Opinions of the United
2001 Decisions States Court of Appeals
for the Third Circuit
6-7-2001
Roadway Pkg Sys Inc v. Kayser
Precedential or Non-Precedential:
Docket 99-1907
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Filed June 7, 2001
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
NO. 99-1907
ROADWAY PACKAGE SYSTEM, INC.
v.
SCOTT KAYSER d/b/a QUALITY EXPRESS
Scott Kayser, Appellant
On Appeal From the United States District Court
For the Eastern District of Pennsylvania
(D.C. No. 99-mc-00111)
District Judge: Honorable John R. Padova
Argued: September 13, 2000
Before: BECKER, Chief Judge, NYGAARD and
AMBRO, Circuit Judges.
(Filed: June 7, 2001)
LAURENCE I. TOMAR, ESQUIRE
(ARGUED)
Ballow & Tomar
419 S. Oxford Valley Road
Fairless Hills, PA 19030
Counsel for Appellant
FRANK C. BOTTA, ESQUIRE
ELLEN P. MILCIC, ESQUIRE
(ARGUED)
Thorp, Reed & Armstrong, LLP
One Oxford Centre
301 Grant Street
Pittsburgh, PA 15219
Counsel for Appellee
OPINION OF THE COURT
BECKER, Chief Judge.
This is an appeal from an order of the District Court
vacating an arbitrator's award. Plaintif f Roadway Package
System, Inc. (RPS) ships small packages for corporate
clients. "Independent linehaul contractors," such as
Defendant Scott Kayser, assist in its operations. RPS
terminated Kayser's contract in 1998, alleging that he had
failed to fulfill his obligations under the Linehaul
Contractor Operating Agreement (LCOA), which governed
their association. Kayser exercised his contractual right to
demand arbitration and was awarded substantial damages.
RPS then brought suit in the District Court for the Eastern
District of Pennsylvania, asking the court to vacate the
award. Applying the vacatur standards set forth in the
Federal Arbitration Act (FAA), the District Court granted the
motion on the grounds that the arbitrator exceeded the
scope of his authority. We will affir m.
Kayser's appeal requires us to decide two questions of
considerable significance for the law gover ning arbitration,
both of which are currently the subject of circuit-splits. The
first question is whether contracting parties may opt out of
the FAA's default vacatur standards and fashion their own.
Because the LCOA is a "contract evidencing a transaction
involving commerce," 9 U.S.C. S 2, the FAA governs this
case. Resolving a question previously r eserved by this
Court, we first hold that the FAA per mits parties to contract
for vacatur standards other than the ones pr ovided in the
FAA. The FAA sets out "a substantive rule applicable in
2
state as well as federal courts," Southland Corp. v. Keating,
465 U.S. 1, 16 (1984), but its rule is simply that courts
must enforce the terms of private arbitration agreements.
The second question we must decide involves the
conceptually complex issue of how courts should determine
whether parties have contracted out of the F AA's default
rules. The LCOA contains a generic choice-of-law clause,
stating that it "shall be governed by and construed in
accordance with the laws of the Commonwealth of
Pennsylvania." Kayser submits that we should r ead this
clause as expressing a desire to opt out of the FAA's default
regime and to incorporate arbitration rules borrowed from
Pennsylvania law. We disagree.
We first explain why the choice-of-law clause sheds little,
if any, light on the parties' actual intent. The issue before
us is simply a matter of contract construction rather than
one of choice-of-law. Because choice-of-law clauses are
designed to deal with a different issue from the one with
which we are currently faced, and because few federal
statutes other than the FAA permit parties to contract out
of their requirements, we do not r ead the LCOA's choice-of-
law clause as evidencing a clear intent to displace the FAA's
default regime. Our conclusion is consistent with
Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52
(1995), and though Volt Information Sciences, Inc., v. Board
of Trustees of Leland Stanford Junior University, 489 U.S.
468 (1989), may appear to the contrary, our r eview of that
opinion, the Supreme Court's subsequent decision in
Mastrobuono, and the unanimous holdings of six other
Courts of Appeals convince us that Volt is distinguishable.
Because the presence of a generic choice-of-law clause
tells us little (if anything) about whether contracting parties
intended to opt out of the FAA's default standards and
incorporate ones borrowed from state law, we must
announce and apply a default rule. We hold that a generic
choice-of-law clause, standing alone, is insufficient to
support a finding that contracting parties intended to opt
out of the FAA's default regime. This rule will: (1) ensure
that parties who have never thought about the issue will
not be found to have elected out of the FAA's default
regime; (2) be comparatively simple for arbitrators and
3
district courts to apply; and (3) preserve the ability of
sophisticated parties to opt out. Applying our rule to this
case, we conclude that the District Court was corr ect to
apply the FAA's vacatur standards.
Analyzing the issue under those standards, we hold that
the District Court correctly determined that the arbitrator
exceeded the scope of his authority. Though our cases
caution against exploiting an ambiguity in an arbitrator's
award to support an inference that he or she exceeded his
or her powers, they also establish that a reviewing court is
not precluded from examining an arbitrator's statement of
reasons. In this case, the arbitrator's written opinion makes
crystal clear that his decision was based on the fact that he
thought that RPS's procedures for notifying Kayser of its
dissatisfaction with his performance wer e unfair. Yet the
intrinsic fairness of RPS's procedur es was not before the
arbitrator--he was empowered to decide only whether the
termination was within the terms of the LCOA. Accordingly,
we conclude that the District Court was corr ect in vacating
the award, and will, therefore, affirm its order.
I.
A.
RPS and Kayser entered into the LCOA in 1996. It
required Kayser to conform to specified service and safety
standards, and permitted early ter mination if he did not
meet them. RPS terminated the LCOA in mid-1998, alleging
that Kayser had repeatedly failed to fulfill his obligations
under the contract.
The LCOA is forty-one pages long and is divided into
sixteen sections. This appeal implicates Sections 9 and 16.
Section 9.3 binds the parties to arbitrate disputes and
outlines the procedures for doing so. Its introductory
sentence provides:
In the event that RPS acts to terminate this Agreement
. . . and [Kayser] disagrees with such termination . . .
then each such disagreement (but no others) shall be
settled by arbitration in accordance with the
4
Commercial Arbitration Rules of the American
Arbitration Association . . . .
Section 9.3(e) states:
The arbitrator shall have the authority only to conclude
whether the termination of [Kayser] was within the
terms of this Agreement, to deter mine damages if
required to do so under this subparagraph, and to
provide for the division of the expenses of the
arbitration between the parties. . . . If the arbitrator
concludes that the termination was not within the
terms of this Agreement, then, at the option of RPS . . .
(2) [Kayser] shall nevertheless be ter minated, and . . .
shall be entitled to damages equal to the arbitrator's
determination of what [Kayser's] net ear nings . . .
would have been during the period between the date of
termination to the last day of the ter m of this
Agreement, (without any renewals). [Kayser] shall have
no claim for damages in any other amount, and the
arbitrator shall have no power to award punitive or any
other damages.
Finally, Section 9.3(f) specifies:
The arbitrator shall have no authority to alter , amend
or modify any of the terms and conditions of this
Agreement (including by application of estoppel, waiver,
or ratification), and further, the arbitrator may not
enter any award which alters, amends or modifies the
terms or conditions of this Agreement in any form or
manner (including by application of estoppel, waiver , or
ratification).
Section 16 contains a generic choice-of-law pr ovision,
stating that the LCOA "shall be governed by and construed
in accordance with the laws of the Commonwealth of
Pennsylvania."
B.
Following RPS's termination of the LCOA, Kayser
demanded arbitration, which was conducted befor e William
Mechmann. Kayser sought $141,961.40 in total damages:
$129,930.00 for projected lost profits plus $12,031.40 for
5
expenses incurred in purchasing a tractor -trailer at RPS's
request. Arbitrator Mechmann ruled for Kayser and
awarded $174,431.15 in damages--$32,469.75 more than
Kayser originally requested.
Mechmann's written decision consists of twelve short
paragraphs. The first is irrelevant to this appeal. The
second paragraph acknowledges that "[t]he arbitrator's
authority is set forth in Section 9.3(e) [of the LCOA]." The
third characterizes the "[t]he main question" before
Mechmann as whether RPS's termination of the LCOA was
"wrongful or proper." The fourth, fifth, sixth, and seventh
paragraphs of the opinion focus on RPS's procedures for
notifying independent contractors when it is dissatisfied
with their performance and discuss the manner in which
those procedures played out in Kayser's case. They read as
follows:
The RPS procedure for dealing with per formance by
its contractors is commendable. [sic] Documentation of
breaches by the contractors are written up by Local
Managers. This is only verbalized to the contractor . . . .
[Kasyer] bought larger equipment at the behest of
RPS and took on that financial responsibility, but when
his performance was unsatisfactory, he only received
verbal warnings until the point of ter mination which of
course, is written. He is aggressive with war ehouse
people in several locations to get in and out to serve
other . . . customers. When his own driver employees
were remiss, he replaced them once RPS brought a
problem to his attention. He was an aggr essive
business man in a very competitive environment.
