Puerto Rico Telephone Co. v. U.S. Phone Manufacturing Corp.

United States Court of Appeals
For the First Circuit

Nos. 04-2601, 04-2602

PUERTO RICO TELEPHONE COMPANY, INC.,
as Liquidator on behalf of
Reliance Insurance Co. (in liquidation),

Plaintiff, Appellant/Cross-Appellee,

v.

U.S. PHONE MANUFACTURING CORPORATION,

Defendant, Appellee/Cross-Appellant.

APPEALS FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF PUERTO RICO
[Hon. Jaime Pieras, Jr., Senior U.S. District Judge]

Before
*
Torruella, Dyk , and Howard, Circuit Judges.

Jesús E. Cuza, with whom Elliot H. Scherker, Pamela A.
DeBooth, and Greenberg Traurig, P.A., were on brief, for
appellant/cross-appellee Puerto Rico Telephone Company.
Pedro Jiménez Rodriguez, with whom Adsuar Muñiz Goyco &
Besosa, P.S.C., was on brief, for appellee/cross-appellant U.S.
Phone Manufacturing Corporation.

October 14, 2005

*
Of the Federal Circuit, sitting by designation.
 DYK, Circuit Judge. Puerto Rico Telephone Company,

Inc. (“PRTC”) appeals from the district court’s denial of its

motion to vacate and entry of judgment confirming an arbitral

award. The award granted $2.5 million in damages to U.S. Phone

Manufacturing Corp. (“USPhone”) for breach of contract. At issue

is whether and how parties can contract for standards of judicial

review of arbitration awards other than those set forth in the

Federal Arbitration Act (“FAA” or “Act”). 9 U.S.C. §§ 10, 11

(2000).

We hold that the judicial review provisions of the FAA

can be displaced only by explicit contractual language evincing

the parties’ clear intent to subject the arbitration award to a

different standard of review. Here, no such clear statement was

contained in the contract. Under the proper review standard set

forth in the FAA there were no grounds for vacating the award.

We accordingly affirm the district court. On the cross-appeal by

USPhone, we also affirm the district court’s decision to deny an

award of attorneys’ fees to USPhone.

I.

The present dispute had its genesis in 1987, when PRTC

solicited bids to procure telephones for its residential

customers over a five-year period. USPhone was awarded the bid,

jointly with two other companies, on February 10, 1988. On

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December 2, 1988, PRTC and USPhone executed a requirements

contract under which USPhone agreed to supply PRTC’s five-year

requirements of residential memory telephones, estimated at

25,000 per year (“the contract”). The contract was drafted by

PRTC. Clause 4 of the contract, titled “Language and Law,”

contained a provision stating that “[t]his Contract shall be

governed by and interpreted in accordance with the laws of the

Commonwealth of Puerto Rico.”1 Clause 17, titled “Arbitration”,

stated, in pertinent part:

17.2 Arbitration Panel

If an attempt at settlement has failed, the
disputes shall be finally settled under the
Rules of Conciliation and Arbitration of the
American Arbitration Association.
Each Party shall appoint a member to a three-
person panel. The two members so appointed
shall within twenty (20) days agree upon a
third member who shall be a jurist and chair
the panel. If the two members fail to
appoint the third member within thirty (30)
days, he will be appointed by the President
of the American Arbitration Association. The
panel shall meet in Puerto Rico and apply the
law of the Commonwealth of Puerto Rico.

17.3 Judgment

The arbitral award shall be substantiated in
writing and the findings shall be final and
1
Clause 4 also stated “[t]his Contract is drawn up in the
English language, which shall govern and shall be designated as the
‘Ruling Language.’”
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 binding for both parties. This arbitration
procedure shall be a condition precedent to
any right of legal action. The panel shall
decide on the matter of costs of the
arbitration.

During the course of performance, various disputes

arose between the parties, which they were unable to resolve.

The contract was eventually terminated by PRTC, pursuant to the

contract’s termination clause, effective January 2, 1993. On

September 13, 1993, USPhone commenced arbitration against PRTC,

before the American Arbitration Association (“AAA”). Three years

later, following various procedural skirmishes regarding the

choice of a neutral arbitrator, the United States District Court

for the District of Puerto Rico ordered the parties to proceed to

arbitration. U.S. Phone Mfg. Corp. v. P.R. Tel. Co., Civ. No.

96-1265CCC, slip op. at 5 (D.P.R. Sept. 30, 1996).

