Deterrence and implied limits on arbitral power

Duke Law Journal

Volumn 55, Issue 3, 2005, Pages 127-196

  Scodro, Michael A ^a  

^a Chicago Kent Collage of Law ^*

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EID: 33744811162     PISSN: 00127086     EISSN: 00127086     Source Type: Journal    
DOI: None     Document Type: Review

References (438)

1. This Article uses the term "commercial" arbitration broadly to refer to all arbitration governed by the Federal Arbitration Act-or its state law counterparts-as opposed to union-management arbitration governed by the Labor Management Relations (Taft Hartley) Act, 29 U.S.C. §§ 185-87 (2000).
2. See infra Part I.B.
3. 9 U.S.C. §§ 1-16 (2000).
4. Id. § 2.
5. Id. § 10(a).
6. See infra Part II.A-B.
7. See infra Part I.C.
8. See infra note 122 and accompanying text.
9. See infra notes 121-124 and accompanying text.
10. See infra Part II.B.
11. See Wilko v. Swan, 346 U.S. 427, 436-37 (1953) ("In unrestricted submissions, . . . the interpretations of the law by the arbitrators in contrast to manifest disregard are not subject, in the federal courts, to judicial review for error in interpretation."), overruled by Rodriguez de Quijas v. Shearson/Am. Express, Inc., 490 U.S. 477 (1989).
12. See infra notes 162-186 and accompanying text.
13. See infra notes 250-253 and accompanying text.
14. See infra Part II.C.
15. This Article uses the term "nonwaivable" as a shorthand to describe these rights, recognizing that they can be "waived" insofar as plaintiffs or would-be plaintiffs may be able to settle suits advancing these rights or contract away their ability to file suit to vindicate them once the wrongdoing has occurred.
16. See Alexander v. Gardner-Denver Co., 415 U.S. 36, 51 (1974) ("[W]e think it clear that there can be no prospective waiver of an employee's rights under Title VII.").
17. See infra notes 204-217 and accompanying text.
18. See infra note 226 and accompanying text.
19. See infra Part III.B.1.
20. 9 U.S.C. § 10(a)(4) (2000).
21. David S. Schwartz, Enforcing Small Print to Protect Big Business: Employee and Consumer Rights Claims in an Age of Compelled Arbitration, 1997 WIS. L. REV. 33, 73-74.
22. IAN R. MACNEIL, AMERICAN ARBITRATION LAW: REFORMATION-NATIONALIZATION-INTERNATIONALIZATION 25-28 (1992).
23. Id. at 31.
24. Id. at 35-37;
25. see also Frank D. Emerson, History of Arbitration Practice and Law, 19 CLEV. ST. L. REV. 155, 161 (1970) (referring to New York's 1920 arbitration act as a "revolutionary step" that "enabl[ed] parties in dispute to control future disputes as well as to settle existing disputes").
26. Nathan William MacChesney, An Act Concerning Arbitration, to Make Uniform the Law with Reference Thereto, 50 A.B.A. COMMITTEE ON UNIFORM ST. L. REP. app. A at 590 (1925) (emphasis added).
27. See Michael A. Scodro, Note, Arbitrating Novel Legal Questions: A Recommendation for Reform, 105 YALE L.J. 1927, 1941 & n.80 (1996) (Nevada, North Carolina, Utah, and Wyoming).
28. See id. at 1941-42 & nn.81-82 (describing Connecticut and Massachusetts statutes).
29. The FAA's legislative history indicates that a prominent proponent of the New York legislation drafted the Act. See J. Hearings Before the Subcomms. of the Comms. on the Judiciary, 68th Cong., 1st Sess. 19 (1924) (testimony of Francis B. James, former member of ABA Committee on Commerce, Trade, and Commercial Law) (stating that Julius Henry Cohen, a leading force behind the New York law, bore "the burden . . . of drafting the [federal] bill").
30. 9 U.S.C. § 10(a) (2000).
31. Id. § 11.
32. Id. § 2.
33. See Allied-Bruce Terminix Cos. v. Dobson, 513 U.S. 265, 277 (1995) ("[W]e conclude that the word 'involving' . . . signals an intent to exercise Congress' commerce power to the full.").
34. MACNEIL, supra note 22, at 55.
35. The website maintained by the National Conference of Commissioners on Uniform State Laws notes that 49 jurisdictions adopted this version of the act. See http://www.nccusl.org/Update/uniformact_factsheets/uniformacts-fs-aa.asp (last visited Jan. 17, 2006).
36. See UNIF. ARBITRATION ACT § 12 (1955). The National Conference of Commissioners on Uniform State Laws approved a Revised Uniform Arbitration Act in 2000. The new model, which twelve states have adopted, is similar to the 1955 act as relevant to this Article.
37. See UNIF. ARBITRATION ACT § 23 (2000); see also http://www.nccusl.org/Update/uniformact_factsheets/uniformacts-fs-aa.asp (listing 12 states that have adopted revised act) (last visited Jan. 17, 2006).
38. Leo Kanowitz, Alternative Dispute Resolution and the Public Interest: The Arbitration Experience, 38 HASTINGS L.J. 239, 256 (1987); see also Dean Witter Reynolds Inc. v. Byrd, 470 U.S. 213, 219-20 (1985) (noting that the FAA was intended "to overrule the judiciary's longstanding refusal to enforce agreements to arbitrate").
39. 346 U.S. 427 (1953), overruled by Rodriguez de Quijas v. Shearson/Am. Express, Inc., 490 U.S. 477 (1989).
40. Id. at 428-29.
41. Wilko v. Swan, 201 F.2d 439, 442 (2d Cir. 1953).
42. Wilko, 346 U.S. at 438.
43. 15 U.S.C. § 77n. (2000).
44. Wilko, 346 U.S. at 435.
45. Id.
46. Id.
47. Id. at 435-36.
48. Id. at 436-37 (footnote omitted). Writing for himself and Justice Minton in dissent, Justice Frankfurter objected that "nothing in the record" suggested that arbitration "would not afford the plaintiff the rights to which he [was] entitled" under the Securities Act. Id. at 439-40 (Frankfurter, J., dissenting).
49. Id. at 438 (footnote omitted).
50. Schwartz, supra note 21, at 89-91;
51. see Stephen J. Ware, Default Rules from Mandatory Rules: Privatizing Law Through Arbitration, 83 MINN. L. REV. 703, 714-15 (1999) (listing formerly nonarbitrable subject matter and concluding that "[u]ntil about twenty-five years ago, arbitration seemed largely confined to contract claims").
52. 391 F.2d 821 (2d Cir. 1968).
53. Id. at 826-28.
54. Id. at 826.
55. Id. at 827-28 (quoting Wilko v. Swan, 346 U.S. 427, 438 (1953)).
56. 415 U.S. 36 (1974).
57. Id. at 39-43.
58. Id. at 45.
59. Id. at 53 ("As the proctor of the bargain, the arbitrator's task is to effectuate the intent of the parties. . . . The arbitrator . . . has no general authority to invoke public laws that conflict with the bargain between the parties . . . .").
60. Id. at 57.
61. 417 U.S. 506 (1974).
62. Id. at 509.
63. Id.
64. Id. at 510.
65. Id. at 515.
66. Id. at 516.
67. Id. at 517.
68. Id. at 519-20.
69. See Dean Witter Reynolds Inc. v. Byrd, 470 U.S. 213, 215 n.1 (1985) (citing cases applying Wilko to render agreements unenforceable when plaintiffs raised claims under § 10(b) of the Securities Exchange Act). The Supreme Court, moreover, continued to adhere to Alexander, allowing employees to sue in court to vindicate federal statutory rights notwithstanding adverse decisions in arbitration required under collective bargaining agreements. In Barrentine v. Arkansas-Best Freight System, Inc., 450 U.S. 728 (1981), a Fair Labor Standards Act (FLSA) claim, and McDonald v. City of West Branch, 466 U.S. 284 (1984), a § 1983 claim alleging violation of First Amendment rights, the Court reiterated that courts, not labor arbitrators, should have the last word in interpreting federal public law rights. See Barrentine, 450 U.S. at 745 (rejecting the argument that FLSA claims were barred by their "prior submission" to arbitration on the ground that "Congress intended to give individual employees the right to bring their minimum-wage claims under the FLSA in court, and because these congressionally granted FLSA rights are best protected in a judicial rather than in an arbitral forum"); McDonald, 466 U.S. at 290 ("[A]lthough arbitration is well suited to resolving contractual disputes . . . it cannot provide an adequate substitute for a judicial proceeding in protecting the federal statutory and constitutional rights that § 1983 is designed to safeguard.").
70. 473 U.S. 614 (1985).
71. Id. at 616-17.
72. Id. at 618-19.
73. Id. at 619-20.
74. Id. at 624.
75. Id. at 636.
76. Id. at 636-37 (footnote omitted).
77. Id. at 638 (footnote omitted).
78. 482 U.S. 220 (1987).
79. Id. at 222-23.
80. Id. at 223.
81. Id. at 228-29.
82. Id. at 232 (citing Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 628, 633-34, 636-37 & n.19 (1985)).
83. Id. at 234.
84. Id. at 242.
85. M at 240.
86. Id. at 241-42.
87. 490 U.S. 477 (1989).
88. Id. at 478-79.
89. Id. at 481.
90. 500 U.S. 20 (1991).
91. Id. at 23-24.
92. Id. at 24.
93. Id. at 27.
94. Id. at 26 (quoting Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 628 (1985)).
95. Id. at 27; see also id. at 27-35 (outlining Gilmer's arguments that arbitration is inappropriate and explaining the reasoning behind the Court's rejection of these claims).
96. See infra notes 121-124 and accompanying text.
97. See supra text accompanying notes 28-30.
98. Barbara Black & Jill I. Gross, Making It Up as They Go Along: The Role of Law in Securities Arbitration, 23 CARDOZO L. REV. 991, 1032 (2002) (observing that "the stated grounds" for overturning arbitration awards in the FAA do not "explicitly provide[] for a review of the merits. Rather, the focus of the statutory concerns is improper conduct on the part of the arbitrators.").
99. See, for example, Julian J. Moore, Note, Arbitral Review (or Lack Thereof): Examining the Procedural Fairness of Arbitrating Statutory Claims, 100 COLUM. L. REV. 1572, 1585 (2000) (citing examples from case law): In addition to the statutory grounds, there are several common law grounds for overturning an arbitral decision: Courts have expressed their willingness to overturn an arbitral decision when it: (1) is in manifest disregard of the law; (2) conflicts with public policy; (3) is arbitrary and capricious; (4) is completely irrational; or (5) fails to draw its essence from the parties' underlying contract. (footnotes and internal quotations omitted).
