I generally advise most clients under most circumstances to avoid arbitration clauses. Over the long run, they do not deliver on the promise of streamlined, cost effective litigation. (I once had an arbitration last a total of 47 days over two years). Unless confidentiality is an issue, a party is usually better served in the courts. Moreover, the right to appeal the outcome of trial is a valuable right not available in arbitration. The merits of an arbitration award are not reviewed by an appellate tribunal, except where the ADR provider has a built-in, previously agreed on appellate procedure. (The AAA recently announced such appellate procedures). That said, there are limited grounds for appealing an arbitration, not related to the merits of the award. Under both California and federal law, an arbitration award can be vacated by a court (or thereafter appealed) if the award was the result of extrinsic fraud or corruption or where the award clearly exceeded the scope of the arbitrator’s power.
Today, the Ninth Circuit considered a matter of first impression: is a provision in an arbitration agreement that eliminates all judicial review of the arbitration award, including review for fraud or excess of power, enforceable? In an opinion authored by Judge Milan D. Smith, Jr., the Ninth Circuit ruled such a clause is not enforceable. In re Wal-Mart Wage and Hour Employment Practices Litigation (9th Cir. Dec. 17, 2013 11-17718) involved in a dispute over an attorney’s fee award among counsel for the plaintiffs in a class action settlement. An arbitrator allotted attorney’s fees among the plaintiffs’ counsel, a district court confirmed the allocation and one of the attorneys appealed that order. The appellee contended that the Ninth Circuit lacked jurisdiction to hear the appeal because the parties’ settlement agreement precluded any judicial review of the arbitration award. Ultimately, the Ninth Circuit held that in enacting the Federal Arbitration Act, Congress intended to balance the policy favoring arbitration with the need to safeguard against arbitration awards “tainted by partiality, a lack of elementary procedural fairness, corruption, or similar misconduct.” The Ninth Circuit ruled that a party may not contract away or waive the right to judicial review of arbitration awards. This decision reaffirms the right of parties to a minimal standard of fairness in the conduct of arbitrations. However, parties’ interested in retaining the right to appellate review of the merits of their dispute should seriously consider avoiding arbitration clauses altogether.