Tracing the Growth Of Arbitral Power

By Bruce Meyerson

In 1953, the U.S. Court held that arbitration was unsuitable for the resolution of claims under the Securities Act of 1933 as it would constitute a waiver of rights protected under the act.  Wilko v. Swan, 346 U.S. 427 (1953).

In 1956, the Court held that the “nature of the tribunal where suits are tried is an important part of the parcel of rights behind a cause of action.  The change from a court of law to an arbitration panel may make a radical difference in ultimate result.”   Bernhardt v. Polygraphic Co. of Am.,  350 U.S. 198, 203 (1956).  The Court also stated that “[a]rbitrators do not have the benefit of judicial instruction on the law; they need not give their reasons for their results; the record of their proceedings is not as complete as it is in a court trial; and judicial review of an award is more limited than judicial review of a trial.”

In 1974, the Court found arbitration to be unsuitable to resolve Title VII discrimination claims, concluding that the “specialized competence of arbitrators pertains primarily to the law of the shop, not the law of the land.”  Alexander v. Gardner-Denver Co., 415 U.S. 36, 57 (1974).

By 1991, however, the Court abandoned completely any antipathy against arbitration, finding that so long as arbitration provided a forum equivalent to court, it was suitable for the resolution of federally-protected civil rights such as the Age Discrimination in Employment Act.  Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20 (1991).

In 2003, the Court upheld the power of arbitrators to decide whether a class arbitration was permissible in a suit seeking to enforce consumer rights on behalf of thousands of South Carolina consumers.  Green Tree Financial Corp. v. Bazzle, 123 S.Ct. 2402 (2003).

It is not an overstatement to say that the shift in judicial thinking regarding arbitration has undergone a radical transformation in the past 50 years.  This change was influenced undoubtedly by many things.  Presumably the cost and delays of litigation caused courts to think more favorably about arbitration, and alternative dispute resolution in general.

Also, between 1974 and 1991, the Supreme Court considered a series of other cases involving the Federal Arbitration Act, or FAA.  These cases, slowly but inexorably, tilted the balance in favor of a more hospitable judicial attitude toward arbitration. 

In Southland Corp. v. Keating, 465 U.S. 1 (1984), the Court, in a controversial ruling, found the FAA to be not merely a procedural statute, but a substantive one as well, creating what amounted to a Congressionally-approved federal policy favoring arbitration, applicable in both federal and state courts.  Moreover, the Court held that the FAA preempted state legislative attempts to interfere with the enforceability of arbitration agreements. 

The next year, in a dispute between businesses from Japan and Puerto Rico, the Court upheld the arbitrability of an antitrust claim, observing that there was no reason to assume that international arbitration would not provide an adequate mechanism for the dispute’s resolution.  Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth Inc., 473 U.S. 614 (1985). 

Two years later, in Shearson/American Express Inc. v. McMahon, 484 U.S. 220 (1987), the Court abandoned completely any judicial hostility to arbitration, declaring that the concerns it articulated 30 years previously were no longer well founded, and like antitrust claims, claims under the Securities Exchange Act of 1934  also may be subject to arbitration.

And, in the final significant case leading up to Gilmer, in 1989, the Court, in upholding the arbitrability of claims under the Securities Act of 1933, unequivocally declared that its 1953 Wilko decision “was incorrectly decided and is inconsistent with the prevailing uniform construction of other federal statutes governing arbitration agreements in the setting of business transactions.”  Rodriguez de Quijas v. Shearson/American Express Inc., 490 U.S. 477, 484 (1989).

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It is not the purpose of this article to examine why the federal courts have turned 180 degrees on arbitration, but rather to explore precisely how far the courts have gone in deferring to arbitrators’ decisions.  It is not simply that courts encourage arbitration, but throughout the arbitral process, from beginning to end, courts have adopted rules that place virtually unreviewable power into the hands of arbitrators.  (Some might question the correctness of this statement.  See S. Hayford & S. Kerrigan, “Vacatur:  The Non-Statutory Grounds for Judicial Review of Commercial Arbitration Awards,” Dispute Resolution Journal 22 (October 1966).)  In many respects, an arbitrator has greater discretion than a federal district court judge.

