Arbitration Agreements: Ninth Circuit Upholds Heightened Judicial Review In Deference To Terms of Parties' Agreement

The Ninth Circuit, in La Pine Technology Corp. v. Kyocera Corp.; Kyocera Corp. v. Prudential-Bache Trade Services Inc., No. 9615319, 96-15321 (December 9, 1997) ("La Pine"), recently held that a clause in the parties' agreement that broadened the scope of judicial review of an arbitration award beyond the bases set forth in the Federal Arbitration Act is valid and enforceable. The court observed that Congress's intent in enacting the Federal Arbitration Act was to ensure enforcement of private agreements to arbitrate in accordance with the agreements' terms.

The parties to the La Pine dispute, members of a joint venture to manufacture and market computer disk drives, had entered into an Agreement that contained the following arbitration

clause: (d) Manner. . . . The United States District Court for the Northern District of California may enter judgment upon any award, either by confirming the award or by vacating, modifying or correcting the award. The Court shall vacate, modify or correct any award: (i) based upon any of the grounds referred to in the Federal Arbitration Act, (ii) where the arbitrators' findings of fact are not supported by substantial evidence, or (iii) where the arbitrators' conclusions of law are erroneous.

After one of the parties moved to compel arbitration pursuant to the agreement, their dispute was submitted to a panel of three arbitrators for decision in accordance with certain "Terms of Reference," which provided for the same broad judicial review of the arbitrators' decision.

After the arbitration panel issued its final decision, Kyocera moved in the district court to vacate, modify, and correct the award. Kyocera argued that the arbitrators' findings of fact were not supported by substantial evidence, that there were errors of law, and that there were statutory bases for vacatur or modification under the FAA.

The district court denied Kyocera's motion, holding it would only consider the statutory bases for vacatur set forth in the Federal Arbitration Act -- it would not review the award for errors of law or fact despite the provisions of the parties' agreement and the "Terms of Reference." In doing so the district court held "the parties may not by agreement alter by expansion the provisions for judicial review contained in the Federal Arbitration Act." The Ninth Circuit disagreed. "There is no federal policy favoring arbitration under a certain set of procedural rules; the federal policy is simply to ensure the enforceability, according to their terms, of private agreements to arbitrate." The Ninth Circuit also observed that the Fifth Circuit and the District Court of the Southern District of New York had approved of heightened judicial review in accordance with the parties' agreement.

In response to the argument that heightened appellate review would sacrifice the simplicity, informality, and expedition of arbitration, the Ninth Circuit observed that in the absence of arbitration agreements, a court would be required to decide all aspects of the dispute rather than only reviewing the arbitrators' findings for factual and legal validity.

Thus, in the Ninth Circuit (as well as the Fifth Circuit) "federal courts can expand their review of an arbitration award beyond the FAA's grounds, when (but only to the extent that) the parties have so agreed."

It will be important for the reinsurance industry to watch for a gradual broadening of judicial review of arbitration awards in the next few years. While judicial review of erroneous conclusions of law could be beneficial to the parties in certain cases, the costs of heightened and broadened judicial review of arbitration awards are likely to outweigh the occasional benefit.

In addition, the broadening of judicial review to encompass questions of law in effect renders the arbitration process less binding. Broad challenges to the arbitration award dampen the sense of finality that all parties sought by consenting to arbitration.

Accordingly, to retain the benefit of faster and more final arbitration systems, it will become even more important to scrutinize the scope of review provided for in arbitration clauses.