Contract Drafters Beware

Inclusion of “no appeal” provisions in arbitration clauses has increased in recent years, as parties seek finality to the costly and time-consuming arbitration process. Commercial parties desire a streamlined process that does not have an endless appeal “tail,” which can delay finality for as much as ten to fifteen years. As a result, terms with an unambiguous waiver or outright surrender of appeal rights have become more popular in commercial and construction contracts. Advocates of such provisions should be forewarned that the Ninth Circuit Court very recently held that such provisions are not enforceable under the Federal Arbitration Act. See In re Wal-Mart Wage & Hour Empl. Practices Litig. v. Class Counsel & Party to Arbitration, 2013 U.S. App. LEXIS 24948 (9th Cir. Nev. Dec. 17, 2013).

In re Wal-Mart involved a protracted dispute over attorneys’ fees awarded in a multidistrict wage and hour litigation. The parties to the Wal-Mart litigation participated in a mediation, during which they agreed to a global settlement of the claims. The parties also agreed that any fee disputes would be arbitrated with a single arbitrator, at a “binding, non-appealable arbitration.” See Id. at *3.

A fee dispute arose, and the arbitrator awarded only $6M to the Burton Group, and the Burton Group moved to vacate the award. The District Court granted Bonsignore’s motion to confirm the award, finding no basis to vacate. Burton Group appealed. Id.

Bonsignore challenged the Ninth Circuit’s jurisdiction because the Settlement Agreement contained a non-appealabililty clause. Specifically, the provision stated:

Class Counsel agree on behalf of themselves, their clients and all Class Counsel to submit any disputes concerning fees (including, but not limited to, disputes concerning the fee allocation to any Class Counsel as recommended by Co-Lead Counsel, and disputes between Co-Lead Counsel regarding the determination of appropriate fee allocations) to binding, non-appealable arbitration…. Id. at *5 (emphasis added).

The Ninth Circuit noted that courts have construed non-appealability provisions in two ways: 1) the phrase “binding, non-appealable arbitration” may be understood to preclude only federal court review of the merits of the Arbitrator’s decision and not to eliminate the parties’ right to appeal from the Arbitrator’s decision under Section 10 of the FAA, which provides grounds for vacatur; or 2) that “binding non-appealable arbitration” divests both the district court and the federal circuit court of jurisdiction to review the arbitrator’s decision. Id. at *6-7. The Ninth Circuit determined that it need not decide which interpretation was correct, concluding that the provision was unenforceable because it eliminates judicial review under Section 10 of the FAA. Id. at *9.

The basis for the Ninth Circuit’s decision was that the Supreme Court has held that the statutory grounds for judicial review in the FAA are exclusive, and may not be supplemented by contract. Id. at *10, (citing Hall St. Assocs., 552 U.S. at 578). The Ninth Circuit reasoned that, likewise, the FAA-granted limited jurisdiction may not be waived or eliminated by contract. The court cited Kyocera Corp. v. Prudential-Bache Trade Servs., Inc., 341 F.3d 987, 1000 (9th Cir. 2003), stating that private parties’ freedom to fashion their own arbitration process has no bearing on their inability to amend the statutorily prescribed standards governing federal court review). The FAA “carries no hint of flexibility” and “does not sound remotely like a provision meant to tell a court what to do just in case the parties say nothing else.” Hall St. Assocs., 552 U.S. at 587. By contrast, other provisions in the FAA expressly permit modification by contract. Id. at 587-88.

Finally, the Ninth Circuit explained that permitting parties to contractually eliminate all judicial review of arbitration awards would not only run counter to the letter of the FAA, but would also frustrate Congress’s attempt to ensure a minimum level of due process for parties to an arbitration. Through Section 10 of the FAA, Congress attempted to preserve due process while still promoting the ultimate goal of speedy dispute resolution. Id. (citing Kyocera Corp., 341 F.3d at 998).

While this decision may not be the final judicial word on this issue, it is a strong indication that no appeal provisions in arbitration clauses may not be enforceable. Drafters beware.