Verbal warnings did not persuade him of RPS's serious
concerns.
Based on many years of dealing with industrial
relations jurisprudence in American business, Ifind
the RPS system lacking in due process towar d [Kayser].
Here the RPS system, which I respect, blinds itself
into thinking - as long as we document our side of the
business arrangement, that is sufficient. For a
reputable business organization that per forms an
important service in the economy, that is inadequate.
6
Paragraph eight gives Mechmann's conclusion:
I conclude that this was wrongful ter mination by RPS
of the LCOA and determine the contractor's ear nings
(after payment of all expenses which are bor ne by
contractor) according to LCOA Section 9.3(e). As
Section 9.3(e) provides, the damage period her e runs
from 05/21/98, the date of RPS's termination of the
LCOA to 01/25/99, the normal date of ter mination of
the present Agreement (LCOA).
Paragraph nine, without explanation, sets Kayser's
damages at $174,431.15. Paragraphs ten, eleven, and
twelve are not relevant to this appeal.
C.
RPS then filed suit, asking the District Court to vacate or
modify the arbitrator's award.1 The District Court granted
RPS's motion, holding that: (1) the FAA, not Pennsylvania
law, supplied the standards for judicial r eview of the
arbitrator's decision; and (2) the arbitrator had exceeded
his authority under the contract. In light of this conclusion,
the Court did not reach RPS's other prof fered bases for
vacatur. Kayser appeals. We have appellate jurisdiction
under 28 U.S.C. S 1291. We review a district court's ruling
on a motion to vacate an arbitration award de novo. See
Kaplan v. First Options of Chicago Inc., 19 F .3d 1503, 1509
(3d Cir. 1994).
II.
We must first decide whether the District Court properly
applied the FAA's vacatur standards or whether it should
have, as Kayser submits, used those laid out in the
Pennsylvania Uniform Arbitration Act (PUAA). For reasons
_________________________________________________________________
1. The Federal Arbitration Act does not cr eate federal question
jurisdiction. See Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp.,
460 U.S. 1, 25 n.32 (1983). But because RPS is a Delaware corporation
and Kayser is a citizen of New Jersey (and because the amount in
controversy requirement is met in this case), the District Court had
diversity jurisdiction under 28 U.S.C. S 1332.
7
we set forth in the margin, the answer to this question
could be quite important to the ultimate disposition of this
case.2 We have no tr ouble in determining that this case is
_________________________________________________________________
2. The FAA lists four circumstances where a court may grant vacatur
and three under which it may correct or modify an award. Vacatur is
governed by 9 U.S.C. S 10(a). It pr ovides that a court may vacate an
award if: (1) it "was procured by corruption, fraud, or undue means," id.
S 10(a)(1); (2) the arbitrator was "partial[ ] or corrupt[ ]," id.S
10(a)(2); (3)
the arbitrator unjustifiably refused to postpone the hearing, refused to
consider "evidence pertinent and material to the controversy," or engaged
in any other "misbehavior" that prejudiced the rights of a party, id.
S 10(a)(3); or (4) the arbitrator "exceeded[his or her] powers, or so
imperfectly executed them that a mutual, final, and definite award upon
the subject matter submitted was not made," id. S 10(a)(4). Some courts,
including this one, have also recognized additional, nonstatutory bases
upon which a reviewing court may vacate an arbitrator's award under
the FAA. See generally Tanoma Mining Co. v. Local Union No. 1269, 896
F.2d 745, 749 (3d Cir. 1990) (r ecognizing that an award may be set aside
if it displays "manifest disregard for the law"); Swift Indus., Inc. v.
Botany
Indus., Inc., 466 F.2d 1125, 1134 (3d Cir . 1972) (noting that an
arbitrator's award must meet the test of fundamental rationality).
Correction and modification under the FAA are covered in 9 U.S.C. S 11,
which empowers courts to act: "(a) Where there was an evident material
miscalculation of figures or an evident material mistake in the
description of any person, thing, or property r eferred to in the award[;
or]
(b) Where the arbitrators have awarded upon a matter not submitted to
them . . . ."
Pennsylvania arbitration law is governed by the PUAA, which sets forth
two discrete regimes. The first is known as "statutory arbitration," under
which the standards for vacatur, modification, and correction parallel
almost perfectly those of the FAA. Compare 42 Pa. Con. Stat. S 7314(a)
(governing vacatur), and id. S 7315(a) (covering modification and
correction), with 9 U.S.C. S 10(a)(vacatur) and id. S 11 (modificationand
correction). The second regime is known as"common law arbitration."
Judicial power to set aside common law arbitration awards is sharply
circumscribed. See 42 Pa. Con. Stat.S 7341 (stating that such awards
"may not be vacated or modified unless it is clearly shown that a party
was denied a hearing or that fraud, misconduct, corruption or other
irregularity caused the rendition of an unjust, inequitable or
unconscionable award"). The PUAA provides that an agreement to
arbitrate "shall be conclusively presumed" to be a common law
arbitration "unless the agreement to arbitrate is in writing and expressly
provides for" statutory arbitration pursuant to the relevant statutory
chapter. Id. S 7302(a). Neither the LCOA's arbitration clause nor its
8
governed by the FAA. Subject to a few exceptions not
implicated here, the statute applies to any"written
provision in any . . . contract evidencing a transaction
involving commerce to settle by arbitration a controversy
arising out of such contract or transaction." 9 U.S.C. S 2.
This language "extend[s] the Act's r each to the limits of the
Congress' Commerce Clause power[.]" Allied-Bruce Terminix
Cos., Inc. v. Dobson, 513 U.S. 265, 268 (1995). The
agreement to arbitrate in this case--one between citizens of
different states and involving a contract for the delivery and
pick-up of packages that have been or will be shipped
interstate--was unquestionably within Congr ess' power to
reach under the Commerce Clause.
Our inquiry is not ended, however, simply because we
have concluded that the FAA applies. Congr ess enacted the
FAA "to overcome courts' refusals to enforce agreements to
arbitrate." Id. at 270. The statute's ultimate purpose is to
enforce the terms of private arbitration agreements. See 9
U.S.C. S 2 (providing that such agr eements "shall be valid,
irrevocable, and enforceable, save upon gr ounds as exist at
law or in equity for the revocation of any contract"); see
also Dean Witter Reynolds Inc. v. Byrd , 470 U.S. 213, 220
(1985) (observing that the statute "was motivated, first and
foremost, by a congressional desir e to enforce agreements
into which parties had entered"). Though the FAA generally
embraces a "proarbitration policy," this policy "does not
operate without regard to the wishes of the contracting
parties." Mastrobuono v. Shearson Lehman Hutton, Inc., 514
U.S. 52, 57 (1995). Thus, if parties contract to arbitrate
pursuant to arbitration rules or procedur es borrowed from
state law, the federal policy is satisfied so long as their
agreement is enforced. See Volt Info. Sci., Inc., v. Board of
Trustees of Leland Stanford Junior University, 489 U.S. 468,
478 (1989).
_________________________________________________________________
choice of law clause mentions the PUAA (much less a particular chapter),
so this would be a common law arbitration if Pennsylvania standards
apply. And because the PUAA's vacatur standar ds for common law
arbitration awards are so much narr ower than the FAA's, the choice of
standards issue could well be dispositive in this case.
9
The foregoing does not mean that agreements specifying
that arbitration will be conducted pursuant to state rules or
procedures cease being subject to the F AA; it means simply
that the FAA permits parties to "specify by contract the
rules under which . . . arbitration will be conducted." Id. at
479. When a court enforces the terms of an arbitration
agreement that incorporates state law rules, it does so not
because the parties have chosen to be governed by state
rather than federal law. Rather, it does so because federal
law requires that the court enfor ce the terms of the
agreement. Cf. Mastrobuono, 514 U.S. at 58 (inquiring
"what the contract has to say about the arbitrability of
petitioner's claim for punitive damages" rather than
whether the agreement was controlled by a New York rule
barring arbitrators from awarding them).
Having previously reserved the thr eshold question, see
Apex Fountain Sales, Inc. v. Kleinfeld, 818 F .2d 1089, 1094-
95 & n.4 (3d Cir. 1987), we now hold that parties may
agree that judicial review of an arbitrator's decision will be
conducted according to standards borr owed from state law.
The FAA creates "a substantive rule applicable in state as
well as federal courts," Southland Corp. v. Keating, 465 U.S.