An AAA panel was convened in June 1997 and spent over

two years considering the matter. More than a decade after the

initial request for arbitration, on March 4, 2003, a unanimous

panel awarded USPhone $2,552,123.99 in damages basing its

decision on a record including “approximately 10 days of

testimony . . . 1900 pages of transcripts, and approximately 175

exhibits, including physical evidence, as well as documents

comprising approximately 1700 pages.” As is common in

arbitration awards, the arbitrators’ decision contained no

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discussion of the arbitrators’ reasoning. See, e.g., Raytheon Co.

v. Automated Bus. Sys., Inc., 882 F.2d 6, 8 (1st Cir. 1989).

On June 2, 2003, PRTC filed a motion to vacate the

arbitration award in the United States District Court for the

district of Puerto Rico. The motion did not challenge the

arbitrability of any aspect of the controversy. However, PRTC

claimed that the limited FAA standard of judicial review of

awards was inapplicable and that the contract provided for

judicial review of all errors of law in the arbitration award.

The motion alleged “various errors in the structure of the

arbitration, the procedures of the arbitration, and the ultimate

findings of the arbitration.” P.R. Tel. Co. v. U.S. Phone Mfg.

Corp., Nos. 03-1593, 03-1815, slip op. at 1 (D.P.R. Mar. 9,

2004). The case was consolidated with an earlier action brought

by USPhone in the Southern District of New York for confirmation

of the award pursuant to the FAA.

The district court denied PRTC’s motion to vacate,

holding that the FAA review standards applied. The district

court concluded that under the FAA standard, judicial review of

arbitral awards is “only allowed in cases of corruption, serious

error, misconduct, and miscalculation,” and that “district courts

do not have the luxury ‘to hear claims of factual or legal error

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by an arbitrator as an appellate court does in reviewing

decisions of lower courts.’” Id., slip op. at 2 (quoting United

Paperworkers Int’l Union v. Misco, Inc., 484 U.S. 29, 38 (1987)).

The district court found that PRTC’s challenge to the

award did “not rise to anywhere near the level required under the

Federal Arbitration Act in order to allow court review ... [and]

that PRTC’s objections to the arbitration are essentially

disagreements with the arbitrators’ conclusions.” Id., slip op.

at 3. In denying PRTC’s motion, the court further observed that

“[t]he mere filing of this motion controverts the purpose of the

Federal Arbitration Act and is a waste of the time and resources

of this Court.” Id., slip op. at 4. Subsequently, the court

granted USPhone’s motion to amend the judgment, nunc pro tunc, to

reflect confirmation of the award. In this same order, the court

denied U.S. Phone’s request for attorneys’ fees but granted pre-

judgment and post-judgment interest on the award. P.R. Tel. Co.

v. U.S. Phone Mfg. Corp., Nos. 03-1593, 03-1815, slip op. at 2-3

(D.P.R. Oct. 6, 2004).

PRTC appeals the denial of its motion to vacate and

the judgment confirming the award. USPhone cross-appeals the

denial of attorneys’ fees. We have jurisdiction pursuant to 28

U.S.C. § 1291. We review the district court decision upholding

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the arbitration award under “ordinary, not special, standards.”

First Options of Chi., Inc. v. Kaplan, 514 U.S. 938, 948 (1995).2

II. The Appropriate Standard of Judicial Review

On appeal, the parties agree that this contract is

governed by the FAA. They also agree that the FAA provides for

very limited review of an arbitration award. Section 10 permits

courts to vacate an award only:

(1) Where the award was procured by corruption,
fraud, or undue means.

2
USPhone argues that PRTC’s motion to vacate the
arbitration award was untimely. Section 12 of the FAA provides:
“Notice of a motion to vacate ... an award must be served upon the
adverse party or his attorney within three months after the award
is filed or delivered.” 9 U.S.C. § 12 (2000). The FAA requires
service on nonresidents "in like manner as other process of the
court" and refers to Rule 4 of the Federal Rules of Civil
Procedure. Wright & Miller, 4A Fed. Prac. & Proc. Civ. 3d § 1101
(2002). Here, PRTC served its motion to vacate on USPhone and its
counsel by mail at least four times prior to the deadline, and was
able to effect personal service on USPhone on June 5, 2003, one day
after the deadline.
We need not decide whether mail service complied with Rule 4
in these circumstances, for courts have held that a failure to
comply with Rule 4 (for example, by serving only the defendant's
attorney) may be excused if notice actually is received. Id.
USPhone does not deny receipt of actual notice during the three
month window, nor allege any significant prejudice. The district
court was within its discretion to excuse the one-day delay. See
Piccolo v. Dain, Kalman & Quail, Inc., 641 F.2d 598, 601 (8th Cir.
1981) (recognizing a “due diligence” exception to the three-month
limit); see also Petrol Shipping Corp. v. Kingdom of Greece,
Ministry of Comm., Purchase Directorate 360 F.2d 103, 107-08 (2nd
Cir. 1966); Matter of Arbitration between InterCarbon Bermuda, Ltd.
and Caltex Trading and Transp. Corp., 146 F.R.D. 64, 71 (S.D.N.Y.
1993).
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 (2) Where there was evident partiality or
corruption in the arbitrators, or either of
them.
(3) Where the arbitrators were guilty of
misconduct in refusing to postpone the hearing,
upon sufficient cause shown, or in refusing to
hear evidence pertinent and material to the
controversy; or of any other misbehavior by
which the rights of any party have been
prejudiced.
(4) Where the arbitrators exceeded their powers,
or so imperfectly executed them that a mutual,
final, and definite award upon the subject
matter submitted was not made.

