Business

Although many employers like the idea of arbitrating employment disputes, especially without a jury second-guessing their decision, they are concerned about the “final and binding” nature of the arbitration award. This is especially so because under state and federal statutes the award is subject to correction only in the event the arbitration award was procured by corruption, fraud or undue means. As a result, many arbitration clauses contain provisions for expanded court review of the factual and legal basis for the arbitrator's award. Those clauses must now be reviewed in light of the holding by the Ninth Circuit in the Kyocera case.

Background of Kyocera case
Kyocera v Prudential-Bache Trade Services (9th Cir 2003) 341 F3d 987 has had a long and tortured history in the federal district and circuit courts. The case arises out of a business relationship whereby Kyocera Corporation manufactured a computer disk drive for LaPine Technology Corporation and Prudential-Bache financed the relationship. A dispute occurred as to the terms of those arrangements and in 1987 LaPine and Prudential-Bache initiated a federal lawsuit in Northern California to compel Kyocera to continue manufacturing and supplying the computer drives to LaPine. Pursuant to an arbitration clause, a motion to compel arbitration was granted and the case was referred to arbitration. The three-person arbitration panel found that Kyocera had breached the agreement and excused LaPine from paying Kyocera over $10 million for computer drives. In addition, the arbitrators granted LaPine and Prudential over $243 million in damages, and over $14 million in attorneys' fees.

Motion to Vacate Arbitration Award
Kyocera filed a motion in the federal district court to vacate, modify and correct the arbitration award. The arbitration clause in the agreement contained a review procedure which not only provided that the federal district court had the right to “vacate, modify or correct” the award based on the grounds provided in the Federal Arbitration Act (FAA), but also the right to determine if “the arbitrators' findings of fact” were “supported by substantial evidence,” or whether “the arbitrators' conclusions of law” were “erroneous.”

In 1995, the district court concluded that the FAA allowed only a very limited judicial review of an arbitration award. Kyocera v Prudential-Bache Trade Services (909 F Supp. 697). Under Section 10 of the FAA the grounds to set aside an award are basically limited to instances where the award was procured by corruption, fraud, or undue means. Based on a review of these factors the district court confirmed the arbitration award in favor of LaPine and Prudential.

LaPine I
In 1997, the case was first appealed to the Ninth Circuit. The three-judge panel found that Section 10 was not a limitation on the rights of the parties to authorize the district court to expand its jurisdictional review of an arbitration award to determine if there was substantial evidence to support the award or determine whether any conclusion of law was incorrect. Kyocera v Prudential-Bache Trade Services (9th Cir 1997) 130 F3d 884. Thus, the appellate court found that private parties could agree in the arbitration agreement itself for an expanded review of the arbitrator's award by the federal court of appeal. This case became know as LaPine I.

LaPine II
Thereafter the case was remanded to the district court for a review beyond the limited review allowed by Section 10. On that remand the district court reviewed the evidence and found that in fact it supported the factual findings and conclusions of law issued by the arbitration panel. That decision was appealed to the Ninth Circuit and in 2002 another panel of the Ninth Circuit affirmed the district court. Kyocera v Prudential-Bache Trade Services (9th Cir 2002) 299 F3d 769. That decision became known as LaPine II. Thereafter, there was a petition for an en banc hearing, and an en banc panel of the Ninth Circuit, composed of 11 judges, reviewed LaPine I and II.

En Banc Review
The en banc decision, written by Judge Reinhardt, concluded that the finding in LaPine I was incorrect in that it allowed the parties to an arbitration agreement to expand the grounds of judicial review beyond that provided by Section 10 of the FAA. The court held that private parties do not have any power to determine the rules for review of an arbitration decision in federal court.

However, the court acknowledged that parties could provide for their own private appellate review. Thus, the parties could agree to a procedure whereby another arbitrator or panel of arbitrators would be authorized to review the original arbitrator's decision to determine if there was evidence to support the findings of fact and conclusions of law. In addition, the Court emphasized that the parties could not confer that expanded appellate review upon the federal courts. The Court noted that a decision issued by the Seventh Circuit came to the same conclusion: “. . . if the parties want, they can contract for an appellate arbitration panel to review the arbitrators award. But they cannot contract for judicial review of that award.” Typographical Union v Chicago Sun-Times (7th Cir 1991) 935 F2d 1501 at 1504.

Severability of Invalid Provision
The final issue decided by the Ninth Circuit was whether the invalid appellate review provision of the arbitration clause so tainted the agreement to arbitrate that it was unenforceable. The Court declined to invalidate the entire arbitration agreement. Rather it simply severed the offending terms from an otherwise valid arbitration agreement. The Ninth Circuit concluded that this decision was controlled by California law and the decision of the California Supreme court in Little v Auto Stiegler, Inc., (2003) 29 C4th 1064. The Ninth Circuit noted that the arbitration clause in Auto Stiegler was held to be invalid under California law because it also provided for expanded judicial review, and the California Supreme Court concluded that such expanded review was illegal under California law. Since the clause was “collateral” to the main purpose of the agreement, it was simply severed and the rest of the arbitration agreement upheld.

Review of Arbitration Clauses for Judicial Review
It is clear from the Kyocera case that private parties cannot expand the grounds for the judicial review of an arbitration award. Thus, arbitration clauses which provide for an expanded judicial review of an award must be modified to eliminate any expanded review over that allowed by law. If an expanded review is desired by the parties, it will be necessary to draft a private appellate review procedure.

Advising California Employers
2d edition, 1556 pages,
2 looseleaf volumes,
updated 1/04
BU32030, $239

Practicing California Judicial Arbitration
243 pages, hardcover, updated 7/03
CP30660, $109