by Matthew Wolper
On March 25, 2008, the U.S. Supreme Court issued its opinion in Hall Street Assoc., LLC v. Mattel, Inc., 552 U.S. 576 (2008), holding that §§10 and 11 of the Federal Arbitration Act (FAA) provide litigants with the “exclusive grounds for expedited vacatur and modification” of arbitration awards.1 The Court also suggested that manifest disregard of the law may no longer be a viable basis on which to vacate an arbitration award, but fell short of actually making that a part of its holding.2
In the ensuing three years, conflicts have arisen in the circuit courts regarding whether the manifest disregard standard survived Hall Street.3 The Second, Fourth, Sixth, and Ninth circuits have held that manifest disregard remains viable while the Fifth, Eighth, and 11th circuits have held that it does not.4 The First, Seventh, and 10th circuits have yet to take a definitive position.
This article explores the most recent cases in each jurisdiction.
The Manifest Disregard of the Law Standard
Section 10 of the FAA provides that a court may vacate an arbitration award under the following circumstances:
[W]here the award was procured by corruption, fraud, or undue means.
[W]here there was evident partiality or corruption in the arbitrators, or either of them.
[W]here 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.
[W]here 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.5
While the phrase “manifest disregard of the law” does not appear anywhere in the statute, over the years, federal courts considering vacatur petitions filed pursuant to the FAA have recognized additional judicially created grounds for vacatur. The additional grounds for vacatur include manifest disregard of the law — a concept used to define conduct when an arbitrator is advised of the law, recognizes its applicability, and consciously disregards it.6
The origin of manifest disregard of the law is found in the Supreme Court’s opinion in Wilko v. Swann, 346 U.S. 427, 436-437 (1953), in which the Court discussed the judicial review of arbitration awards and stated that “the interpretations of the law by the arbitrators in contrast to the manifest disregard are not subject, in the federal courts, to judicial review for error in interpretation.”7 Lower courts have interpreted this to mean that judicial review of arbitration awards is permitted if the arbitrator manifestly disregards the law.8 Prior to Hall Street, the manifest disregard standard was recognized in every federal circuit.9
However, over the years, and even in Hall Street, the Supreme Court has not affirmatively stated whether manifest disregard is an independent, common law ground for vacatur, or simply a shorthand method of referring to the grounds enumerated in the FAA.
In Hall Street, the Court was asked to consider whether the statutory grounds for vacatur under §§10 and 11 of the FAA could be supplemented by contract to provide for a more expansive review of arbitration awards.10 The Court concluded that the enumerated grounds in §§10 and 11 are, in fact, exclusive.11
One of the arguments raised in favor of the ability to contractually supplement the FAA was the Court’s acceptance in Wilko of manifest disregard of the law as a nonstatutory basis on which to vacate an arbitration award.12 It was asserted that this language provided the Court with precedent supporting an expanded judicial review, beyond the confines of the FAA.13 The Court disagreed, finding that a court must grant an application for confirmation of an arbitration award unless one of the prescribed exceptions in §§10 or 11 are present.14
The Court acknowledged the vagueness of Wilko’s expression of manifest disregard, but resisted the invitation to address squarely whether it would continue to be a viable basis for vacatur.15 Instead, the Court engaged in more of a philosophical discussion regarding the past application by federal courts of the manifest disregard standard.
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 paragraphs authorizing vacatur when the arbitrators were “guilty of misconduct” or “exceeded their powers.”16
In holding that §§10 and 11 provide exclusive regimes for the review provided by the statute, we do not purport to say that they exclude more searching review based on authority outside the statute as well.17
The Impact of Hall Street in the Federal Circuits
The Court’s lack of clear direction has led the circuit courts to fend for themselves as to whether manifest disregard remains viable. Each circuit has had the opportunity to consider the implications of Hall Street, but only the Second, Third, Fourth, Fifth, Sixth, Eighth, Ninth, and 11th circuits have taken a clear position.18 The First, Seventh, and 10th circuits have deferred judgment or have failed to take a definitive position.
• Manifest Disregard Remains Viable in the Second, Fourth, Sixth, and Ninth Circuits — Prior to Hall Street, the Second Circuit Court of Appeals embraced the manifest disregard standard, but did not commit to whether it was an independent ground for vacatur or simply a shorthand method of referring to the enumerated grounds in the FAA.