Ironically, the growth of arbitral power has occurred at the same time as another significant trend—the expansion of arbitration in adhesion contracts.  These widely used contracts—credit card agreements, car rental agreements, consumer contracts, etc.—increasingly contain arbitration provisions.  Because of the adhesive nature of these agreements, the weaker party has no choice but to agree to arbitration.  Thus, arbitrators have been given increasingly broader power, while at the same time, federal and state statutory rights increasingly are being arbitrated.

This article explores how court decisions have greatly expanded arbitrators’ powers.

POWERS EXPANDED

A threshold issue that often arises in arbitration “litigation” is whether the underlying dispute is arbitrable: Is the dispute subject to arbitration?  Certainly, since the Supreme Court’s Southland Corp. decision, disputes over arbitrability are most often resolved in favor of arbitration.  Indeed, the Supreme Court has held that in the face of a broad arbitration clause "only the most forceful evidence of a purpose to exclude the claim from arbitration can prevail."  AT&T Techs., Inc. v. Communications Workers of Am.,  475 U.S. 643, 650 (1986).  Historically, at least outside of collective bargaining, the resolution of arbitrability disputes usually was for courts to decide.  In a series of decisions, the Supreme Court has expanded greatly the power of arbitrators to decide this important question. 

The Court has recognized that the “presumption” is that a court, not an arbitrator, ordinarily will decide the issue of arbitrability.  First Options of Chicago Inc. v. Kaplan, 514 U.S. 938, 947 (1995).  But in First Options, the Court recognized that parties to an arbitration agreement can agree that an arbitrator may decide the arbitrability issue so long as the parties’ agreement to submit the issue to an arbitrator may be found by “clear and unmistakable evidence.” 

An example of such “clear and unmistakable evidence” may be found in the American Arbitration Association Commercial Arbitration Rules (see www.adr.org under “Rules/Procedures”), the most widely used arbitration agreement rules, which provide that the “arbitrator shall have the power to rule on his or her own jurisdiction, including any objections to the existence, scope or validity of the arbitration agreement.”  Rule R-7.     

Several years later, the Court again took up the so-called “who” question in Howsam v. Dean Witter Reynolds Inc., 537 U.S. 79, 85 (2002). In that case, the Court was called upon to determine whether an arbitrator or a judge should decide whether application of the NASD’s time-limit provision for initiating a claim in arbitration was to be considered by an arbitrator or a judge.

 The Court held that arbitrability has both substantive and procedural aspects and, as to the procedural “gateway” questions, parties expect an arbitrator to decide them.

According to the Supreme Court, procedural questions that “grow out of the dispute and bear on its final disposition” are presumptively not for a judge to decide, but are for an arbitrator to decide.  The Court placed certain defenses to arbitration, such as waiver, laches, and delay, in the same category. 

Lower courts, following Howsam, have applied these principles, permitting arbitrators to decide such questions as whether separate arbitration proceedings should be consolidated, Shaw’s Supermarkets Inc. v. United Food & Commercial Workers Union, 321 F.3d 251 (1st Cir. 2003), or whether a party has followed the necessary procedural prerequisites to initiate a claim.  International Ass’n of Bridge, Structural, Ornamental, & Reinforcing Ironworkers, Shopman’s Local 493 v. Efco Corp. & Constr. Products, Inc., 2004 WL 369036 (8th Cir. Mar. 1, 2004)(available at http://caselaw.lp.findlaw.com/data2/circs/8th/031583p.pdf); but see Microchip Tech. Inc. v. U.S. Philips Corp., 367 F.3d 1350 (Fed. Cir. 2004)(whether a successor corporation was bound by arbitration agreement and whether an arbitration agreement had expired were questions for court to decide).

Most recently, the Supreme Court broadened further the power of arbitrators to decide issues of arbitrability.  In Green Tree Financial Corp. v. Bazzle, the Court was asked to review a decision of the South Carolina Supreme Court upholding a class arbitration award.  The parties’ agreement was silent on the question of whether class arbitration was permitted.  The question before the Court was whether class arbitration was permissible under such circumstances.

