Gary A. Watt
Partner, Hanson Bridgett LLP
State Bar Approved, Certified Appellate Specialist
Email: gwatt@hansonbridgett.com
Gary chairs Hanson Bridgett's Appellate Practice. He is a State Bar-approved, certified appellate specialist. In addition to writs and appeals, his practice includes anti-SLAPP and post-trial motions as well as trial and appellate consulting. His blog posts can be read at www.appellateinsight.com.
Josephine Petrick
Senior Counsel, Hanson Bridgett LLP
Email: jpetrick@hansonbridgett.com
Josephine is a California State Bar Certified Appellate Specialist. Her practice focuses on writs, appeals, law and motion, and trial consulting in the federal and state courts. Her blog posts can be read at www.appellateinsight.com.
Anyone who's been around the Federal Arbitration Act block knows that the grounds for relief are exceedingly limited. But if an arbitration award violates public policy, can that be a ground for invalidating the award? Or is finality so sacrosanct that public policy implications are irrelevant?
For example, what if an arbitration award requires a company to rehire an employee found intoxicated on the job to a position that could affect public safety, or an employee who committed serious acts of sexual harassment?
While courts are reluctant to enter judgments that would offend fundamental public policy, the FAA does not expressly provide for vacatur of awards on such grounds. And the U.S. Supreme Court held in a landmark opinion, Hall Street Assocs., L.L.C. v. Mattel, Inc., 552 U.S. 576 (2008), that the FAA's enumerated grounds for vacatur are exclusive. That is: (1) the award was obtained by corruption, fraud or "undue means"; (2) the arbitrators exhibited "evident partiality"; (3) the arbitrators wrongfully refused to delay the hearing or to hear material evidence; and (4) the arbitrators "exceeded their powers[.]" 9 U.S.C. Section 10.
But, since Hall Street was decided, courts remain split on the public-policy issue, creating risks and opportunities for litigants seeking to vacate or confirm arbitration awards that present adverse public policy implications.
The Pre-Hall Street Test for Public-Policy Challenges
Hall Street did not address an arbitration award that has the potential to violate public policy. And while Hall Street held that parties cannot expand the FAA vacatur grounds by agreement, it did not address whether courts may recognize nonstatutory grounds for invalidating an award -- for example, based on the public interest or manifest disregard of the law.
Before Hall Street, the Supreme Court recognized that an arbitral award should be vacated if it is "clearly shown" that it violates public policy, a principle which the court explained is based on the common-law doctrine "that a court may refuse to enforce contracts that violate law or public policy." United Paperworkers Int'l Union v. Misco, Inc., 484 U.S. 29, 42-43 (1987); see also id. at 40 & n.9 (incorporating FAA principles by analogy).
Courts must assess "whether the award created any explicit conflict with other 'laws and legal precedents' rather than ... 'general considerations of supposed public interests.'" Id. at 43 (quoting W.R. Grace & Co. v. Loc. Union 759, 461 U.S. 757, 766 (1983)); accord E. Assoc'd Coal Corp. v. United Mine Workers of Am., 531 U.S. 57, 63 (2000) (the "W.R. Grace test").
Applying the W.R. Grace test, pre-Hall Street courts would vacate arbitral awards in the appropriate case where a public-policy violation was shown, in particular in the employment and environmental sectors. See, e.g., Exxon Shipping Co. v. Exxon Seamen's Union, 11 F.3d 1189, 1196 (3d Cir. 1993) (Alito, J.) (affirming order vacating arbitration award that would have required reinstatement of oil tanker crew members found intoxicated on the job, because award offended public policy); Gulf Coast Indus. Workers Union v. Exxon Co., U.S.A., 991 F.2d 244, 252-53 & n.10 (5th Cir. 1993) (same, positive cocaine test); Stroehmann Bakeries, Inc. v. Loc. 776, 969 F.2d 1436 (3d Cir. 1992) (same, sexual harassment); Newsday, Inc. v. Long Island Typographical Union, 915 F.2d 840, 843-45 (2d Cir. 1990) (same); but cf. E. Assoc'd Coal, 531 U.S. 57 (declining to vacate award requiring reinstatement of truck driver who tested positive for marijuana use, because federal regulations did not require forfeiture of driver's license due to marijuana use).
But post-Hall Street, the Supreme Court has not yet resolved whether an arbitrator's award may still be vacated on grounds not specifically enumerated in the FAA, such as public policy or "manifest disregard of the law." However, the Supreme Court has assumed without deciding that the latter does remain a valid ground for vacating an award. See Stolt-Nielsen S.A. v. AnimalFeeds Int'l Corp., 559 U.S. 662, 672 n.3 (2010). In so doing, the court viewed the challenge through the lens of awards exceeding the arbitrator's authority. Id. at 671. The court also hearkened back to pre-Hall Street authorities holding that an arbitrator may not "dispense his own brand of industrial justice." Id. (cleaned up); see, e.g., Misco, 484 U.S. at 38.