1, 16 (1984), but Volt and Mastr obuono clarified that its rule
is simply that courts must enforce the ter ms of arbitration
agreements. We now join with the gr eat weight of authority
and hold that parties may opt out of the FAA's off-the-rack
vacatur standards and fashion their own (including by
referencing state law standards). 3 This holding makes it
_________________________________________________________________
3. See, e.g., Lapine Tech. Corp. v. Kyocera Corp., 130 F.3d 884, 888 (9th
Cir. 1997); Syncor Int'l Corp. v. McLeland, No. 96-2261, 1997 WL
452245, at *6-7 (4th Cir., Aug. 11, 1997) (per curiam) (unpublished
opinion); Gateway Tech., Inc. v. MCI T elecomm. Corp., 64 F.3d 993, 996-
97 (5th Cir. 1995); M & L Power Servs., Inc. v. American Network Int'l, 44
F. Supp. 2d 134, 141 (D.R.I. 1999); New England Util. v. Hydro-Quebec,
10 F. Supp. 2d 53, 63 (D. Mass. 1998); Flexible Mfg. Sys. v. Super Prods.
Corp., 874 F. Supp. 247, 248-49 (E.D. W is. 1994); Flight Sys. v. Paul A.
Laurence Co., 715 F. Supp. 1125, 1127-28 (D.D.C. 1989). But see UHC
Management Co. v. Computer Science Corp., 148 F .3d 992, 997 (8th Cir.
1998) ("It is not clear . . . that parties have any say in how a federal
court will review an arbitration award when Congress has ordained a
specific, self-limiting procedure for how such review is to occur.").
10
necessary for us to decide a truly difficult question--
whether Kayser and RPS did so in this case.
III.
We first consider whether RPS and Kayser manifested a
clear intent that any judicial review of the arbitrator's
award would be conducted pursuant to standar ds borrowed
from Pennsylvania law. Though our ultimate goal is to
effectuate their intent, we have little evidence with which to
work. Section 9.3 of the LCOA binds them to r esolve any
disputes "by arbitration in accordance with the Commercial
Arbitration Rules of the American Arbitration Association."
Section 16 directs that the LCOA "shall be governed by and
construed in accordance with the laws of the
Commonwealth of Pennsylvania." The LCOA itself says
nothing about the issue before us, and ther e is no extrinsic
evidence that RPS and Kayser gave the matter any
consideration. All we have to guide us, ther efore, is an
arbitration clause and a generic choice-of-law clause.
We do not believe that provisions such as these
demonstrate a clear intent to displace the F AA's vacatur
standards and replace them with ones borr owed from
Pennsylvania law. Choice-of-law clauses are ubiquitous in
commercial agreements, and with good r eason. Contract
law is mostly state law, and it varies from state to state. As
a result, parties to commercial agr eements often care a
great deal about which state's law will gover n their
association. And because modern choice-of-law doctrines
tend to place great weight on intent, contracting parties
have an incentive to include choice-of-law clauses in their
agreements. Commercial parties often also bargain for
arbitration clauses, hoping to benefit from arbitration's
purported advantages over litigation. As a r esult, many
commercial contracts include both choice-of-law and
arbitration clauses.
When required to determine the legal standards
governing a particular controversy, courts typically confront
two choice-of-law questions. The first is the horizontal
question: whether the laws of State X or State Y supply the
relevant rule of decision. Choice-of-law doctrines (and,
11
consequently, choice-of-law clauses) speak to this issue.
The second choice-of-law question that courts face is the
vertical one: whether the rule of decision is supplied by the
laws of State X or by federal law. Judge-made choice-of-law
doctrines (and, accordingly, attempts by contracting parties
to influence their application with choice-of-law clauses)
have no applicability to answering this question because
the relevant rule is supplied by the Constitution itself: a
valid federal law preempts any state law purporting to
regulate the same issue. See U.S. Const. Art. VI.
The issue before us, however, is not one of choice-of-law
or preemption--it is simply a matter of contract
construction. No one contests that were this matter
governed by state law, then the relevant rule would be
supplied by the laws of the Commonwealth of Pennsylvania.
But, as we have explained, this case is not governed by
state law--it is governed by federal law. The only reason we
must decide whether to apply federal or state standards in
this case is because the FAA permits parties to "specify by
contract the rules under which . . . arbitration will be
conducted." Volt, 489 U.S. at 479. The issue in this case is
whether the LCOA's generic choice-of-law clause should be
read as specifying that any judicial review of the arbitrator's
decision should be conducted according to the standards
set forth in Pennsylvania arbitration law instead of those
set out in the FAA.
We decline to construe the choice-of-law clause in this
case as evidencing a clear intent to incorporate
Pennsylvania's standards for judicial r eview into the LCOA.
As we explained above, choice-of-law clauses ar e generally
intended to speak to an issue wholly distinct fr om the one
with which we are currently faced. Mor eover, because few (if
any) federal statutes other than the FAA even permit parties
to opt out of the standards contained in them, we are
confident that this particular issue rarely occurs to
contracting parties ex ante.
We find support for our conclusion in Mastrobuono v.
Shearson Lehman Hutton, Inc., 514 U.S. 52 (1995), which
involved a dispute between a securities broker and two of
its customers. The parties had agreed to r esolve any
disputes by arbitration and had indicated a desir e to have
12
their agreement "governed by the laws of the State of New
York." Though the FAA permits arbitrators to award
punitive damages, the question before the Supr eme Court
was whether the parties had intended to incorporate into
their agreement a New York rule that barred arbitrators
from awarding them.
The Court began by examining the choice-of-law clause
"in isolation." Id. at 59. It noted that the clause could
"reasonably be read as merely a substitute for the conflict-
of-laws analysis that otherwise would determine what law
to apply to disputes arising out of the contractual
relationship," id., i.e., whether to apply the laws of New
York or those of another state. If this r eading was the
correct one, the Court observed, then "ther e would be
nothing in the contract that could possibly constitute
evidence of an intent to exclude punitive damages claims."
Id. The Court also stated that even if the choice-of-law
clause was intended to be "more than a substitute for
ordinary conflict-of-laws analysis" it still "might not
preclude the award of punitive damages because New York
allows its courts, though not its arbitrators, to enter such
awards." Id. Because of this, the Court reasoned that "the
provision might include only New York's substantive rights
and obligations and, not the State's allocation of power
between alternative tribunals." Id. at 60.
Though never resolving which interpretation of the
choice-of-law clause was the best one, the Court squarely
held that it did not clearly evidence an intent to opt out of
the federal default rule that arbitrators may awar d punitive
damages and replace it with one borrowed from New York
law that they may not award them. See id. (remarking that
the choice-of-law clause was "not, in itself, an unequivocal
exclusion of punitive damages claims"); see also id. at 62
("At most, the choice-of-law clause intr oduces an ambiguity
into an arbitration agreement that would otherwise allow
punitive damages awards." (emphasis added)). Mastrobuono
thus supports our conclusion that the LCOA evidences no
clear intent to displace the FAA's default standards for
judicial review and to replace them with those borrowed
from Pennsylvania law.
13
Our conclusion that RPS and Kayser have expr essed no
clear intent as to whether the District Court should have
applied federal or state vacatur standards is not
undermined by Volt Information Sciences, Inc. v. Board of
Trustees of Leland Stanford Junior University, 489 U.S. 468
(1989). In that case, the underlying contract included both
an arbitration clause and a choice-of-law clause. See id. at
470. A California court interpreted the contract to mean
that the parties had intended to incorporate California's
arbitration rules into their agreement, see id. at 471-73,
and the Supreme Court of the United States affirmed.
Though the contractor "devote[d] the bulk of its argument
to convincing [the Supreme Court] that the [California court
had] erred in interpreting the choice-of-law clause," it
stressed that "the interpretation of private contracts is
ordinarily a question of state law, which this Court does not
sit to review." Id. at 474 (emphasis added). The Court
acknowledged that it might have needed to review the state
courts' interpretation had that interpr etation infringed
upon federal rights, but explained that the only"right"
conferred by the FAA is to have private arbitration
agreements enforced according to their terms. See id. at
474-76. And, said the Court, because the Califor nia courts
had found that the parties meant to incorporate the
California rules into their agreement, applying those rules to
their case was perfectly consistent with the policies of the
FAA. See id. at 475.
We do not view Volt as of fering guidance as to how
generic choice-of-law clauses should be interpreted; rather,
the Court merely followed its obligation to defer to state
court constructions of private agreements in cases where
no federal rights are at stake. This supposition is supported
by Mastrobuono, where the Court was reviewing a federal
court's construction of a choice-of-law clause. Responding
to Justice Thomas's dissent, which relied heavily on Volt,
the Court clarified that in that case it had not construed
the contract de novo. See Mastrobuono, 514 U.S. at 60 n.4.
Instead, said the Court, it had "deferred to the California
court's construction of its own State's law." Id.
Our understanding of Volt is bolster ed by case law from
our sister circuits. Six other Courts of Appeals have
14
expressly considered the relationship between Volt and
Mastrobuono. All six have unanimously concluded that Volt
is inapposite when a federal court is unconstrained by the
need to defer to state court constructions. See Painewebber,
Inc. v. Elahi, 87 F.3d 589, 594 n.5 (1st Cir. 1996); National
Union Fire Ins. Co. v. Belco Petroleum Corp., 88 F.3d 129,
134 (2d Cir. 1996); Porter Hayden Co. v. Century Indemnity
Co., 136 F.3d 380, 383 n.6 (4th Cir . 1998); Ferro Corp. v.