9 U.S.C. § 10 (2000).3 Thus, the statute "carefully limits

judicial intervention to instances where the arbitration has been

tainted in certain specific ways ... [and] contains no express

ground upon which an award can be overturned because it rests on

garden-variety factual or legal [errors]." Advest, Inc. v.

McCarthy, 914 F.2d 6, 8 (1st Cir. 1990). Under the FAA, an

award may be vacated for legal error only when in “manifest

disregard of the law.” Wonderland Greyhound Park, Inc. v.

Autotote Sys., Inc., 274 F.3d 34, 35-36 (1st Cir. 2001).

However, PRTC contends that the parties contracted for

more rigorous review of arbitration awards than that provided for

by the FAA. In particular, PRTC asserts that the contract, by
3
Section 11, not relevant here, provides the district
court with authority to “make an order modifying or correcting” an
arbitration award in cases of “evident material miscalculation of
figures or an evident material mistake ...[;] [w]here the
arbitrators have awarded upon a matter not submitted to them ...[;]
[or] [w]here the award is imperfect in matter of form not affecting
the merits of the controversy.” 9 U.S.C. § 11 (2000).
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adopting Puerto Rican law and by providing that the “contract

shall be governed by and interpreted in accordance with the laws

of the Commonwealth of Puerto Rico” (language which they claim,

under Puerto Rican law, requires review of the award for legal

errors), demonstrates that the parties agreed to judicial review

of the award for errors of law. Resolution of this question

requires examination of the FAA and case law interpreting it.

A. Background and Purpose of the FAA

The FAA was enacted in 1925, 43 Stat. 883, and then

reenacted and codified in 1947 as Title 9 of the United States

Code. The Act’s “purpose was to reverse the longstanding

judicial hostility to arbitration agreements that had existed at

English common law and had been adopted by American courts, and

to place arbitration agreements upon the same footing as other

contracts.” Gilmer v. Interstate/Johnson Lane Corp., 500 U.S.

20, 24 (1991); see also Allied-Bruce Terminix Cos. v. Dobson, 513

U.S. 265, 270 (1995) (FAA’s purpose was to “overcome courts’

refusals to enforce agreements to arbitrate”). The FAA broadly

provides that written agreements to arbitrate “involving commerce

... shall be valid, irrevocable, and enforceable.” 9 U.S.C. § 2

(2000).

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 Under the Act, federal courts may, inter alia, stay

litigation on issues that are within the scope of the arbitration

agreement, 9 U.S.C. § 3; compel parties to submit to arbitration,

9 U.S.C. § 4; appoint neutral arbitrators, 9 U.S.C. § 5; compel

appearances of witnesses at arbitration hearings, 9 U.S.C. § 7;

confirm arbitration awards and enter judgment accordingly; 9

U.S.C. § 9; and, as discussed above, in very limited

circumstances, vacate, modify, or correct arbitration awards, 9

U.S.C. §§ 10 & 11.

In light of the FAA’s explicit purpose to override

state law that impedes the enforceability of arbitration

agreements, it is well established that the provisions of the FAA

will prevail over contrary state-law rules. The “broad principle

of enforceability” of arbitration agreements embodied in the Act

is not subject “to any additional limitations under state law.”

Southland Corp. v. Keating, 465 U.S. 1, 11 (1984). The Supreme

Court has repeatedly enforced the federal policy favoring

arbitration where the controversy concerns the scope of the

arbitration clause itself.

For example, in Perry v. Thomas, the Court held that

disputes over commissions on securities sales were arbitrable

under a contract that provided for arbitration, even though the

California Labor Code mandated court litigation of such "wage"

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disputes, "despite the existence of an agreement to arbitrate."

482 U.S. 483, 486, 490-91 (1986). This was because section 2 of

the FAA "embodies a clear federal policy of requiring

arbitration” where there is an enforceable agreement to

arbitrate. Id. at 489. Similarly, in Mitsubishi Motors Corp.

v. Soler Chrysler-Plymouth, Inc., the Court held that the

parties' antitrust claims were arbitrable, notwitstanding Puerto

Rican law requiring judicial resolution. 473 U.S. 614, 623 n.10

(1985).