The Court declined to answer that question, instead remanding the case so that the issue could be decided by the arbitrator.  The Court reasoned that the arbitration agreement provided that the parties would submit “all” disputes “arising from or relating” to their contract to arbitration. 

Thus, the Court concluded that the “parties seem to have agreed that an arbitrator, not a judge, would answer the relevant question.”  The relevant question, the Court said, “is what kind of arbitration proceeding the parties agreed to.” Green Tree Financial at 2407 (emphasis is in the opinion).  This, the Court said, is a question of contract interpretation and arbitration procedures, questions which arbitrators “are well situated to answer.”

The distinction between procedural arbitrability as an issue for an arbitrator to decide, and substantive arbitrability as an issue for a court to decide, has been incorporated into the Revised Uniform Arbitration Act, referred to here as the RUAA.  It provides under Section 6(b) that a court “shall decide whether an agreement to arbitrate exists or a controversy is subject to an agreement to arbitrate,” and, under Section 6(c), an “arbitrator shall decide whether a condition precedent to arbitrability has been fulfilled and whether a contract containing a valid agreement to arbitrate is enforceable.”

Consistent with the RUAA distinction, a number of courts have held that even issues of unconscionability are to be decided by arbitrators.  For example, in Hawkins v. Aid Ass’n for Lutherans, 338 F.3d 801 (7th Cir. 2003), the Seventh U.S. Circuit Court of Appeals held that unconscionability arguments concerning limits on remedies found in an arbitration provision were to be resolved by an arbitrator, not a judge.  The court held that “[b]ecause the adequacy of arbitration remedies has nothing to do with whether the parties agreed to arbitrate or if the claims are within the scope of that agreement, these challenges must first be considered by the arbitrator.”  Id. at 807; see Pacificare Health Systems, Inc. v. Book, 538 U.S. 401 (2003).

PROCESS MANAGEMENT DISCRETION

Arbitrators have extremely broad discretion with respect to discovery issues and rulings on evidence.  Of course, arbitrators’ decisions regarding the management of the arbitration have been vacated in some circumstances.  See, e.g., Tempo Shain Corp. v. Bertek Inc., 120 F.3d 16 (2d Cir. 1997)(arbitrator’s decision vacated for refusal to continue hearing to allow key witness to testify); Iran Aircraft Indus. v. Avco Corp., 980 F.2d 141 (2d Cir. 1992)(arbitration award vacated where panel changed evidentiary rules during the hearing).

But so long as “minimum standards of fundamental fairness” are met, an arbitrator’s decision will be upheld.  See Prestige Ford v. Ford Dealer Computer Services Inc., 324 F.3d 391, 395 (5th Cir. 2003); see also Nationwide Mut. Ins. Co. v. Home Ins. Co., 278 F.3d 621, 625 (6th Cir. 2002).  Other aspects of the hearing process are also firmly committed to arbitral discretion, including:

          Refusal to postpone hearing.  In re Time Const., Inc., 43 F.3d 1041 (6th Cir. 1995);

          Exclusion of evidence.  A.H. Robins Co., Inc. v. Dalkon Shield Claimants Trust, 228 B.R. 587 (E.D. Va. 1999);

         Denial of discovery.  Nationwide Mut. Ins. Co. v. Home Ins. Co., 278 F.3d 621 (6th Cir. 2002); and

         Establishing rules of procedure.  Keebler Co. v. Truck Drivers, Local 170, 247 F.3d 8 (1st Cir. 2001).

NARROW JUDICIAL REVIEW

Arbitral Power-- It is well known that the statutory bases for review of arbitration awards are quite narrow.  Under the FAA, judicial review is limited to situations where (1) the award was “procured by corruption, fraud or other undue means,” (2) there was “evident partiality” by an arbitrator appointed as a neutral or corruption in any of the arbitrators, (3) the arbitrators refused to postpone the hearing “upon sufficient cause being shown” or refused to “hear evidence pertinent and material to the controversy” or otherwise conducted the hearing as to prejudice the rights of a party,” and (4) the arbitrators “exceeded their powers.” 9 U.S.C. § 10.