Garrison Indus., Inc., 142 F.3d 926, 936 (6th Cir. 1998);
UHC Management Co., Inc. v. Computer Sciences Corp. , 148
F.3d 992, 996 (8th Cir. 1998); W olsey, Ltd. v. Foodmaker,
Inc., 144 F.3d 1205, 1212-13 (9th Cir. 1998).4 Volt therefore
contains nothing that undercuts our conclusion that RPS
and Kayser expressed no clear intent to incorporate
Pennsylvania standards of judicial review into their
agreement.
IV.
Because the presence of a generic choice-of-law clause
tells us little (if anything) about whether contracting parties
intended to opt out of the FAA's default standards and
incorporate ones borrowed from state law, we need to
establish a default rule, and the one we adopt is that a
generic choice-of-law clause, standing alone, is insufficient
to support a finding that contracting parties intended to opt
out of the FAA's default standards. W e first lay out three
considerations that inform our analysis, articulate why the
_________________________________________________________________
4. We acknowledge that there ar e decisions to the contrary, but we find
them to be of little value. Many of the cases wer e decided before
Mastrobuono clarified the meaning of Volt. See Barbier v. Shearson
Lehman Hutton, Inc., 948 F.2d 117 (2d Cir . 1991); Flexible Mfg. Sys.
Ltd.,
v. Super Prod. Corp., 874 F. Supp. 247 (E.D. Wis. 1994); Flight Sys. v.
Paul A. Laurence Co., 715 F. Supp. 1125 (D.D.C. 1989); Smith Barney,
Harris Upham & Co., Inc. v. Luckie, 85 N.Y .S.2d 193 (1995); Thomson
McKinnon Secur., Inc. v. Cucchiella, 594 N.E.2d 870 (Mass. App. Ct.
1992). Other decisions, though decided after Mastrobuono, never so
much as cite the decision and tend to focus on pr eemption rather than
contract construction. See ASW Allstate Painting & Constr. Co., Inc. v.
Lexington Ins. Co., 188 F.3d 307 (5th Cir. 1999); Ekstrom v. Value Health,
Inc., 68 F.3d 1391 (D.C. Cir. 1995); M & L Power Servs, Inc. v. American
Networks Int'l, 44 F. Supp. 2d 134 (D.R.I. 1999).
15
rule we announce today is consistent with them, and show
why our rule is in line with case law from both the
Supreme Court and six of our sister cir cuits. We then
respond to the alternative approach proposed by Judge
Ambro. We conclude by applying our rule to this case.
A.
Three considerations guide us in formulating a default
rule. First, we aim to minimize the frequency with which
parties will be found to have opted out of the F AA's default
regime when they did not intend to do so. This guidepost is
consistent with the Supreme Court's admonition that the
FAA standards control "in the absence of contractual intent
to the contrary." Mastrobuono, 514 U.S. at 59. It is also
consonant with the FAA's raison d'etr e, which is to
overcome rules (whether created by state legislatures or by
courts) that make it more difficult to enforce arbitration
agreements. See Volt, 489 U.S. at 478 ("The FAA was
designed `to overrule the judiciary's long-standing refusal to
enforce agreements to arbitrate.' ") (quoting Dean Witter
Reynolds Inc. v. Byrd, 470 U.S. 213, 219-20 (1985)). We
acknowledge that some states provide as much or more
protection to arbitration agreements than does the FAA,
see, e.g., 42 Pa. Con. Stat. S 7302 et seq, but others do not,
see, e.g., Garrity v. Lyle Stuart, Inc., 386 N.Y.S.2d 831, 832
(1976) (construing New York law as pr ecluding arbitrators
from awarding punitive damages). The F AA's ultimate goal
is to enforce parties' actual bargains, but any default rule
is doomed to be inaccurate in some cases. We must,
therefore, decide which error is worse: wrongly concluding
that parties intended to opt out, or wrongly concluding that
they did not. In light of the FAA's history, we believe that
the former is worse than the latter.
Second, we strive to create a regime under which it will
be easy for arbitrators and district courts to deter mine
whether parties have opted out of federal standar ds.
Finally, we seek to create a rule that sophisticated parties
may bargain around without significantly increasing their
transaction costs.
In light of these guideposts, we believe that the best rule
is that a generic choice-of-law clause, standing alone, raises
16
no inference that contracting parties intended to opt out of
the FAA's default regime. This rule will ensure that parties
who have never thought about this particular issue--a
characterization that, we suspect, would apply to the
parties in this case--will not be found to have opted out. It
will also make life easier for both arbitrators and judges
because the analysis will be complete once they conclude
that an agreement contains nothing more than a generic
choice-of-law clause. In contrast, any other rule would
often require a protracted analysis to determine whether
the parties have contracted out of the default federal
standards, a process that would impose two burdens: (1) it
would make cases harder to decide for both arbitrators and
judges; and (2) the resulting legal uncertainty might deter
settlements.
Lastly, the rule we announce will preserve and facilitate
the ability of parties to contract around the default federal
standards. Sophisticated parties (i.e., those who employ
experienced lawyers to draft their contracts) will soon learn
that a generic choice-of-law clause is not enough. Assuming
that both parties genuinely wish to be gover ned by
standards other than the FAA's, r equiring something more
will impose minuscule transaction costs. It is not
particularly difficult, for example, to pr ovide that "any
controversy shall be settled by arbitration in accordance
with the terms of the Pennsylvania Unifor m Arbitration
Act." Cf. Ford v. Nyclare Health Plans of the Gulf Coast, Inc.,
141 F.3d 243, 246 (5th Cir. 1998) (noting that the parties'
contract provided that "[a]ny contr oversy . . . shall be
settled by arbitration in accordance with the T exas General
Arbitration Act").5 We note also that any other rule would
impose transaction costs as well by impelling parties not
wishing to opt out to include a provision saying that their
choice-of-law clause should not be read to raise such an
inference.
_________________________________________________________________
5. We do not mean to suggest that parties may not be found to have
opted out unless their contract includes a statement such as this one.
We hold only that a generic choice-of-law clause, standing alone, raises
no such inference. The case might well be dif ferent if other contractual
language or other evidence suggested that the parties intended to be
bound by standards borrowed from state law.
17
Our rule is also consistent with the case law. First, it
honors Mastrobuono's directive that FAA standards apply
"in the absence of contractual intent to the contrary." 514
U.S. at 59. As we have explained, there is good reason to
believe that contracts often contain both generic choice-of-
law and arbitration clauses in cases where it is likely that
the parties gave absolutely no thought to opting out of the
FAA's default standards.
Second, the rule we announce today is in synch with
Mastrobuono's holding. We acknowledge that that opinion
concludes with a discussion that is premised on the
assumption that the presence of a choice-of-law clause can
render a contract ambiguous as to whether the parties
intended to incorporate state arbitration rules into their
agreement. See id. at 63-65. The Court, however, was
careful to make clear that it was rendering no holding as to
the meaning of the clause itself. See, e.g., id. at 62 ("At
most, the choice-of-law clause introduces an ambiguity into
an arbitration agreement that would otherwise allow
punitive damages awards." (emphasis added)). 6 Third, our
holding is in accord with decisions by six of our sister
circuits that declined to construe a generic choice-of-law
clause as raising an inference that the contracting parties
_________________________________________________________________
6. It is for this reason that Mastr obuono's invocation of contra
proferentem to justify its decision is not inconsistent with the rule we
announce here. The party that drafted the contract at issue in that case
contended that it incorporated a New York rule that precluded
arbitrators from awarding punitive damages. Near the end of its opinion
the Court stated that the drafter could not "over come the common-law
rule of contract interpretation that a court should construe ambiguous
language against the interest of the party that drafted it." Id. at 62.
But
as we explained in the text, the Mastrobuono Court assumed without
deciding that the agreement was ambiguous. Consequently, Judge
Ambro is incorrect in arguing that, under Mastrobuono, "a generic
choice-of-law provision not electing any specific law in the same
agreement, is ambiguous." Ambr o Op. at 32 (emphasis added). Under our
holding today, a generic choice-of-law clause is insufficient as a matter
of law to show that the contracting parties intended to displace the FAA's
default rules. As a result, the contract is not legally ambiguous, and
contra proferentem is inapplicable.
18
intended to incorporate state law arbitration standards into
their agreement.7
B.
Judge Ambro proposes a differ ent approach, arguing that
contracts containing generic choice-of-law clauses and
arbitration clauses should be construed as incorporating all
state arbitration rules that are "pr ocedural" in nature and
"substantive" state arbitration rules that do not "conflict"
with the FAA. See Ambro Op. at 29-30. We are unconvinced,
believing that the reasons outlined above that counsel in
favor of the rule we announce today. Additionally, we have
three problems with Judge Ambro's pr oposal.
First, Judge Ambro's proposal is based on the false
premise that we must find a way to "r econcile[ ]" Volt and
Mastrobuono. Id. But as we explained, supra at Part III, the
Supreme Court has already clarified the relationship
between the two cases. In Volt, the Court followed its rule
of deferring to state court interpretations of private
contracts so long as no federal rights are at stake. The
Court had no such obligation in Mastrobuono because that
case (like this one) originated in federal court. See
Mastrobuono, 514 U.S. at 60 n.4; see also Volt, 489 U.S.
