Federal Arbitration Act Precludes Parties from Contracting under State Law for Broader Judicial Review Once Motion to Vacate Is Removed, Provided FAA Applies

From McQueen-Starling v. UnitedHealth Group, Inc., 2009 U.S. Dist. LEXIS 23266 (S.D.N.Y. Mar. 20, 2009):

In Hall Street Assocs., LLC v. Mattel, Inc., 128 S. Ct. 1396 (2008), the Supreme Court addressed the question of whether parties could supplement by contract the statutory grounds for vacating an arbitration award provided in the FAA, including the standard of review established in the statute. The Supreme Court answered this question in the negative. Id. at 1400 ("We hold that the statutory grounds are exclusive."). In Hall Street, the parties to an arbitration agreement had agreed that a district court could vacate any arbitration award "where the arbitrator's findings of fact are not supported by substantial evidence, or [] where the arbitrator's conclusions of law are erroneous." *** The Supreme Court held that parties could not fortify by contract the deferential standard of review established in the FAA, explaining that the FAA "substantiat[es] a national policy favoring arbitration with just the limited review needed to maintain arbitration's essential virtue of resolving disputes straightaway." ***

The Court of Appeals for the Second Circuit has repeatedly reaffirmed the holding in Hall Street in unqualified terms. ***

In arguing that the standard of review agreed to by the parties in the Arbitration Agreement should apply, rather than the standard provided for in the FAA, the petitioner relies upon the following language in Hall Street:

In holding that §§ 10 and 11 [of the FAA] provide exclusive regimes for the review provided by the statute, we do not purport to say that they exclude more searching review based on authority outside the statute as well. The FAA is not the only way into court for parties wanting review of arbitration awards: they may contemplate enforcement under state statutory or common law, for example, where judicial review of a different scope is arguable. But here we speak only to the scope of the expeditious judicial review under §§ 9, 10, and 11 [of the FAA], deciding nothing about other possible avenues for judicial enforcement of arbitration awards.

Hall Street, 128 S. Ct. at 1406.

The petitioner argues on the basis of this language from Hall Street that "parties are free to adopt state rules governing arbitration, even if those rules differ from the FAA." Therefore, the petitioner argues, the Court is not restricted in this case to the deferential standard of review set forth in the FAA.

Although the language cited by the petitioner is suggestive, it is not in itself a sufficient basis for this Court to ignore the plain and unqualified language of the Court of Appeals in interpreting the holding in Hall Street to prohibit parties from contracting around the standard of review outlined in the FAA. The petitioner fails to identify a single case in this or any other Circuit holding that the FAA does not apply in federal court where a petition to vacate originated in state court and the parties contracted for a standard of review derived from state law. The petitioner also conceded that the Arbitration Agreement in this case is governed by the FAA. There is persuasive authority in this Circuit that the FAA standard of review applies to a motion to vacate an arbitration award that was originally brought in state court but has been removed to federal court. See Vail-Ballou Press, Inc. v. Graphic Commc' ns Int'l Union, Int'l Bhd. of Teamsters, Local 898-m, 480 F. Supp. 2d 568, 571 (N.D.N.Y. 2007) (applying FAA standard of review where motion to vacate originated in state court but was removed); Dunhill Franchisees Trust v. Dunhill Staffing Sys., 513 F. Supp. 2d 23, 26 (S.D.N.Y. 2007) (applying FAA standard of review where motion to confirm arbitration award originated in state court but was removed). Therefore, the fact that the petitioner originally brought her petition to vacate in state court does not warrant the application of a state standard of review.

The petitioner attempts to distinguish this persuasive authority by arguing that in this case, unlike in those cases, the parties contracted for a state law standard of review. But if bringing a petition in state court is insufficient to displace the FAA standard of review once the case has been removed to federal court, it is difficult to see how a contractual agreement by the parties to apply a state law standard of review could change the analysis, because contracting around the FAA is precisely the maneuver prohibited by Hall Street and the cases in this Circuit interpreting it. Moreover, the petitioner has failed even to show that the parties agreed that a state law standard of review should apply in this case. The language of the Arbitration Agreement plainly does not specify whether a state or federal standard of review is contemplated, as the petitioner conceded at oral argument.

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