By Thomas K. Potter III and Kasee Sparks Heisterhagen
(Thomas K. Potter III is the Managing Partner of Burr & Forman LLP's Nashville Office. Kasee Heisterhagen is an Associate in Burr & Forman's Mobile, Alabama office.1)
Arbitration awards are, for the most part, final and binding. The Federal Arbitration Act, ("FAA"), 9 U.S.C. §§9-11, provides expedited judicial review to confirm, modify, or vacate arbitration awards. A district court must confirm an arbitration award unless: (a) it was procured by corruption, fraud, or undue means; or (b) the arbitrators were guilty of misconduct or exceeded their powers.
Over time, though, some courts have developed a doctrine under which arbitration awards may be vacated when the arbitrators have exhibited a "manifest disregard of the law.”2
Only the 7th Circuit rejected the notion that manifest disregard of the law was a "common-law ground" for vacatur, instead interpreting it "so narrowly that it fits comfortably under the first clause of the fourth statutory ground -- 'where the arbitrators exceeded their powers.'" Wise v. Wachovia Sec. LLC, 450 F.3d 265, 268 (7th Cir. 2006).
Those circuits previously allowing "manifest disregard" for vacatur (1st, 2nd, 5th, 9th, 11th and D.C.) used a two-part inquiry to determine whether an arbitrator had manifestly disregarded the law.
First, did the arbitrator ignore law that was well defined, explicit, and clearly applicable? Second, did the arbitrator appreciate the existence of a clearly governing legal principle but simply ignore it? Both prongs had to be met.3
Very few arbitration decisions have been vacated for manifest disregard of the law — perhaps due, in part, to the fact that arbitrators are not required to explain their reasoning so there is frequently no record showing that the arbitrator understood but ignored a clearly governing principle.4
In 2008 the Supreme Court further muddled things with its decision in Hall Street Assocs. LLC v. Mattel Inc., 552 U.S. 576 (2008). Since then, the U.S. Circuit Courts of Appeals have remained divided over whether the manifest disregard doctrine survives. Some circuits view Hall Street as eliminating manifest disregard, while others believe manifest disregard survives as "judicial gloss" on sections 9 through 11 of the Federal Arbitration Act. One circuit has expressly avoided the issue.
The Supreme Court considered manifest disregard in Hall Street. In that case, a commercial landlord and tenant attempted to contractually modify the standard for judicial review. The parties' contract provided a court could vacate, modify, or correct any award if the arbitrator's conclusions of law were erroneous.
After arbitration, the district court vacated the award for legal error. The 9th Circuit reinstated the award, holding the contractual terms controlling judicial review were unenforceable. The Supreme Court granted certiorari to decide whether the statutory grounds for vacatur set forth in Sections 10-11 of the FAA were exclusive.
The Hall Street Court stated that manifest disregard can be read as referring to Section 10 grounds collectively, or alternatively, as shorthand for those provisions authorizing vacatur when arbitrators are guilty of misconduct or have exceeded their powers. Id., 552 U.S. at 585.
The Court compared Section 9 language that a court "must" confirm an arbitration award "unless" certain standards are met to Section 5 permissive language providing that "if an agreement provision be made for a method of naming or appointing an arbitrator . . . such method shall be followed; but if no method be provided . . . the court shall designate and appoint an arbitrator." Id. at 588.
Ultimately, Hall Street held that the FAA vacatur provisions are exclusive and cannot be expanded by contract. The Supreme Court said:
Instead of fighting the text, it makes more sense to see the three provisions, §§9-11, as substantiating a national policy favoring arbitration with just the limited review needed to maintain arbitration's essential virtue of resolving disputes straightaway. Id. at 588.
The Court also concluded this approach was in line with Congress' intent that "the grounds for vacating, modifying, or correcting an award are limited." Id. at 589 n.7.
FIVE CIRCUITS: MANIFEST DISREGARD NOT GROUNDS FOR VACATUR
Following Hall Street, the Circuits have disagreed whether manifest disregard survives as an independent ground for vacatur. The 1st, 5th, 7th, 8th, and 11th Circuits have held that manifest disregard is not an independent ground for vacating awards under the FAA.
InCitigroup Global Markets Inc. v. Bacon, 562 F.3d 349 (5th Cir. 2009), the 5th Circuit stated:
Hall Street unequivocally held that the statutory grounds are the exclusive means for vacatur under the FAA. Our case law defines manifest disregard as a nonstatutory ground for vacatur. Thus, to the extent that manifest disregard of the law constitutes a nonstatutory ground for vacatur, it is no longer a basis for vacating awards under the FAA. Id. at 355.
In Frazier v. CitiFinancial Corp., 604 F.3d 1313 (11th Cir. 2010), the 11th Circuit held "judicially-created bases for vacatur are no longer valid in light of Hall Street.” The court added, “In so holding, we agree with the 5th Circuit that the categorical language of Hall Street compels such a conclusion." Id. at 1324.
In Affymax Inc. v. Orth-McNeil-Janssen Pharm. Inc., 660 F.3d 281, 284-85 (7th Cir. 2011) the 7th Circuit agreed that manifest disregard is not a ground to reject an arbitrator's award, unless the award directs the parties to violate the legal rights of third persons who did not consent to the arbitration.
The 8th Circuit also interprets Hall Street as limiting vacatur to those grounds explicitly listed in the FAA, thus eliminating manifest disregard. Medicine Shoppe Int’t Inc. v. Turner Investments, Inc., 614 F.3d 485, 489 (8th Cir. 2010).
The 5th Circuit stated, in dicta, that Hall Street stands for the proposition that manifest disregard of the law was not a valid ground for vacating or modifying an arbitral award, but only in cases brought under the FAA. Ramos-Santiago v. United Parcel Service, 524 F.3d 120, 124 n.3 (1st Cir. 2008) (dicta because not decided under the FAA).