The Post-Hall Street Circuit Split
The Supreme Court has not weighed in on whether Hall Street implicitly overruled the court's prior public-policy precedents. In theory, the W.R. Grace test should survive Hall Street until such time as the Supreme Court explicitly overturns (or otherwise holds inapplicable to the FAA) its public-policy precedents. See Rodriguez de Quijas v. Shearson/Am. Exp., Inc., 490 U.S. 477, 484 (1989) (discouraging lower courts from declaring on-point Supreme Court precedent implicitly overruled); see also Titan Tire Corp. of Freeport v. United Steel Workers, 734 F.3d 708, 717 n.8 (7th Cir. 2013) (holding Hall Street did not overrule the precedents embracing the W.R. Grace test).
Nevertheless, the circuits have split on the post-Hall Street public-policy issue.
The 7th U.S. Circuit Court of Appeals continues to apply the public-policy exception. See Titan Tire, 734 F.3d at 71617 (reversing and ordering award vacated due to conflict with explicit public policy).
The 2nd, 3rd, 4th, 6th and 9th Circuits, too, continue to acknowledge the public-policy exception, though not all have found an appropriate vehicle for applying it, post-Hall Street. See, e.g., Schwartz v. Merrill Lynch & Co., 665 F.3d 444, 452 (2d Cir. 2011); Hamilton Park Health Care Ctr. Ltd. v. 1199 SEIU United Healthcare Workers E., 817 F.3d 857, 862-63 (3d Cir. 2016); Wells Fargo Advisors, LLC v. Watts, 540 F. App'x 229, 231 (4th Cir. 2013); Equitable Res., Inc. v. United Steel Workers, 621 F.3d 538, 551 (6th Cir. 2010); DeMartini v. Johns, 693 F. App'x 534, 537 (9th Cir. 2017).
The 8th and 10th Circuits have also recognized the public-policy exception, but not without some tension among their precedents. Compare Williams v. N.F.L., 582 F.3d 863, 884 (8th Cir. 2009) (acknowledging public-policy ground), and Kelly v. K12 Inc., 20-7046 (10th Cir. May 10, 2021) (same), with Air Line Pilots Ass'n Int'l v. Trans States Airlines, LLC, 638 F.3d 572, 578 (8th Cir. 2011) (observing that, post-Hall Street, the 8th Circuit has rejected non-statutory grounds for vacatur under the FAA), and Piston v. Transam. Cap., Inc., 823 F. App'x 553, 557 (10th Cir. 2020) (noting that Hall Street cast doubt on the public-policy exception).
The 5th and 11th Circuits have shown open hostility to nonstatutory bases for vacating an award, including public policy. See Frazier v. CitiFinancial Corp., LLC, 604 F.3d 1313, 1324 (11th Cir. 2010); McKool Smith, P.C. v. Curtis Int'l, Ltd., 650 F. App'x 208, 211-12 (5th Cir. 2016); Citigroup Glob. Markets, Inc. v. Bacon, 562 F.3d 349, 355 (5th Cir. 2009). However, hostility to the public-policy ground has not been uniform even within those circuits. See McKool Smith, 650 F. App'x at 211-12 (assuming without deciding that public policy could be construed as a statutory basis for vacating an arbitration award, post-Hall Street); Perhach v. Option One Mortg. Corp., 382 F. App'x 897, 900 (11th Cir. 2010) (recognizing but not applying the public policy exception); Grigsby & Assocs., Inc. v. M Sec. Inv., 635 F. App'x 728, 733 n.9 (11th Cir. 2015) (dicta) (same).
Finally, the 1st and D.C. Circuits have not yet taken a position on the question, though the 1st Circuit appears disinclined to recognize the public-policy exception based on its rejection of the analogous "manifest disregard" ground. See Ramos-Santiago v. United Parcel Serv., 524 F.3d 120, 124 n.3 (1st Cir. 2008).
Arbitration Angle
Most circuits continue to recognize the public-policy ground for vacating an FAA award post-Hall Street -- at least in theory. Those courts continue to apply the W.R. Grace test. That is, a challenger must clearly show that the award conflicts with some provision of positive law, such as a statute or legal precedent, not just make a free-wheeling inquiry into "supposed public interests." Misco, 484 U.S. at 43.
The conflict with public policy must be compelling indeed. Research revealed few post-Hall Street FAA cases recognizing such a conflict. See Titan Tire, 734 F.3d 708, 716-29.
Even in those circuits that have expressed doubt or open hostility to public-policy arguments, there is still an opportunity to argue that, due to a clash with a clearly expressed public policy, the arbitrators "exceeded their powers[.]" 9 U.S.C. Section 10(a)(4); see McKool Smith, 650 F. App'x at 211-12; Stolt-Nielsen, 559 U.S. at 671. How such challenges will come out though, is not at all certain given the unresolved tension in the case law.
Though FAA public-policy challenges appear to be few, and are rarely successful, if a client has a substantial argument that an award would violate a well-established and clearly articulated public policy, then consider raising the issue to preserve it for appellate review.
Given the uncertainty among the circuit courts, maybe the Supreme Court will take up the case. And while it may mean the end of any public policy exception, clarity would be welcome, as would uniformity among the circuits.
Arbitration Angle is a bi-monthly column presented by Hanson Bridgett's Appellate Group.