The Court has also held that the federal policy

favoring arbitration and reflected in the FAA “establishes that,

as a matter of federal law, any doubts concerning the scope of

arbitrable issues should be resolved in favor of arbitration.”

Moses H. Cone Mem. Hosp. v. Mercury Constr. Corp., 460 U.S. 1,

24-25 (1983). This is so “whether the problem at hand is the

construction of the contract language itself or an allegation of

waiver, delay, or a like defense to arbitrability.” Id. at 25;

See also Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S.

395, 400 (1967) (holding that notwithstanding a contrary state

rule, consideration of a claim of fraud in the inducement of a

contract "is for the arbitrators and not for the courts"); Volt

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Info. Scis. v. Bd. of Trs. of Leland Stanford Junior Univ., 489

U.S. 468, 475-76 (1989).

A difficulty has arisen, however, when another

important policy in the FAA has been implicated – namely the

federal policy of allowing the parties to craft their own

agreements. Passage of the FAA "was motivated, first and

foremost, by a congressional desire to enforce agreements into

which parties had entered." Dean Witter Reynolds, Inc. v. Byrd,

470 U.S. 213, 220 (1985). The general rule is that arbitration

agreements are to be enforced according to their terms. Volt,

489 U.S. at 479; Prima Paint, 388 U.S. at 404 n.12.

These two policies contained within the FAA – the

policy favoring arbitral resolution of disputes notwithstanding

state law to the contrary, and the policy favoring enforcement of

arbitration agreements according to general contract principles –

are potentially in conflict in two situations. First, choice-of-

law provisions in arbitration contracts (providing that the

contract will be governed by the law of a particular state) have

been argued to evidence the parties’ desire that arbitration be

conducted pursuant to state law. Second, even where federal law

governs, where an arbitration agreement adopts a particular

arbitration rule that departs from the FAA standard (either a

state-law rule or one created for the particular agreement),

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there is an argument that the agreement should be enforced

according to its terms, and that the specific rule chosen by the

parties should prevail over the FAA standard. Here, we must

first determine whether state or federal law applies to the

standard of review issue and then determine if the federal

standard of the FAA has been displaced.

B. Effect of the Choice-of-Law Clause

We consider first the choice-of-law argument. PRTC

argues that by incorporating Puerto Rican law the parties agreed

that the Puerto Rican law of judicial review of arbitration

awards should apply. The Supreme Court has considered the

choice-of-law issue in the Volt and Mastrobuono cases, and

appears to have instructed us that the outcome should depend on

whether there is a significant FAA policy that would be

undermined by the state rule.

Mastrobuono involved a policy central to the FAA: the

allocation of powers between the court and the arbitrators.

Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52, 59-60

(1995). The Court held that a choice-of-law provision could not

be interpreted to substitute state for federal law. Id. at 58-

61. The petitioners in Mastrobuono were unsophisticated

investors who had opened a securities trading account with a

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large brokerage firm. Id. at 54. The contract, drafted in full

by the brokerage firm, contained an arbitration clause providing

for arbitration in accordance with the National Association of

Securities Dealers ("NASD") rules. These rules allowed an award

of punitive damages. Id. at 60-61. The contract also included a

choice-of-law clause stating that the contract was to be governed

by New York law. Id. at 54-55. New York law prohibited

arbitrators from awarding punitive damages. Id. at 55.

In light of the federal policy favoring arbitration,

the Court concluded that the "best way to harmonize the

choice-of-law provision with the arbitration provision [was] to

read ‘the laws of the State of New York’ to encompass substantive

principles that New York courts would apply, but not to include

special rules limiting the authority of arbitrators. Thus, the

choice-of-law provision covers the rights and duties of the

parties, while the arbitration clause covers arbitration." Id.

at 63-64 (emphasis added). In other words, a choice-of-law

clause, standing alone, generally will not be interpreted to

require the application of state law restricting “the authority

of arbitrators.”

Volt, on the other hand, held that a choice-of-law

provision could properly be interpreted by the state court to

provide for application of California law as to the relative

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timing of judicial and arbitration proceedings. 489 U.S. at 479.

There, the contract provided that “[t]he contract shall be

governed by the law of the place where the Project is located,”

that is, California. Id. at 470 (modification in original).

