brokerage agreements, and the like.” Richard Frankel, The Arbitration Clause as Super Contract, 91 Wash. U. L. Rev. 531, 533 (2014). “Over the last few years, it has become increasingly difficult to apply for a credit card, use a cellphone, get cable or Internet service, or shop online without agreeing to private arbitration. The same applies to getting a job, renting a car, or placing a relative in a nursing home.” Jessica Silver-Greenberg and Robert Gebeloff, Arbitration Everywhere, Stacking the Deck of Justice, N.Y. TIMES, Oct. 31, 2015, at A1.
[5] See generally Jennifer R. Scharf & Margot P. Schoenborn, Pros and Cons of ADR from the Corporate Counsel Perspective (Erie Inst. of Law CLE, Feb. 8, 2017).
[6] See Claudia T. Salomon & Sandra Friedrich, Obtaining and Submitting Evidence in International Arbitration in the United States, 24 AM. REV. OF INT’L ARBITRATION 549, 551-54 (2013) (contrasting approach to discovery in U.S.-based arbitrations to the typical disclosure phase approach employed in international arbitrations).
[7] E.g., AAA Commercial Arbitration Rule 33 (providing that the arbitrator may allow filing and rule on dispositive motion “only if . . . the moving party has shown that the motion is likely to succeed and dispose of or narrow the issues in the case”).
[8] This oblique reference to Christopher Nolan’s The Dark Knight is not meant to suggest that manifest disregard is the functional equivalent of an obsessed vigilante, only that manifest disregard has been treated quite poorly in recent years despite its beneficial effect.
[9] E.g., Kergosien v. Ocean Energy, Inc., 390 F.3d 346, 353 (5th Cir. 2004); Brabham v. A.G. Edwards & Sons Inc., 376 F.3d 377, 381 (5th Cir. 2004); Prestige Ford v. Ford Dealer Computer Servs., Inc., 324 F.3d 391, 395 (5th Cir. 2003).
[10] Kate Kennedy, Manifest Disregard in Arbitration Awards: A Manifestation of Appeals Versus a Disregard for Just Resolutions, 16 J. L. & Pol’y 417, 417 n.1 (2007).
[11] E.g., Xtria L.L.C. v. Int’l Ins. Alliance Inc., 286 S.W.3d 583, 594 (Tex. App.—Texarkana 2009, pet. denied); Home Owners Management Enters., Inc. v. Dean, 230 S.W.3d 776, 768-69 (Tex. App.—Dallas 2007, no pet.); Tanox, Inc. v. Akin, Gump, Strauss, Hauer & Feld, L.L.P., 105 S.W.3d 244, 252 (Tex. App.—Houston [14th Dist.] 2003, pet. denied).
[12] 376 F.3d at 381 (internal quotes and citation omitted).
[13] Manifest disregard was judicially designed to provide only extremely limited judicial review, so as to avoid “undermin[ing] our well established deference to arbitration.” Tanox, 105 S.W.3d at 253. “Manifest disregard is a very narrow standard of review. It is more than error or misunderstanding of the law. The error must be obvious and capable of being readily and instantly perceived by the average person qualified to serve as an arbitrator.” Xtria, 286 S.W.3d at 594 (internal quotes and citation omitted). “[T]he issue is not whether the arbitrator correctly interpreted the law, but whether the arbitrator, knowing the law and recognizing that the law required a particular result, simply disregarded the law.” Id.
[14] For those who are curious, Paula Poundstone is largely responsible for introducing the phrase “this is why we can’t have nice things” into popular culture. ENGLISH LANGUAGE & USAGE STACK EXCHANGE, https://english.stackexchange.com/questions/417320/what-is-the-origin-of-the-phrase-this-is-why-we-cant-have-nice- things (last visited Mar. 11, 2018).
[15] 552 U.S. 567, 585 (2008).
[16] See id. at 584 (discussing circuit opinions interpreting Wilko v. Swan, 346 U.S. 427 (1953)). 17 130 S. Ct. 1758, 1768 n. 3 (2010). Given the attendant confusion and crystal-ball gazing prompted by this passage, one commentator has characterized footnote 3 of Stolt-Nielsen as the most famous footnote in the arbitration world. Lionel Schooler, Ethics for Arbitrators and Advocates: I Didn’t Know I Couldn’t Do That!! PowerPoint presentation, Slide 34, from Handling Your First (or Next) Arbitration: Effective Uses of Arbitration (Texas Bar CLE, Nov. 3, 2017).
[18] The Seventh, Eighth, and Eleventh Circuits currently hold that manifest disregard is no longer a basis for appellate review, while the Second, Fourth, Sixth, and Ninth Circuits, no doubt prompted by Stolt-Nielsen, now hold that manifest disregard of the law renders an arbitral award subject to reversal by virtue of the arbitrators exceeding their powers under 9 U.S.C. §10(a)(4). Jason P. Steed, Appealing Arbitration Awards and the Circuit Split over “Manifest Disregard of the Law,” ABA Section of Litigation, Appellate Practice (May 10, 2016), available at http://apps.americanbar.org/litigation/committees/appellate/articles/spring2016-0516-appealing- arbitration-awards-circuit-split-manifest-disregard-law.html.
[19] Citigroup Glob. Mkts., Inc. v. Bacon, 562 F.3d 349, 358 (5th Cir. 2009).
[20] 497 S.W.3d 490 (Tex. 2016). Justice Willet filed a concurring opinion in Hoskins in which he indicated the opinion was motivated in significant part by a desire to “avoid the sort of quagmire that surrounds the TAA’s federal counterpart, the Federal Arbitration Act (FAA).” Id. at 499. If the U.S. Supreme Court decides to revisit the issue and approve of the manifest disregard standard, it will be interesting to see whether this prompts a corresponding change in position by the Texas Supreme Court. See Nafta Traders, Inc. v. Quinn, 339 S.W.3d 84, 91-92 (Tex. 2011) (stating that the Texas Supreme Court was “obliged to examine Hall Street’s reasoning” in the process of reaching its decision).
[21] 339 S.W.3d 84 (Tex. 2011).
[22] Id. at 92-93.
23 Id. at 97.
[24] 489 U.S. 468 (1989).
[25] 339 S.W.3d at 97-101.
[26] 513 S.W.3d 511 (Tex. App.—Houston [14th Dist.] 2016, no pet.).
[27] 339 S.W.3d at 101-02 (discussing the parties’ entitlement to “full judicial review,” and noting that the parties “cannot agree to a different standard of judicial review than the court would employ in a judicial proceeding involving the same subject matter”).
[28] Id.
[29] https://www.jamsadr.com/appeal/
[30] https://www.adr.org/sites/default/files/AAA%20ICDR%20Optional%20Appellate%20Arbitration %20Rules.pdf
[31] As noted by the AAA, “[c]ompanies and their transactional lawyers carefully evaluate the business terms in their contracts, but they often reflexively insert a boilerplate arbitration clause from other contracts or a form book.” David L. Evans & India Johnson, The Top 10 Ways to Make Arbitration Faster and More Cost Effective, https://www.adr.org/sites/default/files/document_repository/The %20Top%2010%20Ways%20to%20Make%20Arbitration%20Faster%20and%20More%20Cost-.pdf (last visited Mar. 7, 2018).