Opinion ID: 783506
Heading Depth: 2
Heading Rank: 1

Heading: Enforceability of Private Agreements to Preclude Judicial Review of Arbitration Awards

Text: 19 Under § 1(d) of the Amendment, disputes over the calculation of EBITDA were to be resolved by Steven Sherrill, whose decision in such matters shall be binding and conclusive upon each of the parties hereto and shall not be subject to any type of review or appeal whatsoever. According to the Hoefts, this provision deprived the District Court of the authority to examine the substance of the arbitrator's decision and, thus, to review it for manifest disregard of the law. While the Hoefts did invoke the District Court's jurisdiction in order to obtain a judgment confirming the arbitration award, they contend that there is no contradiction between their petition and their claim that the substance of the arbitrator's decision is unreviewable. The Hoefts rely on the Stock Purchase Agreement and its Amendment as the source of their right to seek confirmation of the award in federal court. 20 The District Court did not determine whether a private agreement could both authorize a federal court to enter a judgment confirming an arbitral award and divest that court of the authority to review the substance of the award for manifest disregard of the law. Instead, the District Court assumed arguendo that parties could agree to eliminate judicial review of an arbitration award, but concluded that § 1(d) of the Amendment was not sufficiently clear to indicate the parties' intention to do so. 21 In urging us to enforce the parties' apparent agreement to insulate the substance of the arbitration award from judicial review, the Hoefts rely on the general principle of freedom of contract and the more specific canon of deference to private agreements to arbitrate. But the freedom to contract, like any freedom, has its limits, and the Hoefts' reliance on the federal policy favoring arbitration overlooks several key assumptions that undergird that policy. It is in part because arbitration awards are subject to minimal judicial review that federal courts voice such strong support for the arbitral process. See Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 32 n. 4, 111 S.Ct. 1647, 114 L.Ed.2d 26 (1991) (We have stated ... that `although judicial scrutiny of arbitration awards necessarily is limited, such review is sufficient to ensure that arbitrators comply with the requirements of the statute' at issue. (quoting Shearson/Am. Express Inc. v. McMahon, 482 U.S. 220, 232, 107 S.Ct. 2332, 96 L.Ed.2d 185 (1987))). Arbitration awards are not self-enforcing, a fact that the Hoefts, who petitioned the District Court to confirm the award, cannot deny. Thus, while we have spoken in broad terms of deference to private agreements to arbitrate, we have always done so with an awareness of the confirmation-and-vacatur safety net that hangs below. The FAA prescribes several grounds for vacating arbitration awards that although narrow are nevertheless important. Specifically, § 10(a) of the FAA authorizes a district court to vacate an arbitration award: 22 (1) where the award was procured by corruption, fraud, or undue means; (2) where there was evident partiality or corruption in the arbitrators, or either of them; 23 (3) where the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy; or of any other misbehavior by which the rights of any party have been prejudiced; or 24 (4) where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made. 25 9 U.S.C. § 10(a). The Supreme Court has supplemented the FAA with an additional ground not prescribed in the statute: manifest disregard of the law. See Wilko v. Swan, 346 U.S. 427, 436-37, 74 S.Ct. 182, 98 L.Ed. 168 (1953), overruled on other grounds, Rodriguez de Quijas v. Shearson/Am. Express, Inc., 490 U.S. 477, 485, 109 S.Ct. 1917, 104 L.Ed.2d 526 (1989); see also, e.g., Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Bobker, 808 F.2d 930, 933 (2d Cir.1986). The manifest disregard standard together with § 10(a) represent a floor for judicial review of arbitration awards below which parties cannot require courts to go, no matter how clear the parties' intentions. 26 While various courts have enforced private agreements to alter the judicial review to be applied to arbitral awards, as the Hoefts acknowledge, [m]ost of these cases have involved attempts to raise the level of judicial review otherwise available under the FAA. (Br. of Petitioners-Appellants at 26 n. 16 (emphasis added).) See, e.g., Roadway Package Sys., Inc. v. Kayser, 257 F.3d 287, 293 (3d Cir.2001); LaPine Tech. Corp. v. Kyocera Corp., 130 F.3d 884, 888-89 (9th Cir.1997); Gateway Techs., Inc. v. MCI Telecomm. Corp., 64 F.3d 993, 996-97 (5th Cir.1995). Decisions enforcing agreements to decrease the otherwise applicable level of judicial review are far more scarce. See Bowen v. Amoco Pipeline Co., 254 F.3d 925, 931 (10th Cir.2001) (noting in dicta that parties to an arbitration agreement may eliminate judicial review by contract); Aerojet-Gen. Corp. v. Am. Arbitration Ass'n, 478 F.2d 248, 251 (9th Cir.1973) (same). While taking no position on the enforceability of agreements to raise the level of judicial review, we note that there is a fundamental difference between an agreement to increase the scrutiny that courts apply when considering whether to confirm or vacate an arbitration award and an agreement to prevent courts from reviewing the substance of an arbitration award at all. 27 An agreement that contemplates confirmation but bars all judicial review presents serious concerns. Arbitration agreements are private contracts, but at the end of the process the successful party may obtain a judgment affording