The Pros and Cons of Arbitration
By: Robert S. Coldren, Esq. and C. William Dahlin, Esq.
The United States Supreme Court has issued two recent decisions that impact how persons and businesses should view arbitration. The two decisions, Hall Street Associates LLC v. Mattel Inc. and Preston v. Ferrer arise in very different settings and involve different issues. Due to these decisions, the decision to utilize arbitration is worth revisiting. In the manufactured housing industry, the disputes that may be subject to an arbitration agreement run the gamut from employment disputes to construction and landlord tenant issues.
The most oft-cited reasons for arbitration are its simplicity, faster results and lower cost due to less pre-trial discovery. All are important considerations. Generally, arbitration is a non-public event and can provide much more privacy for the resolution of business or other contractual disputes. That goal is magnified if personal disputes are being resolved.
The down side of arbitration is the inability to have any meaningful review of an arbitrator’s decision. Arbitrators have tremendous flexibility in fashioning awards, provided they are consistent with the jurisdictional parameters of the proceeding. Federal statutory restrictions on how or and in what regard an arbitration proceeding may be modified are well known. The recent Hall Street Associates case confirms the restrictions.
As a general rule, a contract is the basis for any arbitration proceeding. Many persons and businesses seek to define the nature and scope of arbitration by use of the contract. In the Hall Street Associates case, a judicial settlement and court order also involved a contractual agreement for arbitration. The provision at issue in the lawsuit was whether or not the arbitration agreement could allow for a more significant and meaningful review of the arbitrator’s decision then that contemplated by the Federal Arbitration Act. The U.S. Supreme Court issued its decision in late April 2008. The Supreme Court stated, quite unequivocally, that private parties may not expand the exclusive criteria in the Federal Arbitration Act for vacating or modifying an arbitrator’s award. Only those grounds set forth in Sections 10 and 11 of the Federal Arbitration Act may be utilized. Thus, the finality of an arbitrator’s award, and the very limited statutory grounds for review, are now firmly established. A change in that regard would necessitate new legislation by Congress.
The second decision announced by the U. S. Supreme Court also impacts whether or not to utilize arbitration. The substantive dispute in the arbitration proceeding in Preston v. Ferrer, was whether or not a contract could be voided due to the failure of Mr. Preston to have a Talent Agency license from the labor commissioner. The question was whether or not the contract was in violation of the California Talent Agency Act. In the Preston matter, the allegedly illegal contract provided for arbitration of any disputes. Preston invoked the provision asking for arbitration. Ferrer petitioned the California
Labor Commissioner for a determination that the contract was invalid under the Talent Agency Act (“TAA”). The United States Supreme Court held that the legality of the contract was to be determined by the arbitrator and that the Federal Arbitration Act superseded any state law which would seek to displace the primary jurisdiction of the arbitrator.
The Federal Arbitration Act (9 U.S.C. ¶ 1 et seq.) was invoked as setting forth that disputes arising under the contract, including the validity of the contract, are to be resolved by the arbitrator and not by a federal or state court or by an administrative agency. The court specifically stated: “We hold today that, when parties agree to arbitration of all questions arising under a contract, state laws lodging primary jurisdiction in another forum, whether judicial or administrative, are superseded by the FAA.”
The potential ramifications of the Preston decision will be seen for years to come. An arbitration proceeding that is properly commenced under the Federal Arbitration Act, which is based upon Congress’ power to regulate interstate commerce, is exceedingly broad. Disputes that would ordinarily be resolved by an administration agency, may well be superseded in many contexts by this new Supreme Court ruling.
These two decisions, and the myriad of decisions issued earlier in time, serve as a reminder that arbitration is a potentially beneficial device for resolving disputes. However, it is also a methodology of resolving disputes where any result that is obtained must be viewed as final and binding. The ability to obtain any relief from a decision perceived to be improper or otherwise in error is very limited. The personal and business judgment of whether a matter should be referred to arbitration, or to use the processes of judicial resolution of any dispute should be carefully weighed.
Rob Coldren is a founding partner of the law firm Hart, King & Coldren, a in Santa Ana, California. For over a quarter or a century, Mr. Coldren’s practice has emphasized representation of mobilehome parks and recreational vehicle parks, as well as park owners, throughout the State of California. He can be reached at (714) 432-8700 or e-mail at firstname.lastname@example.org. Bill Dahlin is a partner with HK&C and has practiced law for over two decades. Mr. Dahlin’s practice focuses on property rights. He may be reached at email@example.com or (714) 432-8700, ext. 306.