Advocate's Journal

The Advocate’s Journal: The AAA Adopts New Rules to Allow Option to Appeal Arbitration Awards

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Biff Sowell

Arbitration is viewed by many as an efficient and economical way to resolve legal disputes.  The parties are bound by the decision of the arbitrator and, except in narrow circumstances, do not have any procedural mechanism to challenge the award of the arbitrator, even in cases where the arbitrator has applied the wrong law or misinterpreted the facts.

On November 1, 2013, the American Arbitration Association (“AAA”) adopted new optional rules that expand the circumstances under which a party may appeal an arbitration award.  The new rules “provide for an appeal to an appellate arbitral panel that would apply a standard of review greater than allowed by existing federal and state statutes.”  The rules “anticipate an appellate process that can be completed in about three months” and “permit review of errors of law that are material and prejudicial, and determinations of fact that are clearly erroneous.”

 The Federal Arbitration Act, 9 U.S.C. §§ 9-11, provides a streamlined procedure for judicial review, allowing a court to confirm, vacate, or modify arbitration awards under certain circumstances.  Under Section 9, a court “must” confirm an award “unless” it is vacated, modified, or corrected “as proscribed” in Sections 10 and 11.  Section 10 enumerates the grounds for vacating an award, including awards procured by corruption, fraud, undue means, or where the arbitrators “exceeded their powers.”  Under Section 11, the grounds for modifying or correcting an award include “evident material mistakes” and “imperfect[ions] in [a] matter of form not affecting the merits.”

For some time historically, the federal courts were split over whether parties could contract for expanded judicial review of arbitration awards.  In Hall Street Associates, LLC v. Mattel, Inc., 552 U.S. 576 (2008), the Supreme Court resolved this issue and held that Sections 10 and 11 of the FAA “provide the exclusive grounds for expedited vacatur and modification.”  Id. at 584.  According to the Court, “[a]ny other reading [of Sections 10 and 11] opens the door to full-bore legal and evidentiary appeals that can ‘rende[r] informal arbitration merely a prelude to a more cumbersome and time-consuming judicial process,’ and bring arbitration theory to grief in post arbitration process.”  Id. at 588 (internal citations omitted).  Thus, under Hall, appellate courts would not disturb aberrant arbitration awards even when the arbitrator applied the wrong law or was mistaken as to the facts.  More recently, in its 2012 term, the United States Supreme Court strictly enforced a class action waiver in an arbitration agreement and also affirmed an arbitrator’s construction of a contractual arbitration clause as authorizing class wide arbitration despite the contract’s complete silence on the matter.  See Am. Express Co. v. Italian Colors Rest., 133 S.Ct. 2304 (2013); Oxford Health Plans v. Sutter, 133 S. Ct. 2064 (2013).

The new rules do not automatically apply.  They must be invoked by agreement.  The rules state that “[a] party may not unilaterally appeal an arbitration award under these rules absent agreement with the other party(s).”  To that end, the new rules suggest language for use to secure the appellate option assuming a standard arbitration clause has been agreed to by the parties:

Notwithstanding any language to the contrary in the contract documents, the parties hereby agree: that the Underlying Award may be appealed pursuant to the AAA’s Optional Appellate Arbitration Rules (“Appellate Rules”); that the Underlying Award rendered by the arbitrator(s) shall, at a minimum, be a reasoned award; and that the Underlying Award shall not be considered final until after the time for filing the notice of appeal pursuant to the Appellate Rules has expired.  Appeals must be initiated within thirty (30) days of receipt of an Underlying Award, as defined by Rule A-3 of the Appellate Rules, by filing a Notice of Appeal with any AAA office.  Following the appeal process the decision rendered by the appeal tribunal may be entered in any court having jurisdiction thereof.

Key provisions of the optional new rules include:

  • A party to an underlying award may initiate an appeal by filing a notice of appeal with the AAA within 30 days of the underlying award.  The notice of appeal must include, among other things, “a statement setting for the portion or portions of the Underlying Award being appealed and the errors alleged.”  Rule A-3(a)(i), (iii)(d).
  • A cross-appeal must be filed within 7 days after notice of filing a notice of appeal.  Rule A-3(c).
  • The parties can select a panel of three appellate arbitrators from a list of 10 names provided by the AAA.  The parties are “encouraged to agree to the appeal tribunal.”  If they cannot agree, the AAA selects the panel.  Rule A-5(a)—(c).
  • All outstanding AAA fees and costs of the arbitration proceeding must be paid in full before an appeal will be initiated.  Rule A-12.
  • Unless agreed otherwise by the parties, the appeal is conducted at the same place of arbitration as was the underlying arbitration.  Rule A-14.
  • The appeal is determined on the basis of the appellate briefs submitted by the parties in accordance with the schedule provided in Rule A-17, although oral argument may be requested by a party within 30 days of the notice of appeal.  Oral argument is granted at the discretion of the appeal tribunal.  Rule A-15.
  • The parties cooperate in compiling the Record on Appeal.  Rule A-16.
  • Within 30 days of service of the last initial brief, the appeal tribunal must either adopt the underlying award, substitute its own award for the underlying award, or request additional information and extend the time to render a decision not to exceed 30 days.  Rule A-19.  The appeal tribunal’s decision “shall become the final award for purposes of judicial enforcement proceedings.  Rule A-20.
  • Any party seeking an appeal or filing a cross-appeal under the new Optional Rules must pay a $6,000 non-refundable administrative fee.  These fees do not include the fees and costs of the appeal tribunal.

In sum, the new Optional Appellate Arbitration Rules widen the scope of review of arbitration awards by allowing parties to arbitration to agree in advance to appeal alleged errors of law that are material and prejudicial, as well as to appeal determinations of fact that are clearly erroneous.