100. See UNIF. ARBITRATION ACT § 23, cmt. C.2 (2000) ("'Manifest disregard of the law' is the seminal nonstatutory ground for vacatur of commercial arbitration awards.");
101. Stephen L. Hayford, A New Paradigm for Commercial Arbitration: Rethinking the Relationship Between Reasoned Awards and the Judicial Standards for Vacatur, 66 GEO. WASH. L. REV. 443, 465 (1998) (same);
102. Noah Rubins, "Manifest Disregard of the Law " and Vacatur of Arbitral Awards in the United States, 12 AM. REV. INT'L ARE. 363, 366, 368 (2001) (referring to the manifest disregard standard as "the most widely recognized extra-statutory ground upon which courts can set aside arbitration awards under U.S. federal law," and observing that "[i]n the United States, the 'manifest disregard of the law' standard remains the most common way to supplement the FAA's narrow procedural protections and give judges a way to avoid enforcing a particular subset of erroneous awards");
103. Marcus Mungioli, Comment, The Manifest Disregard of the Law Standard: A Vehicle for Modernization of the Federal Arbitration Act, 31 ST. MARY'S L.J. 1079, 1080 (2000) (describing the "manifest disregard" doctrine as "the most recognizable and universally accepted non-statutory standard of review for an arbitration award");
104. Michael P. O'Mullan, Note, Seeking Consistency in Judicial Review of Securities Arbitration: An Analysis of the Manifest Disregard of the Law Standard, 64 FORDHAML. REV. 1121, 1124 (1995) ("Chief among [the] judicially-created standards is review for the arbitrators' 'manifest disregard of the law.'");
105. see also Moore, supra note 96, at 1585 ("By far, 'manifest disregard of the law' has been the most hotly contested common law ground for judicial review of arbitral awards."). Another well-used basis for attacking arbitration awards is the nonstatutory "public policy" doctrine. Not to be confused with the "public policy" exception that, until Mitsubishi and its progeny, kept public law claims out of arbitration, courts still refuse to enforce awards that themselves violate "public policy" by compelling illegal conduct. This doctrine is rooted in the longstanding rule that courts will not enforce a contract requiring parties to violate the law or otherwise act contrary to the public welfare. Some lower courts originally interpreted this ground broadly, but the Supreme Court has since narrowly circumscribed it. Today, an award can be vacated for violating "public policy" only if it "run[s] contrary to an explicit, well-defined, and dominant public policy, as ascertained by reference to positive law and not from general considerations of supposed public interests." E. Associated Coal Corp. v. United Mine Workers, Dist. 17, 531 U.S. 57, 63 (2000);
106. see also David M. Glanstein, A Hail Mary Pass: Public Policy Review of Arbitration Awards, 16 OHIO ST. J. ON DISP. RESOL. 297, 301 (2001) ("In Eastern Associated Coal the Supreme Court adhered to the so called narrow approach . . . namely that a reviewing court must find the terms of an award, not the underlying conduct at issue, violated public policy."). As such, the "public policy" doctrine provides no grounds for revisiting the merits of an arbitration award in court.
107. Wilko v. Swan, 346 U.S. 427, 436-37 (1953) (emphasis added);
108. see supra text accompanying note 46.
109. First Options of Chi., Inc. v. Kaplan, 514 U.S. 938, 942 (1995).
110. See Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 640, 656 (1985) (Stevens, J., dissenting) (stating that arbitration awards can only be reviewed for manifest disregard and citing the FAA).
111. See Shearson/Am. Express, Inc. v. McMahon, 482 U.S. 220, 231 (1987) (mentioning "manifest disregard" in the description of the Wilko decision); id. at 242, 257 (Blackmun, J., concurring in part and dissenting in part) (same).
112. A search conducted on December 16, 2005, of all federal and state court cases since January 1, 2000, in the Lexis database using the terms "manifest disregard" and "arbitration" produced 703 results.
113. See, e.g., Hardy v. Walsh Manning Secs., LLC, 341 F.3d 126, 129-34 (2d Cir. 2003) (remanding to arbitral panel for clarification in light of possible manifest disregard of New York law);
114. Nationwide Mut. Ins. Co. v. Home Ins. Co., 330 F.3d 843, 847 (6th Cir. 2003) ("To the extent that the arbitration award vests any rights in AISUK [a nonparty to the arbitration], or creates any obligation to AISUK, it is in manifest disregard for the legal principle that an arbitration panel may not assert jurisdiction over non-parties to the arbitration.");
115. Gas Aggregation Servs., Inc. v. Howard Avista Energy, LLC, 319 F.3d 1060, 1069 (8th Cir. 2003) (upholding vacatur of arbitrators' award of attorneys fees in manifest disregard of Minnesota law);
116. Halligan v. Piper Jafrrey, Inc. 148 F.3d 197, 204 (2d Cir. 1998) (holding that an arbitrator manifestly disregarded law in ruling against an employee's ADEA claim);
117. Montes v. Shearson Lehman Bros., Inc., 128 F.3d 1456, 1464 (11th Cir. 1997) (holding that an arbitrator manifestly disregard law in rejecting an employee's FLSA claim);
118. Wien & Malkin LLP v. Helmsley-Spear, Inc., 12 A. D.3d 65, 71-72 (N.Y. App. Div. 2004) (finding manifest disregard of a "clear, applicable principle" of New York law and of governing contractual provisions);
119. Sawtelle v. Waddell & Reed, Inc., 754 N.Y.S.2d 264, 273-75 (App. Div. 2003) (finding that an arbitrator's award of punitive damages was in manifest disregard of New York law);
120. see also Freightliner, LLC v. Teamsters Local 305, 336 F. Supp.2d 1118, 1127 (D. Or. 2004) (holding, in course of decision reviewing labor arbitration award, that award manifestly disregarded state statute to the extent that arbitrator "effectively applied his own notions of what the law should be" and read statute to invalidate provisions of collective bargaining agreement).
121. See, e.g., Siegel v. Prudential Ins. Co. of Am., 79 Cal. Rptr. 2d 726, 739 (Ct. App. 1998) ("Every federal circuit that has discussed the issue has recognized the manifest disregard of the law standard for vacating an arbitration award is a judicially created standard; it is not part of the [FAA].");
122. MARTIN DOMKE, DOMKE ON COMMERCIAL ARBITRATION § 33:00, at 2 (2002) (referring to "manifest disregard" as a "judicially created ground[] for challenging an award");
123. Kenneth R. Davis, When Ignorance of the Law Is No Excuse: Judicial Review of Arbitration Awards, 45 BUFF. L. REV. 49, 88 (1997) (listing the "manifest disregard standard" among "nonstatutory grounds for vacatur");
124. Stephen L. Hayford, Reining in the "Manifest Disregard" of the Law Standard: The Key to Restoring Order to the Law of Vacatur, 1998 J. DISP. RESOL. 117, 118 (1998) ("Seminal among the nonstatutory grounds for vacatur is the 'manifest disregard' of the law standard . . . .");
125. Bonnie Roach, Recent Development: George Watts & Son v. Tiffany & Co., 17 OHIO ST. J. ON DISP. RESOL. 503, 504 (2002) ("Manifest disregard is almost universally thought of as a non-statutory basis for vacating an arbitration award.");
126. Calvin William Sharpe, Integrity Review of Statutory Arbitration Awards, 54 HASTINGS L.J. 311, 332 (2003) (listing "manifest disregard" among "non-statutory grounds for vacating arbitration awards" that courts have recognized);
127. Paul Turner, Preemption: The United States Arbitration Act, the Manifest Disregard of the Law Test for Vacating an Arbitration Award, and State Courts, 26 PEPP. L. REV. 519, 529 (1999) ("[T]he manifest disregard of the law doctrine is not statutorily based, but is premised on federal common law.");
128. Marta B. Varela, Arbitration and the Doctrine of Manifest Disregard, DISP. RESOL. J., June 1994, at 64, 64 ("Those resisting enforcement of an arbitral award claim manifest disregard is another ground for vacatur in addition to those found in the United States Arbitration Act and the United Nations Convention on the Recognition and Enforcement of Foreign Judgments . . . .");
129. Adam Milam, Comment, A House Built on Sand: Vacating Arbitration Awards for Manifest Disregard of the Law, 29 CUMB. L. REV. 705, 706 (1998-1999) ("[M]anifest disregard of the law is not one of the four statutory grounds explicitly set out in the FAA.").
130. O'Mullan, supra note 97, at 1141;
131. see also Hayford, supra note 104, at 120 ("The oft-cited Wilko dictum is the sole basis for the 'manifest disregard' of the law standard.").
132. See, e.g., DOMKE, supra note 104, § 34:01, at 2 (noting that, in light of the Supreme Court's silence, "state and federal courts have been left in a state of confusion and have tried to fill the void by building on dictum in the Supreme Court's decisions in Wilko v. Swan[, 346 U.S. 427 (1953)] and Enterprise Wheel & Car[, 363 U.S. 593 (1960)]" (footnotes omitted));
133. Milam, supra note 104. at 705 ("The 'manifest disregard of the law' standard of review for arbitration awards has traditionally been a constant source of confusion for attorneys and courts.");
134. Roach, supra note 104. at 505 ("[I]t is very unclear from the dicta as to how the courts should apply the standard.");
135. Sharpe, supra note 104, at 335 ("[Lower courts] have also entered the breach to supply content to the [manifest disregard standard] in the face of virtually no guidance from the Supreme Court.");
136. Varela, supra note 104. at 64 ("The court did not explain in Wilko, and has not explained in subsequent decisions, what it meant by [manifest disregard].");
137. id. at 65 (noting that "the doctrine is non-statutory in its origins," claiming that "it is the product of an ambiguous phrase in a Supreme Court decision," and concluding that "in consequence, manifest disregard is a vague and imprecise term");
138. Brad A. Galbraith, Note, Vacatur of Commercial Arbitration Awards in Federal Court: Contemplating the Use and Utility of the "Manifest Disregard" of the Law Standard, 27 IND. L. REV. 241, 250 (1993) ("Since Wilko, courts have struggled to determine what grounds are valid for vacating commercial arbitration awards.").
139. Varela, supra note 104, at 64.
140. Milam, supra note 104, at 708;
141. see also id. ("Because the basis of manifest disregard of the law is one that was judicially created in dictum of the United States Supreme Court, the definition and application given manifest disregard of the law has varied with the circuits.");
142. Moore, supra note 96, at 1586 ("The Court has never elucidated the meaning of 'manifest disregard of the law' and, as a result, lower courts continue to debate the validity and scope of this judicial standard.");
143. Galbraith, supra note 106, at 250 ("Not only have courts grappled with whether the 'manifest disregard' referred to in Wilko was intended by the Court to be a judicially created exception to the Federal Arbitration Act, they have also had difficulty determining what was meant by the phrase 'manifest disregard' of the law.");
144. Mungioli, supra note 97, at 1080 ("[T]remendous disparity remains in the application of the manifest disregard standard.");
145. id. at 1115-16 ("Courts have been confronted with an unnecessarily burdensome task of searching for a useful definition of manifest disregard, which must end.").
