Last fall, I wrote a paper about the conflict between Federal law and California law relating to judicial review of arbitration awards. (See Jennings Strouss web site (www.jsslaw.com), Judicial Review of Arbitration Awards, Michael R. Palumbo, November 12, 2008). That paper discussed the diametrically opposed conclusions of the U.S. Supreme Court case Hill Street Associates v. Mattel, --- U.S.---, 128 S. Ct. 1396, 170 L.Ed. 2d 254 (2008) and the California Supreme Court decision in Cable Connection, Inc. v. DIRECTV, Inc., 44 Cal.4th 1334, 190 P.3d 586 (2008). In sum, these cases inform us that parties to arbitration contracts in California, who base their arbitration contracts on California statutes, may provide for judicial review of an arbitrator's decision, while parties who seek arbitration under the Federal statutory scheme may not increase judicial review of arbitration decisions beyond the strict terms of the Federal statute. This paper focuses on the development of Federal law in this area in light of the Hill Street Opinion.
As noted in the earlier paper, The Federal Arbitration Act (FAA), which can be found at 9 U.S.C.A. § 1. et seq., restricts the right of appeal of an arbitration decision. Under the FAA grounds for judicial intervention in an arbitration award include where the award was procured by "corruption," "fraud" or "undue means" and where the arbitrators were "guilty of misconduct" or "exceeded their powers." Grounds for modifying or correcting an award, as compared to vacating an award, include "evident material miscalculation," "evident material mistake" and "imperfections in matter of form not affecting the merits."
Although it is not specifically listed in the FAA, "manifest disregard" has been an acceptable judicially created basis for reviewing arbitration awards for sometime. The U.S. Supreme Court implicitly recognized the approach in Wilko v. Swan, 346 U.S. 427, 436-37, 74 S. Ct. 182, 98 L. Ed. 168 (1953) where, citing the FAA, it stated: "Power to vacate an [arbitration] award is limited.... the interpretations of the law by the arbitrators in contrast to manifest disregard [of the law] are not subject, in the federal courts, to judicial review for error in interpretation." [Before Hill Street, all federal appellate circuits and many state courts, but not Arizona, recognized the manifest disregard doctrine.(Coffee Beanery, Ltd. v. WW, LLC, 300 Fed. Appx 415, 2008 WL 4899478 (6th, Cir. 11/14/08)]
In Hill Street, the Supreme Court held that the FAA provided the exclusive grounds to vacate or modify an arbitration award. 128 S. Ct. at 1404. Although it was not directly at issue in Hill Street, because of this holding, and the fact that the FAA does not list "manifest disregard", federal district and appellate courts have reached opposing views on the continued viability of the manifest disregard standard for reviewing arbitration awards. [In Hill Street, the Supreme Court was equivocal in discussing the "manifest disregard" standard. Without deciding, it stated: "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". 128 S. Ct. at---] As more fully discussed below, the Ninth Circuit, Second Circuit and the Sixth Circuit federal appellate courts believe that manifest disregard has continuing vitality, while the First Circuit, the federal District court from Minnesota and the Supreme Court of Alabama (applying the FAA) disagree.
What is the manifest disregard doctrine? "...[R]eview under the doctrine of manifest disregard is severely limited. ...It is highly deferential to the arbitral award, and obtaining judicial relief for arbitrator's manifest disregard of the law is rare." Duferco Int'l Steel Trading v. T. Klaveness Shipping A/S, 333 F.3d 383, 388 (2d. Cir. 2003) The manifest disregard doctrine allows a reviewing court to vacate an arbitration award only in "those exceedingly rare instances where some egregious impropriety on the part of the arbitrators is apparent." (Id.) A federal court cannot vacate an arbitral award merely because it is convinced that the arbitration panel made the wrong call on the law. On the contrary, the award should be enforced, despite a court's disagreement with it on the merits, if there is a "barely colorable justification" for the outcome reached. Wallace v. Buttar, 378 F.3d 182, 194 (2d. Cir. 2004 )
Several elements must exist before the court can find manifest disregard. First, the law that was allegedly disregarded must be clear and explicitly applicable to facts before the arbitrators. Misapplication of ambiguous law dos not constitute manifest disregard. Second, the law must be improperly applied, leading to an erroneous outcome. If the result is justified for other reasons, the doctrine is inapplicable. Third, the law must be known by the arbitrators and its applicability must have been pointed out by one of the parties. Duferco, 333 F.3d at 389-90. According to the Sixth Circuit, an arbitrator acts with manifest disregard if "(1) the applicable legal principle is clearly defined and not subject to reasonable debate; and (2) the arbitrators refused to heed that legal principle." Merrill Lynch Pierce Fenner & Smith., Inc. v. Jaros, 70 F.3d 418, 421 (6th Cir. 1995.)
In Comedy Club, Inc. v. Improve West Associates, 553 F.3d 1277 (9 Cir. 2009), the Ninth Circuit explained why it concluded that manifest disregard is still viable after Hill Street Associates. The Ninth Circuit acknowledged that Hill Street stands for the proposition that the FAA provides the exclusive grounds to modify or vacate an arbitration award. 553 F.3d at 1290. However, it rejected Improv West's argument that since manifest disregard is not listed in the statute, it cannot be used. Noting that the Supreme Court in Hill Street did not directly address the manifest disregard doctrine, but rather listed several readings of the doctrine (see above), it would continue to utilize its prior precedent that "the manifest disregard ground for vacatur is shorthand for a statutory ground under the FAA, specifically 9 USC § 10 (a) (4), which states that the court may vacate ‘where the arbitrators exceeded their powers.'" (Id.) In other words, where an arbitrator meets the elements of manifest disregard summarized above, he has exceeded his powers and the reviewing court can properly vacate the arbitration award.
