The 11th Circuit Puts a Major New Dent in the ARmor Surrounding Arbitration Awards
E very significant recent11th Circuit decision, Montes v. Shearson Lehman Brothers, Inc., 128 F.3d 1456 (11th Cir. 1997), reestablishes the rule of law as part of the arbitration system through its unprecedented application of the “manifest disregard of the law” basis for vacating arbitration awards. This important decision should be welcomed by both employers and employees, as well as anyone involved in arbitration.
In an understandable desire to lessen the perceived time and expense of litigation arising from employment disputes, employers increasingly are turning to the vehicle of mandatory arbitration of disputes with their employees. While the goals of mandatory employment arbitration are salutary, left unchecked, arbitration has the danger of acting as a system with insufficient connection to traditional concepts of due process and justice. Employees shotgunned into signing employment agreements with mandatory arbitration clauses are vulnerable to a capricious forum that, at its worst, is barely governed by the rule of law.
Delfina Montes was employed as a sales assistant in the Hallandale, Florida, office of Shearson, Lehman Brothers, Inc. (now a part of Smith Barney, Inc.) from September 28, 1991, through April 8, 1993, when she was terminated. After her termination, Montes realized that she had been entitled to the payment of overtime compensation under the provisions of the Fair Labor Standards Act of 1938, as amended (FLSA), 29 U.S.C. §§201 et seq. Indeed, her entitlement to overtime compensation seemed obvious. Throughout her tenure in the Hallandale office, Shearson’s internal records exclusively documented her as a “nonexempt” employee, entitled to the payment of overtime compensation for all time worked beyond 40 hours in a workweek.
Shearson rejected Montes’ claim for overtime compensation, resulting in her pursuing a suit in the U. S. District Court for the Southern District of Florida. Shearson subsequently moved to compel arbitration, based on a mandatory arbitration clause contained in a securities industry “U-4 form” that Montes executed during her preceding employment at a Shearson office in New Jersey. Montes did not have an employment contract and was not party to a collective bargaining agreement. The district court granted the motion to compel arbitration on April 30, 1994, which resulted in the filing of a statement of claim with the National Association of Securities Dealers (NASD).
The three-day arbitration proceeding was conducted before a three-person NASD arbitration panel. The proceeding commenced on April 19, 1995, more than two years after Montes had been terminated. The evidence introduced by Montes established that, although Shearson could have documented her employment as exempt from the FLSA overtime compensation requirements, its records exclusively defined her as a nonexempt sales assistant. According to Shearson’s internal policies, while nonexempt employees were required to complete time cards, exempt employees did not have to do so. It was conceded by Shearson at the arbitration that, throughout her employment at the Hallandale branch office, Montes was required to complete falsified time cards stating that she never worked in excess of 40 hours in a workweek. Her supervisors acknowledged that they were aware that she was actually working far in excess of 40 hours per week, although the precise amount of hours could not be reconstructed.1
In opposition to Montes’ claim, Shearson contended that she fit under two different FLSA overtime compensation exemptions — the administrative exemption2 and the executive exemption.3 The evidence that it presented, however, actually served to buttress Montes’ position that her duties did not qualify her for any exemption.
For instance, her direct supervisor testified tellingly that Montes “was never able to take control of the person’s side of that business, you know, really dealing effectively with the staff. There was too much friction. It was not something that happened. . . . She was not able to do that.” This testimony established beyond peradventure that Montes was engaged primarily in a production activity not qualifying under the administrative exemption. Likewise, the woman who replaced Montes, and who worked with her in the Hallandale branch, testified that Montes’ supervisory duties would have only taken one-quarter of her time. This concession that Montes was not primarily performing a supervisory function precluded the applicability of the executive exemption.
In addition to documentary and lay witness testimony, the arbitration panel also was presented with the expert testimony of a former 30-year director and investigator with the U.S. Department of Labor, Wage and Hour Division, who served as the district director of the Miami office from 1981 through the end of 1989. The expert testified that, taking all of the testimony presented by Shearson as true, Montes was a nonexempt employee under the regulations that he administered throughout his career. His expert opinion was uncontradicted, as Shearson called no expert witnesses.