474-76. Judge Ambro is apparently unconvinced by
Mastrobuono's method of distinguishing Volt, see Ambro Op.
at 27 & n.2, but whether we find Mastr obuono persuasive
or not is of no moment. It is not the province of this Court
_________________________________________________________________
7. See Painewebber, Inc. v. Elahi, 87 F.3d 589, 592, 594 (1st Cir. 1996);
National Union Fire Ins. Co. v. Belco Petr oleum Corp., 88 F.3d 129, 132,
134-35 (2d Cir. 1996); Porter Hayden Co. v. Century Indemnity Co., 136
F.3d 380, 382 (4th Cir. 1998); Ferro Corp. v. Garrison Indus., Inc., 142
F.3d 926, 927-28, 937 (6th Cir. 1998); UHC Management Co., Inc. v.
Computer Sciences Corp., 148 F.3d 992, 994, 997 (8th Cir. 1998); Wolsey,
Ltd. v. Foodmaker, Inc., 144 F.3d 1205, 1209,1212-13 (9th Cir. 1998).
But see ASW Allstate Painting & Constr. Co., Inc. v. Lexington Ins. Co.,
188 F.3d 307, 310 (5th Cir. 1999) (per curiam) (concluding otherwise);
Ekstrom v. Value Health, Inc., 68 F.3d 1391, 1394-96 (D.C. Cir. 1995)
(same). We are unpersuaded by ASW and Ekstrom for a simple reason:
neither opinion gives any reasons for concluding that a generic choice-
of-law clause should be read as evidencing an intent to opt out of the
FAA's default regime.
19
to craft a rule based on an assumption that the Supr eme
Court was wrong or that it could not have meant what it
said. As we noted earlier, numerous cases have examined
the interrelationship between Volt and Mastrobuono. See
supra pp. 14-15 & n.5. We have not located, nor has Judge
Ambro cited, a single case that "reconciled" the Court's two
opinions on the basis proposed by Judge Ambr o.
The second reason for our disagreement with Judge
Ambro's proposal is that we believe that it would not
effectively advance its stated purpose of ef fectuating the
intent of most contracting parties. Judge Ambr o concludes
his concurrence by arguing that "custom and practice
among contract drafters" counsel in favor of construing
contracts such as this one as incorporating arbitration
standards borrowed from state law. Ambro Op. at 35. But
that would not happen even under Judge Ambro's
approach; rather, Judge Ambro's approach would have
courts construe contracts like this one as incorporating all
state arbitration rules that are "pr ocedural" in nature, but
only those "substantive" rules that do not"conflict" with the
FAA. Though reasonable people may quarr el over whether
most parties to contracts such as the one befor e us would
wish to be bound by the FAA's default standar ds or would
instead choose to be bound by standards borr owed from
state law, we think it most unlikely that any sizeable
number of parties would wish to be bound by some federal
standards and some state ones.
Lastly, we believe that Judge Ambro's pr oposal would
unduly complicate the law in this area. Under Judge
Ambro's approach, arbitrators and courts seeking to
determine whether a given rule was supplied by the FAA or
was instead borrowed from state law wouldfirst need to
classify the relevant rule as being either"substantive" or
"procedural" for purposes of the F AA.8 It is possible that
_________________________________________________________________
8. Although Judge Ambro cites two Pennsylvania cases for the
proposition that standards of review are procedural, we think that this
would have to be a question of federal law. Judge Ambro's view is that
a generic choice-of-law clause incorporates all of the chosen state's
arbitration law except those portions whose incorporation would be
inconsistent with federal law, i.e., substantive rules that "conflict"
with
20
arbitrators and courts would simply import the distinctions
that have been drawn in the diversity context pursuant to
Erie Railroad Co. v. Tompkins, 304 U.S. 64 (1938), but the
jurisprudence in that area is not always a model of clarity,
and, at all events, we do not understand why distinctions
drawn in a totally different context would necessarily
transfer well to the FAA.
The problematic nature of Judge Ambr o's proposal would
only increase in any case where the party seeking vacatur
complained about multiple issues, at least one of which
was "procedural" and at least one of which "substantive"
(however those terms are defined). In such a case, a
reviewing court could be required to apply some rules
borrowed from state law (i.e., "pr ocedural" rules and the
relevant state's "substantive" rules that do not conflict with
the FAA) and some rules taken from the F AA (i.e.,
"substantive" rules where the rule fr om the relevant state is
in "conflict" with the FAA). Issues involving vacatur are
difficult enough without the additional challenge of
balancing and applying multiple legal regimes within the
same case. For all of these reasons, we decline to adopt
Judge Ambro's proposal.
C.
Applying our rule to the facts of this case yields an
simple answer. The LCOA contains only a generic choice-of-
law clause and there is no extrinsic evidence of an intent to
contract out of the FAA's default regime. We therefore hold
that the District Court was correct in concluding that the
FAA standards of review govern this case.
_________________________________________________________________
the FAA. As a consequence, under the r egime proposed by Judge Ambro,
the categorization of a given rule as "substantive" or "procedural" would
in large part determine whether it was preempted by the FAA. In our
view, because the scope of the preemptive ef fect of a federal statute is
itself a question of federal law, the question whether a given rule was
"substantive" or "procedural" for purposes of the FAA would likewise be
a question of federal law.
21
V.
Applying the FAA standards, we agr ee with the District
Court that the arbitrator exceeded the scope of his
authority. Though judicial review under the F AA is
"narrowly circumscribed," Local 863 Int'l Bhd. of Teamsters
v. Jersey Coast Egg Producers, Inc., 773 F.2d 530, 533 (3d
Cir. 1985), the scope of an arbitrator's authority is defined
and confined by the agreement to arbitrate, see, e.g., Swift
Indus., Inc. v. Botany Indus., Inc., 466 F .2d 1125, 1131 (3d
Cir. 1972). Accordingly, the FAA provides that a court "may
make an order vacating [an] award . . . [w]here the
arbitrators exceeded their powers." 9 U.S.C.S 10(a)(4).
It is undisputed that the only issue presented to the
arbitrator was whether RPS's "termination of [Kayser] was
within the terms of [the LCOA]." The District Court found
that the arbitrator exceeded his powers, and it is manifest
that the court's conclusion was based on the text of the
arbitrator's written decision, the relevant portions of which
are set out in pages 6-7 of this opinion. The court noted
that the arbitrator had "fram[ed] the issue as one of
wrongful or proper termination" and then "proceed[ed] to
discuss the inadequacy of RPS' procedur e for warning
independent contractors of performance deficiencies and
finally conclude[d] that `the RPS system[is] lacking in due
process toward the Claimant contractor .' " Dist. Ct. Op. at
14 (quoting Arb. Op.). The court str essed that "[t]he
arbitration provision clearly limits the arbitrator's authority
to decide only whether the termination was within the
terms of the Agreement, not to examine the fairness of the
extrinsic procedures by which RPS notifies contractors of
problems." Id. It concluded that"[b]y grounding his
decision on such considerations of fairness and thereby
altering the Agreement to require certain pre-termination
procedures, the arbitrator overstepped the bounds of the
authority granted to him by the Agreement." Id. at 14-15.
On appeal, RPS essentially adopts the District Court's
analysis.
Kayser advances three arguments in r esponse. He rightly
notes that Mechmann was not required to justify or
rationalize his decision. See Local 863, 773 F.2d at 534. He
also correctly observes that the arbitrator was entitled to
22
make suggestions that went beyond the scope of his
authority to decide. See Apex Fountain Sales, Inc. v.
Kleinfeld, 818 F.2d 1089, 1095 (3d Cir . 1987). Finally,
though acknowledging that the arbitrator made "r eference
to due process issues," Kayser stresses the eighth
paragraph of Mechmann's decision, which states:"I
conclude that this was a wrongful termination by RPS of
the LCOA." Kayser argues that Mechmann did not, "in the
final analysis, tie his reference to the due process issues
into his decision." Instead, Kayser claims, "the reference to
due process [was] simply surplus, [was] irrelevant to Mr.
Mechmann's decision and should not have been used as a
basis by the court to suggest that the Arbitrator went
beyond his authority." Appellant's Br . at 14-15.
Before parsing the arbitrator's opinion to determine
whether he exceeded his authority, we must first confront
the question whether it is proper to do so. Kayser does not
argue that courts are barred fr om examining an arbitrator's
statement of reasons, and, at all events, such a contention
would be contrary to our cases. See United States Steel &
Carnegie Pension Fund v. McSkimming, 759 F .2d 269, 271
(3d Cir. 1985) (vacating an arbitrator's awar d that ordered
the payment of pension benefits where an examination of
the arbitrator's written decision convinced the Court that
"the arbitrator's award [was] patently based on statutory
interpretation rather than the Plan"); see also Pennsylvania
Power Co. v. Local Union #272 of the Int'l Bhd. of Elec.
