Nafta Traders Inc. v. Quinn, No. 08–0613.

• Court: Supreme Court of Texas
• Writing for the Court: Justice HECHT delivered the opinion of the Court, in which Chief Justice JEFFERSON, Justice WAINWRIGHT, Justice MEDINA, Justice GREEN, Justice JOHNSON, Justice WILLETT, Justice GUZMAN, and Justice LEHRMANN joined.
• Citation: 54 Tex. Sup. Ct. J. 961,112 Fair Empl.Prac.Cas. (BNA) 474,339 S.W.3d 84
• Parties: NAFTA TRADERS, INC., Petitioner,v.Margaret A. QUINN, Respondent.
• Decision Date: 13 May 2011
• Docket Number: No. 08–0613.

339 S.W.3d 84
112 Fair Empl.Prac.Cas. (BNA) 474
54 Tex. Sup. Ct. J. 961

NAFTA TRADERS, INC., Petitioner,
v.
Margaret A. QUINN, Respondent.

No. 08–0613.

Supreme Court of Texas.

Argued Oct. 8, 2009.Decided May 13, 2011.

[339 S.W.3d 86]

Alan L. Busch, Busch and Myers, L.L.P., Robert Ruotolo, Busch Ruotolo & Simpson, L.L.P., Jeffrey H. Rasansky, Rasansky Law Firm, Christopher M. Albert, Busch Ruotolo & Simpson, L.L.P., Dallas, for Nafta Traders, Inc.Janette Johnson, Janette Johnson & Associates, Christine Neill, Dallas, for Margaret A. Quinn.Roger Townsend, Alexander Dubose & Townsend LLP, Houston, for Amicus Curiae Denver City Energy Associates, L.P.

[339 S.W.3d 87]

Justice HECHT delivered the opinion of the Court, in which Chief Justice JEFFERSON, Justice WAINWRIGHT, Justice MEDINA, Justice GREEN, Justice JOHNSON, Justice WILLETT, Justice GUZMAN, and Justice LEHRMANN joined.

“The answer to most questions regarding arbitration ‘flow inexorably from the fact that arbitration is simply a matter of contract between the parties.’ ” ¹ Nevertheless, the United States Supreme Court has held in Hall Street Associates, L.L.C. v. Mattel, Inc., that the grounds for vacating or modifying an arbitration award under the Federal Arbitration Act (FAA) ² “are exclusive” and cannot be “supplemented by contract”. ³ The principal questions in this case are whether the Texas General Arbitration Act (TAA) ⁴ likewise precludes an agreement for judicial review of an arbitration award for reversible error, and if not, whether the FAA preempts enforcement of such an agreement. We answer both questions in the negative and consequently reverse the judgment of the court of appeals ⁵ and remand the case to that court for further proceedings.

I

Petitioner, Nafta Traders, Inc., an international re-distributor of athletic apparel and footwear, terminated its employment of respondent, Margaret A. Quinn, its Vice President of Operations, citing as the basis for its decision a reduction in force due to worsening business conditions. Quinn sued Nafta for sex discrimination in violation of the Texas Commission on Human Rights Act. ⁶ Nafta's employee handbook included a section captioned “Arbitration”, which called for “a dispute arising out of [the] employment relationship ... or its termination” to be submitted to binding arbitration. The arbitration section did not indicate whether state or federal law would apply, providing only that “[a]ll proceedings shall be conducted in the City of Dallas, State of Texas.” ⁷ Nafta moved to

[339 S.W.3d 88]

compel arbitration under the FAA, which applies to “contract[s] evidencing a transaction involving commerce” ⁸ Quinn did not object, and the district court signed an agreed order.

The parties then selected an AAA arbitrator, who heard evidence and awarded Quinn $30,000 in back pay, $30,000 in mental anguish damages, $29,031 in “special damages”,⁹ $104,828 in attorney fees, and costs. A verbatim record was made of the proceedings. Quinn moved the court to confirm the award under the TAA. Nafta moved for vacatur under the FAA, the TAA, the common law, and a provision in the arbitration section of the employee handbook that stated: “The arbitrator does not have authority (i) to render a decision which contains a reversible error of state or federal law, or (ii) to apply a cause of action or remedy not expressly provided for under existing state or federal law.” Nafta argued in part that by agreeing to these limits on the arbitrator's authority the parties had in effect agreed to expand the narrow scope of judicial review otherwise provided by the TAA and the FAA.

As grounds for vacating the award, Nafta asserted that the arbitrator had applied federal law to Quinn's sex discrimination claim even though she had alleged only a violation of Texas law, and that the evidence did not support a finding of sex discrimination. Regarding damages, Nafta asserted that the attorney fee award was improper, that the “special damages” award was really a double recovery of lost wages, and that the evidence did not support an award of mental anguish damages. Quinn responded that none of the grounds asserted by Nafta is recognized by the TAA or the FAA as a basis for vacating an arbitration award, and that neither the TAA nor the FAA permits the grounds for vacating an arbitration award to be enlarged by agreement. Even if such an agreement were permissible, Quinn argued, the statement in the handbook was too vague and one-sided to be enforced. And finally, she contended, even if the grounds asserted by Nafta could be considered, they should all be rejected as meritless.