California law provided that an arbitration should be stayed

pending related litigation by one of the parties to the

arbitration agreement with parties not bound by the arbitration

agreement. There was no provision of the FAA either requiring a

stay of arbitration in such circumstances or prohibiting a stay.4

The Supreme Court, deferring to the state court’s interpretation

of the contract, found that the federal policy favoring

4
Section 3 of the FAA states:
If any suit or proceeding be brought in any of the courts of
the United States upon any issue referable to arbitration
under an agreement in writing for such arbitration, the court
in which such suit is pending, upon being satisfied that the
issue involved in such suit or proceeding is referable to
arbitration under such an agreement, shall on application of
one of the parties stay the trial of the action until such
arbitration has been had in accordance with the terms of the
agreement, providing the applicant for the stay is not in
default in proceeding with such arbitration.
9 U.S.C. § 3 (2000). This provision has been interpreted to
require a stay of litigation between the parties to the arbitration
agreement when the subject of the litigation is within the scope of
the agreement. See e.g., Moses H. Cone, 460 U.S. at 22, 22 n.27.
Section 3 does not directly address the issue of stays of
litigation involving non-parties. Other courts have broadly
interpreted section 3 -- in combination with the district court’s
inherent power to manage its own docket -- to authorize the
district court to issue a stay of litigation involving non-parties.
See, e.g., City of Bismarck v. Toltz, King, Duvall, 767 F.2d 429,
432-33 (8th Cir. 1985).
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arbitration was not offended by application of California’s laws

because, “[t]here is no federal policy favoring arbitration under

a certain set of procedural rules." Volt, 489 U.S. at 476. More

recently, the Court has clarified that the proper inquiry is

whether the state law requirement “undermine[s] the goals and

policies of the FAA,” Doctor’s Assocs. v. Cassaroto, 517 U.S.

681, 685 (1996) (internal quotation marks omitted), and explained

that “[t]he state rule examined in Volt determined only the

efficient order of proceedings.” Id. at 688 (emphasis added).

Thus, Volt establishes that application of state law rules is

appropriate only when there is no conflicting federal policy.

We conclude that this case is closer to Mastrobuono

than to Volt, because here, the policies of the FAA are

implicated. Here, PRTC argues that the choice-of-law provision

requires us to apply Puerto Rican law to determine whether the

contract requires more searching judicial review of the

arbitration award than that provided for in the FAA. The

extremely limited judicial review contemplated by the FAA clearly

implicates the federal policy favoring final resolution of

disputes by arbitration and, in particular, affects the

allocation of powers between the court and the arbitrators.

Mastrobuono, 514 U.S. at 59-60. Allowing more searching judicial

review would inherently limit the authority of arbitrators.

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Jacada Ltd. v. Intern. Mktg. Strategies, 401 F.3d 701, 711 (6th

Cir. 2005); see also Bowen v. Amoco Pipeline Co., 254 F.3d 925,

936 (10th Cir. 2001) ("[E]xpanded judicial review would threaten

the independence of arbitration ... and reduces arbitrors'

willingness to create particularized solutions for fear the

decision will be vacated by a reviewing court.").

In light of this policy, the mere inclusion of a

generic choice-of-law clause within the arbitration agreement is

not sufficient to require the application of state law concerning

the scope of review, since there is a strong federal policy

requiring limited review. This is particularly so when the state

law at issue is “specifically and solely applicable to

arbitration agreements.” Painewebber Inc. v. Elahi, 87 F.3d 589,

593 (1st Cir. 1996). Just as the generic choice-of-law clause in

Mastrobuono was insufficient to invoke New York law precluding

arbitrators’ awards of punitive damages, 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” for vacatur of arbitral awards. Roadway Package Sys.,

Inc. v. Kayser, 257 F.3d 287, 289, 297 (3rd Cir. 2001).

Our conclusion in this respect is in keeping with the

decisions of every circuit that has considered the question.

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These other circuits have held that the mere inclusion of a

choice-of-law clause within the arbitration agreement is

insufficient to indicate the parties’ intent to contract for the

application of state law concerning judicial review of awards.5

Thus, here the choice-of-law provision in Clause 4 of

the contract is insufficient to render applicable Puerto Rican

law concerning the scope of judicial review.

