In BNSF Railway Co. v. Alstom Transp., Inc., No. 13-11274 (5th Cir. Feb. 6, 2015) (click here for a copy of the decision), the Fifth Circuit issued some helpful guidance to lower courts in connection with judicial review of arbitration awards. As explained in more detail below, the Fifth Circuit also addressed a very interesting issue involving state arbitration laws vs. federal arbitration law, and without acknowledging a circuit split, the Fifth Circuit’s decision helped entrench an ongoing circuit split.
The case involved a railway company that had hired a third party to service its locomotives, and the maintenance agreement contained an arbitration clause. After the railway company terminated the third party, the parties arbitrated whether the termination of the maintenance agreement was appropriate. The arbitration panel found that the railway company had breached the maintenance agreement and the covenant of good faith and fair dealing, and the panel also awarded certain damages.
The district court vacated the panel’s holding that the company had breached the covenant of good faith and fair dealing, and the district court also believed that the panel had awarded damages that were not permitted under the contract.
The Fifth Circuit, recognizing the extremely deferential standard of judicial review of arbitration awards, upheld the panel’s arbitration award. The Fifth Circuit reasoned that a court could not vacate the panel’s award under the FAA because the panel had arguably interpreted the contract when issuing its award. The Fifth Circuit explained that even if the panel had engaged in a grave error in interpreting the contract, as long as the panel was arguably construing the contract, a court should not vacate the award.
To help guide lower courts in the future in assessing whether an arbitrator exceeded his or her authority, the Fifth Circuit set forth some helpful factors to consider: “(1) whether the arbitrator identifies her task as interpreting the contract; (2) whether she cites and analyzes the text of the contract; and (3) whether her conclusions are framed in terms of the contract’s meaning.” If these factors exist, then it is unlikely that an arbitrator exceeded his or her authority.
The Fifth Circuit’s opinion also interested me for its discussion of state arbitration law vs. federal arbitration law. Instead of applying the judicial review standards from the FAA, the railway company asked the court to consider applying the standards of review set forth in Illinois or Texas arbitration law. However, the Fifth Circuit found that the contract had not clearly referred to other sources of arbitration law providing for more expansive judicial review, and as a result, the FAA’s narrow standards of judicial review applied as a default. In reaching this conclusion, the Fifth Circuit relied on dicta from the Supreme Court’s Hall Street v. Mattel decision from 2008, where the Supreme Court acknowledged the possibility of more searching judicial review based on state statutes or common law. (This dicta in Mattel has troubled me because it appears to be in tension with earlier Supreme Court decisions finding that federal arbitration law would preempt conflicting state arbitration law.)
On this point regarding whether the parties had incorporated state arbitration law in their contract, the contract at issue contained a simple choice of law clause providing that the contract was governed by the laws of Illinois. Does such a clause incorporate Illinois arbitration law? No, according to the Fifth Circuit. The Fifth Circuit believed that an explicit reference to a state’s arbitration law was required to trigger application of the state’s arbitration law. As a result, a general choice of law clause, like the one in the contract, would not incorporate state arbitration law. However, the Fifth Circuit failed to acknowledge that other federal and state courts have reached the opposite conclusion and have treated a general choice of law clause as triggering application of the state’s arbitration laws. See, e.g., TIG Ins. Co. v. Security Ins. Co. of Hartford, 360 F.3d 322 (2d Cir. 2004) (choice of law clause incorporated California’s arbitration laws).