Workers, 886 F.2d 46, 49 (3d Cir . 1989) (concluding that a
particular dispute was not arbitrable and remarking that
"[n]othing in the arbitrator's two rulings convinces us to the
contrary" because the opinions revealed that the arbitrator
had based his decision "on the general desirability of
arbitration" rather than the language of the agr eement).
On the other hand, we have also cautioned against
exploiting "an ambiguity" in an arbitrator's decision to
support "an inference" that he or she exceeded his or her
authority. NF&M Corp. v. United Steelworkers of Am., 524
F.2d 756, 759 (3d Cir. 1975). The r eason for this policy is
that "[t]o require opinions fr ee of ambiguity [could] lead
arbitrators to play it safe by writing no supporting opinions.
This would be undesirable, for a well-reasoned opinion
23
tends to engender confidence in the integrity of the process
and aids in clarifying the underlying agreement." United
Steelworkers of Am. v. Enterprise Wheel & Car Corp. , 363
U.S. 593, 598 (1960).
We distill the following principles fr om our precedents: (1)
a reviewing court should presume that an arbitrator acted
within the scope of his or her authority; (2) this
presumption may not be rebutted by an ambiguity in a
written opinion; but (3) a court may conclude that an
arbitrator exceeded his or her authority when it is obvious
from the written opinion.
Under these standards, we hold that the District Court
was correct in concluding that Mechmann exceeded his
authority. Although Mechmann's opinion begins by
acknowledging that his authority is set forth in Section
9.3(e) of the LCOA, it contains only four paragraphs of
substantive discussion--all of which focus on the way in
which RPS communicated to Kayser that it was dissatisfied
with his performance. See supra page 6. The conclusion
that arbitrator Mechmann derived from this discussion was
not that Kayser's termination had been contrary to the
LCOA (the question actually before him), but rather that
"the RPS system [was] lacking in due pr ocess toward
[Kayser]." Kayser would have us believe that the arbitrator
devoted four paragraphs to "mere dicta," but not one
sentence to explaining his supposed "holding" that the
termination violated the terms of the agreement. That
reading is simply not supported by the arbitrator's opinion,
which demonstrates, beyond peradventure, that Mechmann
ruled on an issue that was not properly befor e him.
Moreover, as noted by RPS, the arbitrator never framed
or decided the issue in the terms stated by the LCOA:
"[W]hether the termination of [Kayser] was within the terms
of this Agreement." Instead, Mechmann stated that "[t]he
main question" was whether "the termination" was
"wrongful or proper." And Mechmann's "conclu[sion]" was
"that this was wrongful termination by RPS of the LCOA,"
not that the termination violated "the ter ms of " the LCOA.
Though these latter two references, standing alone, would
not suffice to show that the arbitrator exceeded his
authority, they lend further support to our conclusion that
24
he did so. We hold that the District Court was correct to
vacate the arbitrator's award, and will ther efore affirm its
order.9
_________________________________________________________________
9. Our affirmance of the District Court's vacatur order gives rise to a
controversy as to whether Kayser may seek r earbitration. The FAA
provides that "[w]here an awar d is vacated and the time within which the
agreement required the award to be made has not expired, the court
may, in its discretion, direct a r ehearing by the arbitrators." 9 U.S.C.
S 10(a). As our previous discussion indicates, the arbitrator's opinion is
unclear as to whether he ruled on the issue that was before him:
whether RPS's termination of Kayser's contract was within the terms of
LCOA. Under these circumstances, rehearing would seem appropriate.
But query whether "the time within which the agr eement required the
award to be made has . . . expired." Though the LCOA itself sets no
particular date by which an award must be enter ed, the parties agreed
to "arbitration in accordance with the Commercial Arbitration Rules of
the American Arbitration Association [(AAA or Association)]." LCOA S 9.3.
The question seems to be, therefore, whether AAA rules impose an outer
time limit, and that may well be a matter better r esolved by the
Association. We do not decide these difficult issues, which are not before
us, but leave them for any further proceedings that may occur.
If a rearbitration occurs in this matter , we note for guidance that all
members of the panel are in agreement that, at all events, the
arbitrator's award should have been reduced to no more than
$129,930.00--the amount Kayser originally sought to compensate him
for his "lost profits." According to Section 9.3(e) of the LCOA, Kayser
was
entitled to damages only for his "net ear nings . . . during the period
between the date of termination to the last day of the term of this
Agreement." As noted in the text, Kayser originally sought $141,961.40
($129,930.00 in lost profits and $12,031.40 for purchasing a truck at
the behest of RPS), but the arbitrator awarded him $174,431.15. We are
satisfied that the truck purchase was plainly outside the scope of
allowable damages and can find no support in the r ecord for the
arbitrator's award of $32,469.75 mor e than Kayser originally requested.
That being said, the panel expresses no opinion as to whether an award
of $129,930.00 was justified in this case.
25
AMBRO, Circuit Judge, Concurring:
I concur in the outcome reached by my colleagues. I
agree that the arbitrator in this case exceeded his authority
in making the award in favor of Mr. Kayser against
Roadway Package System, Inc. ("RPS"). In arriving at this
result, I agree that the Federal Arbitration Act (the "FAA"),
9 U.S.C. S 1 et seq., permits parties by private agreement to
contract around the FAA's standar ds by which arbitrators'
awards are vacated. I also agree that whether the parties
have contracted out of the FAA's vacatur of awards
standard is a matter of contract construction. 1 But I
disagree with my colleagues' conclusion that, as a matter of
contract construction, the parties' choice of Pennsylvania
law to govern the Linehaul Contractor Operating Agreement
(the "LCOA") requires that the F AA, and not Pennsylvania
law, provide the standard of judicial r eview to be applied to
that contract's arbitration provision (which makes no
mention of a governing law). In determining that the FAA
requires that the LCOA contain a "clear intent" to have
Pennsylvania law govern its arbitration pr ovision, or else by
default the FAA applies, my colleagues, I believe, misapply
our Supreme Court's decision in Mastrobuono v. Shearson
Lehman Hutton, Inc., 514 U.S. 52 (1995), and disregard
custom and practice among the drafters of agr eements.
A. The FAA
The issue of the FAA's preemption of state arbitration law
is a subject of considerable debate. See, e.g. , id. at 52, 56;
Volt Info. Scis., Inc. v. Bd. of Trustees of the Leland Stanford
Junior Univ., 489 U.S. 468, 472 (1989); Maj. Op. at 15 n.4.
_________________________________________________________________
1. My colleagues use "contract construction" instead of "contract
interpretation," and I presume they do so deliberately. Under contract
construction a court construes the effect of an agreement under
applicable law. Contract interpretation is the attempt by a court to
ascertain the intent of the parties to an agr eement by the words they use
to express that agreement. The for mer is a matter of law, the latter one
of fact. See John F. Harkins Co., Inc. v. Waldinger Corp., 796 F.2d 657,
659-60 (3d Cir. 1986); Ram Const. Co. v. Am. States Ins. Co., 749 F.2d
1049, 1052-53 (3d Cir. 1984); see generally Edwin W. Patterson, The
Interpretation and Construction of Contracts , 64 Colum. L. Rev. 833, 835
(1964); 3 Corbin on Contracts S 534, at 9 (1960).
26
Interestingly, the FAA was enacted in 1925 for the purpose
of "overcom[ing] courts' refusals to enforce agreements to
arbitrate." Allied--Bruce Terminix Cos. v. Dobson, 513 U.S.
265, 270 (1995). But this obvious pro-arbitration policy
does not operate without regard to the intent of the parties
to an agreement to arbitrate. Parties may choose that their
arbitration be governed by rules other than those supplied
by the FAA, Volt, 489 U.S. at 479, and the FAA "simply
requires courts to enforce [those] privately negotiated
agreements . . . in accordance with their terms." Id. at 478.
B. Supreme Court Jurisprudence--Volt and
Mastrobuono
Our Supreme Court has twice within the last twelve years
dealt with the deceptively difficult issue of whether the FAA
impliedly governs an agreement to arbitrate within a
contract specifically chosen by the parties to be governed
by state law. See Mastrobuono, 514 U.S. at 52; Volt, 489
U.S. at 468. In Volt, the Supr eme Court held that the FAA
did not preempt a contract's super-generic2 choice of "the
law of the place where the Project is located" (in that case,
California). Ruling that "where the parties have agreed that
their arbitration agreement will be gover ned by the law of
California," a California court, pursuant to its state
arbitration law, could stay the arbitration pending the
results of related litigation involving third parties,
something the FAA does not contemplate and thus would
not permit if it governed. Volt, 489 U.S. at 470. "Where, as
here, the parties have agreed to abide by state rules of
arbitration, enforcing those rules accor ding to the terms of
the agreement is fully consistent with the goals of the FAA,
even if the result is that arbitration is stayed where the
[FAA] would otherwise permit it to go forward." Id. at 479.
