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Is Manifest Disregard of the Law Still a Ground for Vacating Arbitration Awards? - March 2016

March 02, 2016

by Jack Rephan

Eight years ago, the United States Supreme Court, in Hall Street Assocs., LLC v. Mattel, Inc.,[1] had before it the issue of whether or not parties to an arbitration agreement could expand the grounds for vacating an award under §§ 10 and 11 of the Federal Arbitration Act (FAA).[2] In holding that parties to an arbitration agreement cannot by private agreement expand the grounds for the reviewing an arbitration award, the Court also said that the FAA provides the exclusive grounds for confirming, vacating or modifying an arbitration award. The Court rejected Hall Street’s argument that “manifest disregard of the law” was an independent ground for vacatur on top of those grounds listed in §10. In holding that §10 and §11 provide the exclusive grounds for review of an award, the Court explained that its decision applies only to the review of an award under the FAA and not, for example, to the review of arbitration awards under state statutory or common law. The Court recognized, however, that before Hall Street, a number of courts had considered “manifest disregard of the law” as merely a shorthand for §10(a) (3) or §10(a) (4), which authorize vacatur when arbitrators are guilty of misconduct or exceed their powers. A number of federal circuits, in decisions after Hall Street, have interpreted Hall Street as not rejecting, in toto, manifest disregard as basis for seeking to vacate an award, but that it has survived as being merely shorthand for the statutory grounds under §10(a)(3) or §10(a)(4), or as a judicial gloss on the statutory grounds.

In this paper, the decisions of the several United States Courts of Appeal issued after Hall Street will be briefly reviewed to ascertain whether those courts in the eight years following Hall Street have considered the Supreme Court’s decision as sounding the Death Knell of “manifest disregard,” as a ground for vacatur under the FAA, or whether it is still alive and kicking.

1. Circuits holding that Manifest Disregard did not Survive Hall Street.

The First Circuit, in Ramos – Santiago v. United Parcel Service,[3] has interpreted Hall Street as holding that that manifest disregard of the law is no longer a valid ground for vacating or modifying an award.

The Fifth Circuit, in Citigroup Global Markets, Inc. v. Bacon,[4] has also held that manifest disregard as a ground for vacatur does not survive Hall Street. The Court said that “In the light of the Supreme Court’s clear language that, under the FAA, the statutory provisions are the exclusive grounds for vacatur, manifest disregard of the law as an independent, non-statutory ground for setting aside an award must be abandoned and rejected.[5]

The Seventh Circuit, in Affymax, Inc. v. Ortho- McNeil- Janssen Pharms, Inc,[6] rejected the conclusion of the district court that the arbitrator disregarded the law stating “This list [under § 10(a)] is exclusive; neither a judge nor a contracting party can expand it.”[7]

Similarly, the Eight Circuit, in Med. Shoppe Int’l., Inc. v. Turner Invs., Inc.,[8] after quoting the four statutory grounds in §10 (a), rejected the claim that the arbitrator manifestly had disregarded the law because “Appellant’s claims, including the claim that arbitrator disregarded the law, are not included among those specifically enumerated in §10 and are not cognizable.[9]

The view of the Eleventh Circuit is also that “manifest disregard of the law” is no longer valid as a ground for vacatur. Campbell's Foliage, Inc. v. Fed. Crop Ins. Corp.[10]

2. Circuits holding that Manifest Disregard has Survived Hall Street.

The Second Circuit has held that manifest disregard has survived Hall Street. Stolt-Nielsen SA v. AnimalFeeds Int’l Corp,[11] Although the court acknowledged that Hall Street’s holding was in direct conflict with allowing manifest regard as a non-statutory ground for review, the court resolved the conflict by considering manifest regard simply as shorthand for §10(a)(4). Although this case was reversed by the Supreme Court,[12] based upon a finding that the arbitrators exceeded their powers by allowing class arbitration which was not within the scope of the parties’ agreement, the Supreme Court specifically declined to decide whether manifest disregard has survived its decision in Hall Street. The Court did, however, mention that Animal Feeds’ characterization of the standard for manifest disregard was that the arbitrators “knew of the relevant [legal] principle, appreciated that this principle controlled the outcome of the disputed issue, and nonetheless willfully flouted the governing law by refusing to apply it.”[13] Without deciding whether such a standard applies, the Court did find it satisfied for the reasons stated in its opinion.

