U.S. Supreme Court Declines To Review Whether The Federal Arbitration Act Forecloses Public-Policy Challenges To Arbitration Awards

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For the second time in four years, the U.S. Supreme Court has declined to resolve an arbitration-related issue that state and federal courts have been wrestling with over the last decade:  whether the Federal Arbitration Act (“FAA”) precludes courts from invoking public policy as a ground for refusing to enforce arbitration awards.  While public policy challenges to arbitration awards have a long history, some state and federal courts have interpreted a 2008 Supreme Court decision entitled Hall Street Assocs. v. Mattel, Inc., 552 U.S. 576 (2008), as foreclosing such challenges in arbitrations governed by the FAA.

Last month, the Supreme Court denied a petition for a writ of certiorari to review a decision of the Nebraska Supreme Court holding that, under Hall Street, courts may not vacate awards on public policy grounds in arbitrations governed by the FAA.[1]  The Court declined to review a similar ruling by the Texas Court of Appeals four years earlier.[2]  That means the issue will likely remain a point of contention in state and federal courts.

Congress enacted the FAA nearly a century ago to replace judicial opposition to arbitration with a national policy favoring arbitration and placing arbitration agreements on equal footing with other contracts.  The Act, which applies to all contracts involving commerce, except certain collective bargaining agreements, provides expedited judicial review to confirm, vacate, or modify arbitration awards.  Under Section 9 of the FAA, a court “must” confirm an award “unless” it is vacated, modified, or corrected “as prescribed” in Sections 10 and 11.  Section 10 lists grounds for vacating an award, including where the award was procured by “corruption,” “fraud,” or “undue means,” and where the arbitrators were “guilty of misconduct,” or “exceeded their powers.”

Prior to the Supreme Court’s decision in Hall Street, courts generally permitted challenges to arbitration awards on public-policy grounds, although they interpreted that ground narrowly.  It applied only if an award was contrary to “some explicit policy” that is “well defined and dominant” and ascertained “by reference to the laws and legal precedents.”[3]  The doctrine “derives from the basic notion that no court will lend its aid to one who founds a cause of action upon an immoral or illegal act, and is further justified by the observation that the public’s interests in confining the scope of private agreements to which it is not a party will go unrepresented unless the judiciary takes account of those interests when it considers whether to enforce such agreements.”[4]

In Hall Street, the Supreme Court considered whether parties could contractually agree  to vacate an award on grounds not set forth in Section 10 of the FAA —specifically, by agreeing that a court could vacate an award where the arbitrator’s findings of facts are not supported by substantial evidence or where the arbitrator’s conclusions of law are erroneous.  In a 6-3 decision authored by Justice Souter, the Court ruled that parties could not contractually expand the scope of review in an FAA arbitration.  Rather, the Court held, Sections 10 and 11 “provide the FAA’s exclusive grounds for expedited vacatur and modification.”

Although Hall Street did not address a challenge to an arbitration award on public policy grounds and did not mention that issue, some courts have interpreted its holding that the statutory grounds for vacatur are the “exclusive” grounds permitted under the FAA as foreclosing other judicially created grounds, including the ground that an award violates public policy.  Thus, for example, the U. S. Court of Appeals for the 11th Circuit has held that “our judicially-created bases for vacatur are no longer valid in light of Hall Street.”[5]  The highest courts in Alabama, Florida, and Nebraska have ruled the same way.[6]

In contrast, the U.S. Court of Appeals for the 7th Circuit ruled that Hall Street “did not overrule Eastern Associated Coal or W.R. Grace, both of which recognized a public policy exception to the general prohibition on overturning arbitrator awards.”[7]  Similarly, the U.S. Court of Appeals for the 9th Circuit recently stated that “a court may vacate an arbitration award that is contrary to public policy.”[8]

In light of the fact that Hall Street did not expressly address the issue of public-policy challenges to arbitration awards, parties will likely continue to litigate whether the Court intended to foreclose that previously well-established basis for challenging awards—except in jurisdictions like Alabama, Florida, Nebraska, and the 11th Circuit, where the courts have already decided the issue.  Parties may also argue that such a broad reading of Hall Street conflicts with Section 2 of the FAA, which provides that agreements to arbitrate shall be valid and enforceable, “save upon such grounds as exist at law or equity for the revocation of any contract”—because courts have long held that agreements that are contrary to public policy are void and unenforceable.[9]  The Supreme Court may be unlikely to review the issue, however,

[1]  See Seldin v. Estate of Silverman, 2021 WL 1951803 (May 17, 2021).

[2]  See Parallel Networks, LLC v. Jenner & Block LLP, 137 S. Ct. 2176 (2017).

[3]  Cole v. Burns Int’l Sec. Servs., 105 F.3d 1465, 1486 (D.C. Cir. 1997) (quoting United Paperworkers Int’l Union v. Misco, Inc., 484 U.S. 29, 43 (1987)).

[4]  United Paperworkers, 484 U.S. at 42.

[5]  Frazier v. CitiFinancial Corp., 604 F.3d 1313, 1324 (11th Cir. 2010).

[6]  See Cavalier Mfg., Inc. v. Gant, 143 So. 3d 762, 768-69 & n.5 (Ala. 2013); Visiting Nurse Ass’n of Fla., Inc. v. Jupiter Med. Ctr.,Inc., 154 So. 3d 1115, 1128, 1132 (Fla. 2014); Seldin v. Estate of Silverman, 305 Neb. 185, 206-07 (2020).

[7]  Titan Tire Corp. of Freeport, Inc. v. United Steel Workers Int’l Union, 734 F.3d 708, 717 n.8 (7th Cir. 2013) (citing Eastern Assoc. Coal Corp. v. United Mine Workers, 531 U.S. 57 (2000), and W.R. Grace & Co. v. Local Union 759, 461 U.S. 757 (1983).

[8]  DeMartini v. Johns, 693 F. App’x 534, 537 (9th Cir. June 7, 2017).

[9]  See United States v. Bonanno Organized Crime Family, , 879 F.2d 20, 28 (2d Cir. 1989) (“[I]llegal agreements, as well as agreements contrary to public policy, have long been held to be unenforceable and void.”).

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