The district court issued a brief order simply confirming the arbitrator's award without giving any indication whether it had considered the substance of Nafta's complaints and rejected them or instead had concluded that the TAA or FAA did not permit consideration of such grounds for vacatur. Nafta appealed.¹⁰ After oral argument in the court of appeals but before an opinion had issued, the United States Supreme Court decided Hall Street Associates, L.L.C. v. Mattel, Inc., holding that the FAA's grounds for vacatur and modification “are exclusive” and cannot be

[339 S.W.3d 89]

“supplemented by contract”.¹¹ Although the court of appeals applied the TAA in this case rather than the FAA, noting that neither Nafta nor Quinn had disputed on appeal that the TAA governed their arbitration,¹² it concluded that similarities between the two statutes weighed heavily in favor of construing the TAA as Hall Street had construed the FAA.¹³ Accordingly, the court held that “parties seeking judicial review of an arbitration award covered under the TAA cannot contractually agree to expand the scope of that review and are instead limited to judicial review based on the statutory grounds enumerated in the statute.” ¹⁴

One such statutory ground is section 171.088(a)(3)(A), that an arbitrator has exceeded his power,¹⁵ and Nafta argued that the arbitrator had exceeded his power by issuing an erroneous award when the arbitration agreement denied him the authority to commit reversible error or apply an action or remedy contrary to law.¹⁶ The court of appeals rejected Nafta's argument because, it explained, while an arbitrator exceeds his power by deciding an issue the parties did not agree to submit to him, he does not exceed his power by deciding matters incorrectly.¹⁷ Moreover, the court said, Nafta could not use section 171.088(a)(3)(A) “to accomplish indirectly what we have already concluded it cannot do directly, that is, contractually expand judicial review of the arbitration decision.” ¹⁸ Having decided that none of Nafta's complaints fell within any of the statutory grounds for vacatur, the court affirmed the district court's judgment. ¹⁹

We granted Nafta's petition for review.²⁰

II

The TAA, which is based on the Uniform Arbitration Act, ²¹ lists specific grounds for vacating,²² modifying, or correcting

[339 S.W.3d 90]

²³ an arbitration award and provides that unless such grounds are offered, “the court, on application of a party, shall confirm the award.” ²⁴ One such ground for vacating an arbitration award is that “the arbitrators ... exceeded their powers”.²⁵ In arbitration conducted by agreement of the parties, the rule is well established that “[a]n arbitrator derives his power from the parties' agreement to submit to arbitration”.²⁶ As the United States Supreme Court has stated:

Whether enforcing an agreement to arbitrate or construing an arbitration clause, courts and arbitrators must give effect to the contractual rights and expectations of the parties. In this endeavor, as with any other contract, the parties' intentions control. This is because an arbitrator derives his or her powers from the parties' agreement to forgo the legal process and submit their disputes to private dispute resolution.²⁷

[339 S.W.3d 91]

Nafta and Quinn agreed that an arbitrator appointed to resolve disputes between them “does not have authority (i) to render a decision which contains a reversible error of state or federal law, or (ii) to apply a cause of action or remedy not expressly provided for under existing state or federal law.” Unless there is some reason to exclude such limitations from the general rule that the parties' agreement determines arbitral authority, Nafta's contention that the arbitrator exceeded his authority raises a ground to vacate the award, and the court of appeals erred in holding to the contrary.

Quinn argues that her agreement to limit the arbitrator's authority is in effect an agreement for broader judicial review of the arbitration award than permitted by the TAA for the same reasons it is not permitted under similar provisions of the FAA, as the United States Supreme Court held in Hall Street. Sections 10 and 11 of the FAA specify grounds for vacating,²⁸ modifying, or correcting ²⁹ an arbitration award that are similar to the TAA's, and like the TAA, section 9 of the FAA mandates confirmation absent such grounds.³⁰ In Hall Street, the parties had tried part of their dispute to the federal district court and then agreed to submit another part to arbitration.³¹ They agreed that the court could “enter judgment upon any award” unless “the arbitrator's findings of facts are not supported by substantial evidence, or ... the arbitrator's conclusions of law are erroneous.” ³² The Supreme Court held that this agreement impermissibly enlarged the grounds for vacating or modifying an arbitration award under the FAA.³³

We must, of course, follow Hall Street in applying the FAA, but in construing the TAA, we are obliged to examine

[339 S.W.3d 92]

Hall Street's reasoning and reach our own judgment. The Supreme Court based its decision on the framework of the FAA and on policy. It found that “textual features” of sections 9, 10, and 11 were “at odds with enforcing a contract to expand judicial review following the arbitration.” ³⁴ Because the grounds listed in sections...