That is because "[a]rbitration under the[FAA] is a matter of
consent, not coercion." Id. Understood this way, where
parties have a generic choice-of-law provision governing
_________________________________________________________________
2. My colleagues refer to a generic choice of law as an agreement that
states that it will be governed by the laws of a particular jurisdiction
(in
this case, Pennsylvania). In Volt, no particular jurisdiction was listed
in
the agreement under review. Thus, if our case involves a generic choice
of law, Volt pertains to a super-generic choice of law.
27
their contract, they must affirmatively choose to have their
agreement to arbitrate governed by the FAA. The only
exception would be if the state rule chosen "would
undermine the goals and policies of the FAA." Id. at 478.
Mastrobuono, decided only six years after Volt, held, in
the context of a form contract containing a generic New
York choice-of-law provision and a separate arbitration
provision, that the FAA (which per mitted punitive damages
awards by arbitrators) preempted New York law (which did
not). The Supreme Court determined that New York law
would govern substantive principles of the agr eement but
could not provide, by the use of generic choice-of-law
language alone, "special rules limiting the authority of the
arbitrator." Mastrobuono, 514 U.S. at 64. Mastrobuono did
not purport to reverse or even limit Volt. Instead, the Court
distinguished Volt in a footnote:
In Volt . . . we deferred to the California court's
construction of its own state's law . . . . In the present
case, by contrast, we review a federal court's
interpretation of this contract, and our interpretation
accords with that of the only decision-maker ar guably
entitled to deference--the arbitrator .3
_________________________________________________________________
3. Ironically, the Supreme Court pointed out in Mastrobuono that it
would decide the case "the same under either a de novo or a deferential
standard." Mastrobuono, 514 U.S. at 55 n.1. Moreover, Mastrobuono's
effort to distinguish Volt has received strong criticism. See Thomas A.
Diamond, Choice of Law Clauses and Their Preemptive Effect on the
Federal Arbitration Act: Reconciling the Supreme Court with Itself, 39
Ariz.
L. Rev. 35, 56-58 (1997) ("This would suggest that Mastrobuono is
applicable only when the choice of law clause's intended meaning is
resolved in federal court. State courts would r emain free to ignore
Mastrobuono while federal courts would be obligated to honor it. When
the Supreme Court held in Southland Corp. v. Keating [465 U.S. 1
(1984)] that the provisions of the FAA must be honored by state courts
as well as federal courts, it did so to assur e uniformity of law
irrespective
of the selected forum. To hold otherwise would`encourage and reward
forum shopping. . . . Furthermore, the Court's premise that a state
court's interpretation of a choice of law clause is entitled to deference
while a federal court's interpretation is subject to de novo review is
insupportable.") (citations omitted); see also Heather J. Haase, Note, In
Defense of Parties' Rights to Limit Arbitral Awards Under the Federal
28
Id. at 60 n.4.
Underlying the Court's decision in Mastrobuono is that
"the wishes of the contracting parties" prevail, id. at 57
(citing Volt, 489 U.S. at 468), even if those wishes
contravene the FAA by "an unequivocal exclusion of
punitive damages claims." Id. at 60. In ascertaining those
wishes, Mastrobuono instructs a court to take into account
three principles of contract construction and interpretation.
The first (which is in line with Volt , 489 U.S. at 478) is that
the application of the law chosen would not under mine
(absent express agreement) the goals and policies of the
FAA. Id. at 56 ("New York's prohibition against arbitral
awards of punitive damages . . . is a vestige of the `ancient'
judicial hostility to arbitration."). The second principle is
that, by placing in its contract a generic choice of law and
an arbitration provision without a specific choice of law,
Shearson Lehman "drafted an ambiguous contract, and . . .
cannot now claim the benefit of the doubt." Id. at 63.
Finally, "a document should be read to give effect to all its
provisions and to render them consistent with each other."
Id. Each of these principles is discussed below in the
context of this case.
The difference between Volt and Mastrobuono, "while
there, is difficult to grasp." Lanier v. Old Republic Ins. Co.,
936 F. Supp. 839, 844 (M.D. Ala. 1996). But these cases
can, I believe, be reconciled. Taken together, they require
that a substantive state arbitration rule (such as New
York's barring of arbitrators awarding punitive damages) is
superseded by the FAA where ther e is a conflict between
the FAA and the state rule, though even that conflict can be
overcome if dealt with explicitly in the contract. On the
_________________________________________________________________
Arbitration Act: Mastrobuono v. Shearson Lehman Hutton, Inc., 31 Wake
Forest L. Rev. 309, 331-32 (1996) ("Although purporting to follow Volt,
the Supreme Court has ignored its own mandate in Volt to enforce
`contractual rights and expectations of the parties,' and has instead
distorted the meaning of the federal policy in or der to reach the
conclusion that punitive damages should be allowed in arbitration.")
(citations omitted); Joshua M. Barrett, Note, Federal Arbitration Policy
After Mastrobuono v. Shearson Lehman Hutton, Inc., 32 Willamette L.
Rev. 517, 534 (1996).
29
other hand, the FAA defers to procedural state arbitration
rules (such as the California rule delaying an arbitration
pending resolution of another matter in litigation), even
when the FAA is in conflict. See Mastrobuono, 514 U.S. at
63-64 ("We think that the best way to har monize the
choice-of-law provision with the arbitration pr ovision is to
read `the laws of the State of New York' [in the choice-of-law
provision] to encompass substantive principles that New
York courts would apply, but not to include special rules
limiting the authority of arbitrators."); Volt, 989 U.S. at 479
("Where, as here, the parties have agr eed to abide by state
rules of arbitration, enforcing those rules according to the
terms of the agreement is fully consistent with the goals of
the FAA, even if the result is that arbitration is stayed
where the [FAA] would otherwise permit it to go forward.");
Thomas A. Diamond, Choice of Law Clauses and Their
Preemptive Effect on the Federal Arbitration Act: Reconciling
the Supreme Court with Itself, 39 Ariz. L. Rev. 35, 60-65
(1997) (hereinafter "Diamond").
C. Our Case
Applied to our case, the issue is this: in a contract
containing an arbitration provision making no mention of
the FAA, is the affirmative choice of Pennsylvania law in a
general choice-of-law clause enough to govern that entire
contract, or does the FAA further require that the
arbitration section of that contract explicitly choose
Pennsylvania law again for its (and not the FAA's)
arbitration procedures to apply? More specifically, the
conflict is whether the FAA or the Pennsylvania Uniform
Arbitration Act (the "PUAA")4 governs the parties'
arbitration. This issue is easily resolved in favor of the
PUAA if only Volt applies. But Mastrobuono creates the
complexity. Consequently, I analyze our issue based on my
reading of the principles of Volt and Mastrobuono.
_________________________________________________________________
4. Under the PUAA, three types of arbitration are provided: (1) statutory,
42 Pa. Cons. Stat. SS 7301-7320; (2) common law, 42 Pa. Cons. Stat.
SS 7341-7342; and (3) judicial, 42 Pa. Cons. Stat. SS 7361-7362. My
colleagues and I agree that common law arbitration would be applicable
if Pennsylvania law were to apply. See Maj. Op. at 8-9 n.2.
30
1. Application of the Principles of Volt and
Mastrobuono
a. Law Chosen to Govern LCOA (Pennsylvania) Does
Not Undermine FAA
In applying Volt and Mastrobuono to our case, the initial
question is whether the application of Pennsylvania law to
the arbitration section of the LCOA undermines the FAA.
This requires, in my view, preliminary consideration of
whether vacating an arbitrator's award because the
arbitrator exceeded his authority is procedural or
substantive. If the former, the generic choice of
Pennsylvania law to govern the LCOA means that the PUAA
governs all aspects of arbitration. If substantive, we then
must address whether the PUAA is in conflict with the FAA,
for only then does the FAA preempt in our case.
I believe that vacating an arbitrator's awar d because the
arbitrator exceeded his authority is procedural, see Hade v.
Nationwide Ins. Co., 503 A.2d 980, 982 (Pa. Super. Ct.
1986), overruled on other grounds by Ostroff v. Keystone
Ins. Co., 515 A.2d 584 (Pa. Super Ct. 1986) (" `Irregularity'
refers not to the award itself, but to the process used in
arriving at this award."); Diamond, 39 Ariz. L. Rev. at 62 &
n.223, and thus the FAA defers to the generic choice of
state law to govern such matters. But even if the vacatur of
arbitrators' awards is substantive, Pennsylvania law is not
in conflict with the FAA, for both the FAA and common law
arbitration under the PUAA permit vacating or modifying
arbitral awards in circumstances where the arbitrator
exceeds his or her authority. Compare 9 U.S.C. S 10(a)(1)
(allowing courts to vacate arbitrators' awards where
"procured by corruption, fraud, or undue means"), and id.
