Federal Arbitration Act

Citation: Federal Arbitration Act, 9 U.S.C. §§ 1-14.

The Federal Arbitration Act (FAA) explicitly permits the use of arbitration and specifically authorizes individuals in commercial transactions to contract for arbitration. Congress enacted the FAA in 1925 to offset the "hostility of American courts to the enforcement of arbitration agreements." As the FAA evinces the "liberal federal policy favoring arbitration," the legislation "compels judicial enforcement of a wide range of written arbitration agreements."

Federal courts primarily invoke the FAA to give effect to contracting parties’ expectations for resolving disputes. Accordingly, the FAA revolves around contract interpretation. Because the FAA does not define the term "arbitration," "courts and commentators have struggled to do so."

Broadly, this Court has essentially concluded that "the essence of arbitration . . . is that, when the parties agree to submit their disputes to it, they have agreed to arbitrate these disputes through to completion, i.e. to an award made by a third-party arbitrator. Arbitration does not occur until the process is completed and the arbitrator makes a decision."

This definition does little to assist in determining which types of dispute resolution fall under the FAA and which do not. The Court of Appeals for the Fourth Circuit has distinguished "mandatory arbitration, as a prerequisite to litigation" from "binding arbitration, where the parties must accept an award or decision of the arbitrator." But the real debate has occurred "in the context of whether the FAA applies to nonbinding arbitration[.]"

Although the precise identity of nonbinding arbitration is itself perhaps no less murky than the definition of "arbitration" under the FAA, courts have previously looked to Judge Weinstein’s discourse in AMF, Inc. v. Brunswick Corp., for guidance. Judge Weinstein did not contend that the FAA applies to all forms on nonbinding arbitration, but he looked to §2 of the FAA, which states that the FAA applies to "contracts . . . to settle disputes by arbitration." Accordingly, Judge Weinstein centered the inquiry for a classification of nonbinding arbitration on "whether the arbitration at issue . . . might realistically settle the dispute." 111 F.3d at 349. In his eyes, then, a dispute-resolution mechanism would fall under the FAA if "viewed in light of the reasonable commercial expectations the dispute will be settled by this arbitration." It may vacate it where there is "evident partiality or corruption in the arbitrator[ ]," or because "the arbitrators were guilty of misconduct . . . in refusing to hear evidence pertinent and material to the controversy." A district court may also vacate an arbitrator’s decision where the arbitrator’s decision "evidence[s] a manifest disregard for the law rather than an erroneous interpretation of the law." The net result of a court’s application of this standard is generally to affirm easily the arbitration award under this extremely deferential standard -- a result that is squarely in line with the purpose behind the FAA where courts are tasked with reviewing an arbitration decision. If, however, a dispute-resolution mechanism does not constitute arbitration under the FAA, then a district court has no jurisdiction to review the result absent an independent jurisdictional hook.