5
See, e.g., Jacada, 401 F.3d at 711-12 (holding that
generic choice-of-law provision did “not unequivocally suggest an
intent to displace the default federal standard”); Roadway, 257
F.3d at 289; UHC Mgmt. Co. v. Computer Scis. Corp., 148 F.3d 992,
997 (8th Cir. 1998) (finding choice-of-law provision insufficient
to invoke state law providing for more searching judicial review;
“we will not interpret an arbitration agreement as precluding the
application of the FAA unless the parties’ intent that the
agreement be so construed is abundantly clear”).
Our holding is also consistent with the decisions of this
circuit and others that have found a generic choice-of-law
provision insufficient to incorporate state law on the allocation
of powers between the court and the arbitrator. See, e.g., Elahi,
87 F.3d at 593 (following Mastrobuono to “find that the choice-of
law clause in this case is not an expression of intent to adopt New
York caselaw requiring the courts to apply section 15 [the NASD
time bar on arbitration]”); Sec. Ins. Co. of Hartford v. TIG Ins.
Co., 360 F.3d 322, 327 (2d Cir. 2004) (“[T]his Court has rejected
the argument that a general choice-of-law provision without more
evidences the parties intent to incorporate New York decisional law
on the allocation of powers between the court and the
arbitrator.”)(internal quotation marks and citations omitted);
Ferro Corp. v. Garrison Indus., Inc. 142 F.3d 926, 937 (6th Cir.
1998) (holding choice-of-law clause was “not an unequivocal
inclusion” of the Ohio arbitration rule that courts, not
arbitrators decide the issue of fraudulent inducement of the
agreement to arbitrate) (internal quotation marks omitted); Porter
Hayden Co. v. Century Indem. Co., 136 F.3d 380, 382-84 (4th Cir.
1998) (finding general choice-of-law provision insufficient to
require application of Maryland arbitration law and that timeliness
defenses should therefore be submitted to arbitration).
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 C. Effect of Other Provisions

PRTC argues, however, that, even applying federal law,

the contract should be read as evidencing an explicit decision to

provide for more searching judicial review. Specifically, it

urges that the language of Clause 4 of the contract is not merely

a choice-of-law clause because it provides that “[t]his Contract

shall be governed by and interpreted in accordance with the laws

of the Commonwealth of Puerto Rico.” Under Puerto Rican law, if

the parties’ arbitration agreement specifies that the award

should be “conformable to law” (“conforme al derecho”), then the

award will be reviewed for legal error. See, e.g., Unión de la

Industria Licorera de Ponce v. Destilería Serrallés. Inc., 116

P.R. Offic. Trans. 426, 432 (P.R. 1985); S.I. U. De Puerto Rico

v. Otis Elevator Co., 105 P.R. Offic. Trans. 1156, 1163 (P.R.

1977); see also Febus v. MARPE, 135 D.P.R. 206 (1994). PRTC

argues that the “in accordance with the laws” language

demonstrates an intent to subject the arbitrators’ award to

review for errors of law. USPhone, on the other hand, urges the

language here is insufficient under Puerto Rican law to invoke

review for legal error, and that the contract itself explicitly

provides that the findings of the arbitrator “shall be final and

binding for both parties,” thus precluding more searching review.

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 We need not decide whether as a matter of local law

this contract would be construed as providing for review of legal

error, for we conclude that the FAA creates a presumption that

the more limited FAA standard will govern, and the language here,

as a matter of federal law, is insufficient to overcome the

presumption.

The issue whether the parties by contract can supplant

the FAA standard of review has generated substantial litigation.

Some circuits that have held that parties can never by contract

agree to a different standard of review, holding that "because

Congress has specified the exclusive standard by which federal

courts may review an arbitrator's decision ... private parties

may not contractually impose their own standard on the courts."

Kyocera Corp. v. Prudential-Bache Trade Servs., Inc., 341 F.3d

987, 994 (9th Cir. 2003) (en banc); Bowen, 254 F.3d at 935.6

These cases construe the FAA to preclude such a

contractual provision on the theory that allowing private parties

to contract for more searching review standards would create
6
The Eighth Circuit has also suggested that it would not
allow parties to contract for expanded judicial review, although it
did not finally decide the issue, finding the contract language at
issue insufficient to indicate the parties’ intent to do so. See
UHC Mgmt. Co., 148 F.3d at 996-97. The Seventh Circuit, in a
decision construing section 301 of the Taft-Hartley Act but
“looking to” the FAA for guidance has also suggested that parties
cannot contract for vacatur standards other than those set forth in
the FAA. Chi. Typographical Union No. 16 v. Chi. Sun-Times, Inc.,
935 F.2d 1501, 1504-05 (7th Cir. 1991).
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federal jurisdiction by contract. Kyocera, 341 F.3d at 999

(citing Chi. Typographical Union, 935 F.2d at 1504-05). This

concern seems to us misplaced, as it is well settled that federal

courts have jurisdiction over suits seeking to compel arbitration

(or to vacate or enforce arbitration awards) only if the parties

are of diverse citizenship, or some separate grant of

jurisdiction applies.7 Modifying the review standard does not

expand federal jurisdiction.

These decisions also rest on a policy concern that

"[b]road judicial review of arbitration decisions could well

jeopardize the very benefits of arbitration, rendering informal

arbitration merely a prelude to a more cumbersome and

time-consuming judicial review process." Kyocera, 341 F.3d at

998; accord Bowen, 254 F.3d at 935. These cases invoke the goal

of preserving the “independence of the arbitration process,”

Bowen, 254 F.3d at 935, or, put otherwise, the independence of

the arbitrators.