S 10(a)(4) (allowing vacatur where the arbitrator "exceeded
[his or her] powers"), with 42 Pa. Cons. Stat. S 7341
(authorizing vacatur where "fraud, misconduct, corruption
or other irregularity caused . . . an unjust [or] inequitable
. . . award") (emphasis added). An "irregularity" under
Pennsylvania common law arbitration can include that the
arbitrator considered issues beyond the scope of the
arbitration clause. See Hade, 503 A.2d at 983 ("Admittedly,
a finding that the panel considered an issue beyond the
31
scope of the arbitration clause would support a
modification of the award on appeal."). Thus, unlike my
colleagues, I do not believe that judicial power under
Pennsylvania common law arbitration to vacate awar ds is
"so much narrower than the FAA's" vacatur standards. Maj.
Op. at 8-9 n.2. In any event, any differ ences that may exist
do not determine the outcome of this case, and thus the
PUAA does not undermine the goals and policies of the FAA
in this instance.
b. LCOA Is Ambiguous and Must be Construed
Against its Drafter (RPS)
Following the further teaching of Mastrobuono, a generic
choice-of-law provision, coupled with an arbitration
provision not electing any specific law in the same
agreement, is ambiguous.5Mastrobuono, 514 U.S. at 62-63.
Under the rule of contra proferentum, drafters (such as
Shearson Lehman in Mastrobuono) "cannot now claim the
benefit of the doubt" with respect to that ambiguity. Id. at
63. RPS is in the same boat rowing with the same oars. It
alone drafted the LCOA and in it chose Pennsylvania law
without mentioning the FAA in the arbitration section of
that contract. It cannot now argue that what Mastrobuono
found to be ambiguous should be interpreted in RPS's favor
by applying the FAA to the vacatur of the arbitrator's
award.
My colleagues find, in disregard of Mastrobuono (and, I
believe, counterintuitively), that the choice of Pennsylvania
law in the LCOA, coupled with a general arbitration
provision that does not select a set of state arbitration
rules, is by default a "not legally ambiguous" choice of the
_________________________________________________________________
5. My colleagues conclude that Mastrobuono merely contains "a
discussion that is premised on the assumption that the presence of a
choice-of-law clause can render a contract ambiguous as to whether the
parties intended to incorporate state arbitration rules into their
agreement." Maj. Op. at 18; see also Maj. Op. at 18 n.6 ("[A]s we
explained, the Mastrobuono Court assumed without deciding that the
agreement was ambiguous."). What they ignor e is the following
Shermanesque statement of Mastrobuono: "Respondents [Shearson
Lehman, et al.] drafted an ambiguous document, and they cannot now
claim the benefit of the doubt." Mastrobuono, 514 U.S. at 63.
32
FAA to govern the arbitration section. Maj. Op. at 18 n.6.
But even their own words belie this conclusion.
Because the presence of a generic choice-of-law clause
tells us little (if anything) about whether contracting
parties intended to opt out of the FAA's default
standards and incorporate one borrowed fr om state
law, we need to establish a default rule, and the one
we adopt is that a generic choice-of-law clause,
standing alone, is insufficient to support a finding that
contracting parties intended to opt out of the F AA's
default standards.
Maj. Op. at 15. If a generic choice-of-law clause in an
agreement "tells us little if anything" about whether the
parties opted out of the FAA, then the plain words of the
agreement are unclear. Wher e something is unclear or
incapable of one possible meaning, it is ipso facto
ambiguous. Websters' Third New International Dictionary of
the English Language Unabridged 66 (1971); accord
Sumitomo Mach. Corp. of Am. v. AlliedSignal, Inc. , 81 F.3d
328, 332 (3d Cir. 1986) (an agreement is ambiguous if it is
"susceptible of more than one meaning"). To argue that
unclear is, by default, "not legally ambiguous," Maj. Op. at
18 n.6, is, at best, interestingly ironic.
My colleagues' attempt to answer this irony is that "a
generic choice-of-law clause is insufficient as a matter of
law to show that the contracting parties intended to
displace the FAA's default rules.6 As a result, the contract
is not legally ambiguous, and contra proferentum is
inapplicable." Id.
_________________________________________________________________
6. My colleagues never state what the FAA's default rules are. Instead,
they posit by ukase what they determine to be the default rule for a
generic choice of law in an agreement containing an arbitration provision
not electing its own internal choice of law. Their default rule is that,
absent a "clear intent" to choose state law to govern an agreement's
arbitration provision, the FAA applies. Maj. Op. at 3, 11-13.
This default rule brings into focus where my colleagues and I part.
They read the FAA, presumably by some preemptive principle (though
they deny that this is a case of preemption, Maj. Op. at 12), as requiring
"clear intent" to displace it. But, as I note in this concurring opinion,
I
believe that Mastrobuono takes a mor e nuanced approach.
33
I do not understand this statement. Mastr obuono
nowhere states that a generic choice of law is insufficient as
a matter of law to show that the parties intended to
displace the FAA. The Supreme Court's position is more
subtle. When an agreement involving interstate commerce
is affected, the FAA applies to enfor ce arbitration. If the
agreement containing an arbitration provision has no
choice of law, the FAA by default supplies the rules of
arbitration. By contrast, if the agreement contains an
arbitration section with no choice of law but a generic
choice of state law for the entire agreement, that state law
choice supplies (a) the procedural rules for arbitration even
if the FAA is in conflict (the teaching of Volt) and (b) the
substantive rules for the arbitration unless the F AA is in
conflict and the agreement does not explicitly choose the
conflicting substantive rule (the teaching of Mastrobuono).7
Thus, I do not agree with my colleagues that my
approach "unduly complicate[s] the law in this area." Maj.
Op. at 20. Rather, it comports with the Supr eme Court's
rulings in Volt and Mastr obuono.
c. Reading LCOA's Choice-of-Law and Arbitration
Sections as Consistent
Finally, Mastrobuono counsels "that a document should
be read to give effect to all its pr ovisions and to render
them consistent with each other." Mastrobuono, 514 U.S. at
63. It is hardly internally inconsistent to determine that the
choice of Pennsylvania law to govern the LCOA also governs
its section on arbitration when that choice implicates a rule
(which I believe is procedural and in no event inconsistent
with the FAA) relating to the standar d for reviewing an
arbitrator's award.
_________________________________________________________________
7. My colleagues write that any attempt to r econcile Volt and
Mastrobuono is a "false premise," Maj. Op. at 19, and that I "craft a rule
based on the assumption that the Supreme Court was wrong." Id. To the
contrary, I believe that the Supreme Court itself supplies the
reconciliation between these two cases. I would suggest, however, that in
light of the Circuit split on this issue, see Maj. Op. at 19 n.7, the
Supreme Court may wish to clarify its holding in Mastrobuono.
34
2. Custom and Practice Among Drafters of Agr eements
Support the Determination that Pennsylvania Law
Governs the LCOA
Custom and practice among the drafters of agr eements
support my belief that the choice of Pennsylvania law in the
LCOA governs the entire contract (including its arbitration
provisions). In practice, choice-of-law pr ovisions are often
highly contested. They are almost always negotiated in only
one provision of the agreement and usually at (as in the
LCOA) or near the end of that agreement. The choice of law
almost invariably is meant to encompass the entir e
agreement. Usually no thought is given to having a
bifurcated choice of law, but if it is, the bifurcated choice of
law is set forth in the choice-of-law provision itself.
If RPS had intended that the FAA apply to the arbitration
section of the LCOA, it would have so stated. Mor eover, to
require within the arbitration section of the LCOA the
redundant choice of Pennsylvania law leads logically to the
conclusion that other provisions of the LCOA may also need
to contain that redundant choice, e.g., provisions treating
indemnification rights or termination events in contracts
involving the interstate transportation of pr oducts. Thus,
absent express preemption by the F AA,8 I believe that
Pennsylvania law governs the LCOA's arbitration section.
* * * * *
Where does this leave us? We all agr ee that the intentions
of contracting parties prevail over the F AA. I believe that
the generic choice of state law to govern a contract also
governs the arbitration provision within that contract when
arbitration procedure is affected. The FAA preempts when
substantive law is affected and the state law chosen
conflicts with the FAA absent explicit agr eement to override
that preemption. The standard to be applied when vacating
or modifying an arbitrator's award is, I submit, a
procedural matter. Notwithstanding, the Pennsylvania law
for vacating arbitrators' awards does not conflict with the
FAA. Therefore the PUAA should apply to the LCOA's
_________________________________________________________________
8. There is none. Volt, 489 U.S. at 469 ("The FAA contains no express
preemptive provision.").
35
arbitration provision. This result comports with Volt and
Mastrobuono. Moreover, under Mastrobuono the contractual
provisions here are ambiguous and must be construed
against RPS, the drafter of the LCOA that chose only
Pennsylvania law to govern it and now ar gues for the FAA
as governing arbitration. Following this appr oach leaves the
LCOA consistent internally.
One thing is certain to me. No default rule is called for by
which an unclear intent (as my colleagues find) becomes
transmogrified as legally unambiguous. In any event, when
all analysis is done, the result is the same whether under
Pennsylvania law or the FAA -- the arbitrator's award is
vacated. Thus, I concur with the Court's judgment but not,
in part, my colleagues' reasoning.
A True Copy:
Teste:
Clerk of the United States Court of Appeals
for the Third Circuit
36