In Sutter v. Oxford Health Plans LLC,[14] the Third Circuit said: “An award may be vacated only upon one of the four narrow grounds enumerated in the Federal Arbitration Act” and that “These grounds are exclusive and may not be supplemented by contract,” citing Hall Street.[15] Then the court went on to say that “when the arbitrator ‘strays from interpretation and application of the agreement and effectively ‘dispenses his own brand of industrial justice, he exceeds his powers.’”[16] The court in a footnote[17] also cited Hall Street as “suggesting without deciding that the judicially created manifest disregard of law ground for vacatur may be proper only as a judicial gloss on the statutory grounds.”

The Fourth Circuit, in its 2012 decision in Wachovia Sec., LLC v. Brand [18] found that manifest disregard did survive Hall Street as an independent ground for vacatur based upon the Supreme Court later decision in Stolt-Nielsen.[19] The ruling of the District Court for the Eastern District of Virginia, decided three years earlier in DN Betters Drywall, Inc. v. Wirth Dev. Corp.[20] a case in which the author of this paper successfully opposed a motion to vacate an award, was effectively overruled although it is not mentioned in the Fourth Circuit’s opinion. In finding that the arbitrator did not manifestly disregard the law, the Fourth Circuit applied its previously adopted two-part test that a party must meet for vacating an award for manifest regard: “(1) the applicable legal principle is clearly defined and not subject to reasonable debate; and (2) the arbitrator [ ] refused to heed that legal principle.” [Brackets in original]

The Sixth Circuit in Grain v. Trinity Health[21] said that manifest disregard of the law is no longer a ground for modifying an award but the court did not decide the question of whether or not manifest disregard remains as a ground for vacating an award. However in an unpublished opinion, in Coffee Beanery, Ltd v. WW, L.L.C.[22], the Sixth Circuit held the holding of Hall Street applies only to contractual expansions of the grounds for review, so it appears that the Sixth Circuit’s view is that manifest disregard has survived Hall Street as a ground for vacating an award.

The Ninth Circuit, in Comedy Club, Inc. v. Improv West Assoc.,[23] has said that, based upon prior decisions holding that manifest disregard as a ground for vacatur was only a shorthand for the statutory grounds under the FAA, “after Hall Street Associates, manifest disregard of the law remains a valid ground for vacatur because it is a part of §10(a) (4).” After granting certiorari, the Supreme Court vacated the Ninth Circuit’s judgment and remanded the case “for further consideration” in the light of Hall Street.[24] On remand, the court reaffirmed its prior precedent that manifest disregard of the law remains a valid ground for vacatur under §10(a) (4) of the FAA.[25] The court made it clear, however, that for an award to be in manifest disregard of the law, it must be clear form the record that the arbitrator recognized the applicable law and ignored it.

3. Circuits Which Have Not Yet ruled on Whether Manifest Disregard has Survived Hall Street.

Although there are a number of decisions of the Tenth Circuit citing Hall Street, it does not appear that this circuit has specifically ruled yet on whether manifest disregard remains as a ground for vacatur under Hall Street. There is an opinion of the District Court for the District of Utah in Abbott v. Mulligan[26] in which the court expressed the opinion that a willful decision of an arbitrator to apply controlling law might fall within §10 even though the claimed ground for vacatur is expressed in terms of manifest disregard of the law.

The District of of Columbia Circuit has also not yet ruled on the issue, but, in the most recent decision of the District Court for the District Court of Columbia, FBR Capital Mkts. & Co. v. Hans,[27] the court said that an attack on an award for manifestly disregarding the law “falls clearly beyond any of the explicit, challengeable grounds within §10 and §11 of the FAA.”

