Hall Street Associates was the landlord and Mattel Inc. was the tenant under various leases for property that Mattel used as a manufacturing site for many years. The leases provided that the tenant would indemnify the landlord for any costs resulting from the tenant’s failure to follow environmental laws while using the premises. Tests of the property’s well water in 1998 showed high levels of trichloroethylene (TCE), the apparent residue of manufacturing discharges connected with Mattel’s operations on the site between 1951 and 1980. After the Oregon Department of Environmental Quality (DEQ) discovered even more pollutants, Mattel signed a consent order with the DEQ providing for cleanup of the site. After Mattel gave notice of intent to terminate the lease in 2001, Hall Street sued, contesting Mattel’s right to vacate on the date it gave and claiming that the leases obliged Mattel to indemnify Hall Street for the costs of cleaning up the TCE. A federal district court ruled in Mattel’s favor on the termination issue. The parties then proposed that they be permitted to submit the indemnification issue to arbitration rather than having the court rule on it. The court was amenable. The parties drew up an arbitration agreement, which the court approved and entered as an order. One paragraph of the agreement provided that 

United States District Court for the District of Oregon may enter judgment upon any [arbitration] award, either by confirming the award or by vacating, modifying or correcting the award. The court shall vacate, modify or correct any award: (i) where the arbitrator’s findings of facts are not supported by substantial evidence, or (ii) where the arbitrator’s conclusions of law are erroneous. 

The arbitrator initially decided in Mattel’s favor on the indemnification question, but the federal district court vacated the arbitrator’s decision on the ground of legal error (the basis set forth in the parties’ arbitration agreement). On remand, the arbitrator ruled in favor of Hall Street. The district court upheld this ruling. Mattel then appealed to the U.S. Court of Appeals for the Ninth Circuit, arguing that the arbitrator’s initial decision in Mattel’s favor should be reinstated. In particular, Mattel argued that the agreement calling for the district court to vacate the arbitrator’s decision in the event of legal error amounted to an unenforceable attempt to expand the legally permitted grounds for setting aside an arbitrator’s decision (as set forth in the Federal Arbitration Act). How did the Ninth Circuit rule?