Do your company’s policies include an arbitration clause?  Is the clause governed by the Federal Arbitration Act (FAA), Texas Arbitration Act (TAA), or both?  A recent decision by the Texas Supreme Court, Nafta Traders, Inc. v. Margaret A. Quinn, ___ S.W.3d ___, 2011 WL 1820875 (Tex. May 13, 2011) (not yet released for publication), holds that unlike arbitration clauses governed solely by the FAA, arbitration clauses governed by the TAA may expand the scope of judicial review of an arbitration award.  Specifically, under the TAA, parties may elect to have a judge review the arbitrator’s decision for legal error.

But wait, you respond.  I thought the whole purpose of arbitration was to avoid lengthy and expensive appeals and that arbitration awards were subject to review only in limited circumstances such as arbitrator misconduct, corruption, or fraud.  Nope.  According to the Texas Supreme Court, the overriding goal of arbitration is not the “national policy favoring arbitration with just the limited review needed to maintain arbitration’s essential virtue of resolving disputes straightaway” but to “ensure judicial enforcement of privately made agreements.”  Id. at *5 (internal citations omitted).  The Court rejected the U.S. Supreme Court’s analysis in Hall Street Associates L.L.C. v. Mattel, Inc., 552 U.S. 576, 578 (2008), which held that the FAA does not allow parties to agree to an expanded scope of review.

How will Nafta Traders affect employer-drafted arbitration clauses?  Employers who prefer the privacy of arbitration but want the right to have a judge review the arbitrator’s decision for legal error may draft their arbitration clauses to provide for an expanded scope of review under the TAA.  However, any employer who does so should remember that such expended scope of review will apply to employer and employees alike.  Accordingly, to decide whether an expanded scope of review would be advantageous, employers should conduct a cost-benefit analysis.

“[A]bsent clear agreement, the default under the TAA, and the only course permitted by the FAA, is restricted judicial review.”  Nafta Traders, 2011 WL 1820875 at *10.