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New layer of dispute on arbitration

New briefs filed after the Supreme Court had heard argument in a significant case on federal judges’ power to second-guess arbitrators’ awards have opened up a new layer of dispute, potentially complicating the Court’s coming decision. The new controversy resulted from the Court’s Nov. 16 order adding three new legal issues for lawyers to address in post-hearing briefs in Hall Street Associates v. Mattel, Inc. (06-989).

Mattel, which wants its original victory in arbitration to be made final, argued that the case must rise or fall on the meaning of the Federal Arbitration Act — a law that strictly limits judicial review of arbitration awards. But Hall Street Associates, which took the case to the Supreme Court in hopes of having the award in favor of Mattel undone, argued that federal judges have at least two other sources of authority allowing them to move beyond the FAA’s tight curb on their review powers.

During the Court’s hearing on the case on Nov. 7, an issue arose over whether the case was only about the FAA. The Court then followed up the hearing with an order for further briefing on whether there were other sources of law that bore on federal judges’ powers to react to arbitration awards, whether the two sides in this dispute had relied upon that authority in agreeing to arbitration, and whether Hall Street Associates had waived any such authority.The case grows out of a dispute between a landlord, Hall Street Associates, and a tenant, toymaker Mattel, over the costs of cleaning up a toxic water well on the site in Beaverton, Ore., that Mattel had occupied. The landlord sued in state court, but Mattel shifted it to federal court because the two sides were from differing states, thus giving the federal judge “diversity” jurisdiction. While the case was pending before a federal judge, the two sides agreed to arbitrate. The arbitrator ruled for Mattel, finding it had violated no environmental laws. The agreement that sent the case to the arbitrator included a clause that significantly expanded the scope of the federal judge’s power to second-guess any award. The judge did exactly that, finding that the arbitrator was mistaken on the law of Oregon regarding water quality, and ultimately awarded Hall Street more than $810,000. The Ninth Circuit Court overturned the judge’s ruling, finding that the federal law on arbitration barred such broad judicial review. It ordered Mattel’s original award reinstated, and Hall Street then took the case on to the Supreme Court.

In its supplemental brief (download here), Hall Street Associates contended that the FAA is an issue in the case only as to whether it barred the kind of judicial review exercised by the judge. The issue, it said, is not whether the FAA authorized judges to enforce private agreements to expand judicial review of an award, but whether it prohibits them. Hall Street wants the Justices to remove that “roadblock” to such review. The Ninth Circuit’s interpretation of the FAA, the brief added, “is the only impediment” to enforcement of the parties’ agreement on the scope of court review. “Hall Street has consistently maintained that the district court had ample authority to vacate and modify the arbitration award under the agreement,” it said.

One source of authority outside FAA for court enforcement of a broader judicial review agreement, Hall Street asserted, is the court’s inherent authority to manage cases before it. Since the arbitration that occurred in this case was undertaken while the case was pending, as a form of alternative dispute resolution, the judge had authority to enforce the broader review agreement. As a second source of law, the brief went on, there are common law remedies. Under the common law, a party could sue to enforce or set aside an arbitration award, it noted. The agreement on a judicial review provision was a contractual commitment the two sides made to each other voluntarily, and it is enforceable at common law, the brief said. It insisted that the parties relied upon those other authorities, since they were asking the court to engage in contract arbitration, not statutory arbitration under FAA. And, it added, Hall Street never waived any alternative sources of law.

Mattel’s supplemental brief (download here) argued that the dispute throughout its course in federal courts has been only about the FAA. Both sides, it said, understood that Hall Street Associates’ challenge to the original award favoring Mattel was governed by the FAA, which they agreed allowed for expanded judicial review — an understanding that the Ninth Circuit later rejected. Only when the case went from District Court to the Ninth Circuit, Mattel contended, did Hall Street try to distinguish this case from one controlled by Ninth Circuit precedent on the scope of court power under FAA.

In taking the case to the Supreme Court, Hall Street, according to Mattel, “did not suggest that any law other than the FAA was implicated by this case.” In fact, thed appel relied upon an asserted conflict among Circuit Courts on the scope of FAA, it added. “It is far too late….to contend that there is some alternative authority that may give life to the judicial review provision after [Hall Street] has consistently argued that it is the FAA that does so.” If there are any other sources of law on the subject, Mattel concluded, Hall Street waived any reliance upon them by the positions it has taken throughout the litigation.

Each side gets a chance, by next Monday, to file a reply to the other side’s supplemental argument on the sources of law questions.