Chasing Rainbows: The Quest For The Perfect Arbitration Clause

A recent Ninth Circuit opinion1 again points up the need to draft arbitration clauses carefully and specifically, to capture the client's objectives in considering a suitable alternative forum to resolve disputes over the contractual relationship. If the parties want the arbitrator to follow legal authorities, they not only need to specify that in the clause but also need to avoid incorporating federal law. Other issues such as the form of decision, the scope of discovery, and the scope of court review also need to be discussed with the client and not simply presumed.

State Versus Federal Law

In the 2008 Cable Connection2 case, the California Supreme Court reaffirmed its 1992 Moncharsh3 opinion that precludes a California state court from vacating an arbitration award if the arbitrator failed to follow the controlling law. The court went on, however, to hold the parties can modify this rule and expand the statutory grounds for vacating an award by stipulating, in their arbitration clause, that the arbitrator is bound to follow applicable law and that the failure to do so allows a court to vacate the award. Moreover, the Court held federal law does not preempt California law on the subject, so the exception applies in California courts regardless of whether the contract affects interstate commerce and hence is substantively governed by the Federal Arbitration Act (FAA)4. Since the Cable Connection case came down, it is very common for parties, advised by counsel, to draft clauses with this broader scope of judicial review.

The federal rule is different. In the 2008 Hall Street5 case, the United States Supreme court held that the parties, by agreement, cannot expand the statutory scope of court review under the FAA. As interpreted by the federal courts for many years, the FAA permits the court to vacate an award that shows "manifest disregard of the law" or is "completely irrational." But these standards have been narrowed and provide hope for undoing an award only in the rarest circumstances where it is clear from the face of the award that the arbitrator recognized the controlling law, and failed to apply it. It does not allow a court to vacate if the arbitrator simply misunderstood or misapplied the relevant law, or ignored the facts. If the parties in their arbitration clause stipulate that the FAA governs the arbitration, the narrow federal scope of judicial review will apply even if the parties agree the arbitrator has to follow the substantive law. The tension in these standards is what brought the Biller case to the court of appeals.

The Case of Mr. Biller, Attorney at Law

The recent case is that of Dmitrious Biller against Toyota Motor Corporation and its U.S. division Toyota Motor Sales (TMS).6 Suitably enough, Mr. Biller is an attorney. He worked as an in-house counsel for TMS, quit, and later sued for constructive discharge, citing TMS's allegedly unethical discovery practices in litigation as the cause that drove him out the door.

TMS moved to compel arbitration under a severance agreement Biller signed when he departed. The clause required arbitration before one of the main commercial ADR providers, Judicial Arbitration and Mediation Services (JAMS), and required the arbitrator to follow the "applicable law and case precedent of the jurisdiction where [Biller} last worked for TMS...."7 The agreement separately provided that it is governed by California law but that the arbitration clause itself would be governed by the FAA unless a competent court orders otherwise.8

Biller's severance agreement further required an arbitration award "with a written discussion sufficient to permit limited judicial review to enforce or vacate the arbitration award."9 JAMS policy itself requires a "concise written statement of the reasons for the Award, stating the essential findings and conclusions on which the award is based."10

Biller and Toyota stipulated to JAMS arbitration of Biller's federal and state claims, and of TMS's cross-claims against Biller. The arbitrator dismissed various claims and proceeded to hearing on what remained. The award found against Biller on his claims and...