FIVE CIRCUITS STILL RECOGNIZE MANIFEST DISREGARD
The 9th Circuit has taken a different approach, treating manifest disregard of the law as a judicial interpretation of the arbitrator's "power" under Section 10. In Comedy Club Inc. v. Improv West Assocs. 553 F.3d 1277 (9th Cir. 2009), cert. denied, 130 S.Ct. 145, 175 (2009), the 9th Circuit held that "after Hall Street Associates, manifest disregard of the law remains a valid ground for vacatur" because it is "shorthand for a statutory ground under the FAA, specifically 9 U.S.C. § 10(a)(4)." Id., 553 F.3d at 1290.
The court pointed out that the "Supreme Court did not reach the question of whether the manifest disregard of the law doctrine fits within §§ 10 or 11 of the FAA. Hall Street Associates, 128 S.Ct. at 1404. Instead, it listed several possible readings of the doctrine, including our own." Id. See also Biller v. Toyota Motor Corp., --- F.3d ----, 2012 WL 336135, at *5-6 (9th Cir. Feb. 3, 2012) (court considered manifest disregard of law as grounds for vacatur, but did not find manifest disregard under the facts presented).
In Jock v. Sterling Jewelers, 646 F.3d 113, 121-22 (2d Cir. 2011), cert. denied, 646 F.3d 113, --- S.Ct. ---- (2012), the 2nd Circuit acknowledged it would continue to use manifest disregard as a traditional "judicially-created ground [for vacatur], namely 'that an arbitral decision may be vacated when an arbitrator has exhibited a manifest disregard of the law.'" '
In Lynch v. Whitney, 419 Fed. Appx. 826 (10th Cir. 2011), the 10th Circuit stated:
As for judicially-created bases for vacating an award, we have recognized at least three: (1) where the award violates public policy; (2) when there was a denial of a fundamentally fair hearing; and (3) manifest disregard of the law, quoting Sheldon v. Vermonty, 269 F.3d 1202, 1206 (10th Cir. 2001).
The 6th Circuit read Hall Street very narrowly, as applying only to contractual expansions of the grounds for review. Coffee Beanery Ltd. v. WW LLC, 300 Fed. Appx. 415 (6th Cir. 2008) cert. denied, 130 S.Ct. 81 (2009). The Coffee Beanery court wrote that while "Hall Street significantly reduced the ability of federal courts to vacate arbitration awards for reasons other than those specified in 9 U.S.C. § 10, . . . it did not foreclose federal courts' review for an arbitrator's manifest disregard of the law." Id. at 418-19. But see Grain v. Trinity Health, Mercy Health Servs. Inc., 551 F.3d 374, 380 (6th Cir. 2008) (stating in dicta that Hall Street casts doubt on the continuing validity of the manifest disregard theory).
Most recently, in Wachovia Securities v. Brand, 671 F.3d 472 (4th Cir. Feb. 16, 2012), the 4th Circuit held that "manifest disregard continues to exist as either an independent ground for review or as a judicial gloss," but did not decide which of the two is the correct, because the claim failed under both. Id. at *17. Regardless, manifest disregard survives Hall Street in the 4th Circuit.
3RD CIRCUIT REMAINS UNDECIDED
In Rite Aid New Jersey Inc. v. UFCW, 449 Fed. Appx. 126, 129 n.3 (3d Cir. 2011), the 3rd Circuit wrote: "We have not addressed the question of whether manifest disregard of the law remains a valid ground for vacating an arbitration award under the FAA, in light of the Supreme Court's decision in Hall Street."
SUPREME COURT REMAINS SILENT
The Supreme Court itself referred to the issue in Stolt-Nielsen v. AnimalFeeds Int'l Corp., 559 U.S. ---, 130 S.Ct. 1758, 176 L.Ed.2d 605 (2010), and concluded: "We do not decide whether 'manifest disregard' survives our decision in [Hall Street] as an independent ground for review or as a judicial gloss on the enumerated grounds for vacatur set forth at 9 U.S.C. § 10," Id. at 1768 n.3. The court itself has rekindled the debate.
1 Thomas K. Potter III has over 25 years experience representing business interests in securities, corporate and intellectual property disputes, including alternative dispute resolution (ADR), and he sits as an arbitrator and Panel Chair for the Financial Institution Regulatory Authority (FINRA). In addition to disputed matters, he advises broker-dealers, municipal, investment advisors, and companies on regulatory and compliance matters. Kasee Heisterhagen focuses on bankruptcy, maritime, and commercial litigation.
2 See, e.g., Cytyc Corp. v. Deka Prods. Ltd., 439 F.3d 27, 33 (1st Cir. 2006); Westerbeke Corp. v. Daihatsu Motor Co. Ltd., 304 F.3d 200, 208 (2d Cir. 2002); Brabham v. A.G. Edwards & Sons Inc., 376 F.3d 377, 381 (5th Cir. 2004); Coutee v. Barington Captial Group LP, 336 F.3d 1128, 1132-33 (9th Cir. 2003); Montes v. Shearson Lehman Bros. Inc., 128 F.3d 1456, 1461-62 (11th Cir. 1997); LaPrade v. Kidder, Peabody & Co., 246 F.3d 702, 706 (D.C. Cir. 2001).
3 Westerbeke Corp., 304 F.3d at 209; Halligan v. Piper Jaffray Inc., 148 F.3d 197, 202 (2d Cir. 1998).
4 See, e.g., O.R. Securities Inc. v. Professional Planning Assoc. Inc., 857 F.2d 742, 747 (11th Cir. 1988).