US and International Arbitration
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Current Challenges in US and International Arbitration
The Federal Arbitration Act (FAA) and judicial decisions construing it reflect the United States’s continuing commitment to its longstanding policy favouring the enforcement of domestic and international arbitration agreements and awards. In the international context, this policy is given effect by the implementation of the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards in chapter 2 of the FAA.
One recent result of this strong pro-arbitration policy, and especially decisions expanding the scope of subject matter arbitrability to include public law disputes, is the increased use of arbitration provisions in consumer and employment contracts and other agreements between parties who may have unequal bargaining power, such as franchise agreements. As a general rule, these agreements have been enforced in the same way as in the commercial context. Some commentators and consumer advocates, however, have expressed concern that arbitration provisions in these kinds of agreements have the potential to be one-sided or otherwise inequitable, and legislation has been introduced in Congress with the stated purpose of excluding ‘employment, consumer, franchise, [and] civil rights dispute[s]’ from the scope of the FAA.1 No such legislation has passed either house, but draft language in proposed bills has thus far failed to adequately distinguish between the consumer, employment, and franchise agreements that have given rise to the concern and general commercial contracts to which the concern does not apply.
The final result of the legislative activity remains uncertain, but the prospect of important revisions to the FAA is already having an impact. In July, the American Arbitration Association announced a moratorium on accepting new consumer debt collection arbitrations, noting that such cases ‘require additional protections, due to, among other things, a high rate of non-participation by consumers’.2 A few days before, the National Arbitration Forum agreed with the attorney general of Minnesota to do the same.3
Meanwhile, US courts continue to play an important role in developing and elaborating the US law of international arbitration. In this article, we discuss the most significant recent US decisions, dealing with:
- the fallout from last year’s Supreme Court decision in Hall Street, which called into question the US doctrine of ‘manifest disregard of the law’;
- a recent Supreme Court decision confirming appellate jurisdiction in the case of interlocutory appeals from denials of motions to compel arbitration in a class of cases as to which there previously was doubt;
- decisions addressing contentions that specific arbitration agreements were unconscionable and hence unenforceable;
- a decision refusing enforcement of an agreement to arbitrate US statutory claims by application of dicta in the Supreme Court’s 1985 decision in Mitsubishi Motors Corporation v Soler Chrysler-Plymouth, Inc; and
- a decision recognising the authority of an arbitral tribunal to order fee-shifting as a remedy for bad faith conduct of the arbitration even in the face of an express provision in the arbitration agreement providing that costs be shared equally.
The future of manifest disregard in US law
In last year’s article, we discussed the Supreme Court’s decision in Hall Street Associates, LLC v Mattel, Inc,4 and in particular the dictum in that case calling into question the judicially created doctrine of ‘manifest disregard of the law’ as a ground for vacating awards under the FAA. Hall Street had argued that the Supreme Court’s previous statement in Wilko v Swan5 that an arbitral award could be vacated on grounds of manifest disregard of law meant that the grounds for vacatur set forth in section 10 of the FAA could not be exclusive. Rejecting the argument, the Supreme Court suggested that the courts that have interpreted the Wilko dictum as providing an additional, non-statutory basis for vacatur may have been in error. We predicted that, in light of the Hall Street decision, the lower federal courts would re-evaluate the doctrine and either reject the doctrine altogether or limit it to circumstances in which one of the statutory grounds for vacatur could be established.
This is precisely what has happened in all but two of the courts of appeals that, since Hall Street, have considered whether manifest disregard remains a valid basis for vacating an arbitral award. In Citigroup Global Markets v Bacon,6 the Fifth Circuit became the first court of appeals expressly to reject manifest disregard of the law as a ground for vacating an arbitral award. The Fifth Circuit explained that its precedent had treated manifest disregard as a non-statutory basis for vacatur, but that Hall Street made clear that those cases were no longer good law.
Other circuits have followed the Supreme Court’s suggestion that, as a doctrine, ‘manifest disregard’ may have ‘merely referred to the section 10 grounds collectively, rather than adding to them’ or was ‘shorthand for [...] subsections authorising vacatur when the arbitrators were guilty of misconduct’ or ‘exceeded their powers.’7 In Stolt-Nielsen SA v AnimalFeeds International Corporation,8 the Second Circuit acknowledged that Hall Street had overruled its prior case law treating manifest disregard of law as a non-statutory ground for vacatur, but held that, ‘reconceptualised as a judicial gloss on the specific grounds for vacatur enumerated in section 10 of the FAA’, the doctrine ‘remains a valid ground for vacating arbitration awards.’9 While the Supreme Court has granted certiorari in the case,10 it did so on the question whether the arbitrators had exceeded their powers in ordering class arbitration, so the case should not provide an occasion for the Supreme Court to revisit its Hall Street dictum on manifest disregard.
