Court of Appeals Deals a Blow to Arbitrator Autonomy in Contract Interpretation

In a recent decision, the U.S. Court of Appeals for the Seventh Circuit backtracked on a decades-long precedent that required deference to an arbitrator’s contract interpretation.

The case, United States Soccer Federation v. United States National Soccer Team Players Association, involved a dispute regarding the use of soccer players’ likenesses by the federation, specifically, whether and on what conditions the federation was contractually required to obtain players’ approval for the use of their images.  The matter went to arbitration.  The sole arbitrator interpreted the various agreements between the players and the federation and found a “gap” in the language, which he interpreted as an ambiguity.  He resolved this ambiguity by reference to the parties’ prior course of conduct and rendered an award in favor of the players. The district court confirmed it.

On appeal, the Seventh Circuit found that the arbitrator erred in finding an ambiguity based on “silence,” and that he exceeded his authority by looking into the parties’ past dealings to imply an approval requirement.  The court reversed the confirmation and voided the award.

The critical aspect of the decision is that the Seventh Circuit effectively rewrote the long-standing standard by which an arbitrator’s interpretation of a contract is judged.  The well-settled rule is (was) that an arbitrator’s contractual interpretation would be reversed only if “there is no possible interpretive route to the award.”  The new test applied by the Seventh Circuit is whether the contract “can be reasonably construed in one way.”  As every lawyer recognizes, there is a gulf of difference between asking whether a contractual interpretation is “possible” and whether it is “reasonable.”

The decision opens up a new line of attack for parties unhappy with arbitration awards.  It can now be argued – at least in the courts encompassed by the Seventh Circuit – that an arbitrator erred by adopting an unreasonable interpretation of the contractual language.  If this is shown, the award would be voided.

The players in the case filed a petition for an en banc hearing arguing that the “decision is fundamentally out of step with this court’s arbitration case law.” They have been joined by a group of legal scholars who have written that the decision “threatens to undo six decades of arbitration jurisprudence.”  It remains to be seen whether the full court of appeals will reverse the three-judge panel’s decision and reinstate arbitrator autonomy in contract interpretation.