Appellate Review of District Court-Ordered Arbitration Must Specify the Standard of Review or Is Limited to FAA Grounds — Mere Recitation of “Appeal Rights” Inadequate — No Direct Appeal to Circuit from Court-Ordered Arbitration

From Johnson v. Wells Fargo Home Mortgage, Inc., 2011 U.S. App. LEXIS 2908 (9th Cir. Feb. 15, 2011):

After a ... magistrate judge held a settlement conference three weeks before the trial's scheduled start date, the parties stipulated to binding arbitration of Johnson's FCRA claim. The District Court entered the parties' stipulation as an order.

***[T]he stipulation stated that the "parties shall participate in a binding arbitration with appeal rights"; that the Federal Rules of Evidence and Civil Procedure, as well as "the Federal Arbitration Act . . . shall apply to the arbitration proceedings"; and that, within thirty days after the arbitrator made an award, either party would be able to apply to the court for an order confirming the award in accordance with the Federal Arbitration Act ("FAA"). ***

After the arbitrator made his award, Johnson moved the District Court to confirm it. *** At a telephonic status conference on the motion, counsel for Wells Fargo told the District Court "Wells Fargo does intend on appealing this arbitrator's award, asking you to modify or vacate the award. So, how will — how do you want to deal with that?" The District Court responded by saying it would not review the arbitrator's award and that Wells Fargo should take its objections to the Court of Appeals. In the Court's words: "Well, it's my understanding that what you stipulated to was, that everybody stipulated, that following this arbitration award, if somebody wanted to, they could take it directly to the Ninth Circuit." Counsel for Wells Fargo protested, pointing out that the stipulation read "'unless this Court vacates, modifies or corrects.' So that was where I got the fact that I didn't know if we would have to file something with you before, you know --" Magistrate Judge McQuaid interjected: "Oh, I don't believe so, because I'm going to enter this judgment today." He entered judgment and an order confirming the award later that day. ***

As it explained, the District Court understood that after it ordered the arbitration, the parties would "get the arbitrator's decision, the Court [would], in essence, rubber stamp the arbitrator's decision, and whichever party [was] unhappy [could] then appeal it directly to the Ninth Circuit."***

The first question *** is whether the District Court could properly decline to review the arbitrator's award but nonetheless enter an order confirming that award in the expectation that review would begin in this Court. We conclude that it could not. Although we also conclude that this procedural error does not deprive this Court of jurisdiction, we decline to review the arbitrator's award ourselves and then affirm or reverse the District Court's order on the alternative ground of the award's substantive merits. Instead, we exercise our power to remand the case to the District Court with directions to rule on the motion to vacate, as it should have done in the first instance. ***

The parties allege that this Court has jurisdiction pursuant to 28 U.S.C. § 1291. That familiar statute gives this Court jurisdiction "of appeals from all final decisions of the district courts . . . ." This Court assuredly does not have jurisdiction over an appeal taken directly from a private arbitrator. ***

Because there is no direct appellate jurisdiction over arbitral awards, when this Court reviews arbitrators' decisions, it is technically reviewing a district court's decision confirming or vacating an arbitrator's award. ***

[T]he District Court did, in fact, enter orders confirming the arbitrator's award and denying Wells Fargo's motion to vacate the arbitrator's award. Because the District Court has also entered judgment in the case, there can be no doubt that this Court has jurisdiction over the District Court's orders and has the power to reverse or affirm them. ***

In Hall Street Associates v. Mattel, Inc., 552 U.S. 576, 128 S. Ct. 1396, 170 L. Ed. 2d 254 (2008), the Supreme Court speculated that an arbitration agreement entered into in the course of litigation and adopted by a district court as an order might "be treated as an exercise of the District Court's authority to manage its cases under Federal Rule[ ] of Civil Procedure 16." Id. at 591. If so, the Supreme Court hypothesized, the FAA might not provide the exclusive permissible standard for judicial review of arbitration awards. ***

Wells Fargo argues that "the arbitration agreement here embodies the very alternative contemplated by Hall Street," contending that the District Court authorized the arbitration pursuant to its "independent case management powers under the federal and local rules, including Rules 16, 53 and Nevada Local Rule 16-5." This thesis, clever though it may be, has no basis in the record: The District Court did not once reference its independent case management powers in approving the arbitration agreement or in confirming the resulting award. This omission alone makes Wells Fargo's "case management" assertion dubious. Entirely fatal to that assertion is that under the Federal Rules of Civil Procedure, a district court only has the power "to manage its cases." Hall St., 552 U.S. at 591 (emphasis added). Nothing in Federal Rules of Civil Procedure 16 or 53, much less Nevada Local Rule 16-5, grants a district court the power to override the basic structure of federal courts by passing off cases to a court of appeals without itself conducting the review contemplated by statute. The District Court was therefore without power to abdicate entirely its role in reviewing the arbitrator's award, either because of the terms of the parties' agreement or under the applicable court rules.