146. 808 F.2d 930 (2d Cir. 1986).
147. Id. at 933-34 (emphasis added) (citations omitted);
148. see also Bret F. Randall, The History, Application, and Policy of the Judicially Created Standards of Review for Arbitration Awards, 1992 BYU L. REV. 759, 766 ("[T]he most often cited formulation of the manifest disregard standard originated in the Second Circuit." (citing Bobker, 808 F.2d at 933));
149. Galbraith, supra note 106, at 251-52 (referring to the Bobker decision as "[t]he most notable attempt at creating a functional definition of 'manifest disregard' of the law," and reporting that "[t]he Second Circuit's explanation of 'manifest disregard' of the law in Bobker is often cited by courts when reviewing commercial arbitration awards to determine whether the arbitrators acted in 'manifest disregard' of the law").
150. See, e.g., Montes v. Shearson Lehman Bros., Inc., 128 F.3d 1456, 1461 (11th Cir. 1997) (using the Black's Law Dictionary and American Heritage Dictionary definitions of "manifest" and "disregard" to give content to the "manifest disregard" doctrine);
151. Norman S. Poser, Judicial Review of Arbitration Awards: Manifest Disregard of the Law, 64 BROOK. L. REV. 471, 510 (1998) ("Used as a noun, 'disregard' means the 'lack of thoughtful attention or due regard' . . . , [whereas] '[m]anifest' means 'clearly apparent to the sight or understanding; obvious.'").
152. Sharpe, supra note 104, at 335;
153. see also DOMKE, supra note 104, § 33:00, at 2 ("[T]o successfully challenge an award based upon manifest disregard of the law, most courts require proof that: (1) the arbitrator knew of the governing legal precedent yet refused to apply it or ignored it and (2) the law ignored by the arbitrator was well-defined, explicit and clearly applicable to the case.");
154. id. § 33:08, at 33 ("Under [the manifest disregard] exception an arbitration award can be vacated where the arbitrators conspicuously choose to disregard a clearly applicable legal principle."). As one commentator observed, courts read "manifest disregard" to have "an 'actus reus'-like dimension: the commission of a very serious error of law by the arbitrator," and also to "require[] a reviewing court to evaluate the arbitrator's knowledge, or awareness, of the relevant law, leading to a 'mens rea'-like, state-of-mind determination."
155. Hayford, supra note 97, at 468;
156. see also Hayford, supra note 104, at 124 (describing the same "two constituent elements" of "manifest disregard" doctrine "as currently applied by the U.S. Courts of Appeals").
157. See Williams v. Cigna Fin. Advisors, Inc., 197 F.3d 752, 762 (5th Cir. 1999) (quoting and adopting the test described in IAN R. MACNEIL ET AL., FEDERAL ARBITRATION LAW § 40.7.2.6, at 95 (1994)).
158. Milam, supra note 104, at 708.
159. Poser, supra note 111, at 505
160. (quoting Varela, supra note 104, at 71).
161. Davis, supra note 104, at 89.
162. Poser, supra note 111, at 504-05.
163. Mungioli, supra note 97, at 1103.
164. Varela, supra note 104. at 65;
165. see also C. Evan Stewart, Securities Arbitration Appeal: An Oxymoron No Longer?, 79 KY. L.J. 347, 352-54 (1991) (describing the "manifest disregard" standard as under pressure to expand).
166. For example, Professor Macneil's treatise recommends a "manifest disregard" standard that allows for the vacation of awards derived from any obvious legal error, provided the error "result[s] in significant injustice." MACNEIL ET AL., supra note 113, § 40.7.2.6, at 95;
167. see supra text accompanying note 113.
168. See, e.g., Robert N. Covington, Employment Arbitration after Gilmer: Have Labor Courts Come to the United States?, 15 HOFSTRA LAB. & EMP. L.J. 345, 387 (1998) ("Critics of [the Supreme Court's decision in] Gilmer sometimes suggest that the harm done by that decision can be undone in part by providing for de novo review of arbitrators' decisions.");
169. Laurie Leader & Melissa Burger, Let's Get a Vision: Drafting Effective Arbitration Agreements in Employment and Effecting Other Safeguards to Insure Equal Access to Justice, 8 EMP. RTS. & BMP. POL'Y J. 87, 117-21 (2004) (reviewing a range of scholarly recommendations for judicial review of arbitral awards and recommending the authors' own variation on the "manifest disregard" doctrine);
170. Martin H. Malin, Privatizing Justice but by How Much? Questions Gilmer Did Not Answer, 16 OHIO ST. J. ON DISP. RESOL. 589, 631 (2001) (arguing that "courts should police arbitration awards for errors of law" because "[f]ailure to do so can lead to the use of mandatory arbitration systems as vehicles for contracting out of statutory obligations");
171. Poser, supra note 111, at 518 (seeking a standard allowing courts to upset awards that "show[] an extraordinary lack of fidelity to established legal principles or an egregious departure from established law");
172. Sharpe, supra note 104, at 346 (recommending "integrity" review allowing courts to reexamine "the arbitrator's reasoning process to determine whether the arbitrator's reasons plausibly lead to the decision"-an appraisal of the arbitrator's conclusions of law and fact);
173. Clyde W. Summers, Mandatory Arbitration: Privatizing Public Rights, Compelling the Unwilling to Arbitrate, 6 U. PA. J. LAB. & EMP. L. 685, 732 (2004) ("Where statutory rights are involved, the [FAA] needs to be amended to provide for a standard of review of the arbitrator's decision that is equivalent to the standard a trial court would receive.").
174. See, e.g., Malin, supra note 121, at 594 (summarizing scholarly concerns).
175. See, e.g., id. at 596 (reasoning that, when agreeing to a predispute arbitration clause, "[t]he employee or job applicant is unable to assess the likelihood that she may end up in litigation with the employer").
176. See, e.g., Ian Ayres & Robert Gertner, Filling Gaps in Incomplete Contracts: An Economic Theory of Default Rules, 99 YALE L.J. 87, 87 (1989) (distinguishing between "default" rules, which parties can modify by contract, and mandatory or "immutable" rules, which "parties cannot change by contractual agreement").
177. An example of this approach appears in Philip J. McConnaughay, The Risks and Virtues of Lawlessness: A "Second Look" at International Commercial Arbitration, 93 NW. U. L. REV. 453, 456 (1999) ("[P]rivate arbitral decisions resolving mandatory law claims, or resolving claims according to principles that do not subvert those of displaced mandatory law, are far less likely than public judicial decisions to effectuate the purposes of the mandatory laws.").
178. As Professor Stephen Ware writes: When courts confirm arbitration awards that make errors of law, parties lose the substantive rights that would have been vindicated by an application of the law. Only in rare cases does a court vacate an arbitration award because of the arbitrator's legal error. Outside these rare cases, an agreement to arbitrate is, in effect, an agreement to comply with the arbitrator's decision whether or not the arbitrator applies the law. Such an agreement, then, contracts out of all the law that would have been applied by a court but for the agreement. All such law, in effect, consists of default rules because arbitration agreements are enforced. Arbitration agreements contract out of substantive law; they privatize law. Ware, supra note 48, at 726-27 (footnote omitted).
179. For these observers, too, the prescription is de novo judicial review to correct arbitral error, at least on legal questions. See id. at 727 (arguing that the Supreme Court should either revert to the pie-Mitsubishi status quo and "reverse its decisions that claims arising under otherwise mandatory rules are arbitrable" or "require de novo judicial review of arbitrators' legal rulings on such claims");
180. McConnaughay, supra, at 461 (calling for "exacting merits review" of awards resolving claims under mandatory law). Professor Alan Scott Rau likewise draws the critical distinction between mandatory and default rules in the context of judicial review.
181. See Alan Scott Rau, The Culture of American Arbitration and the Lessons of ADR, 40 TEX. INT'L L.J. 449, 527 (2005) (criticizing the fact that courts applying the "manifest disregard" standard "without exception omit even a glance in the direction of the quite elementary distinction . . . between legal rules that contracting parties are free to vary (or, which is the same thing, free to entrust to their agents), and those that they are not");
182. see also id. at 530 ("The conceptual spillover-from a concern for the protective effects of mandatory rules, to the suggestion that arbitrators are bound also to respect default, background rules-is evident, and has been careless and unreflective."). Professor Andrew Guzman also relies on the distinction between mandatory and default rules in his article advocating a scheme of arbitrator liability.
183. See Andrew T. Guzman, Arbitrator Liability: Reconciling Arbitration and Mandatory Rules, 49 DUKE L.J. 1279, 1306 (2000). Professor Guzman recommends imposing a duty, not in the arbitration agreement between the disputing parties but in the contract between the parties and the arbitrator, requiring the arbitrators to apply mandatory law. Arbitrators' failure to do so would not subject their awards to vacatur, under this proposal, but disappointed parties could seek contract damages from arbitrators who ruled against them by ignoring the law.
184. See id. at 1316-17.
185. See supra text accompanying notes 74, 79.
186. See Poser, supra note 111, at 514-15 (reasoning that a broad reading of the "manifest disregard" standard for statutory claims "follows from several statements of the Supreme Court asserting that [parties] who bring claims under the antitrust laws, the securities laws, and other statutes should not be deprived of their statutory rights because they have agreed to arbitrate their claims" (footnotes omitted));
187. see also Stewart, supra note 119, at 352-53 (reasoning that the Supreme Court's statements "that arbitrators must look to and follow the law" have likely caused "more courts" to "embrace" the manifest disregard standard "and openly look for ways in which to review arbitration awards that appear to be clearly contrary to law");
188. Mungioli, supra note 97, at 1113 ("Implicitly, the manifest disregard standard binds an arbitrator to the requirement of applying the substantive law, which accommodates the Supreme Court's stated corollary interest.").
189. 105 F.3d 1465 (D.C. Cir. 1997).
190. Id. at 1469-70.
191. Id. at 1467-69.
192. Id. at 1486-87.
193. Id.; see also Montes v. Shearson Lehman Brothers, Inc., 128 F.3d 1456, 1459 (11th Cir. 1997) (citing language from Gilmer for the proposition that "[w] hen a claim arises under specific laws, . . . the arbitrators are bound to follow those laws in the absence of a valid and legal agreement not to do so").
194. See, e.g., R. Glenn Bauer, Upsetting a Charter Party Arbitration Award: Are the Courts Lowering the Bar on Judicial Review?, 25 TUL. MAR. L.J. 419, 439 (2001) (calling for the elimination of the freestanding "manifest disregard" doctrine, at least as to maritime and other commercial cases);
195. Varela, supra note 104, at 66 (arguing that the doctrine "ought not to be interpreted to create a new basis for vacatur");
196. Galbraith, supra note 106. at 263-65 (advocating the elimination of "manifest disregard" as a separate, nonstatutory basis for review);
197. O'Mullan, supra note 97, at 1155 ("[T]he manifest disregard standard should be rejected.");
198. see also Davis, supra note 104, at 98 ("Wrung out of ambiguous Supreme Court dictum, the manifest disregard standard has incited a rash of disapproval.")