4. Conclusion

From a review of the decisions of the ten circuits who have ruled on the issue of whether manifest disregard has survived Hall Street, five circuits, namely the First, Fifth, Seventh, Eighth and Eleventh, have expressed the view that manifest disregard is no longer available as a ground for vacatur of an arbitration award under the FAA. Three circuits, the Second, Third and Ninth, have interpreted manifest disregard as being only shorthand, or a judicial gloss, for exceeding authority by an arbitrator, or for arbitrator misconduct, under §10 of the FAA, and one circuit, the Fourth, holds that manifest disregard remains even, after Hall Street, as an independent ground for vacatur. The two remaining circuits, the Tenth and the District of Columbia have not yet ruled on the issue, although there are opinions of the district courts in those circuits taking opposite views. Although the Supreme Court has had the opportunity to resolve what some of the circuits believe to be an ambiguity in the Supreme Court’s opinion in Hall Street, it declined to do so in Stolt-Nielsen so that the split among circuits remains. Until the Supreme Court resolves the split, whether a particular federal court will allow the review of an arbitration award under the FAA for manifest disregard of the law remains uncertain and this will depend, not only on which circuit the case is in, but also how a party phrases its challenge to an award. While a simple allegation that the arbitrator manifestly disregarded applicable law may not pass muster, an allegation that the arbitrator manifestly disregarded the law and therefore exceeded his or her authority or that he or she was guilty of misconduct will, more likely, avoid a dismissal of a motion or petition to vacate an award. As a further caveat, while a number of circuits treat manifest disregard as only shorthand for the statutory grounds, a rather stringent standard will be replied for proving that an arbitrator manifestly disregarded the law and a simply misapplication or misinterpretation of a legal principle will not be enough. A party claiming manifest disregard should therefore be prepared to offer evidence that the legal principle involved is well defined and not subject to different interpretations, that it is controlling on a dispute which will affect the outcome of the arbitration, and that the arbitrator was fully aware of the principle but willfully refused to apply it.

Jack Rephan is a shareholder and director of Pender & Coward, P.C., where his law practice is substantially devoted to Construction and Government Contract Law matters and Alternate Dispute Resolution. He also serves as an Arbitrator and Mediator on the American Arbitration’s National Panel of Neutrals. For more information, contact him at (757) 490-6278 or jrephan@pendercoward.com.

 


 

 

 

1 552 U.S. 576, 128 S. Ct. 1396, 170 L. Ed. 2d 254 (2008)

29 U.S.C. §§9-11

3524 F.3d 120 (1st Cir 2008)

[4] 562 F. 3d 349 (5th Cir. 2009)

[5] Id. at 358

[6] 660 F. 3d 281 (7th Cir. 2011)

[7] Id. at 283

[8] 614 F. 3d 485 (8th Cir. 2010)

[9] Id. at 487.

[10] 562 Fed. Appx. 828 (11th Cir. 2014).

[11] 548 F. 3d 85 (2d Cir. 2008).

[12] 559 U.S. 662, 130 S. Ct. 1757, 176 L. Ed 2d 605 (2010)

[13] Id. Footnote 3

[14] 675 F. 3d 215 (3d Cir. 2012)

[15] Id. at 219

[16] Id. at 220

[17] Id. Footnote 2

[18] 671 F. 3d 472 (4th Cir. 2102)

[19] 671 F. 3d 472(4th Cir. 2012

[20] 2009 U.S. Dist. LEXIS 130746

[21] 551 F.3d 374 (6th Cir.. 2008)

[22]300 Fed. No.07-1830. App. 415 (6th Cir. 2008).

[23] 553 F.3d 1277 (9th Cir 2009)

[24] 555 U.S. 801, 129 S. Ct. 45, 172 L. Ed. 2d 6 (2009).

[25] 553 f. 3d 1277, 1290

[26] 647 F. Supp.2d 1286 (D.C. Utah 2009)

[27] 985 F. Supp. 2d 33 (D.C.D.C. 2013)