Commercial Litigation and Arbitration

Arbitration: “Manifest Disregard of the Law,” but Not of the Evidence, Survives Hall Street — Circuit Split

Earlier this year, the Supreme Court ruled in Hall Street Assocs. LLC v. Mattel, Inc., 128 S.Ct. 1396 (2008), that the Federal Arbitration Act “confines its expedited judicial review to the grounds listed in 9 U.S.C. §§ 10 and 11,” id. at 1408, and “manifest disregard of the law” nowhere appears in those sections. Therefore, one would think, the manifest-disregard-of-the-law standard disappeared with Hall Street.

Not so. At least not in a number of courts, now including the Second Circuit. From Stolt-Nielsen AS v. AnimalFeeds Int’l Corp., 2008 U.S. App. LEXIS 22838 (2d Cir. Nov. 4, 2008):

We have ... recognized that the district court may vacate an arbitral award that exhibits a "manifest disregard" of the law. [Citations omitted.] We do not, however, "recognize manifest disregard of the evidence as proper ground for vacating an arbitrator's award." ***

In the short time since Hall Street was decided, courts have begun to grapple with its implications for the "manifest disregard" doctrine. Some have concluded or suggested that the doctrine simply does not survive. See Ramos-Santiago v. United Parcel Service, 524 F.3d 120, 124 n.3 (1st Cir. 2008) (dicta); Robert Lewis Rosen Assocs., Ltd. v. Webb, 566 F.Supp.2d 228, 233 (S.D.N.Y. 2008); Prime Therapeutics LLC v. Omnicare, Inc., 555 F. Supp. 2d 993, 999 (D. Minn. 2008); Hereford v. D.R. Horton, Inc. , So. 2d , No. 1070396, 2008 WL 4097594, *5, 2008 Ala. LEXIS 186, *12-*13 (Ala. Sept. 5, 2008). Others think that "manifest disregard," reconceptualized as a judicial gloss on the specific grounds for vacatur enumerated in section 10 of the FAA, remains a valid ground for vacating arbitration awards. See MasTec N. Am., Inc. v. MSE Power Sys., Inc., No. 1:08-cv-168, 2008 WL 2704912, at *3, 2008 U.S. Dist. LEXIS 52205, at *8-9 (N.D.N.Y. July 8, 2008); Chase Bank USA, N.A. v. Hale, 859 N.Y.S.2d 342, 349 (Sup. Ct. N.Y. County 2008).

We agree with those courts that take the latter approach. The Hall Street Court held that the FAA sets forth the "exclusive" grounds for vacating an arbitration award. Hall Street, 128 S. Ct. at 1403. That holding is undeniably inconsistent with some dicta by this Court treating the "manifest disregard" standard as a ground for vacatur entirely separate from those enumerated in the FAA. See, e.g., Hoeft, 343 F.3d at 64 (describing manifest disregard as "an additional ground not prescribed in the [FAA]"); Duferco, 333 F.3d at 389 (observing that the doctrine's use is limited to instances "where none of the provisions of the FAA apply"); DiRussa v. Dean Witter Reynolds Inc., 121 F.3d 818, 821 (2d Cir. 1997) (referring to the doctrine as "judicially-created"), cert. denied, 522 U.S. 1049 (1998); Merrill Lynch, Pierce, Fenner & Smith, Inc., 808 F.2d at 933 (same). But the Hall Street Court also speculated that "the term 'manifest disregard' . . . merely referred to the § 10 grounds collectively, rather than adding to them" -- or as "shorthand for § 10 (a)(3) or § 10 (a)(4)." Hall Street, 128 S. Ct. at 1404. It did not, we think, abrogate the "manifest disregard" doctrine altogether.

We agree with the Seventh Circuit's view expressed before Hall Street was decided:

It is tempting to think that courts are engaged in judicial review of arbitration awards under the Federal Arbitration Act, but they are not. When parties agree to arbitrate their disputes they opt out of the court system, and when one of them challenges the resulting arbitration award he perforce does so not on the ground that the arbitrators made a mistake but that they violated the agreement to arbitrate, as by corruption, evident partiality, exceeding their powers, etc. -- conduct to which the parties did not consent when they included an arbitration clause in their contract. That is why in the typical arbitration . . . the issue for the court is not whether the contract interpretation is incorrect or even wacky but whether the arbitrators had failed to interpret the contract at all, for only then were they exceeding the authority granted to them by the contract's arbitration clause.

Wise v. Wachovia Sec., LLC, 450 F.3d 265, 269 (7th Cir.) (citations omitted), cert. denied, 127 S. Ct. 582 (2006). This observation is entirely consistent with Hall Street. And it reinforces our own pre-Hall Street statements that our review for manifest disregard is "severely limited," "highly deferential," and confined to "those exceedingly rare — instances" of "egregious impropriety on the part of the arbitrators."

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