Arbitral Power to Rewrite the Contract: Has the Fifth Circuit Overextended Judicial Deference?
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Does an arbitrator exceed her powers when, as a remedy for fraud in the inducement of a limited-duration intellectual property license, she modifies the contract “as a matter of law” to provide the licensor with a perpetual royalty-free license? The U.S. Fifth Circuit Court of Appeals, reversing a Texas district court’s vacatur order, held that the arbitrator’s award should stand. (Timegate Studios, Inc. v. Southpeak Interactive, L.L.C., 2013 WL 1437710 (5th Cir. April 9, 2013)).
Even though the question presented was whether the arbitrator could rewrite the contract as a fraud remedy, the Court held that the relevant legal test under Section 10(a)(4) of the Federal Arbitration Act (permitting vacatur where an arbitrator exceeds her powers) is whether the award “draws its essence from the contract.”
So it is useful to understand where the “draws its essence” formula comes from. It source is in a very famous Supreme Court arbitration case: United Steelworkers of America v. Enterprise Wheel & Car Corp., 363 U.S. 593 (1960). That case involved a labor arbitration under a collective bargaining agreement, and the Supreme Court, referring not to the FAA but to the need for finality in the resolution of labor disputes under collective bargaining agreements, stated: “The arbitrator … does not sit to dispense his own brand of industrial justice; he may of course look for guidance from many sources, yet his award is legitimate only so long as it draws its essence from the collective bargaining agreement.” 363 U.S. at 597.
The Supreme Court has not seen fit in 53 years to incorporate the “draws its essence” phrase into the lexicon of commercial arbitration and the FAA. Not a single instance of reference to the “draws its essence” phrase is found in any FAA case in the Supreme Court. That might be due to some key differences between collective bargaining agreements and commercial contracts, and between disputes under the two types of agreements. Perhaps most significantly, when a dispute arises under the collective bargaining agreement, that agreement is in practical terms the applicable law. In the particular dispute, the labor arbitrator decides the respective rights and duties of employee and employer under a collective agreement which is likely to be a lengthy and self-contained charter. Certainly the steel industry agreements circa 1960 fit that mold.
Read original articleTags: collective bargaining agreement, Supreme Court, U.S. Fifth Circuit Court of Appeals