In Comedy Club Inc v Improv West Assocsation,11 the Ninth Circuit reached the same conclusion, holding that even prior to Hall Street it had been treating manifest disregard as an instance of arbitrators having ‘exceeded their powers’, an express statutory ground for vacatur under 16 USC section 10(a)(4). Similarly, a district court within the Seventh Circuit observed that there, too, manifest disregard was already limited to cases in which arbitrators ‘exceeded their powers’ as provided for in section 10(a)(4).12
The situation in the First Circuit is uncertain. In Ramos-Santiago v United Parcel Services,13 a case to which the FAA did not apply, the First Circuit cited Hall Street in dicta as holding that ‘manifest disregard of the law is not a valid ground for vacating or modifying an arbitral award in cases brought under the [FAA]’. At least one district court within the circuit has applied that dictum to conclude that manifest disregard is no longer good law in the First Circuit.14 However, in a case decided two months after Ramos-Santiago, the First Circuit vacated an arbitral award on grounds of manifest disregard of the law without any mention of that case or of Hall Street.15
Thus far, only the Sixth Circuit has held unequivocally that Hall Street did not require it to abandon manifest disregard as a ground for vacatur. In a recent, unpublished decision, the Sixth Circuit, noting that the Hall Street court had not expressed a conclusion as to the meaning of the Wilko dictum, deemed it ‘imprudent to cease employing such a universally recognised principle’ when the Supreme Court had hesitated to reject it.16 However, in another decision dealing with modification of an award, the Sixth Circuit acknowledged, in dicta, that Hall Street cast doubt on the continuing vitality of manifest disregard as a judicially created basis for vacatur.17
To the extent that Hall Street has and continues to cast doubt on the doctrine of manifest disregard as an independent, non-statutory ground for vacatur, it strengthens the view that but for issues of public policy, the Federal Arbitration Act contemplates no merits review of arbitral awards, and thereby strengthens both the effectiveness and the efficiency of the arbitration system.
Interlocutory appeal of motions to compel arbitration
A recent decision by the Supreme Court has clarified a rule of jurisdiction over interlocutory appeals of motions to stay litigation on the grounds that the subject matter is subject to an arbitration agreement. Section 16(a)(1)(A) of the FAA provides that an order denying a motion to stay litigation in favour of arbitration is immediately appealable, but the grant of such a stay, which permits an arbitration to proceed, is not. This provision reflects the FAA’s strong policy in favour of arbitration, as it was included as a deliberate exception to the usual final-judgment rule of federal appellate jurisdiction in order to ensure that a party asserting a right to arbitrate a dispute did not need to go through litigation on the merits before having that right finally determined on appeal.
In Arthur Andersen v Carlisle,18 the Supreme Court held that a non-signatory defendant relying on an arbitration clause by virtue of the doctrine of equitable estoppel, alter ego, or contract theories to similar effect had the right to appeal a denial of a motion to compel arbitration without making any threshold showing on the merits. The defendants in Arthur Andersen had moved the district court to stay the action under section 3 of the FAA on the grounds that principles of equitable estoppel demanded that the claims against them be arbitrated pursuant to an arbitration agreement with a co-defendant. The court denied that motion, and the Court of Appeals dismissed the appeal for lack of appellate jurisdiction. The Supreme Court reversed the decision, holding that jurisdiction ‘must be determined by focusing upon the category of order appealed from, rather than upon the strength of the grounds for reversing the order’.19
The Supreme Court’s holding vindicates the policy of section 16(a)(1)(A) that a party’s right to arbitrate a dispute should be finally determined before the party can be forced to litigate that dispute.
Allegations of unconscionability in arbitration agreements
In recent years, US courts have regularly addressed cases in which a party contends that it had significantly less bargaining power than its counterpart and that the arbitration agreement is invalid on the ground of unconscionability. In the international context, these cases arise primarily in the context of franchise agreements.
In three recent cases, federal courts have addressed unconscionability challenges to arbitration agreements at the outset of the case, notwithstanding their view that as a general matter, under the rule of First Options v Kaplan,20 parties may commit jurisdictional issues (or, in US parlance, ‘arbitrability’ issues) to the arbitral tribunal as long as they do so ‘clearly and unmistakably’.
In Awuah v Coverall North America, Inc,21 the First Circuit concluded that by choosing AAA Rules, the parties had submitted to the arbitral tribunal the determination of whether an arbitration provision was unconscionable. The court nonetheless held that the parties opposing arbitration were entitled to have the court decide whether the terms of the arbitration agreement were so onerous as to make the arbitration remedy illusory. For instance, the court indicated that, if the costs of arbitration proved so high as to prevent the party from presenting its arguments to the tribunal, it would not deny the parties access to a judicial forum as well.
