WLF Legal Backgrounder
"Manifest Disregard Of The Law": Does It Provide Courts A Reason To Vacate Arbitration Awards?
By Stephen S. Schwartz
October 9, 2009 (Vol. 24 No. 33)
A recent decision by the U.S. Supreme Court has changed the grounds for vacatur of arbitral awards. Confusion over the consequences of that change has led to a split in the federal circuits on the continued viability (and legal underpinnings) of a ground for vacatur that had previously enjoyed wide acceptance. This Legal Backgrounder will explain that ground as it has been understood previously, describe the Court's change of position with respect to it, and summarize the approaches lower federal courts have taken in the aftermath of the Court's action.
The Federal Arbitration Act ("FAA") provides four statutory grounds for vacatur of arbitration awards:
(1) where the award was procured by corruption, fraud, or undue means; (2) where there was evident partiality or corruption in the arbitrators, or either of them; (3) where the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy; or of any other misbehavior by which the rights of any party have been prejudiced; or (4) where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made.
9 U.S.C. § 10(a). Many federal courts, though, recognized "manifest disregard of the law" as an additional nonstatutory basis for vacatur. See, e.g., Williams v. Cigna Fin. Advisors, Inc., 197 F.3d 752 (5th Cir. 1999) (adopting the manifest disregard standard in the Fifth Circuit).
The manifest disregard ground for vacatur derives from a rather cryptic statement in Wilko v. Swan, 346 U.S. 427, 436-37 (1953): "[T]he interpretations of the law by the arbitrators in contrast to manifest disregard are not subject, in the federal courts, to judicial review for error in interpretation." After the Wilko decision, federal courts elaborated that language into a developed and consistent nonstatutory theory of vacatur. Manifest disregard, as federal courts understood it, requires not only that the arbitrators made an error, but that the error was "obvious and capable of being readily and instantly perceived by the average person qualified to serve as an arbitrator," that the correct governing law was "well defined, explicit, and clearly applicable," and that the arbitrators exhibited "willful inattentiveness" suggesting that they "appreciate[d] the existence of a clearly governing principle but decide[d] to ignore or pay no attention to it." Prestige Ford v. Ford Dealer Computer Services, Inc., 324 F.3d 391 (5th Cir. 2003). Until 2008, parties arguing for vacatur in arbitral awards were typically able to assert in federal court, without special justification, that the arbitrators in their case had manifestly disregarded the applicable law.
But after the Supreme Court's recent decision in Hall Street Associates, LLC v. Mattel, Inc., 128 S. Ct. 1396 (2008), there is some doubt whether the manifest disregard standard still exists as a basis for vacatur at all. In that case, in an opinion by Justice Souter, the Court held that the statutory bases for vacatur could not be supplemented by contract. (The arbitration agreement at issue provided for independent judicial review of the arbitrators' legal reasoning and factual conclusions.) When it reached the petitioner's counterargument pointing out that at least some nonstatutory bases of vacatur, such as manifest disregard, were widely accepted, the Court's opinion lost clarity. Though the Court's narrow holding struck down use of contractual bases for vacatur, the Court did not give a precise answer to the question of whether judicially-created ones are still permissible:
Maybe the term "manifest disregard" was meant to name a new ground for review, but maybe it merely referred to the § 10 grounds collectively, rather than adding to them. Or, as some courts have thought, "manifest disregard" may have been shorthand for § 10(a)(3) or § 10(a)(4), the subsections authorizing vacatur when the arbitrators were "guilty of misconduct" or "exceeded their powers." We, when speaking as a Court, have merely taken the Wilko language as we found it, without embellishment[.]
Id. at 1404 (internal citations omitted). But though the Court cast doubt on whether manifest disregard survives, and listed several possibilities for what it might mean if so, it never explained what manifest disregard actually does mean. In effect, the Court created further confusion and then failed to resolve it. Federal courts have since split roughly three ways on the question of whether manifest disregard survives Hall Street.
One circuit has tersely stated that manifest disregard is abolished. In Ramos-Santiago v. United Parcel Serv., 524 F.3d 120, 124 n.3 (1st Cir. 2008), one of the earliest comments on the subject after Hall Street, the First Circuit "acknowledge[d]," in dictum and without explanation, that the Supreme Court had held "that manifest disregard of the law is not a valid ground for vacating or modifying an arbitral award" in FAA cases. That, of course, is perhaps an unnecessarily strong reading of Hall Street, considering that the Court went out of its way to suggest ways in which manifest disregard might survive in some form.