199. Barbara Black, The Irony of Securities Arbitration Today: Why Do Brokerage Firms Need Judicial Protection?, 72 U. CIN. L. REV. 415, 434 (2003);
200. see id. at 444 (arguing that '"manifest disregard' should be eliminated as a basis for vacating arbitration awards").
201. Turner, supra note 104, at 542.
202. Siegel v. Prudential Ins. Co. of Am., 79 Cal. Rptr. 2d 726, 739-40 (Ct. App. 1998).
203. Warbington Constr., Inc. v. Franklin Landmark, L.L.C., 66 S.W.3d 853, 858-59 (Tenn. Ct. App. 2001).
204. See, e.g., Coors Brewing Co. v. Cabo, 114 P.3d 60, 63 (Colo. Ct. App. 2004) ("We decline to adopt an arbitrator's manifest disregard of the law as a ground for vacating an arbitration award under [Colorado's arbitration statute or common law]."), cert. denied, 2005 WL 1273570 (Colo. 2005);
205. Police Officers Fed. v. City of Minn., No. C4-99-2041, 2000 WL 719860, at *1 (Minn. Ct. App. June 6, 2000) (explaining in dicta that "Minnesota has not adopted manifest disregard of the law as a test for reviewing arbitration awards");
206. Maxwell-Gabel Contracting Co. v. City of Milan, 147 S.W.3d 93, 97 (Mo. App. 2004) ('"Manifest disregard for the law' is not a basis under [Missouri's arbitration statute] for a reviewing court to reverse the trial court's judgment affirming an arbitration award. . . . The concept of'manifest disregard of the law' is a judicially created basis for vacating an arbitration award made under the FAA.");
207. Action Box Co. v. Panel Prints, Inc., 130 S. W.3d 249, 252 (Tex. App. 2004) (refusing to recognize the "manifest disregard" doctrine in a case governed by Texas law, observing that "the manifest disregard standard is a federal common law doctrine, the underlying rationale for which the United States Supreme Court has largely rejected");
208. Signal Corp. v. Keane Fed. Sys., Inc., 574 S.E.2d 253, 257 (Va. 2003) ("Even though courts in other jurisdictions have vacated arbitration awards when there has been a 'manifest disregard of the law,' we refuse to adopt that standard in this case because to do so would require that this Court add words to [the Virginia arbitration statute] . . . .");
209. see also Double Diamond Constr. v. Farmers Coop. Elevator Ass'n, 680 N.W.2d 658, 660 n.1 (S.D. 2004) (noting that so far "South Dakota has not adopted the theory of a 'manifest disregard of the law' as a ground for vacation of an arbitration award"). Likewise, the Georgia Supreme Court recently rejected the "manifest disregard" doctrine.
210. See Martha Neil, In Georgia, Arbitrators May Disregard the Law, ABA J. E-REPORT, July 26, 2002, at 5 (discussing Progressive Data Sys., Inc. v. Jefferson Randolph Corp., 275 Ga. 420, 568 S.E.2d 474 (2002), and noting that "[e]ven manifest disregard of the law isn't reason to reverse an arbitration decision in Georgia, the state's highest court has decided").
211. The state legislature resurrected it with an amendment to the state's arbitration statute. Brent S. Gilfedder, Note, "A Manifest Disregard of Arbitration?" An Analysis of Recent Georgia Legislation Adding "Manifest Disregard of the Law" to the Georgia Arbitration Code as a Statutory Ground for Vacatur, 39 GA. L. REV. 259, 259-60 (2004) (describing H.R. 91, 147th Gen. Assem., Reg. Sess. (Ga. 2003)).
212. 248 F.3d 577 (7th Cir. 2001).
213. Id. at 578.
214. Id.
215. Id. at 579.
216. Id.
217. Id. at 580.
218. Id. at 579.
219. Id.
220. Id at 580. The court elsewhere indicated that it would also be a "manifest disregard" of the law to render an award "that does not adhere to the legal principles specified by contract, and hence unenforceable under § 10(a)(4)." Id. at 581. This Article ultimately works from a related principle. Importantly, howver, it does so without requiring parties to specify any legal rules in their agreement.
221. Id. at 582. Indeed, the majority expressly drew support for its standard from the Supreme Court's decision in E. Associated Coal Corp. v. United Mine Workers, Dist. 17, 531 U.S. 57 (2000), a case about the "public policy" exception, not "manifest disregard of the law." Id. at 580;
222. see also supra note 97.
223. See supra note 97.
224. See Roach, supra note 104. at 512 ("[T]he Watts case represents . . . the rejection of the manifest disregard doctrine . . . .");
225. see also DOMKE, supra note 104, § 33:08, at 35 ("It is an open question whether other courts will follow the Seventh Circuit's new and very restrictive approach to the manifest disregard rule.").
226. See, e.g., Paul D. Carrington & Paul H. Haagen, Contract and Jurisdiction, 1996 SUP. CT. REV. 331, 345 ("[T]he arbitrator has been under no duty to resolve a dispute in compliance with the parties' legal rights.").
227. DOMKE, supra note 104, § 25.01, at 3 (internal quotations omitted).
228. See, e.g., Kristen M. Blankley, Class Actions Behind Closed Doors? How Consumer Claims Can (and Should) Be Resolved by Class-Action Arbitration, 20 OHIO ST. J. ON DISP. RESOL. 451, 467 (2005) ("Arbitrators are not required to follow the law when making their decisions.");
229. Edward Brunet, Arbitration and Constitutional Rights, 71 N.C. L. REV. 81, 85 (1992) ("[The] freedom from substantive rules creates a milieu in which arbitrators can ignore the law when making decisions.");
230. Kenneth R. Davis, The Arbitration Claws: Unconscionability in the Securities Industry, 78 B.U. L. REV. 255, 302 n.277 (1998) ("Arbitrators do not have to follow the law unless the arbitration agreement directs them to do so. Generally, they may enforce their own sense of justice.");
231. Davis, supra note 104, at 76 (explaining that, "[u] nless the agreement directs arbitrators to apply particular law, the arbitrators may resolve the dispute as they deem appropriate, regardless of prevailing legal norms," but also that "[b]y agreeing to arbitrate a statutory claim, the parties direct the arbitrators to apply the statute in question");
232. see also Marc I. Steinberg, Securities Arbitration in the United States, in YEARBOOK OF INTERNATIONAL FINANCIAL & ECONOMIC LAW 1997, 251, 261 (Joseph J. Norton ed., 1999) ("Arbitrators, not being bound by precise legal standards in their decisions, may render awards premised on the standards of applicable self-regulatory organi[z]ations' (SROs) standards, industry custom, or even concepts of equity and fairness." (footnotes omitted));
233. Lionel G. Hest, The Tension Between the Policy Favoring Arbitration and the Adequacy of Arbitration as a Means of Vindicating Statutory Rights, 1264 PLI/Corp 669, 673 (2001) ("Under New York law, arbitrators need not follow the law.").
234. But see William W. Park, The Specificity of International Arbitration: The Case for FAA Reform, 36 VAND. J. TRANSNAT'L L. 1241, 1290 n.217 (2003) ("The assertion that arbitrators are allowed to be lawless is at odds with the existence of 'manifest disregard of the law' as a standard for judicial review, and inconsistent with the provisions of many arbitration rules.").
235. Hest, supra note 152, at 672.
236. Id. (quoting the NASD Arbitrator Training Manual). Similarly, see SECURITIES INDUSTRY CONFERENCE ON ARBITRATION, THE ARBITRATOR'S MANUAL 31 (May 2005), which provides that: Arbitrators are not strictly bound by case precedent or statutory law. Rather, they are guided in their analysis by the underlying policies of the law and are given wide latitude in their interpretation of legal concepts. On the other hand, if an arbitrator manifestly disregards the law, an award may be vacated. The Arbitrator's Manual begins with the following quote from Domke: "Equity is justice in that it goes beyond the written law. And it is equitable to prefer arbitration to the law court, for the arbitrator keeps equity in view, whereas the judge looks only to the law, and the reason why arbitrators were appointed was that equity might prevail.'" Id. at 2.
237. See also Rau, supra note 124. at 515 n.272 (quoting the same passage from the NASD manual).
238. Hest, supra note 152. at 672 (quoting the NASD Arbitrator Training Manual). In contrast, some arbitration codes require arbitrators to apply the law.
239. See, e. g., NAT'L ARBITRATION FORUM, CODE OF PROCEDURE Rule 20(d) (2005), available at http://www.arbforum.com/programs/ code new/2005 Code.doc ("An arbitrator shall follow the applicable substantive law...."). Influential protocols designed to govern particular classes of arbitration likewise direct arbitrators to apply substantive law.
240. See, e.g., DUE PROCESS PROTOCOL FOR MEDIATION & ARBITRATION OF STATUTORY DISPUTES ARISING OUT OF THE EMPLOYMENT RELATIONSHIP § C(5) (1995) ("The arbitrator should be bound by applicable agreements, statutes, regulations and rules of procedure of the designating agency.");
241. DUE PROCESS PROTOCOL FOR CONSUMER DISPUTES, Principle 15.2 (1998) ("In making the award, the arbitrator should apply any identified, pertinent contract terms, statutes and legal precedents."). While such protocols "do not have the force of law," "the major arbitration service providers have formally or informally endorsed [them], crafted rules to reflect the due process principles set forth in [them], and agreed to decline to provide arbitration services if the agreement does not comport with [them]."
242. Margaret M. Harding, The Limits of the Due Process Protocols, 19 OHIO ST. J. ON DISP. RESOLUTION 369, 370, 423 (2004).
243. See, e.g., John F.X. Peloso, A Discussion of Whether Arbitrators Have a Duty to Apply the Law, 949 PLI/CORP. 61, 61 (July-Aug. 1996) (citing former president of American Arbitration Association and arbitration scholar for proposition that "[s]everal commentators have stressed the responsibility of arbitrators to follow established legal principles when making their decisions");
244. Rau, supra note 124. at 514 ("Now I imagine it is fair to say that arbitrators usually do try their best to model their awards on what courts would do in similar cases-and that as often as not they succeed in doing so.").