Indeed, as one court explained, “[w]hen courts are called on to review an arbitrator’s decision, the review is very narrow; one of the narrowest standards of judicial review in all of American jurisprudence.”  Lattimer-Stevens Co. v. United Steelworkers, 913 F.2d 1166, 1169 (6th Cir. 1990).  In fact, an arbitration award may even be “arbitrary and capricious” and still not be subject to judicial review.  Brabham v. A.G. Edwards & Sons Inc., 2004 W.L. 1444919 (5th Cir. June 28, 2004).

One of these grounds permits judicial review of arbitration awards where the arbitrators have “exceeded their powers.”  9 U.S.C. § 10(a)(4).  But consistent with the narrow scope of review under the FAA and state arbitration acts, this basis of judicial review has been “consistently accorded the narrowest of readings” by the courts.  Westerbeke Corp. v. Daihatsu Motor Co., Ltd., 304 F.3d 200, 220 (2d Cir. 2002).  A reviewing court, examining whether an arbitrator has exceeded his or her powers, “must resolve all doubts in favor of arbitration.”  Brook v. Peak Int’l, Ltd., 294 F.3d 668, 672 (5th Cir. 2002). 

Where an arbitration clause is broad, arbitrators have the discretion to order remedies they determine appropriate, so long as they do not exceed the power granted to them by the contract itself.  See, e.g., Banco De Seguros Del Estado v. Mutual Marine Office, 344 F.3d 255, 262 (2d Cir. 2003)(courts have “consistently” given the “narrowest of readings” to the FAA’s authority to vacate awards where it is alleged that the arbitrators have exceeded their powers).

The California Supreme Court also has held that arbitrators are not obliged to read contracts literally, and an award may not be vacated simply because a reviewing court is unable to find that the relief granted was authorized by a specific contract term.  The California court has held that an award will be upheld so long as the remedy granted is “even arguably” based on the contract.  Advanced Micro Devices Inc. v. Intel Corp., 885 P.2d 994, 1006 (Cal. Sup. Ct. 1994). 

The RUAA adopts this principle.  It provides that an arbitrator may award such remedies as the arbitrator considers “just and appropriate under the circumstances” even if the remedy “could not or would not be granted by” a court.  Section 21(c).

The converse of this principle also has been adopted by the courts--in adhesion contracts, an arbitrator’s power to grant full relief to the prevailing party may not be restricted.  In Gilmer, the U.S. Supreme Court found arbitration to be an acceptable alternative to litigation so long as the claimant can “effectively . . .vindicate” his or her rights in the arbitral forum.  500 U.S. at 28. 

Courts repeatedly have struck down arbitration provisions that sought to limit the relief that an arbitrator might award denying claimants remedies that would be available in court.  See, e.g., Paladino v. Avnet Computer Tech. Inc., 134 F.3d 1054 (11th Cir. 1998)(employee is not required to arbitrate Title VII where the agreement limits damages allowed by law); Armendariz v. Foundation Health Psychcare Serv. Inc., 6 P.3d 669 (Cal. Sup. Ct. 2000)(arbitration clause that limits employee’s remedies under state antidiscrimination statute is unconscionable).

Manifest Disregard of the Law--The most common nonstatutory basis for reviewing an arbitration award is the doctrine known as manifest disregard of the law.  Although this basis for review of arbitration awards never has been defined precisely by the Supreme Court, the federal appellate courts have applied the doctrine sparingly.  It is an “extremely narrow, judicially-created rule with limited applicability.”  Prestige Ford v. Ford Dealer Computer Services, Inc., 324 F.3d 391, 396 (5th Cir. 2003). 

Another court observed, “[W]e will confirm the award if we are able to discern any colorable justification for the arbitrator’s judgment, even if that reasoning would be based on an error of fact or law.”  Westerbeke Corp. v. Daihatsu Motor Co., 304 F.3d 200, 212 n. 8 (2d Cir. 2002).