In Stolt-Nielsen SA v. Animalfeeds International Corp., 548 F.3d 85 (2d Cir. 2008), rev’d on other grounds, 130 S. Ct. 1758 (2010), the Second Circuit clarified its position.19 The court held that Hall Street “did not, we think abrogate the ‘manifest disregard’ doctrine altogether” and that “we must therefore continue to bear the responsibility to vacate arbitration awards in the rare instances in which ‘the arbitrator knew of the relevant [legal] principle, appreciated that this principle controlled the outcome of the disputes issue, and nonetheless willfully flouted the governing law by refusing to apply it.’”20 The Second Circuit believes this conduct is tantamount to an arbitrator exceeding his or her powers, which is an enumerated ground for vacatur under the FAA.21
Thus, the Second Circuit Court of Appeals acknowledged that manifest disregard was abolished as an independent basis for vacatur, but that it was viable as a “judicial gloss on the specific grounds for vacatur, enumerated in [§]10 of the FAA.”22
The Sixth Circuit Court of Appeals concurred with the Second Circuit in Coffee Beanery, Ltd. v. WW, LLC, 300 Fed. Appx. 415, 419 (6th Cir. 2008) (unpublished opinion), cert. denied 130 S. Ct. 81 (2009). The court noted that “since Wilko, every federal appellate court has allowed for vacatur of an award based on an arbitrator’s manifest disregard of the law” and that it would be “imprudent to cease employing such a universally recognized principal” in light of “the Supreme Court’s hesitation to reject the ‘manifest disregard’ doctrine in all circumstances.”23
The Ninth Circuit followed suit. In Kyocera Corp. v. Prudential-Bache Trade Services, Inc., 341 F.3d 987, 997 (9th Cir. 2003), cert. denied 540 U.S. 1098, the court maintained that manifest disregard is a “shorthand” description for the statutory grounds enumerated in §10(a)(4), applied when an arbitrator exceeds his or her authority. In Comedy Club, Inc. v. Improv West Associates, 553 F.3d 1277 (9th Cir. 2009), cert. denied 130 S. Ct. 145, decided after Hall Street, the court reconfirmed its prior holding in Kyocera, stating that “we cannot say that Hall Street Associates is ‘clearly irreconcilable’ with Kyocera and thus we are bound by our prior precedent.” The court concluded that manifest disregard remains a valid ground for vacatur.24
The Fourth Circuit is the most recent court to weigh in on the continued viability of the manifest disregard standard. In Wachovia Securities, LLC v. Brand, 671 F.3d 472 (4th Cir. 2012), Wachovia was the subject of an adverse arbitration award in an employment dispute.25 Wachovia filed a motion to vacate the arbitration, asserting, among other things, that the arbitrators manifestly disregarded the law when they awarded their adversary attorneys’ fees pursuant to a South Carolina statute that provided sanctions against attorneys who file frivolous claims.26 Wachovia alleged that when the arbitrators awarded attorneys’ fees, they failed to follow the procedural requirements set forth in the statute and, thus, manifestly disregarded the law.27
The district court rejected Wachovia’s argument and upheld the arbitrators’ award of attorneys’ fees.28 On appeal, the Fourth Circuit affirmed.29 The court acknowledged that Hall Street did inject some “uncertainty” into the status of manifest disregard as a basis for vacatur but believed it survived as an “independent ground.”30 The court rested its conclusion on the analysis of the Second Circuit in Stolt-Nielsen.31
With the exception of the Fourth Circuit’s decision in Brand, the common thread in these decisions is a narrow construction of Hall Street — it abolished manifest disregard as an independent basis for vacatur, but permits an interpretation that it is a judicial gloss of the already enumerated grounds set forth in the FAA.
• Manifest Disregard Abolished in the Fifth, Eighth, and 11th Circuits — The federal courts in the Fifth, Eighth, and 11th circuits have taken a starkly different view.