245. Ware, supra note 48, at 719-21;
246. see STEPHEN J. WARE, ALTERNATIVE DISPUTE RESOLUTION 93 (2001) ("Many arbitrators believe they are free to ignore legal rules whenever they think that more just decisions would be reached by so doing.");
247. Guzman, supra note 124. at 1306 ("More modern discussions of labor arbitration similarly conclude that arbitrators believe they should adhere to the collective bargaining agreement rather than the law.");
248. Soia Mentschikoff, Commercial Arbitration, 61 COLUM. L. REV. 846, 861 (1961) ("Eighty per cent of the experimental arbitrators thought that they ought to reach their decisions within the context of the principles of substantive rules of law, but almost 90 per cent believed that they were free to ignore these rules whenever they thought that more just decisions would be reached by so doing."). Professor Mentschikoff noted, however, that the results of her survey were "curiously parallel to the attitudes that seem to be implicit in our appellate courts." Id. A more recent survey of American Arbitration Association construction arbitrators found that 72 percent of respondents indicated that they "always follow[ed] the law in formulating [their awards]," though fewer than one third of those who explained this response expressly indicated that they always followed the law because "it was essential or their duty" to do so.
249. Dean B. Thomson, Arbitration Theory and Practice: A Survey of AAA Construction Arbitrators, 23 HOFSTRA L. REV. 137,154-55 (1994). Among the 20 percent of respondents who indicated that they do not always follow the law, several "stated they did not know the law and therefore could not follow it," while an equal number "said they would not follow the law if it led to an inequitable result." Id.
250. See supra text accompanying notes 28-30.
251. O'Mullan, supra note 97, at 1138 (footnotes omitted).
252. See, e.g., Hayford, supra note 97, at 471. As Professor Hayford writes: This nonstatutory ground for vacatur was created 'ex nihilo' in what may well have been only a passing, insignificant reference in dictum. The oblique nature of the Supreme Court's reference to the 'manifest disregard of the law' ground in Wilko and the subsequent lack of guidance from the Court as to the proper meaning and effect of this criterion for vacatur indicate how slender a reed the standard rests upon. Id.
253. See supra notes 84-86 and accompanying text.
254. See infra notes 163-186 and accompanying text.
255. 58 U.S. (17 How.) 344 (1855).
256. Id. at 350 (quoting Lord Thurlow's opinion in Knox v. Symmonds, (1791) 30 Eng. Rep. 390 (A.C.)).
257. 89 U.S. (22 Wall.) 406 (1875).
258. Id. at 420.
259. Id at 420-21 (emphases added).
260. 14 F. Cas. 732 (C.C.D. Mass. 1814) (No. 7,869).
261. Id. at 734-35.
262. Id. at 734.
263. Id. at 735. 172. Id
264. 158 F.2d 251 (8th Cir. 1946).
265. Id. at 256-57.
266. 62 F.2d 72 (2d Cir. 1932).
267. Id. at 73.
268. 142 F.2d 390 (1st Cir. 1944).
269. Id. at 393-94.
270. Wilko v. Swan, 346 U.S. 427, 436-37 (1953).
271. WESLEY A. STURGES, A TREATISE ON COMMERCIAL ARBITRATION & AWARDS 500-02 (1930);
272. see also supra text accompanying note 151.
273. Id. at 503.
274. Note, Judicial Review of Arbitration Awards on the Merits, 63 HARV. L. REV. 681 (1950).
275. Id. at 685 (emphasis added). Professor Rau quotes this same passage and likewise concludes that, although cited by the Wilko majority, the Note "says nothing" whatever about a "manifest disregard" standard of review. Rau, supra note 124. at 522 n.299.
276. See Note, Judicial Review of Arbitration Awards on the Merits, supra note 182. at 687 ("This power to interfere is justified in the decisions as a means to prevent an award from achieving an effect which the arbitrator, as can be seen from his own theory, really did not intend.").
277. Archibald Cox, The Place of Law in Labor Arbitration, CHI. BAR REC., Oct. 1952, at 205, 208, 210.
278. Id. at 208.210.
279. For a more recent statement justifying review on these grounds, see Allen v. A & W Contractors, Inc., 433 So. 2d 839, 842 (La. Ct. App. 1983), holding that a court can set aside an arbitral award "where, in the case of an error of law, it clearly appears from a statement of the basis of the award that the arbitrators meant to decide the case according to law" (quoting 5 AM. JUR. 2D Arbitration and Award §167).
280. Professor Rau recently characterized the perverse motives put in place by this historical approach
281. It must have created some odd incentives indeed: For if the modern arbitrator, in order to safeguard the currency of his award, will often purport to have followed legal principles-even when he hasn't-the common-law arbitrator must have often felt the need-even while scrupulously straining to apply the law-to appear to disregard it completely!
282. Rau, supra note 124, at 511 n.248.
283. Id at 522. This is not to say that reference was not occasionally made in the pre-Wilko era to review for what would now be called "manifest disregard." Along these lines
284. see Philip G. Phillips, Rules of Law or Laissez-Faire in Commercial Arbitration, 47 HARV. L. REV. 590, 604 (1934): "There is some intimation, however, that if the arbitrators know the law, and deliberately choose to disregard it, their awards may be set aside." Professor Phillips cites, for support
285. Allen v. Smith's Administrator, 4 Del. (4 Harr.) 234 (Del. 1845). I am grateful to Professor Christopher Drahozal for bringing this reference to my attention.
286. Shearson/Am. Express, Inc. v. McMahon, 482 U.S. 220, 232 (1987);
287. see supra text accompanying notes 74. 79. & 130-31.
288. Cf. Chisolm v. Kidder, Peabody Asset Mgmt, Inc., 966 F. Supp. 218, 226-27 (S.D.N.Y. 1997), aff'd, 164 F.3d 617 (2d Cir. 1998) (table):
289. While it is true that the Supreme Court has indicated that rights are not surrendered when a party agrees to arbitrate and that judicial review, though limited, is sufficient to ensure that arbitrators comply with the law... there is absolutely nothing in any of these Supreme Court cases ... which indicates that the scope of review for statutory claims is any different from any other arbitrated claims.
290. See supra text accompanying notes 94-95 & 104-105.
291. One of these authors implies, correctly I think, that the standard will remain amorphous and inconsistently applied until it has some statutory or other legal grounding. Milam, supra note 104, at 711, 716, 729-32. Under another proposal to amend the FAA, review for manifest disregard would only be available if the parties agreed to such review in their contract.
292. Mungioli, supra note 97, at 1116, 1121.
293. Cf. DOMKE, supra note 104. § 25.01, at 2-3 ("Standard arbitration clauses do not usually contain any reference to ... the law to be applied...."). Professor Macneil's treatise observes that contracts "often do not" include choice of law provisions.
294. MACNEIL, supra note 113. § 40.7.2.4, at 90. In fact: [Even] when they do, the meaning of the choice of law clause may be obscure. It may (or may not) refer only to the general body of substantive law the parties expect the arbitrators to look to, to whatever extent they apply legal principles. It may (or may not) be intended to require the arbitrators to apply the designated law correctly. Id.
295. Professor Macneil's treatise provides that, "since parties quite commonly confer powers on arbitrators only in general terms,... much will turn on assumptions the courts make about what parties in general do intend to consent to respecting arbitral powers." MACNEIL, supra note 113. § 40.7.2.6, at 95. The ubiquity of the idea that arbitrators are not bound to apply substantive law makes it difficult to presume that the parties to predispute arbitration agreements expect arbitrators to feel bound by legal rules.
296. See DOMKE, supra note 104. § 25.01, at 3 ("It is often said that the parties do not expect the arbitrators to make their decision according to rules but rather, especially when the arbitrators are not lawyers, on the basis of their experience, knowledge of the customs of the trade, and fair and good sense for equitable relief.");
297. David A. Lipton, The Standard on Which Arbitrators Base Their Decisions: The SROs Must Decide, 16 SEC. REG. L.J. 3, 18 (1988) ("Parties to arbitration do select that forum of dispute resolution precisely because of the opportunity to have a dispute resolved in accordance with equitable judgment rather than by strict adherence to the law.");
298. Ware, supra note 48. at 720 ("The widespread belief among arbitrators that they are under no duty to apply the law is consistent with standard expectations about arbitration ....").
299. But see Rau, supra note 124. at 515 (reasoning that arbitrators' presumed efforts to follow the law are "most likely ... congruent with the ex ante expectations of contracting parties, who-behind the proverbial veil of ignorance-may not have supposed that in drafting an arbitration clause, they were entirely surrendering the right to have their conduct judged by external legal standards").
300. The following discussion is necessarily specific to arbitration involving "nonwaivable" rights, as that term is defined in this Article. See supra note 15. The theory outlined in this Article would not apply to arbitration implicating only laws whose protections can be waived prospectively. For an argument favoring arbitral discretion to reject or modify such "default" rules
301. see Ware, supra note 48. at 744-50.
302. See, e.g., Guido Calabresi & A. Douglas Melamed, Property Rules, Liability Rules, and Inalienability: One View of the Cathedral, 85 HARV. L. REV. 1089, 1111-15 (1972) (describing "inalienable entitlements").
303. Schwartz, supra note 21, at 110-13.
304. For example, the Securities Exchange Act provides that "[a]ny condition, stipulation, or provision binding any person to waive compliance with any provision of this chapter or of any rule or regulation thereunder, or of any rule of an exchange required thereby shall be void." 15 U.S.C. § 78cc(a) (2000); see also id. § 77n (providing for a similar rule under the Securities Act);
305. id. § 80b-15(a) (providing for a similar rule under the Investment Advisers Act). ERISA likewise provides that, with certain exceptions, "any provision in an agreement or instrument which purports to relieve a fiduciary from responsibility or liability for any responsibility, obligation, or duty under this part shall be void as against public policy." 29 U.S.C. § 1110(a) (2000). Many times, the courts have held that statutory rights are not waivable prospectively, even absent statutory language to that effect. Thus, for example, the Supreme Court has declared "that there can be no prospective waiver of an employee's rights under Title VII." Alexander v. Gardner-Denver Co., 415 U.S. 36, 51 (1973);
306. see also Barrentine v. Arkansas-Best Freight Sys., 450 U.S. 728, 740 (1981) (stating that FLSA "rights cannot be abridged by contract or otherwise waived because this would 'nullify the purposes' of the statute and thwart the legislative policies it was designed to effectuate" (quoting Brooklyn Savs. Bank v. O'Neil, 324 U.S. 697, 707 (1945)));
307. SAMUEL WILLISTON, A TREATISE ON THE LAW OF CONTRACTS § 19:26, at 316 (1998) ("A purported exemption from statutory liability is usually void, unless the purpose of the statute is merely to give an added remedy which is not based on any strong policy." (footnote omitted)).
308. See Wilko v. Swan, 346 U.S. 427, 435 (1953) (holding that the language of the judicial forum selection provision of the Securities Act prohibits waivers);
309. supra text accompanying note 41.
310. See Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 637 n.19 (1985) ("[I]n the event the choice-of-forum and choice-of-law clauses operated in tandem as a prospective waiver of a party's right to pursue statutory remedies for antitrust violations, we would have little hesitation in condemning the agreement as against public policy.").
