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Appealing Arbitration Awards and the Circuit Split over "Manifest Disregard of the Law"

By Jason P. Steed – May 10, 2016


Appealing an arbitration award has always been hard, and—according to some circuits—the Supreme Court recently made it harder. Under section 10 of the Federal Arbitration Act (FAA), a court may vacate an arbitration award only


(1) where the award was procured by corruption, fraud, or undue means;

(2) where there was evident partiality or corruption in the arbitrators . . . ;

(3) where the arbitrators were guilty of misconduct in refusing to postpone the hearing, 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)(1)–(4).


For decades, courts also sometimes vacated arbitration awards based on an arbitrator’s “manifest disregard of the law”—and most circuits defined this as a common-law ground for vacatur. E.g., Citigroup Glob. Mkts., Inc. v. Bacon, 562 F.3d 349, 355 (5th Cir. 2009). But in Hall Street Associates, LLC v. Mattel, Inc., the Supreme Court held that section 10 provides the “exclusive” grounds for vacatur. 552 U.S. 576, 584–85 (2008). Consequently, a circuit split has developed over whether “manifest disregard” remains available as a basis for challenging an arbitration award. A case currently pending before the Fifth Circuit—McKool Smith, P.C. v. Curtis International, Ltd., No. 15-11140—could present the Supreme Court with an opportunity to resolve this question.


After Hall Street, the Seventh, Eighth, and Eleventh Circuits decided “manifest disregard of the law” is no longer a valid basis for appeal. Affymax, Inc. v. Ortho-McNeil-Janssen Pharm., Inc., 660 F.3d 281, 284–85 (7th Cir. 2011); Medicine Shoppe Int’l, Inc. v. Turner Invs., Inc., 614 F.3d 485, 489 (8th Cir. 2010); Frazier v. CitiFinancial Corp., LLC, 604 F.3d 1313, 1323–24 (11th Cir. 2010).


But in Hall Street, the Supreme Court noted that, as a basis for vacating arbitration awards, “manifest disregard” originated in language from one of the Court’s own earlier decisions. See 552 U.S. at 584–85 (discussing Wilko v. Swan, 346 U.S. 427, 436 (1953), overruled on other grounds by Rodriguez de Quijas v. Shearson/American Express, Inc., 490 U.S. 477 (1989)). And—instead of simply rejecting “manifest disregard of the law” as an invalid non-statutory ground for vacatur—the Court recognized that it might be understood as judicial shorthand for the statutory grounds listed in section 10 of the FAA. Id. (citing circuit court decisions to show “manifest disregard” might refer either to “the § 10 grounds collectively” or to the specific provisions authorizing vacatur where arbitrators are “guilty of misconduct” or “exceeded their powers”).


Given this leeway, the Second, Fourth, Sixth, and Ninth Circuits have since held that arbitrators who manifestly disregard the law have “exceeded their powers” under section 10(a)(4). See Schafer v. Multiband Corp., 551 F. App’x 814, 819 n.1 (6th Cir. 2014); Wachovia Sec., LLC v. Brand, 671 F.3d 472, 480 (4th Cir. 2012); Comedy Club, Inc. v. Improv W. Assocs., 553 F.3d 1277, 1290 (9th Cir. 2009); Stolt-Nielsen SA v. AnimalFeeds Int’l Corp., 548 F.3d 85, 95 (2d Cir. 2008), overruled on other grounds, 559 U.S. 662 (2010).


In fact, after Hall Street, the Second Circuit explicitly “reconceptualized [‘manifest disregard of the law’] as a judicial gloss on the specific grounds for vacatur enumerated in section 10.” Stolt-Nielsen, 548 F.3d at 94–95. And when Stolt-Nielsen presented the Supreme Court with an opportunity to reject the Second Circuit’s affirmation of “manifest disregard” as a valid ground for vacatur, the Supreme Court instead reversed on other grounds while indicating “manifest disregard” might indeed remain available. See Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662, 669–70, 672 n.3 (2010) (assuming, without deciding, that “manifest disregard” still “applies”).