Finally, we note that, despite the FAA's use of the seemingly permissive term "may," the statute did not grant the District Court discretion to decline to consider the motion to vacate the arbitral award. ***

Wells Fargo moved the District Court to vacate the arbitrator's award on the ground the arbitrator "demonstrated a manifest disregard for law." Although the words "manifest disregard for law" do not appear in the FAA, they have come to serve as a judicial gloss on the standard for vacatur set forth in FAA § 10(a)(4). ***

As to whether private parties may vary that standard, we concluded in an en banc decision, Kyocera Corp. v. Prudential-Bache Trade Services, Inc., 341 F.3d 987 (9th Cir. 2003), that they may not. The Supreme Court later in large part agreed, but left open for future decision whether judicial review of arbitration awards may ever be subjected to a standard other than those provided by the FAA. ***

In Hall Street, the Supreme Court largely adopted Kyocera's conclusion, holding that the FAA has "textual features at odds with enforcing a contract to expand judicial review following the arbitration." 552 U.S. at 586. But, as previously discussed, the Court qualified that holding, noting that "we do not purport to say that [the FAA] exclude[s] more searching review based on authority outside the statute." Id. at 590. The Court surmised that because the arbitration agreement in the case before it had been entered into in the course of litigation and had been adopted by the district court as an order, it was possible that the "agreement [should] be treated as an exercise of the District Court's authority to manage its cases under Federal Rule[ ] of Civil Procedure 16." Id. at 591. Because potentially authorized other than pursuant to the FAA, judicial review of such an arbitral award might conceivably be more searching than that pursuant to the FAA. The Supreme Court noted the question "implicate[d] issues of waiver and the relation of the FAA both to Rule 16 and the Alternative Dispute Resolution Act of 1998," see 28 U.S.C. § 651, and remanded the question, "express[ing] no opinion on these matters." Hall St., 552 U.S. at 592.

Wells Fargo argues that "the arbitration agreement here embodies the very alternative contemplated by Hall Street." The company contends that, as in Hall Street, the agreement to arbitrate was entered into in the course of litigation; it also contends that the District Court "explicitly approved the parties' agreement subject to full judicial review," and that the District Court was authorized to ensure "full judicial review" "by its independent case management powers under the federal and local rules, including Rules 16, 53 and Nevada Local Rule 16-5."

Whatever the merits of the Fed. R. Civ. P. 16 theory as to which Hall Street speculated, it does not apply to this case. Wells Fargo's argument, even if otherwise viable, is untenable in the face of the parties' stipulation and the District Court's statements.

Footnote 12. We, like the Supreme Court, therefore express no opinion as to the viability of the case-management theory of judicial review of arbitration awards alluded to in Hall Street.

The parties' stipulation to arbitrate expressly provides that "the FAA . . . shall apply to the arbitration proceedings." The stipulation then largely incorporates the language of the FAA in describing how the District Court, upon application by the parties, "must" enter an order confirming the arbitration award "unless this Court vacates, modifies or corrects the arbitration award, and enter a judgment in accordance with the provisions of the Federal Arbitration Act." See 9 U.S.C. § 9 (using similar language). Nothing in the agreement suggests that anything other than the ordinary FAA standard of judicial review should apply.

Wells Fargo points out that the stipulation provides that "the parties shall participate in a binding arbitration with appeal rights." (Emphasis added). But the phrase "appeal rights" says nothing about the standard of review. After all, parties have a right to judicial review, including appellate review, under the FAA, but that review is only for manifest disregard of the law by the arbitrator, or for one of the other highly deferential standards contained in the statute.

Footnote 13. One plausible explanation of the phrase "appeal rights" is that it was inserted to make clear that the bar on appeal in the Alternative Dispute Resolution Act, 28 U.S.C. §§ 651 et seq., was not intended to apply to the confirmation of the arbitration award. See 28 U.S.C. § 657(a) (providing that when a district court confirms an arbitration award pursuant to the Alternative Dispute Resolution Act, "the judgment shall not be subject to review in any other court by appeal or otherwise").

Moreover, the District Court did not once cite, or by implication refer to, its case management authority under the Federal Rules in adopting the stipulation as an order, and never indicated any intent to vary the standard of review. As the alternative thesis suggested in Hall depends on the district court's invocation of its case management authority under Rule 16 to vary the review standard, the thesis has no application here.

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