Experienced appellate
practitioners know that an advantageous
standard of review can be crucial
to winning on appeal. Orders
granting motions to dismiss
on the pleadings and motions
for summary judgment are among
the most often reversed on appeal,
because appellate courts apply
a non-deferential plenary review.
By contrast, an appeal that
challenges a judge's findings
of fact at a non-jury trial,
or argues that a jury's verdict
is against the manifest weight
of the evidence, rarely will
succeed, because the applicable
standards of review require
an appellate court to show great
deference to those types of
decisions.
Perhaps the most deferential
of all standards of review is
the one that Pennsylvania law
applies to a common-law arbitration
award. The Supreme Court of
Pennsylvania has ruled that
the grounds for denying enforcement
of a common-law arbitration
award are "extremely limited."
Newspaper Guild of Greater
Phila. v. Philadelphia
Daily News, Inc., 164 A.2d
215, 220 (Pa. 1960). Pennsylvania's
highest court has further explained
that "arbitrators are the final
judges of both law and fact,
and an award will not be reviewed
or set aside for mistake in
either." Patriotic Order
Sons of Am. v. Hartford
Fire Ins. Co., 157 A. 259,
262 (Pa. 1931). Indeed, the
Supreme Court of Pennsylvania
has ruled that "an arbitration
award is conclusive even if
it has the effect of varying
the terms of the contract" and
even if the award is "blatantly
at odds with the contract involved."
Runewicz v. Keystone
Ins. Co., 383 A.2d 189,
192-93 (Pa. 1978).
By contrast, the Federal Arbitration
Act (FAA), which governs contracts
containing an arbitration provision
if the contract "evidenc[es]
a transaction involving commerce,"
9 U.S.C. § 2, gives a reviewing
court greater leeway to set
aside or alter an arbitration
award. Under the FAA, a court
may set aside an arbitration
award that manifestly disregards
the law or fails the test of
fundamental rationality. Roadway
Package Sys., Inc. v. Kayser,
No. 99-1907, 2001 WL 629276,
at *4 n.2 (3d Cir. June 7, 2001).
In its recent opinion in Roadway,
the Third Circuit agreed that
Pennsylvania's "vacatur standards
for common law arbitration awards
are so much narrower than the
FAA's."
In Roadway, the Third
Circuit finally resolved a thorny
arbitration-related standard
of review question that the
court first noted some fourteen
years ago in Apex Fountain
Sales, Inc. v. Kleinfeld,
818 F.2d 1089, 1094-95 & n.4
(3d Cir. 1987). Put simply,
the question is this: where
a contract evidencing a transaction
involving commerce contains
both an arbitration clause and
a generic choice of law provision
stating that Pennsylvania law
governs the contract, is an
arbitration award due the all
but complete deference provided
under Pennsylvania law, or is
the award subject to a lesser
degree of deference under the
FAA?
The answer the Third Circuit
supplied last month may come
as a surprise. The court held
that the generic choice of law
provision was insufficient to
establish the parties' intent
to select Pennsylvania's highly
deferential standard of review
applicable to common-law arbitrations.
Thus, the FAA's less deferential
standard of review applied,
the Third Circuit held, and
under that standard of review
the federal appellate court
set aside the arbitrator's award
because it appeared plainly
to violate the terms of the
parties' agreement.
Importantly, the Third Circuit
ruled in Roadway that
the FAA permits parties to agree
in the contract between them
that any arbitration award is
subject to Pennsylvania's standard
of review, rather than the FAA's.
But, the court held, a generic
choice of law provision stating
that the contract "shall be
governed by and construed in
accordance with the laws of
the Commonwealth of Pennsylvania"
was insufficient to evidence
such an agreement. Rather, the
court explained, parties that
wish to opt for Pennsylvania's
standard of review instead of
the FAA's should include in
their contract language providing
that "any controversy shall
be settled by arbitration in
accordance with the terms of
the Pennsylvania Uniform Arbitration
Act."
Putting aside the readily apparent
irony that the Third Circuit
has invoked the FAA, a statute
that reflects "a liberal federal
policy favoring arbitration,"
Moses H. Cone Mem. Hosp.
v. Mercury Constr. Corp.,
460 U.S. 1, 24 (1983), to make
it easier for a court to set
aside the result of an arbitration
proceeding, the importance of
the Third Circuit's recent ruling
in Roadway can hardly
be overstated. As the panel's
opinion explains, the question
whether parties may ever opt-out
of the FAA's standard of review
was already the subject of a
split among the U.S. Courts
of Appeals. In answering that
question in the affirmative,
the Third Circuit sided with
the vast majority of federal
appellate courts to have addressed
that issue. The opinion further
explains that another circuit
split exists over whether a
generic choice of law provision
sufficiently evidences the contracting
parties' intent to elect the
chosen state's standard of review
in lieu of the FAA's. Greatly
complicating this second circuit
split is the fact that it arises
from doubt about how to reconcile
two apparently conflicting U.S.
Supreme Court decisions that
give vastly different effects
under the FAA to contractual
choice of law provisions.