311. See Schwartz supra note 21. at 112 ("Courts generally hold contract clauses to be void as against public policy if their effect is to exempt a party from liability for its own future fraud or intentional torts, violations of statute, and injuries caused by gross negligence or recklessness." (footnotes omitted));
312. see also id. ("General principles of common law likewise have broadly disfavored prospective waivers of extra-contractual rights, whether those be rights grounded in the law of tort or in statutes.");
313. E. ALLEN FARNSWORTH, CONTRACTS § 5.2, at 328 (3d ed. 1999) ("A party clearly cannot exempt itself from liability in tort for harm that it causes intentionally or recklessly.");
314. WILLISTON, supra note 199, § 19:23, at 291-97 ("An attempted exemption from liability for a future intentional tort or crime or for a future willful or grossly negligent act is generally held void...." (footnotes omitted));
315. Anita Cava & Don Wiesner, Rationalizing a Decade of Judicial Responses to Exculpatory Clauses, 28 SANTA CLARA L. REV. 611, 613 (1988) ("Courts uphold exculpatory clauses only if simple negligence is at issue.");
316. Joseph H. King, Jr., Exculpatory Agreements for Volunteers in Youth Activities-The Alternative to "Nerf(r)" Tiddlywinks, 53 OHIO ST. L.J. 683, 727 (1992) ("Even if an exculpatory agreement is otherwise valid, many courts have held that such agreements will not preclude tort liability for various forms of more serious tortuous conduct.").
317. Recent Case, Wagenblast v. Odessa School District, 110 Wash. 2d 845, 758 P.2d 968 (1988), 102 HARV. L. REV. 729, 729-34 (1989) (summarizing state court tests for deciding when to enforce exculpatory clauses in negligence cases).
318. See, e.g., Mitsubishi, 473 U.S. at 637 (referring to antitrust law's "remedial and deterrent function");
319. Judith A. McMorrow, Who Owns Rights: Waiving and Settling Private Rights of Action, 34 VILL. L. REV. 429, 434 (1989) ("Both compensatory and deterrent goals are present in private rights of action....").
320. McMorrow, supra note 204, at 456;
321. see also Faragher v. City of Boca Raton, 524 U.S. 775, 806 (1998) (noting that Title VII aims to compensate but that "its 'primary objective,' like that of any statute meant to influence primary conduct, is not to provide redress, but to avoid harm");
322. Salil K. Mehra, Deterrence: The Private Remedy and International Antitrust Cases, 40 COLUM. J. TRANSNAT'L L. 275,278-84 (2002) (contending that the foremost purpose behind U.S. antitrust law, as interpreted by courts, is deterrence);
323. Steven S. Poindexter, Note, Pre-Dispute Mandatory Arbitration Agreements and Title VII: Promoting Efficiency While Protecting Employee Rights, 2003 J. DISP. RESOL. 301, 311 ("The primary purpose of Title VII is to avoid harm to employees by discrimination, not to redress harm to individual employees."). More broadly, "[a] decrease in the deterrent effect of the law is especially problematic in the United States, where tort duties are a major component of how social policy is enforced."
324. Elizabeth G. Thornburg, Contracting with Tortfeasors: Mandatory Arbitration Clauses and Personal Injury Claims, 67 LAW & CONTEMP. PROBS. 253, 271 (2004).
325. Schwartz, supra note 21, at 118.
326. McMorrow, supra note 204, at 449.
327. Id. at 464;
328. see also id. ("[A] proper tension of inchoate rights to sue discourages wrongful acts.").
329. Id. at 459-61.463-65.
330. Schwartz, supra note 21. at 118;
331. see also Michael C. Harper, Age-Based Exit Incentives, Coercion, and the Prospective Waiver ofb ADEA Rights: The Failure of the Older Workers Benefit Protection Act, 79 VA. L. REV. 1271, 1296 (1993) ("[T]he prospective sale of a right to be free of discrimination primarily facilitates future acts of discrimination. The employer who has purchased the right to discriminate is surely more likely to indulge discriminatory preferences.").
332. Harper, supra note 210. at 1296.
333. II PHILLIP E. AREEDA ET AL., ANTITRUST LAW: AN ANALYSIS OF ANTITRUST PRINCIPLES & THEIR APPLICATION 1339e, at 331 (2d ed. 2000) (noting that plaintiff may lack antitrust standing when a "more immediate victim of the defendant's violation is available as a 'superior' plaintiff to vindicate the public interest"). Among the reasons for this limitation, it is recognized that "damages for all 'remote' plaintiffs are more than necessary to deter illegal conduct and may overdeter." Id. ¶ 335c3, at 290.1 am grateful to Professor Max Schanzenbach for this illustration.
334. See, e.g., Richard A. Epstein, Standing in Law & Equity, 6 GREEN BAG 2D 17, 19 (2002) (noting that standing doctrine "simplif[ies] the legal system by channeling the rights of action through one party" on the theory that, "[s]o long as [that party] is allowed to sue, others receive the indirect benefits of deterrence before the loss, even if they do not get any direct compensation after the fact"). Professor Judith McMorrow contends that "[t]he mere fact that Congress uses its ... authority to regulate private interactions indicates some effect or consequence of those private acts on the public .... The mere presence of federal... law indicates ... that there are interests-however slight-involved in the statute beyond the private interactions of the parties regulated."
335. McMorrow, supra note 204, at 453-54.
336. Dan M. Kahan, Social Influence, Social Meaning, and Deterrence, 83 VA. L. REV. 349, 355 (1997).
337. Id. at 354;
338. see also Edward Brunet, Questioning the Quality of Alternative Dispute Resolution, 62 TUL. L. REV. 1, 18 (1987) ("Dispute processing systems that are predicated upon so-called 'creative' solutions send a false signal to the community that the outcomes dictated by substantive law are unworthy of enforcement.").
339. See, e.g., Faragher v. City of Boca Raton, 524 U.S. 775, 806 (1998) (emphasizing that Title VII's chief aim is to deter discrimination).
340. See Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 637 (1985) (noting, in the course of enforcing an arbitration agreement, that "so long as the prospective litigant effectively may vindicate its statutory cause of action in the arbitral forum, the statute will continue to serve both its remedial and deterrent function[s]"); Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 28 (1991) (quoting this passage from Mitsubishi).
341. See generally Jennifer L. Peresie, Case Note, Reducing the Presumption of Arbitrability, 22 YALE L. & POL'Y REV. 453,455-60 (2004) (describing two competing court of appeals approaches to question whether arbitration provisions are enforceable when they impose costs on plaintiffs).
342. See generally Anthony Ragozino, Domesticating the United States' Securities Laws: The Ninth Circuit Joins the Majority in Enforcing Forum Selection and Choice of Law Clauses Displacing U.S. Law in Richards v. Lloyd's of London, 10 PACE INT'L L. REV. 31,36-55, 64-75 (1998) (summarizing decisions considering enforceability of choice-of-law and forum selection clauses in suits alleging violations of U.S. securities law).
343. See Richard E. Levy & Sidney A. Shapiro, Administrative Procedure and the Decline of the Trial, 51 U. KAN. L. REV. 473,481 n.27 (2003) ("The relative certainty of consequences, of course, affects the overall deterrent effect of legal rules.");
344. Jeffrey Grogger, Certainty v. Severity of Punishment, ECON. INQUIRY, Apr. 1, 1991, at 297, 308 ("The results [of Grogger's study] point to large deterrent effects emanating from increased certainty of punishment, and much smaller, and generally insignificant effects, stemming from increased severity of sanction.");
345. Katherine J. Strandburg, Deterrence and the Conviction of Innocents, 35 CONN. L. REV. 1321, 1322 (2003)
346. ("Unsurprisingly,... analyses generally agree that criminal behavior is increasingly effectively deterred as punishment becomes either more certain or more severe.");
347. see also King, supra note 202, at 738-39 (suggesting that jury verdicts in personal injury cases have become "so unpredictable" that the law's deterrent effect is impaired).
348. Strandburg, supra note 220, at 1322;
349. see Johannes Andenaes, PUNISHMENT & DETERRENCE 54 (1974) ("At least since the time of Beccaria, it has been commonly accepted that the certainty of detection and punishment is of greater consequence in deterring people from committing crimes than is the severity of the penalty.");
350. Kahan, supra note 214. at 379 ("A high-certainty/ low-severity strategy ... is more likely to generate a low crime-rate equilibrium.");
351. see also id. at 380 ("[E]mpirical studies ... conclude that certainty of conviction plays a much bigger role in discouraging all manner of crime than does severity of punishment."). Indeed, Professor Kahan's "social influence" model actually attributes even more effect to certainty than the traditional economic model does. Id. at 379.
352. The 1983 amendment to Rule 11 of the Federal Rules of Civil Procedure making sanctions mandatory rather than discretionary was intended to increase the rule's power to deter frivolous filings. See, e.g., Barbara Comninos Kruzansky, Note, Sanctions for Nonfrivolous Complaints? Sussman v. Bank of Israel and Implications for the Improper Purpose Prong of Rule 11, 61 ALB. L. REV. 1359, 1372 (1998) ("Through the 1983 amendments to Rule 11, federal rulemakers sought to emphasize deterrence by making violators of the Rule subject to mandatory sanctions.");
353. see also Bruce G. Vanyo & Ignacio E. Salceda, Making Motions to Dismiss More Moving: The Securities Litigation Reform Act, 1996S PLI/CORP. 35, 45 (noting that, even when the Rule 11 sanctions were mandatory, between 1983 and 1993, experience showed that "the application of sanctions is all too often haphazard, leading to the lessening of the deterrent effects of a sanctions provision"). The U.S. Sentencing Commission made the related observation that "[c]omplexity can seriously compromise the certainty of punishment and its deterrent effect."
354. U.S. SENTENCING GUIDELINES MANUAL pt. A, § 1.2 (1987).
355. See I.P.L. Png, Note, Optimal Subsidies & Damages in the Presence of Judicial Error, 6 INT'L REV. L. & ECON. 101, 101 (1986) ("[T]o the extent that an individual who has not violated the law will be made to pay damages, the cost of violating the law, relative to not doing so, will be reduced. The result will be more violations of the law.");
356. see also Gail B. Agrawal & Mark A. Hall, What If You Could Sue Your HMO? Managed Care Liability Beyond the ERISA Shield, 47 ST. LOUIS U. L.J. 235, 261 (2003) (observing that "[e] ven if a general deterrent effect could be proved [for medical malpractice litigation], that effect would be lessened by the uncertainty of sanction for harm resulting from the undesirable behavior and the possibility of sanction for harm unrelated to bad acts");
357. Strandburg, supra note 220, at 1321 (advancing the thesis that conviction of the innocent lessens criminal law's deterrent effect).