In Citigroup Global Markets, Inc. v. Bacon, 562 F.3d 349 (5th Cir. 2009), the Fifth Circuit Court of Appeals held that Hall Street unequivocally abolished manifest disregard as an independent basis for vacatur. The court specifically limited its opinion to whether manifest disregard would remain a valid, independent basis for vacatur (as opposed to being a shorthand method of referring to the enumerated grounds in the FAA).32 The court pronounced that “the term itself, as a term of legal art, is no longer useful in actions to vacate arbitration awards.”33 The strong language chosen by the court sends a clear message that manifest disregard is likely a dead concept within the Fifth Circuit in light of Hall Street.
Notably, in dicta, the court suggested that if an arbitrator “flouts the law” after being “fully aware of the controlling principle of law,” he or she has “exceeded the powers bestowed upon him.”34 The court did not provide an example of the degree of conduct that would transform a manifest disregard of the law into something far greater. However, this does leave open the possibility an egregious disregard of the law could potentially still be applied in the Fifth Circuit under appropriate circumstances.
The Eighth Circuit Court of Appeals weighed in shortly after the Fifth Circuit in Medicine Shoppe International, Inc. v. Turner Investments, Inc., 614 F.3d 485 (8th Cir. 2010). Swiftly, and with very little analysis, the court determined “the claim that the arbitrator disregarded the law, [is] not included among those specifically enumerated in §10 and [is] therefore not cognizable.”35
The 11th Circuit confronted the issue in 2010. In Frazier v. Citi Financial Corp., No. 08-15188, 2010 U.S. App. LEXIS 8960, *24-33 (11th Cir. Apr. 10, 2010), reh’g denied, 2010 U.S. App. LEXIS 27365 (11th Cir. Aug. 11, 2010), the 11th Circuit analyzed the competing holdings of the Second, Sixth, and Ninth circuits versus the holdings in the Fifth and Eighth circuits. The court acknowledged its past opinions have analyzed manifest disregard as an independent, common law ground for vacatur intended to supplement the grounds enumerated in the FAA.36
Therefore, the court believed it had little choice but to hold that “our judicially-created bases for vacatur are no longer valid in light of Hall Street…. In so holding, we agree with the Fifth Circuit that the categorical language of Hall Street compels such a conclusion.”37
• The First, Seventh, and 10th Circuits Remain on the Sidelines — The First, Seventh, and 10th circuits have refused to consider or avoided considering the impact of Hall Street, despite having the opportunity to do so. Perhaps, these circuits are waiting to see if the U.S. Supreme Court will revisit this issue.38
As discussed in Hall Street, the FAA is not the only vehicle that a litigant can use when seeking vacatur of an arbitration award. Many states have enacted arbitration codes to manage the increasing presence of alternative dispute resolution.39 If a party moving for vacatur does so in state court, but utilizes the FAA as a statutory vehicle, the implications of Hall Street will weigh heavily. The U.S. Supreme Court has stated that the FAA “creates a body of federal substantive law,” which is “applicable in state and federal courts.”40
Hall Street is not binding authority on a state court interpreting the provisions of its own arbitration code. Individual states are free to expand judicial review of arbitration awards under their own arbitration codes so long as they do not deprive litigants of rights afforded by the FAA.
In the wake of Hall Street, many states have addressed the viability of the manifest disregard of the law standard but are no more uniform that the federal courts. Alabama and Colorado have determined that manifest disregard of the law is no longer available.41
Similarly, the Supreme Court of Vermont, in dicta, stated that in light of Hall Street, “while contractor did not raise this ground, we take this opportunity to clarify that we do not recognize a court’s right to review an arbitrator’s decision for manifest disregard of the law.”42
California partially resolved this issue in Cable Connection, Inc. v. DirectTV, Inc., 190 P.3d 586, 589 (Cal. 2008). In DirectTV, the motion to vacate was filed in state court pursuant to the California Arbitration Act. The parties were bound by an arbitration agreement that provided that arbitrators are not permitted to make “errors of law.”43 The issue before the court was whether the interpretation of judicial review under the FAA preempts a state litigant’s right to contract for expanded review.44
The court acknowledged Hall Street effectively eliminated manifest disregard as a basis for vacatur pursuant to the FAA.45 However, the motion to vacate in this case was filed pursuant to the California Arbitration Act, which the court interpreted to allow for expanded review of arbitration awards if the parties provide for it in their arbitration agreement.46 The court noted Hall Street was not “intended to declare a policy with preemptive effect in all cases involving interstate commerce.”47 Thus, the court acknowledged that the FAA did not permit expanded review of arbitration awards, but it declined to hold that Hall Street should be read to eliminate manifest disregard entirely.48
The Supreme Court of South Carolina has squarely held that manifest disregard is viable in Gissel v. Hart, 382 S.C. 235 (S.C. 2009). In Hart, the court analyzed both the FAA and South Carolina’s substantively identical arbitration code.49 The court held that “an arbitrator’s award may be vacated when the arbitrator exceeds his or her power and/or manifestly disregards or perversely misconstrues the law.”50
Although it is clear that the ground is alive and well in South Carolina, the court’s chosen language suggests that its view is that manifest disregard is not an independent basis for vacatur but merely a judicial gloss of the enumerated grounds. Notably, the court did not reference Hall Street in its opinion, raising the question as to whether the court was misguided, unaware of Hall Street, or simply found it to be inapplicable.
