CALIFORNIA SUPREME COURT APPROVES VASTLY EXPANDED JUDICIAL REVIEW OF ARBITRATION AWARDS

Arbitration has several advantages to litigation as a quicker and less expensive means of resolving disputes. However, many people have been reluctant to agree to arbitration because arbitration awards have been essentially immune to attack or appeal, even where the award is factually or legally erroneous. Until now, courts would not allow parties to graft appeal rights onto their agreements to arbitrate. The California Supreme Court has now ruled that parties are permitted to structure arbitration agreements to allow judicial review of legal error in an arbitration award under California state law.

In Cable Connection, Inc. v. DirecTV, Inc., the arbitration clause in sales agreements provided that “[t]he arbitrators shall not have the power to commit errors of law or legal reasoning and the award may be vacated or corrected on appeal to a court of competent jurisdiction for any such error.” The California Supreme Court reversed prior law and approved the clause. The Court reasoned that because the powers of the arbitrator are based on the parties’ expectations as embodied in their agreement, the parties should be able to determine the scope of judicial review. “It is the parties who are best situated to weigh the advantages of traditional arbitration against the benefits of court review for the correction of legal error.” However, the Court was careful to not open the floodgates for the retrial of every legal and evidentiary issue submitted to arbitration. In order to remove an agreement from the general rule that the merits of an arbitration award are not subject to judicial review, “the parties must clearly agree that legal errors are an excess of arbitral authority that is reviewable by the courts.”

The Cable Connection ruling takes advantage of a narrow exception allowed by the United States Supreme Court in what appears, at first blush, to be a directly contradictory decision issued only six months earlier. In Hall Street Associates, LLC v. Mattel, Inc., the Court held that the Federal Arbitration Act precludes parties from expanding the scope of judicial review of an arbitration award by agreement. However, the Court also noted that federal law does not prohibit review based on authority outside the FAA, including “state statutory or common law.” The California Supreme Court accordingly concluded that the Hall Street holding is restricted to proceedings to review arbitration awards under the FAA. As a result, parties who seek enforcement under state law are not required to conform to its limitations.