Invitation to “Ignore
the Dictates of the Law”4
Stripped of any legal support for its argument that Montes was an exempt employee, particularly where the heavy burden of proving the applicability of a narrowly construed exemption belonged to Shearson,5 its position was essentially reduced to a plea that the industry panel (comprising a majority of nonattorneys) unilaterally immunize the brokerage industry from the dictates of the FLSA, one of the bedrock labor laws of the United States for nearly 60 years. The panel was urged to disregard precedent during Shearson’s opening argument: “I know, as I have served many times as an arbitrator, that you as an arbitrator are not guided strictly to follow case law precedent. That you can also do what’s fair and just and equitable and that is what Shearson is asking you to do in this case.”6
Later in closing argument, Shearson reemphasized its concept of “fairness” and “equity,” asking the panel to reject the FLSA and undertake its own path of judicial nullification:
You have to decide whether you’re going to follow the statutes that have been presented to you, or whether you will do or want to do or should do what is right and just and equitable in this case. I know it’s hard to have to say this and it’s probably even harder to hear it but in this case this law is not right. . . . The law says one thing. What equity demands and requires and is saying is another. What is right and fair and proper in this? You know as arbitrators you have the ability, you’re not strictly bound by case law and precedent. You have the ability to do what is right, what is fair and what is proper, and that’s what Shearson is asking you to do.. . . [T]hus, as I said in my Answer, as I said before in my Opening, and I now ask you in my Closing, not to follow the FLSA if you determine she’s not an exempt employee.7
Astonishingly, the panel embraced Shearson’s argument. On May 26, 1995, the panel issued an award concluding that “Shearson is found not liable and, therefore, all claims against it are hereby dismissed.” No basis for the “finding” of no liability was stated, with the panel apparently relying on the legal principle that “arbitrators are not required to explain an arbitration award and that their silence cannot be used to infer a grounds for vacating the award”8 to cover the absence of support for their decision.
Arbitration Appeals Gauntlet
Montes left the arbitration arena and promptly submitted in court a motion to vacate arbitration award, arguing that the arbitration award was both violative of public policy, since it served to nullify federal labor law, and “arbitrary and capricious,” because “a ground for the arbitrator’s decision cannot be inferred from the facts of the case.”9 Ultimately, the district court affirmed the arbitration award by order dated July 18, 1996. In its order, the district court emphasized that the arbitrary and capricious standard is “a very difficult standard for the party contesting the arbitration award to overcome” because “the award is presumptively correct”10 and that, for the award to be vacated, it “must contain more than an error of law or interpretation.”11
Having been rebuffed at the district court level by the heavy presumption of correctness favoring arbitration awards, Montes appealed the decision to the 11th Circuit Court of Appeals. Upon the completion of briefing and oral argument, the 11th Circuit issued a strong opinion reversing the district court and vacating the arbitration award on November 24, 1997,12 more than four years after Montes originally brought suit.
Application of “Manifest Disregard” Standard
The detailed 11th Circuit opinion, authored by Judge Rosemary Barkett, goes to great lengths both to reinforce the judicial policy favoring the finality of arbitration awards and to point out the weaknesses in the arbitration process that permitted the miscarriage of justice that befell Montes. Its precise legal basis for vacating the arbitration award was not that it was arbitrary and capricious or violative of public policy, but that the award was rendered in “manifest disregard of the law,” a standard that, while similar to “arbitrary and capricious,”13 had been rejected in all previous 11th Circuit decisions.14 In recognizing the deference granted to arbitration awards, the court stated as follows:
The thread that runs through our precedent in this regard is our reluctance to suggest explicitly or implicitly that an arbitration board’s decision can be reviewed on the basis that its conclusion or reasoning is legally erroneous. We do not permit review under these circumstances and reject any argument that to err legally always equates to a “manifest disregard of the law.”
