Challenging Arbitration Awards: Rare but Possible

People know that it is hard to change arbitration awards. Courts often say that people who choose arbitration must accept the arbitrator’s decision, even if it is wrong. Still, courts will throw out an award if the process was unfair, corrupt, or exceeded the arbitrator’s authority.

Limited review by courts 

The Federal Arbitration Act (FAA), 9 U.S.C. §§ 1–16, covers most arbitration agreements. The FAA also has a list of reasons why an award can be changed. As § 10(a) says, a court can only set aside an award if 

1. It was obtained through fraud, corruption, or other unfair means.
2. The arbitrator was clearly unfair or dishonest.
3. The arbitrator did something wrong, like not listening to important evidence, or
4. The arbitrators did more than what the agreement said they could do.

Fraud-based challenges have a high bar to meet: the fraud must be important, not something that could be discovered during arbitration with reasonable diligence, and it must change the outcome.

Courts have said that a case can’t be thrown out solely because someone made a mistake in the law or the facts. The Supreme Court ruled in Hall Street Assocs., LLC v. Mattel, Inc., 552 U.S. 576 (2008), that being unhappy with an arbitrator’s reasoning or even a clear legal mistake is not a good enough reason to change a decision.

Theories that back vacatur 

The FAA’s judicial review is respectful, but it does leave a little room for extreme injustice or actions that are against the law: 

Misconduct (§ 10(a)(3)): If an arbitrator doesn’t give one side a fair chance to present its case, such as by not letting important witnesses testify, not allowing reasonable continuances, or not letting important documents be looked at, the courts can throw out the award. The question is not whether the evidence was wrong, but whether the hearing was unfair in the first place.

Going beyond authority (§ 10(a)(4)): The contract between the two parties is what gives an arbitrator power. If the arbitrator decides things that weren’t sent to arbitration, gives help that the agreement doesn’t allow, or changes the contract instead of interpreting it, vacatur may be necessary. This is a reason that courts don’t use very often, and only when there are clear violations of the contract. 

Violations of public policy: Courts may throw out awards that go against clear and well-established public policy that is based on law or tradition, not vague ideas of fairness. This theory isn’t used very often, but it can be used when doing so would go against the law’s protections, like in the New Jersey case above.

Procedural defects: Vacatur can also happen when the process is unfair because it doesn’t give notice, gives an award that is incomplete or unclear, takes action after the arbitrator’s authority has run out, or makes improper ex parte communications. 

A recent example: An arbitrator goes beyond their authority

The recent decision by the New Jersey Superior Court (Lindsey Sengebush v. House Values Real Estate School, LLC d/b/a RE/MAX, House Values, Ralph Fucci and Michael A. Luzzi) shows how far arbitral power can go and when it is appropriate to vacate. The plaintiff, who used to be a real estate agent, said that a manager at the defendant’s brokerage sexually harassed her in increasingly serious ways, such as stalking, assault, and threats to her job. After she told her boss about her problems, they let her go. She said that her job was hostile, that she was sexually harassed in exchange for anything, that she was punished for speaking out, and that the arbitration process under New Jersey’s Law Against Discrimination (LAD) violated her rights.

Plaintiff’s case

The plaintiff contended that the arbitrator erroneously applied the governing law for granting summary judgment as delineated in Brill v. Guardian Life Ins. Co. of America, 142 N.J. 520 (1995).

• Ignored evidence that didn’t match up and made wrong decisions about credibility.
• Used the wrong legal test to figure out if someone was an employee or an independent contractor.
• Misunderstood the LAD by throwing out claims of a hostile work environment and quid pro quo. 
• Went against public policy by letting real estate agents off the hook for sexual harassment.

The Defendants’ arguments

The defendants argued that: 

• The arbitrator had a lot of leeway and could not be reviewed. 
• Summary judgment was allowed under American Arbitration Association Rule 28.
• The plaintiff did not show that they did not agree or that they were retaliated against. 
• The arbitrator’s reading of the LAD was reasonable and backed up by past cases.

The court’s ruling

The court threw out the arbitration decision, sent the case back for a new arbitration with a different arbitrator, and made it clear that arbitration results must still follow the law and public policy.

The court said that the arbitrator: 

• Misapplied the Brill summary judgment standard by weighing evidence and making credibility findings.
• Didn’t use the right test for employment status.
• Wrongly threw out harassment claims that are allowed under the LAD. 
• Gave an award that went against New Jersey’s strong public policy against workplace discrimination and harassment.

Conclusion

Courts respect arbitration decisions because they are a way to settle a disagreement without going to court. But the FAA still lets you get rid of an award if it was affected by fraud, bias, misconduct, going too far, or clear violations of public policy. 

The most recent decision in New Jersey is a good reminder that arbitrators still have to follow the law, ensure the process is fair, and not do anything their contracts don’t allow.