If “Grave Error” Is Not Enough To Vacate An Arbitrator’s Decision, What Is?

GenieLampThe recent Sutter decision drives home repeatedly that a court may not vacate an arbitrator’s decision under the FAA just because a judge thinks the arbitrator reached the wrong result.  Justice Kagan said that under Section 10(a)(4) the court cannot second-guess the award, not even in the face of “grave error.”  Instead, the award must be confirmed, whether it is “good, bad, or ugly.”  If an ugly and gravely erroneous arbitration award does not establish that an arbitrator “exceeded his or her powers,” what does?

In general, the answer relates back to the fact that arbitration is a matter of contract.  If an arbitrator forgets that he or she is an all powerful genie only within the confines of his or her own lamp, which is defined by the arbitration agreement, there is a risk that the award can be vacated.  (Can you tell I watched “Aladdin” with the kids on my ArbitrationVacation?)  Here are a few examples of recent cases finding an arbitrator exceeded his or her powers, that would likely survive the test articulated in Sutter.

When an arbitrator issued an award that significantly rewrote the parties’ contract, the Third Circuit held that the award exceeded the arbitrator’s powers.  In particular, the court noted that the relief “was not sought by either party, and was completely irrational because [the arbitrator] wrote material terms of the contract out of existence.” PMA Capital Ins. Co. v. Platinum Underwriters Bermuda, Ltd., 2010 WL 4409655 (3d Cir. 2010). See also Nat’l Hockey League Players’ Assoc. v. Nat’l Hockey League, 30 F. Supp. 2d 1025, 1029 (N.D. Ill. 1998) (vacating an award when the arbitrator considered evidence the parties had specifically agreed to exclude).

In another case, the Ninth Circuit upheld a district court’s finding that an arbitrator exceeded the scope of his authority when he issued two permanent injunctions to bind nonparties to a trademark agreement. Comedy Club, Inc. v. Improv West Assocs., 553 F.3d 1277, 1286-88 (9th Cir. 2009). The court held that the arbitrator had no authority to enjoin a nonparty since it was not a “third party beneficiary, an agent, or an assignee” of the agreement.  That portion of the award was vacated.

In a case where the court remanded an award to the arbitrator to clarify the calculation of damages, but the arbitrator did more than clarify the requested issue, the Fifth Circuit has held that the arbitrator exceeded his authority upon remand, and thereby reinstated the original arbitration award. Brown v. Witco Corp., 340 F.3d 209, 221 (5th Cir. 2003).

If “manifest disregard of the law” is no longer a separate, viable basis for vacating an arbitration award (which SCOTUS has not officially declared, but has hinted strongly twice), then parties seeking relief from an award must find ways to fit themselves into one of the four narrow bases for vacatur under Section 10(a) of the FAA.  The fourth of those, when an arbitrator exceeds his or her power, is just as narrow as the rest.   As the Court said in Stolt-Nielsen “[i]t is only when [an] arbitrator strays from interpretation and application of the agreement and effectively ‘dispense[s] his own brand of industrial justice’ that his decision may be unenforceable.” 

*ArbitrationNation thanks Zelda Elcin, a student at the University of Minnesota Law School, for her work on this post.