* * *
Nonetheless, we must recognize and give meaning to the distinction made by the Supreme Court in Wilko15 b etween an erroneous interpretation of the law and a manifest disregard of it16. . . . An arbitration board that incorrectly interprets the law has not manifestly disregarded it. It has simply made a legal mistake. To manifestly disregard the law, one must be conscious of the law and deliberately ignore it. See O.R. Sec. [ v. Professional Planning Assoc., Inc. ] , 857 F.2d 742, 747 (11th Cir. 1988) (“[T]here must be some showing in the record, other than the result obtained, that the arbitrators knew the law and expressly disregarded it.”). In the case before us, that is precisely what the panel was flagrantly and blatantly urged to do. The arbitrators expressly took note of this plea in their award when summarizing the parties’ arguments. There is nothing in the award or elsewhere in the record to indicate that they did not heed this plea. In the absence of any stated reasons for the decision and in light of the marginal evidence presented to it, we cannot say that this is not what the panel did. We conclude that a manifest disregard for the law, in contrast to a misinterpretation, misstatement or misapplication of the law, can constitute grounds to vacate an arbitration decision. We emphasize again that this ground is a narrow one. We apply it here because we are able to clearly discern from the record that this is one of those cases where manifest disregard of the law is applicable, as the arbitrators recognized that they were told to disregard the law (which the record reflects they knew) in a case in which the evidence to support the award was marginal. Thus, there is nothing in the record to refute the suggestion that the law was disregarded. Nor does the record clearly support the award.17
The 11th Circuit remanded the matter to the district court with instructions to refer it to a new arbitration panel.18 In an apparent effort to ward off efforts by Shearson to relitigate the question of Montes’ entitlement to overtime compensation, the court analyzed at length all of the evidence presented by both sides at the arbitration.19 Indeed, the court explained that it reviewed the evidence because “[t]he reason for Shearson’s appeal to ignore the law is discernible from the facts of the case.”20 At the close of the opinion, the 11th Circuit drew the following conclusion:
On the whole, the evidence did not show that Montes’ primary duties consisted of work directly related to management policies or general business operations and required the exercise of discretion and independent judgment. At most, the evidence only showed that Montes performed some of this kind of work; it did not show that these duties were her primary duties as required by the FLSA.21
Shearson’s arguments on appeal that its repeated pleas to the arbitration panel “not to follow the FLSA” should be interpreted as a benign statement that “Montes simply did not qualify for overtime under the FLSA and therefore, the arbitrators were not bound by the FLSA”22 were flatly rejected. The majority opinion observed that “trial counsel’s meaning is clear: notwithstanding Montes’s entitlement to overtime under the FLSA, the arbitrators should ignore the dictates of the law.”23
The 11th Circuit’s decision in Montes v. Shearson Lehman opens the door to challenging arbitration injustices to some degree, but only by a slender crack. Where the court previously had universally rejected arguments that an arbitration award should be vacated as being in manifest disregard of the law, that ground for vacating an arbitration award, in the appropriate circumstances, is now available throughout the 11th Circuit. The statement in the 11th Circuit opinion Raiford v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 903 F.2d 1410 (11th Cir. 1990), that the manifest disregard standard “would likely never be met when the arbitrator provides no reasons for its award,” id. at 1413, was implicitly disavowed. The Montes arbitrators provided no reasons for their award, yet the court still was moved to vacate it on the manifest disregard grounds that it had previously observed might never be met.
The court also has made a strong statement that it will not countenance invitations by counsel for lawlessness on the part of the arbitration panel. In the past, such appeals were safe from reproach due to the extreme deference granted to the results of arbitration proceedings. While the 11th Circuit repeatedly emphasized in Montes that its holding was narrow and the result of a particularly egregious fact pattern, the decision establishes an unmistakable out-of-bounds line for both counsel and arbitrators in that (formerly) rarely judicially governed forum.
Nevertheless, those (employees and employers) who proceed to arbitration are still vulnerable to the whims of the arbitrators, so long as it is not apparent that the arbitrators understood the governing law and elected not to apply it. While the court system also can produce harsh or plainly erroneous results, the right of appeal is part of the checks and balances of the judicial system. That right of appeal usually does not carry with it the extreme deference to the lower tribunal’s decision as does the arbitration route.
