ARBITRATION

The submission of a dispute to an unbiased third person designated by the parties to the controversy, who agree in advance to comply with the award—a decision to be issued after a hearing at which both parties have an opportunity to be heard.

Hall Street Associates, L.L.C. v. Mattel, Inc.

The use of arbitration has increased in part because state and federal courts have abandoned their hostility to this form of dispute resolution. The Federal Arbitration Act, (FAA), 19 U.S.C.§§ 1 et seq., has encouraged the use of arbitration by providing expedited judicial review to confirm, vacate, or modify arbitration awards. The act also greatly restricts the grounds that a court can use to vacate or modify an award, limiting these to address egregious departures from the parties' agreed-upon arbitration. The U.S. Supreme Court, in Hall Street Associates, L.L.C. v. Mattel, Inc.,—U.S.—, 128 S. Ct. 1396, 170 L. Ed. 2d 254 (2008), ruled that the grounds for modifying, vacating, or correcting an arbitration award contained in the FAA are the exclusive grounds for using expedited judicial review.

Hall Street Associates L.L.C. leased property in Oregon to the Mattel, Inc. toy company for many years. Mattel used the property as a manufacturing site. The lease provided that Mattel would pay Hall Street for any costs resulting from the failure of Mattel or its predecessor tenants to follow environmental laws while using the property. In 1998 tests on the property's well water revealed high levels of a toxic chemical that was the residue of manufacturing discharges by Mattel's predecessor between 1951 and 1980. After more pollutants were discovered in well water by Oregon's Department of Environmental Quality (DEQ), Mattel and one of its predecessors signed a consent order with the DEQ, agreeing to clean up the site.

Mattel gave notice of intent to terminate its lease in 2001. Hall Street filed suit in federal court, claiming that Mattel did not have the right to vacate on the date it gave and that Mattel was required to pay Hall Street for the costs of cleaning up the pollutants. A bench trial was conducted (a judge rather than a jury acts as fact-finder) and Mattel prevailed as to the right to terminate the lease. As to Hall Street's demand for clean-up money, the parties failed to settle the claim through mediation . It was then agreed that the parties would arbitrate this issue. The district court was in favor of this process and it approved the arbitration agreement the two companies drew up. The court entered the agreement as an order, with one paragraph permitting the court to vacate or modify the arbitration award if it found the arbitrator's findings of fact were not supported by substantial evidence or if the arbitrator's conclusions of law were erroneous.

The arbitrator ruled in Mattel's favor, finding that the lease obligation to follow all applicable environmental laws did not require compliance with Oregon's Drinking Water Quality Act. The arbitrator said this act dealt with human health contamination, not environmental contamination. Hall Street filed a motion with the district court, asking it to vacate the decision because the arbitrator committed legal error by failing to find the water act was environmental in nature. The court agreed, vacated the award, and remanded the case to the arbitrator. In the order the court noted that the standard of legal review was the one chosen by the parties. On remand the arbitrator ruled for Hall Street. This time the court upheld the ruling and modified the arbitrator's calculation of interest. Both parties appealed to the Ninth Circuit Court of Appeals, with Mattel now claiming that the application of the standard of review contained in the agreement was invalid and unenforceable. The appeals court agreed, holding that the award could only be reviewed using the grounds contained in the FAA.

The Supreme Court, in a 6–3 decision, upheld the Ninth Circuit interpretation of the FAA. Justice DAVID SOUTER, writing for the Court, noted that the circuit courts of appeals were split over the exclusiveness of the statutory grounds for a court's review of an arbitration award. Some courts thought them exclusive, while others saw them as threshold provisions that could be expanded by agreement of the parties. Justice Souter concluded that the FAA provisions were the exclusive set of categories, which included corruption, fraud , evident partiality, misconduct, misbehavior, evident material mistake, and several other serious issues. There was no comparison between fraud and a mistake of law . The FAA provisions dealt with serious matters that went to the integrity of the arbitration process. The provisions were elements of a “national policy favoring arbitration with just limited review needed to maintain arbitration's essential virtue of resolving disputes straightaway.” Any other interpretation of the statute would pave the way for full-scale, time-consuming judicial review. Therefore, parties to arbitration under the FAA may not change the scope of judicial review.

Preston v. Ferrer

The Supreme Court in 2008 ruled against the star of the syndicated television show “Judge Alex” by holding that his case should have been decided by an arbitrator. The case presented an issue of whether a California state law could require the parties to bring the case before the state's labor commission before requesting arbitration. In Preston v. Ferrer, 522 U.S.—(2008) (No. 06-1463), the Court in an 8–1 vote determined that the Federal Arbitration Act preempted the state law.