However, the Supreme Court has emphasized on more than

one occasion that the principal objective behind the passage of

7
The FAA is “something of an anomaly in the field of
federal-court jurisdiction. It creates a body of federal
substantive law establishing and regulating the duty to honor an
agreement to arbitrate, yet it does not create any independent
federal-question jurisdiction under [28 U.S.C. § 1331 (2000)] or
otherwise." Moses H. Cone, 460 U.S. at 25 n.32.
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the FAA was enforcement of the parties’ agreements, and that

efficient dispute resolution should not be favored over the FAA’s

primary goal of enforcing private agreements to arbitrate, given

Congress's "preeminent concern in passing the Act ... to enforce

private agreements." Dean Witter Reynolds, 470 U.S. at 221; see

also Moses H. Cone, 460 U.S. at 20 (FAA "requires piecemeal

resolution when necessary to give effect to an arbitration

agreement") (emphasis omitted).

Other circuits have held that the parties may contract

to displace the FAA standards. See, e.g., Jacada, 401 F.3d a

Roadway, 257 F.3d at 288-89; Gateway Techs., Inc. v. MCI, 64 F.3d

993, 996-97 (5th Cir. 1995). These courts have held that the

Act’s ultimate purpose is to enforce the terms of the agreement

to arbitrate, and that they are therefore bound by federal law to

enforce the arbitration agreements as drafted. See, e.g.,

Roadway, 257 F.3d at 292. At the same time they have recognized

that the federal policy in favor of recognizing broad authority

of the arbitrators, even if not sufficient to override the

parties’ agreement for more searching review, at least requires a

presumption that the FAA standard will apply. Id. at 294. Thus,

in the few cases where courts have found that the parties

contracted for more searching judicial review of arbitral awards,

there has been explicit contractual language that specified the

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precise nature of the intended judicial review. See, e.g.,

Gateway Techs., 64 F.3d at 996 (contract language stated that

“[t]he arbitration decision shall be final and binding on both

parties, except that errors of law shall be subject to

appeal”)(emphasis and modification in original); Harris v. Parker

Coll. of Chiropractic, 286 F.3d 790, 793-94 (5th Cir. 2002)

(contract expressly provided that “each party shall retain his

right to appeal any questions of law”).

We agree with the other circuits that have concluded

that the parties can by contract displace the FAA standard of

review, but that displacement can be achieved only by clear

contractual language. The contract here, even if sufficient

under Puerto Rican law, is far short of the explicit language

required by federal law to displace the FAA standard of review,

particularly in light of the agreement’s language that any

disputes “shall be finally settled” under the AAA Rules. See

Elahi, 87 F.3d at 594. We conclude that the FAA standard

applies.

III. Interpreting the Governing Standard

PRTC contends that, even applying the federal

standard, the award should be set aside. As we noted earlier,

under the FAA itself, “judicial review of arbitration awards is

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available where arbitrators have acted in manifest disregard of

the law.” Prudential-Bache Secs., Inc. v. Tanner, 72 F.3d 234,

239 (1st Cir. 1995) (citing Wilko v. Swan, 346 U.S. 427, 436-37

(1953)). Thus, “a mere mistake of law by an arbitrator cannot

serve as the basis for judicial review.” Id. at 239 n.6.

Rather, “manifest disregard” means that “arbitrators knew the law

and explicitly disregarded it.” Advest, 914 F.2d at 10. Vacatur

is appropriate under the manifest disregard standard only when

the award is “‘unfounded in reason and fact, ... based on

reasoning so palpably faulty that no judge or group of judges

could ever conceivably have made such a ruling, or is mistakenly

based on a crucial assumption which is decidedly a non-fact.’”

Challenger Caribbean Corp. v. Unión General de Trabajadores, 903

F.2d 857, 861 (1st Cir. 1990) (quoting In re Hotel Da Vinci, 797

f.2d 33, 34 (1st Cir. 1986)). Put differently, “disregard

implies that the arbitrators appreciated the existence of a

governing legal rule but wilfully decided not to apply it. As

arbitrators need not explain their award, and did not do so here,

it is no wonder that appellant is hard pressed to satisfy the

exacting criteria for invocation of the doctrine.” Advest, 914

F.2d at 10 (internal quotation marks and citations omitted).8

8
“‘[A]s long as the arbitrator is even arguably constru-
ing or applying the contract and acting within the scope of his
authority,' a court's conviction that the arbitrator made a serious
mistake or committed grevious error will not furnish a satisfactory
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 This standard has not remotely been satisfied here.

PRTC contends that the arbitrators failed to recognize various

breaches of cardinal contractual obligations by USPhone that

provided a defense to USPhone’s claims for breach of contract.