358. Louis Kaplow & Steven Shavell, Accuracy in the Determination of Liability, 37 J.L. & ECON. 1, 2-3 (1994);
359. see also Keith N. Hylton, Agreements to Waive or to Arbitrate Legal Claims: An Economic Analysis, 8 SUP. CT. ECON. REV. 209, 223, 229 (2000) (noting a positive correlation between adjudicatory accuracy and deterrence);
360. A. Mitchell Polinsky & Steven Shavell, Legal Error, Litigation, and the Incentive to Obey the Law, 5 J.L. ECON. & ORG. 99, 100 (1989) ("Assuming a suit will be brought, both types of error reduce an individual's incentive to obey the law."). Judge Frank Easterbrook makes the same point in the criminal context: "Deterrence increases with the difference between what happens to you if you violate the law and what happens to those who don't. Every conviction of an innocent person undermines deterrence by reducing the marginal punishment of the guilty ...."
361. Frank H. Easterbrook, Plea Bargaining as Compromise, 101 YALEL.J. 1969, 1970 (1992).
362. "[B]oth types of error reduce deterrence ...." A. Mitchell Polinsky & Steven Shavell, The Economic Theory of Public Enforcement of Law, J. ECON. LITERATURE, Mar. 2000, at 45, 60 (emphasis omitted). When the universe of possible behavior can be described by a continuum-as is often true with negligence claims, for example-ill-defined legal standards may promote overdeterrence.
363. See Richard Craswell & John E. Calfee, Deterrence and Uncertain Legal Standards, 2 J.L. ECON. & ORG. 279, 281-82 & n.8 (1986) (describing their model's overdeterrence implications in assuming that actors choose from a spectrum of possible conduct rather than "from only two discrete options-to commit or not to commit the crime");
364. see also John E. Calfee & Richard Craswell, Some Effects of Uncertainty on Compliance with Legal Standards, 70 VA. L. REV. 965, 967 (1984) (explaining that the authors' analysis is interested chiefly in "parties who must choose some course of action from a more or less continuous range of choices"). The idea is that uncertainty over the location of the legal limit on the continuum will motivate parties to occupy points below it-so long as the likelihood of being found liable for innocent conduct decreases as one gets farther from that limit. Even taking account of this effect, however, Craswell and Calfee conclude that parties may "undercomply"-may be insufficiently deterred from engaging in proscribed conduct-as the level of uncertainty rises to more substantial levels.
365. See Craswell & Calfee, Deterrence and Uncertain Legal Standards, supra, at 280 (summarizing their finding that "[v]ery broad uncertainty ... is more likely to lead to undercompliance").
366. If arbitrators were authorized to ignore the law in their discretion, see infra Part ffl.B.2, the result would be tremendous uncertainty. Moreover, such discretion would likely foster a situation far closer to the legal "error" scenario-in which inaccuracy undermines deterrence-than to the "vague standard" scenario in which parties can predictably reduce the likelihood of being found liable simply by adjusting their behavior along a defined continuum. Arbitrators free to ignore the law in favor of their sense of justice would not be confined to such a continuum, making it difficult for parties to avoid false liability by "overcomplying" with established law. For example, the arbitrator might decide that a terminated employee should get something as a matter of distributive justice, even if the employer is innocent of wrongdoing; alternatively, the arbitrator might opt to relieve the employer of liability for a clear act of employment discrimination because an adverse award would impose a substantial hardship on the employer, or because the employer is a first-time offender.
367. As one court put it in the context of all (not just nonwaivable) legal claims: "Parties to a contract calling for statutory arbitration are not free to agree, implicitly or explicitly, that their dispute will be resolved in disregard of controlling principles of constitutional, statutory, or judge-made law, and expect the courts to approve and enforce the result." Detroit Auto. Inter-Ins. Exch. v. Gavin, 331 N.W.2d 418, 429-30 (Mich. 1982). The court derived this conclusion from a conception of the court's own institutional integrity. See id. at 430 ("We cannot give parties the use, and benefit, and authority of the state's judicial process which exists solely to interpret and apply the law by giving effect to an agreement to ignore the law.").
368. Nonwaivable rights are subject neither to full and direct nor partial and indirect waiver. See, e.g., Schwartz, supra note 21, at 113 ("Where it applies, this general public policy against limitation-of-liability clauses operates to invalidate not only contract clauses purporting to eliminate liability for future wrongs, but also clauses tending to limit liability, even partially or indirectly ....");
369. see also Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 637 n.19 (1985) ("[I]n the event the choice-of-forum and choice-of-law clauses operated in tandem as a prospective waiver of a party's right to pursue statutory remedies for antitrust violations, we would have little hesitation in condemning the agreement as against public policy."). In fact, parties can use choice-of-law clauses to select the law that will govern their relationship-even if that means opting out of one jurisdiction's "mandatory" law-provided that certain criteria are satisfied.
370. See Larry E. Ribstein, Choosing Law by Contract, 18 J. CORP. L. 245, 261-66 (1993)
371. (outlining requirements for the enforcement of contractual choice-of-law clauses). There is often an inherent legal uncertainty among parties to a contract from different jurisdictions, however, meaning the deterrent effect of any arguably relevant "mandatory" law is already compromised. Recall that the "considerable uncertainty" over governing law was the impetus behind the Supreme Court's decision in Scherk v. Alberto-Culver Co., 417 U.S. 506 (1974).
372. See supra text accompanying notes 62-65. At least with choice-of-law clauses, moreover, the parties are limited to rules that some jurisdiction has adopted. Ribstein, supra, at 255 ("[U]se of choice-of-law clauses to avoid mandatory rules is constrained by the fact that avoidance [of mandatory rules] requires applying a state law ...."). This is a critical limitation obviously absent in cases when arbitrators are free to ignore the law in favor of an intuitive sense of equity.
373. The rationale is not that arbitrators lack authority that the parties to a predispute agreement themselves lack, see, e.g., Ware, supra note 48. at 737-38 n. 148 (noting that contracting parties "lack the power to contract out of a mandatory law prior to a dispute" and therefore cannot delegate that power to an arbitrator);
374. Nathalie Voser, Mandatory Rules of Law as a Limitation on the Law Applicable in International Commercial Arbitration, 7 AM. REV. INT'L ARB. 319, 332 (1996) ("The argument has been made that arbitrators must apply mandatory rules because the parties cannot confer on the arbitral tribunal more freedom than they have under the national legal systems involved."), a rationale that would prohibit parties from requiring arbitrators to ignore nonwaivable rights in resolving any future disputes. Parties are presumably free to agree, predispute, to consult one another if a conflict arises and to consider resolving their controversy in a way that a court bound by law would not. What parties cannot do, this Article contends, is commit in advance to let a third party decide whether to follow the law in resolving some future dispute.
375. See Lipton, supra note 195. at 6 ("[I]f arbitrators are not strictly bound by the law, parties to arbitration will not receive the same degree of outcome predictability as they would in judicial litigation.").
376. See, e.g., Craswell & Calfee, Deterrence and Uncertain Legal Standards, supra note 225. at 284 (noting that, even if jurors are properly instructed, they may render an erroneous verdict).
377. See generally Davis, supra note 104, at 83-84 ("Some argue that ignoring law diminishes respect for legal norms. Parties enter into arbitration agreements, knowing that if they or their employees act irresponsibly the arbitrators may not hold them to the standards of substantive law.");
378. id at 84 ("Critics of arbitration argue that to the extent that arbitrators do not apply substantive law, they remove the incentive to abide by it.");
379. see also Mehra, supra note 205. at 315 (asserting that the fact that an international arbitrator "may apply completely different legal rules than a U.S. court would" reduces "the expected value of an antitrust claim").
380. An arbitrator contractually permitted to ignore the law undermines nonwaivable legal principles in another way, too. The law is not merely a deterrent; it is a means of communicating decisions society has made about proper conduct. The incentive to learn and internalize these norms is not weakened because there is a chance that an adjudicator will inadvertently misapply them: arguing before a relatively inexperienced judge still requires counsel to master the public law and argue for its application in the client's favor, and a client's best bet is still to learn established legal limits and live within them. Not so with adjudicators free to abandon settled rules in favor of their own sense of justice. In such a case, the public law becomes significantly less important, reduced to one of many tools that counsel can use in the client's defense. See Brunet, supra note 215. at 19 ("Once a citizen loses the predictability of a probable law-constrained court outcome, the benefit of'law' as signal is lost."). Lawyers in that context no longer need to speak the same language-i.e., the relevant statutory terms and interpretative case law. They can urge the arbiter to ignore all of that in favor of an intuitive sense of fairness.
381. Schwartz, supra note 21. at 37. Citing data suggesting that employers fare better as defendants in arbitration than in litigation, Professor Schwartz concludes that a predispute arbitration clause acts as a prospective waiver of substantive rights. See id at 113 ("If, as I have argued, a regime of compelled arbitration reduces aggregate plaintiffs' compensation and defense costs of statutory violations, then it functions in much the same way as an indirect, prospective waiver of substantive rights.");
382. see also Brunet, supra note 215. at 17-18 ("[I]f society learns that [alternative dispute resolution] is a way to avoid the harsh consequences of breach of contract, then the deterrence effect of damages for breach is weakened considerably."). Professor Schwartz is particularly concerned with predispute arbitration clauses that appear in employment agreements and other contracts of adhesion. He proposes that such clauses be unenforceable when they appear in adhesive contracts or that the Supreme Court protect employees by overruling or severely limiting its decision in
383. Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20 (1991), described supra in the text accompanying notes 87-92.
384. Schwartz, supra note 21, at 125-30.
385. See, e.g., Leader & Burger, supra note 121. at 88-89 (reviewing statistical data on employer-employee arbitration);
386. Lewis L. Maltby, Private Justice: Employment Arbitration and Civil Rights, 30 COLUM. HUM. RTS. L. REV. 29, 45-54 (1998) (same).
387. See supra text accompanying notes 223-224.
388. See supra note 194 and accompanying text.
389. FARNSWORTH, supra note 202. § 7.15, at 494-97, § 7.16, at 501.
390. See 5 ARTHUR LINTON CORBIN, CORBIN ON CONTRACTS § 24.22, at 235-38 (Joseph M. Perillo ed., 1998): Many cases can be seen in which, when the words of the contract can be interpreted either in a way which would cause the contract to be valid or in a way which would result in invalidity, courts have chosen the former interpretation. This preference is based upon the judicial belief that the parties intend their agreement to be valid rather than invalid, lawful rather than unlawful, and honest and effective rather than fraudulent and voidable.