In Kam-Ko Bio-Pharm Trading Co, Ltd-Australasia v Mayne Pharma (USA) Inc,22 the plaintiff filed suit notwithstanding an ICC arbitration clause. Reaching the unconscionability issue, the court held that that issue had to be assessed at the time of contracting. As the claimant had proposed the arbitration provision in the first place, and the cost of arbitration - the primary grounds for asserting unconscionability - was based on the amount of the claim and thus within his control, the court held that the agreement was not unconscionable and referred the parties to arbitration.
In IJL Dominicana SA v It’s Just Lunch International,23 a district court concluded that the arbitration provision of a franchise agreement was unconscionable. Specifically, the court held that the bars on punitive damages and class action procedures were unconscionable because they affected only the franchisee. Rather than deny the motion to compel arbitration, however, the court severed the unconscionable terms and referred the parties to arbitration without the restrictions.
Arbitration of statutorily created rights
In Thomas v Carnival Corporation,24 after concluding that an arbitration agreement and a choice-of-law clause ‘operated in tandem’ to prevent an employee claimant from enforcing his rights under the Seaman’s Wage Act, the US Court of Appeals for the Eleventh Circuit refused to enforce the arbitration agreement on the authority of dictum in Mitsubishi Motors Corporation v Soler Chrysler-Plymouth, Inc.25 The case represents the first time that the much-discussed footnote 19 in the Mitsubishi decision has been applied to deny enforcement of an arbitration agreement in an international case.
In Mitsubishi, disagreeing with each of the federal courts of appeals that had previously addressed the question, the Supreme Court held that an agreement to arbitrate federal antitrust claims was enforceable. In reaching that result, the Court noted that Mitsubishi had conceded that the arbitral tribunal could hear the claims and that the record reflected that those claims had indeed been submitted to the tribunal. The Court therefore observed that the US courts would have ‘the opportunity at the award-enforcement stage to ensure that the legitimate interest in the enforcement of the antitrust laws has been addressed’.26
In Vimar Seguros y Reaseguros v M/W Sky Reefer,27 the court later held that parties asserting non-waivable statutory claims should be referred to arbitration even when it was not yet clear whether those claims would be taken up by the tribunal, reasoning that a US court would have a later opportunity to hear the claims if the tribunal did not do so. Meanwhile, a number of federal courts of appeals held that arbitration agreements providing for arbitration in London should be enforced even though US securities claims would not be heard by those tribunals, reasoning that antifraud remedies available under English law provided an adequate substitute. See, for example, Roby v Corporation of Lloyd’s.28
In Thomas, as in Mitsubishi, the court first held that the arbitration agreement encompassed the statutory claims - in Thomas, those claims were for unpaid wages under the Seaman’s Wage Act, which incorporates a treble-damages penalty for late payments. The court then considered the effect of the choice-of-law provision, which required the arbitral tribunal to apply Panamanian law, ‘notwithstanding any claims [...] which might be available under the laws of any other jurisdiction.’29 In the face of that provision, the court concluded that an arbitrator would be barred from entertaining the Seaman’s Wage Act claims, and it therefore held that the arbitration agreement was unenforceable as applied to those claims.
Thomas might be distinguished from Vimar on the ground that the choice-of-law clause expressly excluded the prospect that the tribunal might hear the statutory claims. Still, the thrust of the Vimar decision would have counseled in favour of allowing the tribunal to act in the first instance. Nor did the Thomas court consider, as had the Roby court, whether the remedies available under the chosen law would be equally effective in vindicating the objectives of the US statute. Perhaps the court’s approach in Thomas is most readily explained by the source of the arbitration agreement in an employment contract, as to which US courts have demonstrated themselves willing to take a more skeptical approach to arbitration agreements that risk waiver of statutory rights.
Limitations on a tribunal’s discretion to craft appropriate relief
The US Court of Appeals for the Second Circuit recently addressed the question of whether an arbitral tribunal has inherent discretion to award attorneys’ fees in appropriate circumstances even in the face of a provision in the arbitration agreement providing that the parties should bear their own costs. Under US law, this is a question of whether the arbitrators exceeded their powers under an arbitration agreement in awarding a particular form of relief.
In Reliastar Life Insurance v EMC National Life Co,30 the petitioner sought to enforce an award that included an award of costs and attorneys’ fees because of its adversary’s bad faith. The respondent objected to the award of costs and fees because the arbitration agreement provided that each party would bear its own costs and all other costs would be divided equally. Over a strong dissent, the court confirmed the award, holding that a broad arbitration clause gives the arbitrators wide discretion to order appropriate remedies, including attorneys’ fees as a sanction for bad faith. The court reasoned that the costs provision reflected only an agreement on the sharing of costs ‘in the expected context of good faith dealings’.
