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10 August 2009

US Courts Wrestle with “Manifest Disregard” after Hall Street
Jeffrey Sarles,

The Federal Arbitration Act (FAA), the primary arbitration statute in the United States, provides four narrow grounds for vacating an arbitration award—a party’s procurement of the award through fraud; evident partiality on the part of the arbitrators; miscon­duct by the arbitrators; and where the arbitrators exceeded their authority. These are essentially “due process” grounds, and they do not permit an award to be vacated merely for being either contrary to the applicable law or otherwise wrong.

However, virtually every jurisdiction in the United States has adopted a fifth, non-statutory ground on which an award may be vacated—"manifest disregard" of the law. Although the courts have offered varying definitions of this standard, most have defined it as a refusal to apply a clearly defined legal principle known to the arbitrator to be controlling. The rationale for devising this non-statutory ground, which has its origins in dicta from a US Supreme Court case from the 1950s, is that some arbitration awards are too manifestly contrary to the applicable law to be sustained and yet are not covered by any of the four statutory grounds.

The continuing viability of the manifest disregard standard was thrown into question by an opinion issued by the Supreme Court in March 2008. The primary issue in Hall Street Assocs. v. Mattel, Inc., 128 S. Ct. 1396 (2008), was whether parties may contractually expand the narrow scope given to judicial review of arbitration awards by the FAA. In answering that question in the negative, the Court deemed the four grounds listed in FAA § 10 as “exclusive” and openly mused about the Court’s prior references to “manifest disregard of the law”:

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…“manifest disregard” may have been shorthand for [the] subsections authorizing vacatur when the arbitrators were “guilty of misconduct” or “exceeded their powers.”

These “maybes” have led the lower courts to re-examine the manifest disregard of law standard. Five courts of appeals have now expressed their views.

The First Circuit was the first court of appeals to comment on Hall Street. It viewed the opinion as holding that manifest disregard “is not a valid ground” for vacating an arbitration award. Ramos-Santiago v. UPS, 524 F.3d 120, 124 n.3 (1st Cir. 2008). The Fifth Circuit has recently adhered to that conclusion in a lengthy analysis. In Citigroup Global Markets, Inc. v. Bacon, 562 F.3d 349 (5th Cir. 2009), the court concluded that the Supreme Court’s description of the FAA § 10 grounds as “exclusive” means that manifest disregard of the law “is no longer an independent ground for vacating arbitration awards under the FAA.”

In contrast, the Sixth Circuit has held that Hall Street merely “reduced” the ability of courts to vacate awards on grounds other than those specified in FAA § 10 but “did not foreclose” review for manifest disregard of the law. Coffee Beanery, Ltd. v. WW, L.L.C., 300 F.3d App’x 415, 418 (6th Cir. 2008). The Sixth Circuit reasoned that the Supreme Court’s “hesitation to reject” the manifest disregard standard would make it “imprudent” to jettison “such a universally recognized principle.” But underscoring the difficulties posed by Hall Street, a different Sixth Circuit panel subsequently noted that the Supreme Court opinion “casts some doubt on the continuing vitality” of the manifest disregard standard. Grain v. Trinity Health, Mercy Health Servs. Inc., 551 F.3d 374, 380 (6th Cir. 2008).

The Ninth Circuit, too, has held that Hall Street did not undermine a court’s authority to vacate arbitration awards for manifestly disregarding the law. Comedy Club, Inc. v. Improv West Assocs., 553 F.3d 1277 (9th Cir. 2009). However, the Ninth Circuit views manifest disregard as subsumed within FAA § 10(a)(4), which authorizes vacatur where the arbitrators exceed their powers. On that view, manifest disregard is not a non-statutory ground but rather one way that arbitrators can exceed their powers (another being, for example, deciding an issue not presented to them).

Finally, the Second Circuit also has held that the manifest disregard standard survives Hall Street but explained that the standard can no longer be considered a non-statutory ground of judicial review. Rather, it must be deemed as “a mechanism to enforce the parties’ agreements to arbitrate.” Stolt-Nielsen SA v. AnimalFeeds Int’l Corp., 548 F.3d 85, 95 (2d Cir. 2008). In any event, one of the Second Circuit’s various articulations of the standard—“an error that is so obvious that it would be instantly perceived as such by the average person qualified to serve as an arbitrator”—seem to offer unhappy recipients of an arbitration award at least some room to challenge the award other than on the FAA’s narrow grounds. But litigants should note that the Second Circuit continues to insist that an arbitration award will be vacated on that basis only in “exceedingly rare” instances.

This division among the courts of appeals is reproduced among the district courts. What does all this mean for parties seeking to challenge an unfavorable arbitration award?

With the law unsettled on whether the manifest disregard standard has survived Hall Street and, if so, on what basis, parties petitioning to vacate an award should consider invoking both FAA § 10 and the manifest disregard of law standard in their petitions. Even in circuits where the manifest disregard standard has been firmly rejected (e.g., the Fifth), it would be wise to raise it in the alternative because this issue may well return to the Supreme Court for final resolution.

Of course, no matter what court you are in, and no matter what standard you invoke, it remains extremely difficult to vacate an arbitration award for a substantive defect. Hence, the best practice is to do everything possible to avoid an unfavorable arbitration award—for example, by carefully drafting the arbitration clause to require the arbitrators to apply the governing law and issue a reasoned decision, engaging experienced counsel and carefully selecting the arbitrators. Notwithstanding the controversy over the full meaning of Hall Street, there can be no doubt that the decision reconfirmed the narrow scope of judicial review of arbitral awards. Thus, parties are well advised to minimize the risk of a bad award rather than hope to vacate one.


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