Commercial Litigation and Arbitration

Federal Arbitration Act — “Manifest Disregard” After Hall Street — Circuit Split — Fifth Circuit Summary

From Citigroup Global Mkts. Inc. v. Bacon, 2009 U.S. App. LEXIS 4543 (5th Cir. Mar. 9, 2009):

The question before us now is whether, under the FAA, manifest disregard of the law remains valid, as an independent ground for vacatur, after Hall Street. The answer seems clear. Hall Street unequivocally held that the statutory grounds are the exclusive means for vacatur under the FAA. Our case law defines manifest disregard of the law as a nonstatutory ground for vacatur…. Thus, to the extent that manifest disregard of the law constitutes a nonstatutory ground for vacatur, it is no longer a basis for vacating awards under the FAA.

Four other circuits have considered this issue. The First Circuit, in dictum and with little discussion, concluded that Hall Street abolished manifest disregard of the law as a ground for vacatur. See Ramos-Santiago v. United Parcel Serv., 524 F.3d 120, 124 n.3 (1st Cir. 2008) ("We acknowledge the Supreme Court's recent holding in Hall Street Assocs., L.L.C. v. Mattel that manifest disregard of the law is not a valid ground for vacating or modifying an arbitral award in cases brought under the [FAA]." (citations omitted)). The Sixth Circuit, in an unpublished opinion, reached the opposite conclusion by narrowly construing the holding of Hall Street to apply only to contractual expansions of the grounds for review. Coffee Beanery, Ltd. v. WW, L.L.C., 2008 WL 4899478, at *4 (6th Cir. Nov. 14, 2008). The Second Circuit has also held that manifest disregard survives Hall Street. Stolt-Nielsen SA v. AnimalFeeds Int'l Corp., 548 F.3d 85, 93-95 (2d Cir. 2008). The court, however, recognized that Hall Street's holding was in direct conflict with the application of manifest disregard as a nonstatutory ground for review, but resolved the conflict by recasting manifest disregard as a shorthand for § 10(a)(4)…. Finally, the Ninth Circuit has concluded that Hall Street did not abolish manifest disregard because its case law defined manifest disregard as shorthand for § 10(a)(4). See Comedy Club Inc. v. Improv West Assocs., 2009 WL 205046, at *9 (9th Cir. Jan 29, 2009) ("Comedy Club II"). We now turn to discuss the opinions of the Sixth, Second, and Ninth Circuits.

Coffee Beanery only briefly considered the effect of Hall Street on manifest disregard of the law…. In what we view as an understatement, the Sixth Circuit acknowledged that Hall Street "significantly reduced the ability of federal courts to vacate arbitration awards for reasons other than those specified in 9 U.S.C. § 10 . . . ." ... Citing Hall Street's discussion of Wilko, which Coffee Beanery thought demonstrated a "hesitation to reject the 'manifest disregard' doctrine," and noting the acceptance of the standard by each and every court of appeals, the court concluded that it would be imprudent to cease vacating arbitration awards made in manifest disregard of the law. ***

This decision suffers from two significant flaws. First, the opinion utterly fails to address Hall Street's express holding that the grounds for vacatur found in § 10 are exclusive. Instead, the court narrowly construed Hall Street as applying only to contractual expansions of the grounds for vacatur…. In the light of Hall Street's repeated statements that "We hold that the statutory grounds are exclusive," we think it incorrect so narrowly to construe Hall Street's holding. 128 S.Ct. at 1400 (emphasis added).

Second, we believe that Coffee Beanery misread Hall Street's discussion of Wilko. We do not see hesitation by Hall Street to reject manifest disregard of the law as an independent ground for vacating an award under the FAA; instead, Hall Street's discussion of Wilko demonstrates the Supreme Court's unwillingness to give any significant meaning to Wilko's vague language. Hall Street observed that Wilko dealt with an entirely separate issue and, noting the vagueness of Wilko's statement, concluded that: "When speaking as a Court, we have taken the Wilko language as we found it, without embellishment, and now that its meaning is implicated, we see no reason to accord it the significance that [the petitioner] urges." ...

Unlike Coffee Beanery, the Second Circuit in Stolt-Nielsen did not shy from Hall Street’s holding. The court acknowledged that Hall Street "held that the FAA sets forth the 'exclusive' grounds for vacating an arbitration award." …. The court also recognized that this holding was in conflict with its own prior statements regarding manifest disregard, which the court discounted as dicta. Id. ("[Hall Street's] 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."). Instead of directly concluding that Hall Street eliminated manifest disregard as a ground for vacatur under the FAA, the court reasoned that manifest disregard of the law should be "reconceptualized as a judicial gloss on the specific grounds for vacatur enumerated in section 10 of the FAA . . . ." Id.

Describing its "reconceptualization," the court … seems to conclude that manifest disregard — as the court describes it — does not add to the statutory grounds. The court simply folds manifest disregard into § 10(a)(4). In the full context of the Second Circuit's reasoning, this analysis is not inconsistent with Hall Street's speculation that manifest disregard may, among other things, "have been shorthand for § 10(a)(3) or § 10(a)(4) . . . ." Hall Street, 128 S.Ct. at 1404.

We should be careful to observe, however, that this description of manifest disregard is very narrow. Because the arbitrator is fully aware of the controlling principle of law and yet does not apply it, he flouts the law in such a manner as to exceed the powers bestowed upon him. This scenario does not include an erroneous application of that principle.

***Comedy Club II has a lengthy procedural history. In a decision issued prior to Hall Street, the Ninth Circuit found that the arbitration award at issue constituted a manifest disregard of the law. Comedy Club Inc. v. Improv West Assocs., 514 F.3d 833 (2008) ("Comedy Club I"). The Supreme Court then vacated the decision in Comedy Club I and remanded for reconsideration in the light of its recently issued decision in Hall Street.***

On remand, the Ninth Circuit, unlike the Second Circuit, had no need to reconceptualize manifest disregard because its own case law had already defined it as a shorthand for § 10(a)(4)…. The court therefore held that manifest disregard of the law, as a shorthand for § 10(a)(4), survived Hall Street. Id. ("manifest disregard of the law remains a valid ground for vacatur because it is a part of § 10(a)(4)").

In the light of the Supreme Court's clear language that, under the FAA, the statutory provisions are the exclusive grounds for vacatur, manifest disregard of the law as an independent, nonstatutory ground for setting aside an award must be abandoned and rejected. Indeed, the term itself, as a term of legal art, is no longer useful in actions to vacate arbitration awards. Hall Street made it plain that the statutory language means what it says: "courts must [confirm the award] unless the award is vacated, modified, or corrected as prescribed in sections 10 and 11 of this title," 9 U.S.C. § 9 (emphasis added), and there's nothing malleable about "must," Hall Street, 128 S.Ct. at 1405. Thus from this point forward, arbitration awards under the FAA may be vacated only for reasons provided in § 10.

Share this article:


Recent Posts