Let’s Just Skip Appellate Review of Our Arbitration Award, Okay?

Parties choose arbitration to have their disputes resolved cheaper, and faster.  Typical resolution times from demand to award are measured in months – not years. 

Slowing down final resolution

But arbitrators don’t have the means to enforce their award.  So, a winning party must go to court if its opponent doesn’t pay the award or otherwise comply with it.  Of course, the surest way to slow down final resolution of a dispute is to involve courts in the process.  Courts necessarily work on their own schedule, and busy dockets usually mean months of delay in finalizing an arbitration award and moving on.

Contracting to forego court review

Because arbitration is a creature of contract, some parties have sought to minimize the courts’ involvement by agreeing to forego court review of arbitration awards at all.  But this hasn’t fared very well. 

For example, the Second Circuit refused to enforce the parties' agreement to insulate the substance of the arbitration award from judicial review in Hoeft v. MVL Group, Inc., 343 F.3d 57 (2d Cir. 2003).  The court recognized that judicial review of arbitration awards is quite limited.  Section 10(a) of the Federal Arbitration Act allows a court to vacate an arbitration award only if: (1) the award was procured by corruption, fraud or undue means, (2) there was evident partiality or corruption of an arbitrator, (3) the arbitrator(s) were guilty of misconduct in refusing to postpone the hearing upon sufficient cause, refusing to hear pertinent and material evidence, of other misbehavior prejudicing a party’s rights, or (4) the arbitrators exceed their powers or so imperfectly executed them that a mutual, final and definite award was not made.  Some courts have also added manifest disregard of the law, but that’s a topic for another day.  Mistaken fact-finding or erroneous legal conclusions are not included as grounds for vacating an award.

But that the FAA provides limited grounds for overturning an award, does not mean parties can simply agree to forego any judicial review at all.  In Hoeft, the claimant was, of course, seeking court enforcement of the award.  The court reasoned that, while freedom of contract is important, it is not the only thing that bears on the issue.  In passing the FAA, Congress afforded potent legal remedies to parties who are successful in arbitration. But it also provided limited but critical safeguards, barring federal courts from confirming awards tainted by partiality, a lack of elementary procedural fairness, corruption, or similar misconduct. 

In short, “[s]ince 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). Id. at 64.  So, parties cannot agree to forego substantive review – limited as it may be – of arbitration awards. 

Limiting appellate review

There is, of course, another level of review in the judicial system: appeals.  Appeals are also expensive and can add significant additional delays in finalizing an arbitration award and concluding the dispute. 

But can parties forego appellate review of decisions enforcing arbitration awards?  Based on the reasoning of the Second Circuit in Hoeft, you might expect not.  After all, the federal scheme provides for review of arbitration awards and also for appellate review of district court decisions in that regard.  You well may conclude that an agreement foreclosing appellate review would be another example of a private agreement trying to turn federal courts into rubber stamps for arbitration awards. 

But you would be wrong, at least in the Fourth and Tenth Circuits.

In Beckley Oncology Associates, Inc. v. Abumasmah, No. 19-1751 (4th Cir. April 8, 2021), Dr. Abumasmah received an award against his former employer.  His employment agreement purported to waive both judicial and appellate review of the award.  The district court refused to enforce the waiver of judicial review and confirmed the award.  The employer appealed. 

The Fourth Circuit dismissed the appeal, upholding the parties’ waiver of appellate review.  In doing so, the court noted that Tenth Circuit had earlier addressed a provision purporting to forego appellate review, but not district court review in MACTEC, Inc. v. Gorelick, 427 F.3d 821, 830 (10th Cir. 2005).  The Fourth Circuit agreed with its sister circuit’s reasoning that “prohibiting appellate, but not district court, review is ‘a compromise whereby the litigants trade the risk of protracted appellate review for a one shot opportunity before the district court.’ Such provisions are consistent with  ‘the fundamental policy behind the FAA . . . to reduce litigation costs by providing a more efficient forum.’”

The Fourth Circuit then noted that a party giving up appellate review of arbitration awards isn’t giving much at all.  It said,  “[A] contract provision purporting to bar a district or circuit court from reviewing an arbitrator’s decision on the merits is essentially meaningless, since the FAA forecloses all but the most limited review.”

Frivolous appeals

This all brings to mind the attitude of the appellate courts which specifically warned parties not to pursue meritless appeals of arbitration awards. This was mentioned in my earlier article: Courts to Lawyers: We Mean It. Stop Making Baseless Attacks on Commercial Arbitration Awards.  For example, the Seventh Circuit in Johnson Controls, Inc. v. Edman Controls, Inc., 712 F.3d 1021 (2013), warned that “challenges to commercial arbitral awards bear a high risk of sanctions. Attempts to obtain judicial review of an arbitrator’s decision undermine the integrity of the arbitral process.” In this case, the appellant deprived the appellee of “part of the value of the arbitration to which both parties agreed.” The Courts said it would have awarded fees against the appellant if the contract did not already have a loser pays provision.

Similarly, in B.L. Harbert International, LLC v. Hercules Steel Co., 441 F.3d 905 (11th Cir. 2006), the court noted that the attack on the award was without good basis and that therefore the appellant deprived both the court and the appellee of the benefits of arbitration. The case cost more and took longer because the appellant dragged the matter through two courts after the arbitration. The Court then issued its warning: “[I]n order to further the purposes of the FAA and to protect arbitration as a remedy we are ready, willing, and able to consider imposing sanctions in appropriate cases.”

So, agree not to go there?

• Given the limited scope of appellate review and just how unlikely anything meaningful will come of it, you may want to strongly consider contracting to avoid appellate review of judicial decisions confirming or vacating arbitration awards.   The appellate process is likely to just delay things and cost more money in most cases.  It might be better to just skip it.