Where arbitrators have only the slightest tether to the rule of law, rational litigation decisionmaking by both employees and employers can be illusory. Even with the slight safe haven provided in Montes v. Shearson Lehman, parties who are confident in the merits of their positions may be better off litigating their disputes in court, where precedents are binding and errors of law are reviewable. q
1 It is the employer’s burden to disprove the hours claimed by the employee in a situation when the employer’s records are false or nonexistent. See, e.g., Skipper v. Superior Dairies, Inc., 512 F.2d 409, 420 (Fla. 5th Cir. 1975).
2 29 C.F.R. §541.2.
3 29 C.F.R. §541.1.
4 Montes v. Shearson Lehman Brothers, Inc., 128 F.3d 1456, 1462 (11th Cir. 1997).
5 See, e.g., Michigan Ass’n of Gov’tal Employees v. Michigan Dep’t of Corrections, 992 F.2d 82, 83 (6th Cir. 1993), citing Corning Glass Works v. Brennan, 417 U.S. 188, 196–97 (1974), and Mitchell v. Lublin, McGaughy & Assocs., 358 U.S. 207, 211 (1959).
6 Montes, 128 F.3d at 1459.
8 Robbins v. Day, 954 F.2d 679, 684 (11th Cir.), cert. denied, 506 U.S. 870 (1992).
9 Ainsworth v. Skurnick, 960 F.2d 939, 941 (11th Cir. 1992), cert. denied, 507 U.S. 915 (1993).
10 Lifecare Int’l, Inc. v. CD Medical, Inc., 68 F.3d 429, 435 (11th Cir. 1995).
11 Brown v. Rauscher Pierce Refsnes, Inc., 994 F.2d 775, 781 (11th Cir. 1993).
12 Montes v. Shearson Lehman Brothers, Inc., 128 F.3d 1456 (11th Cir. 1997).
13 See Marshall & Co., Inc. v. Duke, 941 F. Supp. 1207, 1216 n. 11 (N.D. Ga. 1995) (“recent precedent has blurred any distinction that may have existed between [‘manifest disregard for the law’] and the ‘arbitrary and capricious’ ground”), aff’d, 114 F.3d 188 (11th Cir. 1997).
14 See Raiford v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 903 F.2d 1410, 1413 (11th Cir. 1990) (“[t]his court has never adopted the manifest-disregard-of-the-law standard; indeed, we have expressed some doubt as to whether it should be adopted since the standard would likely never be met when the arbitrator provides no reasons for its award”). See also Robbins, 954 F.2d at 684 (“[f]ollowing 11th Circuit precedent, we decline to adopt the manifest disregard of the law standard”); Brown, 994 F.2d at 779, n. 3 (the 11th Circuit “has declined to adopt the manifest disregard of the law standard as a basis for vacating an arbitration award”).
15 Wilko v. Swan, 346 U.S. 427 (1953), overruled on other grounds, Rodriguez de Quijas v. Shearson/American Express, Inc., 490 U.S. 477 (1989).
16 Id. at 436–37 (“[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.”).
17 Montes, 128 F.3d at 1461–62 (emphasis added).
18 Id. at 1464.
19 Id. at 1462–65.
20 Id. at 1462.
21 Id. at 1464.
22 Id. at 1462.
23 Id. In a brief concurring opinion, Judge Edward Carnes opined that Shearson “conceded to the arbitration panel that its position was not supported by the law, which required a different result.” Id. at 1464.
Daniel Blonsky practices with the Miami firm of Aragon, Burlington, Weil & Crockett, P.A., where he concentrates on commercial and employment litigation. He completed his undergraduate education at Duke University and received his J.D. from the University of Pennsylvania in 1990. In addition to Florida, Mr. Blonsky is admitted to practice in Pennsylvania and the District of Columbia.
This column is submitted on behalf of the Labor and Employment Law Section, David J. Linesch, chair, and F. Damon Kitchen, editor.