Another court has decided that manifest disregard survives as a freestanding nonstatutory ground. The Sixth Circuit, in an unpublished decision, limited Hall Street's holding about the exclusivity of the statutory grounds of vacatur to contractual expansions, thus leaving the door open for judicially-created nonstatutory grounds. Coffee Beanery, Ltd. v. WW, L.L.C., 300 F. App'x 415 (6th Cir. 2008) (unpublished). More recently, another Sixth Circuit panel adopted the solution of "resolving [the arbitration dispute] as the parties have presented it to us-namely . . . that the ‘manifest disregard' standard continues to apply[.]" Martin Marietta Materials, Inc. v. Bank of Oklahoma, 304 F. App'x 360, 362-63 (6th Cir. 2008) (unpublished). The Sixth Circuit's solutions, naturally, are not easily reconcileable with the Supreme Court's statement in Hall Street that the statutory bases of vacatur are "exclusive" and cannot be modified by the agreement of the parties; whether manifest disregard survives for judicial purposes depends on the statute, not the parties' litigation strategies. In the Sixth Circuit's only published decision on the subject, the court was able to avoid the question entirely. The appellant sought modification rather than vacatur of the arbitral award at issue; the court, interpreting Sixth Circuit precedent to apply manifest injustice only to vacatur, added nothing new. Grain v. Trinity Health, Mercy Health Servs. Inc., 551 F.3d 374, 380 (6th Cir. 2008). Thus, considering that the Sixth Circuit's statements on manifest disregard since Hall Street have been in unpublished opinions, that court's ultimate decision is uncertain and unpredictable.
The third-and most intriguing-group of courts has adopted a more creative approach to preserve manifest disregard. The Court has observed in the past that when parties contract in advance for arbitration of their disputes, "[i]t is the arbitrator's construction which [the parties] bargained for," not the courts', meaning that the arbitration decision must stand "so far as the arbitrator's decision concerns construction of the contract." United Steelworkers of America v. Enterprise Wheel & Car Corp., 363 U.S. 593, 598-99 (1960). In Wise v. Wachovia Sec., LLC, 450 F.3d 265, 269 (7th Cir. 2006), the Seventh Circuit (which has not discussed manifest disregard since Hall Street) explained that the FAA does not, strictly speaking, provide for review of arbitrators' decisions at all, but rather for enforcement of the parties' agreement to arbitrate. Observations such as these, together with the Hall Street Court's suggestion that "manifest disregard" may be "shorthand" for statutory bases of vacatur, open the way for recharacterizing the manifest disregard standard to preserve its substance.
The Second Circuit has adapted the Seventh Circuit's pre-Hall Street interpretation of review of arbitral awards. In Stolt-Nielsen SA v. AnimalFeeds Int'l Corp., 548 F.3d 85 (2d Cir. 2008), the Second Circuit applied that understanding of manifest disregard to the post-Hall Street legal landscape. Since, it reasoned, parties are presumed "not [to] agree in advance to submit to arbitration that is carried out in manifest disregard of the law," arbitrators who manifestly disregard the law exceed their powers, meaning that their decisions may be vacated under § 10(a)(4). Furthermore, the Ninth Circuit, because it had always treated manifest disregard as shorthand for a ground for vacatur under § 10(a)(4) even before Hall Street, concluded roughly the same thing, meaning that manifest disregard in that circuit will carry on roughly as before. Comedy Club, Inc. v. Improv West Associates, 553 F.3d 1277, 1290 (9th Cir. 2009).
Under this third approach, the statutory grounds of vacatur have expanded proportionally to the Hall Street Court's restriction of nonstatutory grounds. It has the virtue of at least some degree of consistency with Hall Street. It also is consistent with the treatment, in at least some courts, of other judicially-created grounds for vacatur as special cases of arbitrators exceeding their powers. See, e.g., Brabham v. A.G. Edwards & Sons, Inc., 376 F.3d 377, 383 n.8 (5th Cir. 2004) (explaining that the superficially nonstatutory requirement "that an arbitration decision must ‘draw its essence' from the agreement it construes" in fact derives from § 10(a)(4)).
The most recent federal circuit to enter the debate is the Fifth Circuit, which took the opportunity to survey the field of other courts. See Citigroup Global Markets, Inc. v. Bacon, 562 F.3d 349 (5th Cir. 2009). It rejected the Sixth Circuit's analysis in Coffee Beanery as failing to take seriously the Hall Street Court's description of the statutory grounds as "exclusive." Id. at 356. It then described the reasoning of the Second and Ninth Circuits with little comment. Id. at 356-58. Its ultimate conclusion, in light of the extent of its analysis, was cryptic. While the court stated that "manifest disregard of the law as an independent, nonstatutory ground for setting aside an award must be abandoned and rejected," that the term "manifest disregard" "is no longer useful in actions to vacate arbitration awards," and that "from this point forward, arbitration awards under the FAA may be vacated only for reasons provided in § 10," it never answered the critical question of whether the substance of manifest disregard would survive along the lines outlined by the Second and Ninth Circuits. Rather, it remanded for consideration of statutory grounds of vacatur without explaining whether manifest disregard is such a ground. Id. at 358.
Courts have, in dictum or unpublished decisions, treated Hall Street as abolishing manifest disregard or leaving it untouched. The firmest and clearest decisions consider the standard to survive in substance, but the Fifth Circuit is perhaps more skeptical. This split among the circuits can be remedied by the Supreme Court, Congress, en banc decisions in the circuit courts that have decided the issue, or in some cases later panels. Until then, parties to arbitration agreements will contend with a great deal of uncertainty, partly because the survival of judicial review of arbitration awards for manifest disregard depends on which circuit litigation takes place in, and partly because many circuits have yet to decide what their treatment of arbitration awards will be.
Stephen S. Schwartz recently finished a clerkship on the U.S. Court of Appeals for the Fifth Circuit under Judge Jerry Edwin Smith.