Using a somewhat different rationale, the Second Circuit Court of Appeals reached the same conclusion in Stolt-Nielsen, SA v. Animalfeeds International Corp., 548 F.3d 85 (2nd Cir. 2008). With respect to Hill Street, the Second Circuit noted that the Supreme Court "declined to resolve [the manifest disregard] question explicitly, noting instead that it had never indicated, in Wilko or elsewhere, that "manifest disregard' was an independent basis for vacatur outside the grounds provided in section 10 of the FAA." 548 F.3d at 94. The Second Circuit explained that it viewed the "manifest disregard" concept as a mechanism to enforce the parties' arbitration agreement and not a judicial review device.
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 disputed issue and nonetheless willfully flouted the governing law by refusing to apply it. (Cite omitted) At that point the arbitrators have "failed to interpret the contract at all (cite omitted), for parties do not agree in advance to submit to arbitration that is carried out in manifest disregard of the law. Put another way, the arbitrators have thereby "exceeded their powers, or so imperfectly executed them that a mutual, final and definite award upon the subject matter was not made. (Cite Omitted.).
Id at 95.
In its decision upholding the applicability of the manifest disregard principle, the Sixth Circuit simply stated, "In light of the Supreme Court's hesitation to reject the "manifest disregard" doctrine in all circumstances, we believe it would be imprudent to cease employing such a universally recognized principle. Accordingly, this Court will follow its well-established precedent...." Coffee Beanery, Ltd. v. WW, LLC, 300 Fed Appx. 415 (6 Cir. 2008).
In contrast to the cases discussed above, three courts from distinctly different jurisdictions have concluded that the manifest disregard standard did not survive Hill Street. Those courts are the First Circuit Federal Court of Appeals, the Federal District Court from Minnesota and the Alabama Supreme Court. The First Circuit case is Ramos-Santiago v. United Parcel Service, 524 F.3d 120 (1st. Cir. 2008) Ramos-Santiago did not involve the FAA, so the issue was not before the court. Nevertheless, in a footnote, the Court stated: "We acknowledge the Supreme Court's recent holding in Hall Street Associates v. Mattel, Inc., --- U.S.---, 128 S. Ct. 1396, 1401-04, 170 L. Ed. 2d 254 (2008), that manifest disregard of the law is not a valid ground for vacating or modifying an arbitral award brought under the Federal Arbitration Act."
In Prime Therapeutics LLC v. Omnicare, Inc., 555 F. Supp. 2d 993 (D. Minn. 2008), the Minnesota Federal District Court engaged in an extensive discussion of Hill Street and its impact on manifest disregard. The Court acknowledged that the Eight Circuit, where it is located and under whose precedents it is governed, had recognized the manifest disregard doctrine. 555 F. Supp. at 997. The Court read Hill Street as rejecting arguments that the statutory grounds for vacating or modifying an arbitration award were not exclusive. Rather, said the District Court, "the Supreme Court held that Sections 10 and 11 of the FAA provide the exclusive grounds for vacating and modifying an arbitration award." Id. at 998. The Court pointed out that the Supreme Court emphasized that there was "no hint of flexibility" in the FAA language and that the arbitration award "must" be confirmed "unless" one of the specific grounds set out in Sections 10 and 11 of the Act is present. Id. at 998-99. The Court went on to asked "But does this suggest that courts can no longer vacate an arbitration award based on judicially-created grounds such as "manifest disregard" of the law? After Hall Street, this Court believes the answer to that question is yes." Id. at 999.
In Hereford v. D.R. Horton, Inc., --- So.2d---, 2009 WL 104666 (Ala. 1/9/09), the Alabama Supreme Court was required to review the actions of a lower state appellate court in the context of an arbitration agreement that was governed by the FAA. Alabama courts had previously recognized that the manifest disregard doctrine controlled arbitrations under the federal scheme. The question before the Hereford court was whether the manifest disregard doctrine continued to apply after Hill Street. Noting that the Supreme Court in Hill Street "rejected the conclusion that it had adopted manifest disregard as an additional, non-statutory ground for relief from an arbitrator's decision" (2009 WL 104666at * 5), the Alabama Supreme Court held "that manifest disregard is no longer an independent and proper basis under the Federal Arbitration Act for vacating, modifying or correcting an arbitrator's award." (Id.)
In conclusion, the debate about judicial review of arbitration awards and the continued applicability of the "manifest disregard" doctrine will continue in the various federal and state courts until the Supreme Court again speaks on the issue. However, one thing is clear: if you are arbitrating under the aegis of the FAA and are in the federal courts, your ability to obtain judicial review of an arbitration award is, at best, very limited. And, if the Supreme Court decides that the manifest disregard doctrine no longer has any vitality, the scope of review will be limited even further.
If you are interested in preserving a right to appeal an arbitrator's award, you need to be careful to adopt the California approach discussed in the earlier article and then hope that your jurisdiction will agree with the California Supreme Court.