The Supreme Court of Texas reached the same conclusion in Nafta Traders, Inc. v. Quinn, 339 S.W. 3d 84 (Tex. 2011). In Quinn, the court stated that “we must, of course, follow Hall Street in applying the FAA, but in construing the TAA, we are obliged to examine Hall Street’s reasoning and reach our own judgment.”51 The court concluded that the purpose of the Texas Arbitration Act is to facilitate arbitration agreements and that if parties want to allow for expanded review, the “TAA presents no impediment.”52
Where Do We Go From Here?
With the increasing presence of arbitration in our legal system, it would be irresponsible for courts not to permit vacatur of an arbitration award when an arbitrator is clearly apprised of binding legal authority, understands its applicability, knows its controlling of the outcome in the case, but consciously chooses to ignore it. This rationale is even more compelling given that there is no right to appeal in arbitration.
Hall Street has had the effect of converting a universally applied legal principle into a vague morass of conflicting federal and state court decisions. This incongruent application of the law should be addressed by the U.S. Supreme Court so that arbitration participants have a firm understanding of their post-arbitration bill of rights.
In the interim period, there are two lessons learned. First, litigants who choose to modify or vacate an arbitration award must carefully review the applicable law of the jurisdiction before moving to vacate. The decision to move for judicial review pursuant to the FAA, a state statute or state common law will ultimately be determinative of what grounds are available. Knowing the law in your jurisdiction may be the difference between the affirmation or reversal of an arbitration award. Second, now more than ever, litigants must carefully select arbitrators. Experienced litigation attorneys and retired judges give litigants the best opportunity for reasonable application of the law. The appointment of a nonlawyer to an arbitration panel, even when the prospective arbitrator has a unique qualification, may have irreversible consequences.
1 Hall Street, 522 U.S. at 584.
2 Id. at 586-587.
3 Stolt-Nielsen SA v. Animalfeeds International Corp., 548 F.3d 85, 94 (2d Cir. 2008); Wachovia Securities, LLC v. Brand, 671 F.3d 472 (4th Cir. 2012); Coffee Beanery, Ltd. v. WW, LLC, 300 Fed. Appx. 415, 419 (6th Cir. 2008) (unpublished opinion); Comedy Club, Inc. v. Improv West Associates, 553 F.3d 1277, 1290 (9th Cir. 2009).
4 Citigroup Global Markets, Inc. v. Bacon, 562 F.3d 349, 355-356 (5th Cir. 2009); Medicine Shoppe International, Inc. v. Turner Investments, Inc., 614 F.3d 485, 489 (8th Cir. 2010); Frazier v. Citi Financial Corp., No. 08-15188, 2010 U.S. App. LEXIS 8960, *24-33 (11th Cir. Apr. 10, 2010).