Thus, for example, USPhone allegedly violated the contract by

failing to comply with applicable FCC requirements. PRTC’s

argument that the district court failed to review the arbitration

award under the “manifest disregard of the law standard” is

nothing more than a thinly veiled attempt to obtain appellate

review of the arbitrators’ legal and factual determinations

regarding the contract dispute. The district court properly

rejected PRTC’s claim, finding that “PRTC’s objections to the

arbitration are essentially disagreements with the arbitrators’

conclusions.” P.R. Tel., Nos. 03-1593, 03-1815, slip op. at 3.

IV. Attorneys’ Fees

In its cross-appeal, USPhone contends that the

district court erred in refusing to award attorneys’ fees, in

light of various observations made by the district court when

dismissing with PRTC’s motion with prejudice.9 Our review of the

basis for undoing the decision,” under the manifest disregard
standard. Advest, 914 F.2d at 9 (quoting Misco, 484 U.S. at 371).
9
Specifically, USPhone cites to the following language
from the district court’s Opinion and Order:
The Court finds that the basis for review stated by PRTC
in this case does not rise to anywhere near the level
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district court’s denial of attorney fees is for abuse of

discretion. Top Entm’t, Inc. v. Torrejon, 351 F.3d 531, 533 (1st

Cir. 2003).

Puerto Rican law, which governs the question of fees

in this diversity action, see Newell P.R., Ltd. v. Rubbermaid

Inc., 20 F.3d 15, 24 (1st Cir. 1994), provides that “[i]n the

event any party or its lawyer has acted obstinately or

frivolously, the court shall, in its judgment, impose on such

person the payment of a sum for attorney’s fees which the court

decides corresponds to such conduct.” P.R. R. Civ. P. 44.1(d).

Puerto Rican law thus provides that an award of fees shall be

made for either (1) obstinate conduct or (2) frivolous

litigation. There is no basis for USPhone’s contention that

federal law requires a more liberal standard for the award of

attorney’s fees in suits seeking to set aside arbitration

awards.10

required under the Federal Arbitration Act in order to
allow court review. The Court finds that PRTC’s
objections to the arbitration are essentially
disagreements with the arbitrators’ conclusions. This
type of disagreement cannot form the basis of a
legitimate motion to vacate an arbitration award because
it would subvert the very purpose of arbitration. ...
The mere filing of this motion controverts the purpose of
the Federal Arbitration Act and is a waste of the time
and resources of this Court.”
P.R. Tel., Nos. 03-1593, 03-1815, slip op. at 3-4.
10
The case relied upon by USPhone, Courier-Citizen Co. v.
Boston Electrotypers Union No. 11, 702 F.2d 273, 282 (1st Cir.
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 Under Rule 44.1(d), “a finding of obstinacy requires

that the court determine a litigant to have been unreasonably

adamant or stubbornly litigious, beyond the acceptable demands of

the litigation, thereby wasting time and causing the court and

the other litigants unnecessary expense and delay.” De Leon

Lopez v. Corporacion Insular de Seguros, 931 F.2d 116, 126 (1st

Cir. 1991). Factual findings of specific instances of

misconduct, taking into account the overall character of the

litigation, are required to support a finding of obstinacy

mandating the award of attorney fees under Puerto Rican law.

See, e.g., Mejias-Quiros v. Maxxam Prop. Corp., 108 F.3d 425, 429

(1st Cir. 1997); Dopp v. Pritzker, 38 F.3d 1239, 1253-54 (1st

Cir. 1994). “Examples of obstinate conduct include: denying all

liability in answering a complaint, where the defendant later

admits liability; raising inapplicable defenses; denying all

liability when only the amount of damages sought is contested;

and denying a fact, knowing it is true.” Correa v. Cruisers, a

Div. Of KCS Int’l, Inc., 298 F.3d, 13, 31 (1st Cir. 2002)

(citation omitted). The district court here made no such

explicit factual finding, nor does the record otherwise document

1983), involved an arbitration award enforceable under section
301(b) of the Labor Management Relations Act, codified at 29 U.S.C.
§ 185(b).
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specific instances of obstinate conduct. Compare Top Entm’t, 351

F.3d at 534.

The district court also did not conclude that the

motion to vacate was frivolous, although the court did observe

that PRTC’s filing of its motion was “a waste of time and

resources of this court.” Moreover, a finding of frivolity would

not be justified in this case. The district court acted within

its discretion in denying USPhone's motion for the award of fees.

V.

In sum, we hold that the parties did not by contract

displace the FAA standard of review and, under the FAA standard,

the district court properly denied the motion to vacate and

confirmed the arbitration award. The district court also did not

err in denying U.S. Phone’s motion for attorney fees.

Accordingly, we affirm the district court’s judgment.

It is so ordered.

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