resort to the potent public legal remedies available to judgment creditors. In enacting § 10(a), Congress impressed limited, but critical, safeguards onto this process, ones that respected the importance and flexibility of private dispute resolution mechanisms, but at the same time barred federal courts from confirming awards tainted by partiality, a lack of elementary procedural fairness, corruption, or similar misconduct. This balance would be eviscerated, and the integrity of the arbitration process could be compromised, if parties could require that awards, flawed for any of these reasons, must nevertheless be blessed by federal courts. Since federal courts are not rubber stamps, parties may not, by private agreement, relieve them of their obligation to review arbitration awards for compliance with § 10(a). Cf. I/S Stavborg v. Nat'l Metal Converters, Inc., 500 F.2d 424, 427 (2d Cir.1974) (holding that parties' invocation of district court's power to appoint arbitrator demonstrated their intent to permit court to review arbitral award). 28 The Hoefts contend there is a middle ground. They would draw a distinction between the bases for vacatur enumerated in § 10(a), on the one hand, and the judicially created manifest disregard of the law standard, on the other. Thus, the argument goes, we may preclude parties from contracting around § 10(a), yet permit them to contract around the manifest disregard standard. Accordingly, the Hoefts urge us to interpret § 1(d) of the Amendment as divesting the District Court of the authority to review the arbitration award for manifest disregard of the law, even if it does not divest the court of the authority to review it for corruption, partiality, or the other § 10(a) grounds. 29 But we see no reason to treat manifest disregard of the law differently from the grounds enumerated in § 10(a). Through the combination of legislation and common law, narrow standards of reviewing arbitration awards have developed in the courts of this and other Circuits. See, e.g., Greenberg v. Bear, Stearns & Co., 220 F.3d 22, 26-27 (2d Cir.2000), cert. denied, 531 U.S. 1075, 121 S.Ct. 770, 148 L.Ed.2d 669 (2001); see also, e.g., G.C. & K.B. Invs., Inc. v. Wilson, 326 F.3d 1096, 1106 (9th Cir.2003); Prestige Ford v. Ford Dealer Computer Servs., Inc., 324 F.3d 391, 394-96 (5th Cir.2003); Sheldon v. Vermonty, 269 F.3d 1202, 1206 (10th Cir.2001); O.R. Sec., Inc. v. Prof'l Planning Assocs., Inc., 857 F.2d 742, 746-47 (11th Cir.1988). As the Tenth Circuit held in refusing to enforce a private agreement to expand judicial review of arbitration awards, in the absence of clear authority to the contrary, parties may not interfere with the judicial process by dictating how the federal courts operate. Bowen, 254 F.3d at 936 n. 8. Similarly, in a different context the Supreme Court has held that the mere fact that [a] settlement agreement provides for vacatur of a judgment does not justify vacatur, U.S. Bancorp Mortgage Co. v. Bonner Mall P'ship, 513 U.S. 18, 29, 115 S.Ct. 386, 130 L.Ed.2d 233 (1994), stating that judicial precedents are not merely the property of private litigants, id. at 26, 115 S.Ct. 386 (citation and quotation marks omitted). The fact that the manifest disregard standard is a product of common law, rather than statute, makes it no less essential to the judicial review of arbitration awards. Just as the Supreme Court held in Bonner Mall that private parties may not dictate to a federal court when to vacate another court's judgment, we hold today that private parties may not dictate to a federal court when to enter a judgment enforcing an arbitration award. Judicial standards of review, like judicial precedents, are not the property of private litigants. 30 Lastly, we note that Katz v. Feinberg, 290 F.3d 95 (2d Cir.2002), upon which the Hoefts place considerable reliance, does not alter this analysis. In that case, we enforced the parties' agreement to preclude arbitral review of an arbitration award, holding that a panel had exceeded its authority in modifying the award that another arbitrator had rendered. Id. at 98. Katz obviously did not hold that parties may preclude judicial review of arbitration awards, as that decision itself affirmed a district court judgment vacating a portion of an arbitration award. There is no contradiction in our differing treatment of private agreements to preclude arbitral and judicial review of arbitration awards. As the district court noted in Katz, Because arbitration is a creature of contract, the arbitrability of an issue derives fundamentally from the parties' agreement to arbitrate. Katz v. Feinberg, 167 F.Supp.2d 556, 565-66 (S.D.N.Y.2001), aff'd, 290 F.3d 95 (2d Cir.2002). Thus, just as a private agreement may vest decision-making authority in an arbitrator, so may it deprive an arbitrator of that authority. Unlike arbitration, however, judicial review is not a creature of contract, and the authority of a federal court to review an arbitration award — or any other matter — does not derive from a private agreement. See, e.g., Ins. Corp. of Ireland, Ltd. v. Compagnie des Bauxites de Guinee, 456 U.S. 694, 702, 102 S.Ct. 2099, 72 L.Ed.2d 492 (1982) (holding that no action of the parties can confer subject-matter jurisdiction upon a federal court). 31 Parties seeking to enforce arbitration awards through federal-court confirmation judgments may not divest the courts of their statutory and common-law authority to review both the substance of the awards and the arbitral process for compliance with § 10(a) and the manifest disregard standard. Therefore, we must examine the merits of the District Court's conclusion that the arbitrator manifestly disregarded the law in rendering his award.