Alex E. Ferrer is a former state judge from Florida. He was originally born in Havana, Cuba, but his family migrated to the United States when he was a young child. While serving as a police officer, he earned a law degree from the University of Miami, and he later served as an administrative judge in Miami. In 2005, he became the star of a nationally syndicated television show named “Judge Alex.”

In March 2002, Ferrer entered into a management agreement with Arnold Preston, an attorney who represents clients in the television and motion picture industries. The parties entered into a contract that included a standard clause, which required arbitration for “any dispute … relating to the terms of [the contract] or the breach, validity, or legality thereof … in accordance with the rules” of the American Arbitration Association.

The Federal Arbitration Act, 9 U.S.C.§§ 1 et seq. establishes a national policy that favors arbitration proceedings when commercial contracts call for this form of dispute resolution. In addition to providing a procedural framework for federal courts , it requires that both state and federal courts apply federal substantive law to the resolution of arbitration disputes. The Court in Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 126 S. Ct. 1204, 163 L. Ed. 2d 1038 (2006) ruled that when parties agree to arbitrate all of their disputes arising out of the validity of the contract, these questions should be resolved by the arbitrator instead of a state or a federal court.

In 2005, Preston sought to recover fees under his agreement with Ferrer and demanded arbitration. Ferrer responded with a petition to the California Labor Commission where Ferrer argued that the contract was invalid and unenforceable under the California Talent Agencies Act, Cal. Lab. Code Ann.§§ 1700 (West 2003& Supp. 2008). According to Ferrer, Preston had acted as a talent agent without a license as required by California law, and thus the contract between Preston and Ferrer was entirely void.

A California Labor Commissioner hearing officer heard the case in November 2005 and determined that Ferrer had stated a “colorable basis” for the exercise of the Labor Commissioner's exercise of jurisdiction. However, the officer decided that the Labor Commissioner could not stay the arbitration. Ferrer subsequently brought an action in the Los Angeles Superior Court, where he sought a ruling that the action was not subject to arbitration and also requested an injunction that would prevent Preston from moving to compel arbitration.

The Superior Court in December 2005 determined that the Labor Commissioner was the proper decision-maker in the case. Thus, the court denied Preston's motion to compel arbitration. Preston appealed the decision to the California Court of Appeals. While the appeal was pending, the Supreme Court decided Buckeye Check Cashing, concluding that an arbitrator, rather than a court, should decide whether a contract is valid. In Preston's appeal, however, the state court determined that Buckeye Check Cashing did not apply because the case did not address an instance where an administrative body had exclusive jurisdiction over a disputed issue. The California Court of Appeals ruled that the state statute gave the Labor Commissioner “exclusive original jurisdiction” over the case. Preston v. Ferrer, 145 Cal. App. 4th, 51 Cal. Rptr. 3d 628 (Ct. App. 2006).

After the California Supreme Court declined to review the case, Preston sought to appeal the decision to the U.S. Supreme Court. The Court granted certiorari in September 2007. In his briefs to the Court, Preston argued that a series of cases, including Buckeye Check Cashing and Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 111 S. Ct. 1647, 114 L. Ed. 2d 26 (1991), the Court clearly established that the arbitrator is the first decision-maker who should resolve a question of the validity of the contract. Ferrer argued that the prior cases were distinguishable because they did not involve a state law that required exhaustion of administrative remedies prior to bringing a case before an arbitrator.

In an 8–1 decision, the Court sided with Preston and reversed the California appellate court's decision. An opinion by Ruth Bader Ginsburg determined that the Federal Arbitration Act and the cases interpreting it had established that contracts containing arbitration clauses should be interpreted by arbitrators not by administrative bodies, no matter what the California law said. In so ruling the Court disagreed with Ferrer that the case was at all distinguishable from a long line of prior Supreme Court precedents. “[W]e disapprove the distinction between judicial and administrative proceedings drawn by Ferrer and adopted by the appeals court,” wrote Ginsburg. “When parties agree to arbitrate all questions arising under a contract, the FAA supersedes state laws lodging primary jurisdiction in another forum, whether judicial or administrative.”

Justice Clarence Thomas, in a lone dissent, argued that the Federal Arbitration Act does not apply to state court proceedings. He also dissented in several other decisions, including Buckeye Check Cashing, by making the same argument.