Relying on the consensual nature of arbitraton, the dissenting judge argued that an arbitral tribunal has no ‘inherent’ powers other than those granted by the arbitration agreement by which it exercises its authority. Thus, because the arbitration agreement at issue had a provision specifying how costs are to be allocated, the arbitrators had no authority to award costs contrary to the terms of that agreement, even if one of the parties failed to arbitrate in good faith.
Though not couched in those terms, the difference in approach between the majority and the dissent reflect their different emphases on the jurisdictional and contractual theories as the source of an arbitrator’s authority. While the majority credited the parties’ execution of a broad arbitration agreement to mean that the arbitral tribunal could exercise ‘inherent’ powers ordinarily exercised by arbitrators under similarly broad provisions, the dissent took precisely the opposite view, arguing that ‘inherent’ powers cannot exist because the powers of an arbitrator necessarily are cabined by the language of the specific agreement between the parties. Hence, general principles can be used to interpret the arbitration agreement only where the agreement itself is silent, not to infer an exception or limitation to an express provision in the agreement. While this decision could be read narrowly to allow remedies in the rare instances where ‘bad faith’ has been demonstrated, the majority’s holding is consistent with US law’s pro-enforcement policy and should provide arbitrators comfort that they enjoy at least some discretion based on powers not specifically enumerated by the parties.
Notes
HR 2010, 111th Congress (2009); and S 931, 11th Congress (2009).
Press Release, American Arbitration Association, AAA Announces Moratorium on Consumer Debt Collection Arbitration Cases (27 July 2009).
Firm Agrees to End Role in Arbitrating Card Debt, NY Times, 19 July 2009, at B8.
Hall Street Associates, LLC v Mattel, Inc, 128 Supreme Court at 1396 (2008).
Wilko v Swan, 346 US 427 (1953).
Citigroup Global Markets v Bacon, 562 F 3d 349 (5th Circuit 2009).
Hall Street, 128 Supreme Court at 1404.
Stolt-Nielsen SA v AnimalFeeds International Corporation, 548 F 3d 85 (2nd Circuit 2008).
Id. at 94.
129 Supreme Court 2793 (2009).
Comedy Club Inc v Improv West Association, 553 F 3d 1277 (9th Circuit 2009).
Joseph Stevens & Co v Cikanek, No. 08 C 706, 2008 WL 2705445 (ND Illinois, 9 July 2008) (citing Wise v Wachovia Sec, LLC, 450 F 3d 265, 269 (7th Circuit 2006) (‘we have confined [manifest disregard] to cases in which arbitrators direct the parties to violate the law.’).
Ramos-Santiago v United Parcel Services, 524 F 3d 120 (1st Circuit 2008).
ALS & Association, Inc v AGM Marine Constructors, Inc, 557 F Supp 2d 180 (D Massachusettes 2008).
Kashner Davidson Securities Corporation v Mscisz, 531 F 3d 68 (1st Circuit 2008).
Coffee Beanery, Ltd v WW, LLC, 300 Fed Appx 415 (6th Circuit 2008) (vacating award on manifest disregard grounds).
Grain v Trinity Health, 551 F 3d 374 (6th Circuit 2008).
Arthur Andersen v Carlisle, 129 Supreme Court at 1896 (2009).
129 Supreme Court at 1900.
First Options v Kaplan, 514 US 938 (1995).
Awuah v Coverall North America, Inc, 554 F 3d 7 (1st Circuit 2009).
Kam-Ko Bio-Pharm Trading Co, Ltd-Australasia v Mayne Pharma (USA) Inc, 560 F 3d 935 (9th Circuit 2009).
IJL Dominicana SA v It’s Just Lunch International, LLC, No. CV 08-5417-VAP (OPx), 2009 WL 305187 (CD California, 6 February 2009).
Thomas v Carnival Corporation, 573 F 3d 1113, 1123 (11th Circuit 2009).
Mitsubishi Motors Corporation v Soler Chrysler-Plymouth, Inc, 473 US 614, 637 No. 19 (1985).
473 US at 638.
Vimar Seguros y Reaseguros v M/W Sky Reefer, 515 US 528 (1995).
Roby v Corporation of Lloyd’s, 996 F 2d 1353, 1366 (2d Circuit 1993).
573 F 3d at 1123.
Reliastar Life Insurance v EMC National Life Co, 564 F 3d 81 (2d Circuit 2009).