Given the above, it is clear that an arbitrator’s manifest disregard of the law remains a valid basis for vacating an arbitration award in the Second, Fourth, Sixth, and Ninth Circuits. And cases from those circuits—combined with the Supreme Court’s friendly treatment in Hall Street and Stolt-Nielsen—provide support for arguing that “manifest disregard” ought to remain available in the First, Third, and Tenth Circuits, where this issue remains undecided. See Whitehead v. Pullman Grp., LLC, 2016 WL 279015, at *3 (3d Cir. Jan. 22, 2016) (“A circuit split has since developed, and this Court has not yet weighed in.”); Raymond James Fin. Servs., Inc. v. Fenyk, 780 F.3d 59, 64–65 (1st Cir. 2015) (“[W]e have not squarely determined whether our manifest disregard case law can be reconciled with Hall Street.”) (internal quotations omitted); Abbott v. Law Office of Patrick J. Mulligan, 440 F. App’x 612, 619–20 (10th Cir. 2011) (unpublished) (declining to decide whether “manifest disregard” should be reconceptualized as a statutory ground for vacatur, as in the Second Circuit, or “entirely jettisoned”).


Moreover, though the Seventh, Eighth, and Eleventh Circuits have flatly rejected “manifest disregard” after Hall Street, they have done so with little analysis and without considering Hall Street’s own suggestion that “manifest disregard” might remain viable. See Medicine Shoppe, 614 F.3d at 489 (holding only that “manifest disregard” is “not included among those [grounds] specifically enumerated in § 10” and is “therefore not cognizable”); Affymax, 660 F.3d at 284–85 (same); Frazier, 604 F.3d at 1323–24 (following the Fifth Circuit’s decision in Citigroup to hold “manifest disregard” is “no longer valid,” without recognizing nuances of Fifth Circuit’s opinion (see infra)). Thus, an enterprising appellate lawyer might still argue “manifest disregard” in these circuits too, in a justified pursuit of either a hearing or rehearing en banc. Cf. Fed. R. App. P. 35(a).


A case currently before the Fifth Circuit has the potential to resolve the circuit split over this issue—depending, of course, on what the Fifth Circuit does with it. In McKool Smith, P.C. v. Curtis International, Ltd., No. 15-11140, a law firm billed over $1.4 million in legal fees and the client objected, in part, claiming at least $221,000 was for work the client had explicitly instructed the lawyers not to perform. Nevertheless, the arbitrator awarded the law firm 100 percent of its billed fees. (Disclosure: The author of this article is counsel for Curtis International.) At the district court, Curtis argued that the award should be vacated because the arbitrator had manifestly disregarded Texas law regarding the collection of “reasonable” legal fees. But the district court refused to consider Curtis’s “manifest disregard” argument, believing it was “foreclosed” by the Fifth Circuit’s decision in Citigroup Global Markets, Inc. v. Bacon, 562 F.3d 349 (5th Cir. 2009).


On appeal, Curtis contends the district court erred by reading Citigroup too broadly. In Citigroup, the Fifth Circuit said it had previously defined “manifest disregard” as a common-law ground for vacating arbitration awards and therefore held it was no longer a valid ground for vacatur after Hall Street. Citigroup, 562 F.3d at 355. But the court was careful to reject “manifest disregard” only “to the extent that [it] constitutes a nonstatutory ground for vacatur.” Id. (emphasis added). After analyzing post-Hall Street decisions, including the Second Circuit’s decision in Stolt-Nielsen, the Fifth Circuit left open the question of whether “manifest disregard” might be reconceptualized as a statutory ground for vacatur—as it had been by the Second Circuit—noting only that the Second Circuit’s reconceptualization was “very narrow” and did not apply to the scenario at hand. See id. at 356–57; accord United Forming, Inc. v. FaulknerUSA, LP, 350 F. App’x 948, 950 (5th Cir. 2009) (not reaching the question of whether “manifest disregard” might constitute statutory ground for vacatur because “such a situation [was] not presented”). Thus, a careful reading of Citigroup shows that the Fifth Circuit has not yet taken a side in the circuit split and remains open to the possibility that “manifest disregard of the law” may be understood as referring to the statutory grounds for vacating an arbitration award.


This question—whether “manifest disregard” remains viable as judicial shorthand for one of the grounds listed in section 10 of the FAA—is squarely presented in McKool Smith, P.C. v. Curtis International, Ltd. Thus, McKool could eventually present the Supreme Court with an opportunity to resolve the circuit split that emerged after Hall Street. But Curtis has also argued, in the alternative, that the arbitrator’s award should be vacated for violating Texas public policy. Cf. Stolt-Nielsen, 559 U.S. at 671–72 (holding arbitrator “exceeded his powers” by “impos[ing] [his] own view of sound policy”). If the Fifth Circuit relies on this alternative ground for vacating the award in McKool, the split over “manifest disregard” will continue.


Keywords: litigation, appellate practice, arbitration, manifest disregard, vacatur


Jason P. Steed is an appellate attorney with Bell Nunnally & Martin LLP in Dallas, Texas.


 
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