5 See 9 U.S.C. §10 (2011).
6 Montes v. Shearson Lehman Brothers, 128 F.3d 1456, 1461-1462 (11th Cir. 1997).
7 Wilko, 346 U.S. at 436-437.
8 Prudential-Bache v. Robert Tanner, 72 F.3d 234, 239-241 (1st Cir. 1995); D.H. Blair & Co., Inc. v. Gottdeiner, 462 F.3d 95, 110-111 (2d Cir. 2006); Tanoma Mining Co., Inc. v. Local Union #1269, 896 F.2d 745, 749 (3d Cir. 1990); Hilb Rogal & Hobbs Co. v. Golub, No. 3:05cv574, 2006 U.S. Dist. LEXIS 58214, *12 (E.D.V. Aug. 18, 2006); Brabham v. A.G. Edwards & Sons, Inc., 376 F.3d 377, 381-382 (5th Cir. 2004); Golden Brands, LLC v. Castle Cheese, Inc., 1110 Fed. Appx. 666, 668 (6th Cir. 2004); George Watts & Sons, Inc. v. Tiffany & Co., 248 F.3d 577, 578 (7th Cir. 2001); Lincoln National Life Insur. Co. v. Payne, 374 F.3d 672, 674 (8th Cir. 2004); Theis Research, Inc. v. Brown & Bain, 386 F.3d 1180, 1185 (9th Cir. 2004); Mactec, Inc. v. Gorelick, 427 F.3d 821, 827 (10th Cir. 2005); Montes, 128 F.3d at 1461-1462; Al-Harbi v. Citibank, N.A., 85 F.3d 680, D.C. Cir. 1996).
10 Hall Street Assoc., 552 U.S. at 578.
11 Id. at 584.
14 Id. at 587.
15 Id. at 585-586.
16 Id. at 585.
17 Id. at 590.
18 See notes three and four.
19 Stolt-Nielsen SA v. Animalfeeds International Corp., 548 F.3d 85, 94 (2d Cir. 2008), rev’d on other grounds, 130 S. Ct. 1758 (2010).
20 Id. at 94-95.
22 Id. at 94 (emphasis added).
23 Coffee Beanery, 300 Fed. Appx. at 419.
24 Comedy Club, 553 F.3d at 1290.
25 Brand, 671 F.3d at 477.
29 Id. at 483.
30 Id. at 480-481.
31 Id. at 482.
32 Bacon, 562 F.3d at 355-356.
33 Id. at 358.
34 Id. at 357.
35 Medicine Shoppe, 614 F.3d at 489.
36 See B.L. Harbert Intn’l, LLC v. Hercules Steel Co., 441 F.3d 905, 910 (11th Cir. 2006).
37 Frazier, 2010 U.S. App. LEXIS 8960 at *33.
38 See Ramos-Santiago v. U.S. Postal Service, 524 F.3d 120, 124, n.3 (1st Cir. 2008) (“We decline to reach the question of whether Hall Street precludes a manifest disregard inquiry”); Raymond James Financial Services, Inc. v. Bishop, 596 F.3d 183, 193 (4th Cir. 2010) (declining the invitation to consider the post-Hall Street viability of manifest disregard after affirming vacatur on a statutory ground); Hicks v. The Cadle Company, 355 Fed. Appx. 186, 197 (10th Cir. 2009) (finding no need to consider the impact of Hall Street because the appellant did not allege sufficient facts to demonstrate a manifest disregard of the law even if the standard were to be viable).
39 See, e.g., Fla. Stat. §682, et seq.
40 Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 445 (2006).
41 Hereford v. D.R. Horton, Inc., 13 So. 2d 375 (Ala. 2009) (“manifest disregard of the law is no longer a proper basis under the Federal Arbitration Act for vacating, modifying, or correcting an arbitration award”); Treadwell v. Village Homes of Colorado, Inc., 222 P.3d 398, 402 (Col. App. Div. V 2009) (holding that “manifest disregard is not an independent basis under Colorado law for vacating arbitration awards”).
42 Built v. Krolick, 2008 VT 131, 146 n.2 (VT 2008).
43 Cable Connection, 190 P.3d at 590.
44 Id. at 596-599.
45 Id. at 596.
46 Id. at 599.
49 Hart, 382 S.C. at 242.
51 Quinn, 339 S.W. at 92.
52 Id. at 97.
Matthew Wolper is an attorney in the Ft. Lauderdale office of Bressler, Amery & Ross, P.C. As a member of the securities litigation group, he focuses his practice on the representation of financial institutions, broker-dealers, and investment advisers in litigation and arbitration. Wolper’s practice covers a wide spectrum of securities-related claims, including those involving nontraditional investment strategies, including structured products, hedge funds, multi-tranche offerings, privately held investments, margin and options strategies, and cross-currency investments/borrowing.