Parties Cannot Divest Federal Court of Authority to Review Arbitration Award

Critics of arbitration often cite the absence of any avenue for a participant to appeal what it believes to be an unfair award.  Proponents see this as an advantage; by deciding disputes finally and conclusively, an arbitration panel circumvents the opportunity for endless appeals.  A recent Ninth Circuit Court of Appeals decision illustrates what occurs when participants seek to make an arbitration award binding and non-appealable in a settlement agreement.[i]

  1. 1. The Walmart Wage and Hour Lawsuit is Resolved in Mediation

This dispute arose out of the protracted litigation of the Walmart “wage and hour” multidistrict lawsuit.  The suit was eventually resolved in mediation, and the parties agreed to a settlement agreement whereby Walmart agreed to pay $85 million to settle all claims against it.  Later, the district court awarded plaintiffs another $28 million in attorneys’ fees.  In the settlement agreement, the parties had agreed that any fee disputes among the plaintiffs’ counsel would be submitted to “binding, non-appealable arbitration” before the mediator who assisted in the bringing about the settlement agreement.

The relationship among plaintiffs’ counsel had deteriorated during the course of the Walmart litigation, and a dispute arose regarding the proper allocation of the $28 million.  Consequently, the fee dispute was submitted to “binding, non-appealable arbitration” before the former mediator.  The arbitrator’s award allocated the $28 million fee among the various plaintiffs’ counsel.  One of the dissatisfied lawyer groups sought to vacate the award, but the District Court found no legal basis for vacating the award.  The matter was appealed to the Ninth Circuit Court of Appeals.

  1. 2. The Arbitrator’s Award Was “Non-Appealable”

The key phrase in the settlement agreement was that the dispute was to be submitted to “binding, non-appealable arbitration,” which could be construed in two different ways.  First, it could be understood to preclude only federal court review of the merits of the arbitrator’s decision and not to eliminate the parties’ right to appeal from the arbitrator’s decision under § 10 of the Federal Arbitration Act (“FAA”) (providing that any arbitration award can be appealed if it is procured by corruption, fraud, or undue means, where there is evident partiality or corruption, where the arbitrators are guilty of misconduct, or where the arbitrators exceeded their powers).  A second possible construction is that the arbitration clause divests state and federal courts of a review of the arbitrator’s fee allocation on any ground, including those enumerated in § 10 of the FAA.

  1. 3. Circuit Court Rules All Arbitration Awards are Appealable on Narrow Grounds

The Ninth Circuit concluded that the “binding, non-appealable arbitration” clause was ambiguous (subject to two reasonable, but different interpretations).  Since one of the constructions divested the court of jurisdiction altogether, the Ninth Circuit found, relying on the Supreme Court case of Hall St. Associates,[ii] that the statutory grounds for judicial review in the FAA are exclusive and may not be supplemented by contract.  By enacting the FAA, Congress intended to promulgate a national policy favoring arbitration and to place arbitration agreements on equal footing with all other contracts.  Permitting parties to contractually eliminate all judicial review of arbitration awards would not only run counter to the text of the FAA, but would also frustrate Congress’ attempt to ensure a minimum level of due process for parties to an arbitration. Thus, the Ninth Circuit concluded that although the arbitration decision was reviewable, the district court decided the case correctly, irrespective of the language in the settlement agreement.

Comment:  The lesson from this case is that all arbitration awards are reviewable based on four very narrow grounds set forth in § 10 of the FAA, irrespective of parties’ attempts to make an arbitration award non-appealable.  Any attempt by parties to divest appellate courts of jurisdiction to review under § 10 of the FAA will likely be unsuccessful.  Most courts will uphold arbitration awards and only vacate them on very narrow grounds, but the courts will not allow elimination of those very narrow grounds altogether.

Recently, due to the criticism of the non-appealability of arbitration awards, the American Arbitration Association (“AAA”) promulgated optional Appellate Arbitration Rules (November 1, 2013).  Under the AAA’s Appellate Arbitration Rules, an appeal tribunal is selected from the AAA’s appellate panel.  The parties then cooperate to compile a record and submit appellate briefs; oral argument is allowed.  The appeal tribunal’s decision is issued within 30 days of the last appellate brief submitted.  The proceedings are confidential and the decision is final, presumably subject to further appeal under the FAA.

[i]  In re Wal-Mart Wage & Hour Employment Practices Litigation, 737 F.3d 1262 (9th Cir. 2013).

[ii] Hall St. Associates, L.L.C. v. Mattel, Inc., 552 U.S. 576, 128 S. Ct. 1396, 170 L. Ed. 2d 254 (2008).

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