391. Corbin comments on this issue elsewhere as well. See id. at 232 ("Courts often state that when a contract term can be interpreted in at least two ways, and when one of those interpretations would result in a valid contract and the other would cause the agreement to be void or illegal, the former interpretation is preferred.");
392. id. at 234 ("If... the words of a contract have more than one possible meaning, and one of these meanings would produce a legal effect that the court believes the parties intended to produce, while another meaning would not, the court should unhesitatingly adopt the first meaning.");
393. see also RESTATEMENT (SECOND) OF CONTRACTS § 203 (1981) ("[A]n interpretation which gives a reasonable, lawful, and effective meaning to all the terms is preferred to an interpretation which leaves a part unreasonable, unlawful, or of no effect.");
394. FARNSWORTH, supra note 202. § 5.1, at 325 ("Given a choice between two reasonable interpretations of an agreement, a court will prefer the one under which the agreement involves no contravention of public policy and is enforceable to the one under which it involves such a contravention and is not enforceable.");
395. id. (noting that this interpretive principle "is epitomized in the maxim ut res magis valeat quam pereat ('that the thing may rather have effect than perish')").
396. CORBIN, supra note 237, § 24.25, at 266;
397. see also RESTATEMENT (SECOND) OF CONTRACTS § 207 ("In choosing among the reasonable meanings of a promise or agreement or a term thereof, a meaning that serves the public interest is generally preferred.").
398. In this sense, parties could not avoid the effect of this arbitral duty by express contract language. Cf. 2 ALLEN FARNSWORTH, FARNSWORTH ON CONTRACTS § 7.17, at 356 (2004) (noting that parties cannot contract away duty of good faith performance implied between contracting parties).
399. Phillips Petroleum Co. v. Shutts, 472 U.S. 797, 834-35 (1985) (Stevens, J., concurring in part and dissenting in part). For an articulation of this duty that bears particular resemblance to the "manifest disregard" doctrine
400. see Sun Oil Corp. v. Wortman, 486 U.S. 717, 730-31 (1988) ("To constitute a violation of the Full Faith and Credit Clause or the Due Process Clause .... our cases make plain that [a state court's] misconstruction [of another state's law] must contradict law of the other [s]tate that is clearly established and that has been brought to the court's attention.").
401. Pa. Fire Ins. Co. of Phila. v. Gold Issue Mining & Milling Co., 243 U.S. 93, 96 (1917), quoted in Shutts, 472 U.S. at 835.
402. Historically, courts resisted finding that the parties required arbitrators to apply the law correctly, absent clear language to this effect. STURGES, supra note 180, § 366, at 794-96.
403. 9 U.S.C. §10(a)(4) (2000);
404. see supra text accompanying note 29. This provision has an analogue in state arbitration statutes.
405. UNIF. ARBITRATION ACT § 23(a)(4) (2000);
406. UNIF. ARBITRATION ACT § 12(a)(3) (1955).
407. See, e.g., Mungioli, supra note 97, at 1091 (citing cases supporting the proposition that because an arbitrator's power derives from the parties' contract, "the test for vacatur under the first clause of section 10(a)(4) of the FAA, whether the 'arbitrator exceeded the powers delegated to him by the parties,' does not necessarily give courts the authority to scrutinize the merits of an arbitration award").
408. Id. at 1090.
409. See Hayford, supra note 97, at 455 ("The case law demonstrates a judicial belief that the arbitrator's 'powers' referred to in the first clause of section 10 (a)(4) are contractual in nature.").
410. Id. at 455-56. One scholar explains that where the parties, without stipulating applicable law, agree to submit a dispute to arbitration, the arbitrators are not constrained by any particular legal norms. The arbitrators may draw on state law, federal law, or natural law. If so inclined, they may borrow from French civil law. Or, they may simply enforce their own sense of justice.
411. Davis, supra note 104. at 124. "By agreeing to arbitrate a statutory claim," however, Davis argues that "the parties direct the arbitrators to apply the statute in question." Id. at 125. "At the beginning of an arbitration, the parties, given the choice, would surely desire judicial correction rather than enforcement of awards violating the rule of decision that they instructed the arbitrator to apply." Id. at 126. This position is consistent with the argument outlined herein to the extent that the two parties to a dispute mutually provide that an arbitration must proceed pursuant to particular law, as through an express statement to that effect in the predispute arbitration clause. If the predispute clause is silent as to governing law, however, it is less clear that a defendant patently liable under established law, for example, would want the arbitrators to apply that law faithfully to the exclusion of a defense argument grounded in notions of equity or fairness.
412. Davis, supra note 104. at 59 (emphasis added) (quoting Univ. of Alaska v. Modern Constr., Inc., 522 P.2d 1132, 1140 (Alaska 1974));
413. see also id. at 76 ("Unless the agreement directs arbitrators to apply particular law, the arbitrators may resolve the dispute as they deem appropriate, regardless of prevailing legal norms.").
414. MACNEIL, supra note 113. § 40.5.2.4, at 48.
415. But see id., § 40.5.1.3, at 37-40 (arguing that "manifest disregard" is best understood as an excess of arbitral authority, on the theory that courts can "defin[e] just what are the powers of the arbitrators");
416. Rau, supra note 124. at 532 ("[T]he lion's share of the 'manifest disregard' cases can be redistributed and placed within an alternative analytical construct-a simple inquiry into the contractual powers of the arbitrator required by § 10(a)(4).");
417. Rebecca Hanner White, Arbitration and the Administrative State, 39 WAKE FOREST L. REV. 1283, 1300 (2003) ("It appears as though 'manifest disregard' is merely the Court's understanding of what Section 10(a)(4) of the FAA means rather than a judicially crafted exception to arbitral finality.").
418. See, e.g., Todd Shipyards Corp. v. Cunard Line, Ltd., 943 F.2d 1056, 1060 (9th Cir. 1991);
419. Saguenay Terminals, Ltd. v. San Martin Compania de Navegacion, S.A., 293 F.2d 796, 801 (9th Cir. 1961).
420. Metal Prods. Workers Union v. Torrington Co., 242 F. Supp. 813, 824 (D. Conn. 1965), aff'd 358 F.2d 103 (2d Cir. 1966).
421. Milam, supra note 104. at 711-12. Professor Hayford argues that the doctrine is best read into the prohibition on arbitrator misconduct in § 10(a)(3).
422. Hayford, supra note 104, at 137: If'manifest disregard' is understood only to occur, as the author has suggested, when an arbitrator has correctly interpreted the law and then consciously or intentionally ignored it, then 'manifest disregard' describes a kind of untoward arbitral behavior which fits neatly within the proscription on arbitrator 'misconduct' and 'misbehavior' contained in Section 10(a)(3) of the FAA. In Professor Hayford's view, "the 'manifest disregard' of the law ground for vacatur most likely will be addressed in one of two ways-either by the Supreme Court rejecting it as inconsistent with Section 10(a) of the FAA, or by the Court bringing it within the embrace of Section 10(a)(3) of the Act." Id. at 139.
423. 201 F.2d 439 (2d Cir. 1953).
424. Id. at 444-45.
425. Id. at 445.
426. Analogously, some scholars have argued that if the parties contract to require the arbitrators to decide legal questions correctly, legally erroneous awards can be overturned for an arbitrator's excess of authority under § 10(a)(4).
427. See, e.g., Christopher R. Drahozal, Contracting Around the RUAA: Default Rules, Mandatory Rules, and Judicial Review of Arbitral Awards, 3 PEPP. DISP. RESOL. L.J. 419, 431-33 (2003);
428. Roger S. Haydock & Jennifer D. Henderson, Arbitration and Judicial Civil Justice: An American Historical Review and a Proposal for a Private/Arbitral and Public/Judicial Partnership, 2 PEPP. DISP. RESOL. L.J. 141, 193 (2002) ("If the arbitration agreement or arbitration code of procedure requires the arbitrator to follow the law, arbitrators must comply with its requirement or otherwise exceed their power and authority.");
429. Alan Scott Rau, Contracting Out of the Arbitration Act, 8 AM. REV. INT'L ARB. 225, 239 (1997) ("A contract that withdraws errors of law from the authority conferred on the arbitrator-that, in other words, places issues of law 'beyond the scope of the submission' to binding arbitration-should, then, allow an aggrieved party on 'review' to invoke § 10(a)(4)."). Professor Christopher Drahozal found that among thirty-four franchise agreements requiring arbitration of future claims, two "effectively provided for judicial review of errors of law by making legal errors beyond the scope of the arbitrator's jurisdiction."
430. Christopher R. Drahozal, "Unfair" Arbitration Clauses, 2001 U. ILL. L. REV. 695, 731.
431. See, for example, NASD Code of Arbitration Procedure § 10326(a) (2000): A verbatim record by stenographic reporter or a tape recording of all arbitration hearings shall be kept. If a party or parties to a dispute elect to have the record transcribed, the cost of such transcription shall be borne by the party or parties making the request unless the arbitrators direct otherwise. The arbitrators may also direct that the record be transcribed.
432. The Eleventh Circuit followed essentially this approach to the evidence in Montes v. Shearson Lehman Bros., 128 F.3d 1456 (1997), wherein the court overturned an arbitral award for "manifest disregard of the law." Id. at 1462. Montes sued her employer for allegedly violating the FLSA. Id. at 1458. The suit went to arbitration pursuant to a predispute agreement, and the arbitrator ruled for the employer, but only after the employer's attorney urged the arbitrators to ignore relevant law and decide the case in the defendant's favor as a matter of "equity." Id. at 1459. Citing Wilko, the court recognized "manifest disregard" as a nonstatutory ground for vacating an arbitral award. Id. at 1459-62 & n.5. Because "[t]here [was] nothing in the award or elsewhere in the record to indicate that [the arbitrators] did not heed this plea" to ignore the law, and given "the marginal evidence presented" by the defense, the court decided that it could not conclude that the arbitrators had decided the case according to law. Id. at 1467.
433. Another inference is also possible in some such cases. In her seminal 1961 article, Professor Soia Mentschikoff reported the results of her survey of commercial arbitrators and awards, including her finding that when arbitrators did render "partial awards," many of them "[were] arrived at in a judicial manner since they resulted] from the striking of particular items of damage that the arbitrators believe[d] [were] not justified under the facts or law of the particular case." Mentschikoff, supra note 157. at 861.
434. See, e.g., Hayford, supra note 104. at 140 ("[T]he 'manifest disregard' of the law standard has prevented the emergence of on the record decision making (i. e., reasoned awards) in commercial arbitration.").
435. See Martin H. Malin & Robert F. Ladenson, Privatizing Justice: A Jurisprudential Perspective on Labor and Employment Arbitration from the Steelworkers Trilogy to Gilmer, 44 HASTINGS L.J. 1187, 1233 (1993) (recommending that when addressing unsettled legal questions, "employment arbitrators should continue to place predominant value on judicial caution");
436. cf. Fid. Union Trust Co. v. Field, 311 U.S. 169, 177 (1940) (observing a duty on the part of a federal court sitting in diversity "to ascertain and apply" state law even when a state high court has not yet decided the issue).
437. See supra text accompanying notes 134-149 (describing both the Seventh Circuit's elimination of even "manifest disregard" review and decisions in California and other states).
438. See infra notes 34-35 and accompanying text.