In Volt Info. Scis., Inc.
v. Board of Trustees of
Leland Stanford Junior Univ.,
489 U.S. 468 (1989), the Supreme
Court concluded that the FAA
did not preempt a California
law that permitted a state court
to stay arbitration pending
the resolution of related litigation
involving third-parties who
were not bound by an agreement
to arbitrate. Volt
arose in the California state
court system, and before the
case reached the U.S. Supreme
Court a California state court
had ruled that the parties'
forum selection clause mandating
application of California law
demonstrated the parties' intent
to apply California's body of
arbitration law. The U.S. Supreme
Court in Volt stated
that the California state court
should have the last word on
whether the contractual forum
selection clause sufficed to
invoke California's body of
arbitration law.
Exactly six years to the day
later, the Supreme Court announced
its ruling in Mastrobuono
v. Shearson Lehman Hutton,
Inc., 514 U.S. 52 (1995),
by means of an opinion that
charitably can be said to be
in some tension with the Court's
earlier ruling in Volt.
In Mastrobuono, customers
filed a claim in arbitration
against their securities broker.
The contract between these parties
contained a choice of law provision
specifying that "[t]his agreement
. . . shall be governed by the
laws of the State of New York."
After the arbitration panel
returned an award that included
punitive damages in the customers'
favor, the broker sought judicial
review in federal district court,
arguing that New York's law
of arbitration prohibited arbitrators
from awarding punitive damages.
Both the district court and
the court of appeals agreed
and vacated the arbitrator's
award of punitive damages. The
Supreme Court, however, disagreed
and reversed, holding that the
choice of law provision failed
to demonstrate with sufficient
clarity that the parties had
intended to invoke New York's
law of arbitration, which would
have prohibited the award of
punitive damages.
Reasonable minds can certainly
disagree over how best to harmonize
the Supreme Court's rulings
in Volt and Mastrobuono.
In Roadway, Chief Judge
Edward R. Becker's majority
opinion for himself and Circuit
Judge Richard L. Nygaard concluded
that Mastrobuono established
that a generic choice of law
provision is insufficient to
demonstrate the parties' agreement
to be bound by the designated
state's law governing review
of arbitration awards. In so
concluding, Chief Judge Becker's
opinion closely followed the
reasoning found in Justice William
J. Brennan's dissenting opinion
in Volt. Circuit Judge
Thomas L. Ambro, who issued
a separate opinion in Roadway
concurring only in the judgment,
argued that the Pennsylvania
choice of law provision sufficed
to demonstrate that the parties
wished to be bound by Pennsylvania's
stricter standards for setting
aside a common-law arbitration
award. Judge Ambro's argument
in this respect followed Justice
Clarence Thomas's dissenting
opinion in Mastrobuono.
One very interesting question
that arises in the aftermath
of the Third Circuit's Roadway
decision is whether Pennsylvania
state courts will agree that
a contractual choice of law
provision selecting Pennsylvania
law in a contract requiring
arbitration of disputes and
evidencing a transaction involving
commerce fails to demonstrate
the parties' intent that the
arbitration award be reviewed
under Pennsylvania law rather
than under the FAA. The U.S.
Supreme Court has ruled that
the FAA applies in both federal
and state courts. Southland
Corp. v. Keating,
465 U.S. 1, 15-16 (1984). Yet,
a search of Westlaw's "Pennsylvania
cases" database conducted in
late June 2001 revealed only
nine reported Pennsylvania state
court opinions that mentioned
the "Federal Arbitration Act,"
which Congress enacted in 1925.
The U.S. Supreme Court's ruling
in Volt establishes
that Pennsylvania state appellate
courts have the discretion to
rule that a contract's Pennsylvania
choice of law provision suffices
to demonstrate the parties'
intent that an arbitration award
be governed by the very restrictive
Pennsylvania common-law rules
of arbitration review. The Third
Circuit's ruling in Roadway
does not bind Pennsylvania state
courts; rather, state courts
have an independent duty to
apply federal law as they understand
it, and state courts are only
bound by the U.S. Supreme Court's
pronouncements of what federal
law is. Lockhart v.
Fretwell, 506 U.S.
364, 375-76 (1993) (Thomas,
J., concurring) ("neither federal
supremacy nor any other principle
of federal law requires that
a state court's interpretation
of federal law give way to a
(lower) federal court's interpretation").
While the U.S. Supreme Court
has observed that "Congress
would not have wanted state
and federal courts to reach
different outcomes about the
validity of arbitration in similar
cases," Allied-Bruce Terminix
Cos. v. Dobson,
513 U.S. 265, 272 (1995), precisely
that result would occur if Pennsylvania
state courts disagree with the
Third Circuit's decision in
Roadway.
Until the state appellate courts
of Pennsylvania make clear whether
they will follow the Third Circuit's
holding in Roadway,
parties that are on the losing
side of an arbitration award
will greatly prefer to have
their challenges to the award
heard and decided by a federal
court. The FAA, however, does
not itself confer subject matter
jurisdiction on federal courts,
and thus only arbitration challenges
in which diversity of citizenship
or federal question jurisdiction
exists can be filed in or removed
to federal court. Kaplan
v. First Options of Chicago,
Inc., 143 F.3d 807, 814
(3d Cir. 1998). At least one
thing is certain in the aftermath
of Roadway -- the FAA
is about to be litigated much
more often in Pennsylvania state
court actions challenging common-law
arbitration awards.
This
article is reprinted with permission
from the July 16, 2001 issue
of The Western Pennsylvania
Legal Intelligencer © 2001 NLP
IP Company.