LaPine sued Kyocera in U.S. federal court for breach of their agreement concerning sales of computer disk drives. The trial court granted Kyocera's motion to compel arbitration pursuant to the arbitration clause in the parties' agreement. The arbitration clause in the agreement provided for judicial review of the arbitrator's decision:
(a) based upon any grounds referred to in the [FAA], or (b) where the Tribunal's findings of fact are not supported by substantial evidence, or (c) where the Tribunal's conclusions of law are erroneous. After the Tribunal issued its final decision, Kyocera sought judicial review of the Tribunal's decision on all three grounds contained in the parties' agreement (as well as another ground not pursued on appeal).The trial court denied Kyocera's request for relief from the Tribunal's decision because none of the statutory grounds for vacating the Tribunal's decision provided by the FAA were present (clause (a) above). The court refused to consider the other grounds asserted by Kyocera to which it and LaPine had contracted (clauses (b) and (c) above), and entered final judgment. On appeal, a split panel of the U.S. Ninth Circuit Court of Appeals reversed the trial court.
Looking to precedent from both the U.S. Supreme Court and the U.S. Fifth Circuit Court of Appeals, the Ninth Circuit held "that the district court erred when it decided that it could not expand judicial review of an arbitration award beyond the grounds set forth in the FAA to the more generous review for substantial evidence and errors of law agreed to by the parties."
The Supreme Court previously had stated that: "Arbitration under the Act is a matter of consent, not coercion, and parties are generally free to structure their arbitration agreements as they see fit. Just as they may limit by contract the issues which they will arbitrate, so too may they specify by contract the rules under which that arbitration will be conducted." Volt Info. Sciences v. Board of Trustees, 489 U.S. 468, 478-79 (1989).
Similarly, the Fifth Circuit had held: "Because these parties contractually agreed to expand judicial review, their contractual provision supplements the FAA's default standard of review and allows for de novo review of issues of law embodied in the arbitration award. . . . When, as here, the parties agree contractually to subject an arbitration award to expanded judicial review, federal arbitration policy demand that the court conduct its review according to the terms of the arbitration contract." Gateway Techs., Inc. v. MCI Telecomm. Corp., 64 F.3d 993, 996-97 (5th Cir. 1995)(In the Gateway case, the Fifth Circuit also disagreed with the U.S. Seventh Circuit Court of Appeal's opposite conclusion reached in Chicago Typographical Union v. Chicago Sun-Times, Inc., 935 F.2d 1501, 1505 (7th Cir. 1991)).
In reaching its decision, the Ninth Circuit also stressed that for federal courts to be able to review arbitral awards, the court must first "have jurisdiction over and the obligation to decide the whole matter in the absence of arbitration."
Recommendations:
A common criticism of arbitration is limited judicial review. It is a trade off. Companies entering into a contract providing for arbitration in the U.S. can provide for broader judicial review than provided in the FAA. Contracting for broader judicial review of an arbitral decision takes away to a great extent the finality of that decision, providing essentially for a non-jury hearing before a U.S. judge, doing so will likely lead to a more just and reasoned result, it also will increase court costs and the time before a final decision is reached on a dispute.