In the Second Circuit, for example, to prevail on a manifest disregard claim, the claimant must identify a well-defined and explicit governing legal principle, clearly applicable to the case, and ignored by the arbitrator after it was brought to the arbitrator’s attention in a way that assures that the arbitrator knew its controlling nature.  GMS Group LLC v. Benderson, 326 F.3d 75, 78 (2d Cir. 2003); see also Duferco Intern’l Steel Trading v. T. Klaveness Shipping A/S, 333 F.3d 383 (2d Cir. 2003).  The Eighth Circuit Court of Appeals has expressed this rule somewhat succinctly: to prevail on a claim of manifest disregard of the law, the claimant must show that the arbitrators were aware of a clearly defined governing legal principle, but refused to apply it.  St. John’s Mercy Medical Center v. Delfino, 414 F.3d 882 ((8th Cir. 2005).  And, despite the growing use of arbitration of statutory claims arising out of contracts of adhesion, courts remain reluctant to liberalize this doctrine.  GMS Group LLC v. Benderson, 326 F.3d 75 at 79. 

While not citing the doctrine of manifest disregard of the law, the California Supreme Court, generally discussing the reviewability of arbitration awards, has held that “an arbitrator’s decision is not generally reviewable for errors of fact or law, whether or not such error appears on the face of the award and causes substantial injustice to the parties.”  Moncharsh v. Heily & Blase, 832 P.2d 899, 900 (Cal Sup. Ct. 1992).

The Public Policy Exception--Another judicially created basis for review of arbitration awards is known as the “public-policy exception.”  This doctrine holds that an arbitration award may be vacated where it violates public policy.  The Supreme Court has interpreted this rule so narrowly that many believe it is no longer viable. 

The latest opportunity for the Court to address this issue was in Eastern Associated Coal Corp. v. United Mine Workers of America, 531 U.S. 57 (2000).  In this case, a driver of heavy truck-like vehicles on public highways tested positive for marijuana.  The company sought to discharge him, but the union contested the dismissal at an arbitration hearing.  The arbitrator found that the discharge did not amount to just cause and ordered the employee reinstated subject to certain conditions. 

One year later, the employee again tested positive for marijuana.  Again, the company sought to discharge the employee, again the union went to arbitration, and again, an arbitrator concluded that the marijuana use did not amount to just cause, citing two mitigating factors—the employee had been a good worker for 17 years, and a personal problem caused his repeated drug use.  The arbitrator ordered the employee reinstated again, subject to conditions.

The company filed suit to have the arbitration award vacated.  The district court, the Circuit Court of Appeals, and the U.S. Supreme Court all affirmed the conditional reinstatement.  The question before the Court was whether the reinstatement would be tantamount to making the collective bargaining agreement contrary to public policy.  Such a public policy must be explicit, well defined, and dominant, and must be ascertained by reference to laws and legal precedents--and not from general considerations of supposed public interests. 

Despite finding laws and regulations prohibiting drivers of heavy-duty vehicles from using drugs while driving, the Court could find no specific law that had been violated and to the contrary, that the restrictions imposed by the arbitrator were consistent with the remedial purposes of rehabilitation.  The Court’s reasoning is based on the broad discretion given to arbitrators.  In beginning its analysis, the Court stated that it “must assume that the collective bargaining agreement itself calls for [the employee’s] reinstatement.” Why?  Because both the employer and the union have entrusted to the arbitrator the authority to interpret the meaning of the collective bargaining agreement, including words such as “just cause.” 

Thus, as long as the arbitrator is “even arguably” construing or applying the contract, the award will be upheld, even though the court is convinced “he has committed serious error.”  Id. at 61-62.  Because the parties did not claim that the arbitrator acted outside the scope of his contractually designated authority, the Court treated the award “as if it represented an agreement” between the parties.  Id. at 62.

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The growth of arbitral power cannot be denied.  From the beginning to the end of the arbitration process, courts consistently grant deference to arbitrator decision making. During the past 50 years the courts have gone from questioning the integrity of the arbitral process to vesting in arbitrators virtually unreviewable discretion to decide federal statutory rights. 

For arbitration, it has been quite a ride.