Category Archives: Arbitration

Does “Manifest Disregard” Still Exist as a Grounds for Vacating an Arbitrator’s Award?

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For as long as I can remember, courts have entertain arguments about whether or not to overturn an arbitrator’s award on the grounds the the arbitrator “manifestly disregarded” the law.

Trouble is, there’s this statute out there called the Federal Arbitration Act, and the FAA lists several grounds for vacating an arbitrator’s award, and “manifest disregard for the law” isn’t one of them. And then, in 2009, the Supreme Court issued an opinion in a case called Hall Street Assocs. v. Mattel, Inc., 552 U.S. 576, 581 (2008), in which the Supremes held that the enumerated grounds for vacatur in the FAA are “exclusive.”

Is this the death of “manifest disregard” review?

Yes, that’s exactly what Hall Street means, according to the 1st, 5th and 11th Circuits.  (See Citigroup Global Mkts., Inc. v. Bacon, 562 F.3d 349, 358 (5th Cir. 2009); Frazier v. CitiFinancial Corp., 604 F.3d 1313, 1323-24 (11th Cir. 2010); Ramos-Santiago v. UPS, 524 F.3d 120, 124 n.3 (1st Cir. 2008), although the latter of these is clearly dicta).

But not every Circuit has been willing to let go of its “manifest disregard” blanket yet.  The 2nd, 6th, and 9th Circuits have narrowly construed Hall Street and have continued to give varying degrees of life to “manifest disregard.” (Stolt-Nielsen SA v. AnimalFeeds Int’l Corp., 548 F.3d 85, 93-94 (2d Cir. 2008), rev’d on other grounds, Stolt-Nielsen S. A. v. AnimalFeeds Int’l Corp., 130 S. Ct. 1758 (2010)); Comedy Club, Inc. v. Improv W. Assocs., 553 F.3d 1277, 1290 (9th Cir. 2009); Coffee Beanery, Ltd. v. WW, LLC, 300 Fed. Appx. 415, 419 (6th Cir. 2008)).

Even in the midst of this rather obvious circuit split, the Supreme Court in the aforementioned Stolt-Nielsencase punted on the question, stating in a footnote (footnote 3, to be exact) that it was not going to resolve the question of whether “manifest disregard” was dead in light of Hall Street:

We do not decide whether “manifest disregard” survives our decision in Hall Street Associates, as an independent ground for review or as a judicial gloss on the enumerated grounds for vacatur set forth at 9 U.S.C. § 10. AnimalFeeds characterizes that standard as requiring a showing that the arbitrators knew of the relevant principle, appreciated that this principle controlled the outcome of the disputed issue, and nonetheless willfully flouted the governing law by refusing to apply it. Assuming, arguendo, that such a standard applies, we find it satisfied.

And now, the 4th Circuit has chimed in – and has joined the side of the Circuits that will still entertain arguments concerning “manifest disregard.”

At issue was a $1.1 million sanction that an arbitration panel had smacked upon Wachovia after Wachovia had initiated arguably-frivolous unfair competition FINRA arbitration against some departed broker-dealers, who countersued for unpaid wages under South Carolina state wage law and then asked the arbitration panel to sanction Wachovia under South Carolina’s frivolous conduct statute.  The Fourth Circuit went through a length analysis of the history of the “manifest disregard” analysis, noted the circuit split above, and then concluded that – based solely on the footnote from Stolt-Nielsen (the same footnote 3 mentioned above), that it was joining the side of the 2nd, 6th, and 9th Circuits:

We read this footnote [footnote 3 from Stolt-Nielsen] to mean that manifest disregard continues to exist either “as an independent ground for review or as a judicial gloss on the enumerated grounds for vacatur set forth at 9 U.S.C. § 10.”

So, there you have it.  If you’re keeping score, the “manifest disregard is alive” team has now pulled out in the lead, leading the “manifest disregard is dead” team by a score of 4 circuits to 3.

5th Circuit: Arbitration Agreement Unenforceable Because Employer Reserved Right to Modify It

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Several companies have mandatory arbitration programs, pursuant to which every employee must sign an agreement promising to submit every possible claim they might want to assert against the company to mandatory and binding arbitration. Much ink has been spilled in various court decisions concerning the circumstances pursuant to which these these types of agreements are enforceable.

But though the law on this issue can vary significantly from state to state, there is at least one universal principle that, one would think, should be pretty obvious: it must be an agreement.  A real, honest-to-goodness contract.

Which brings us to the Fifth Circuit’s new opinion in Carey v. 24 Hour Fitness USA, Inc.  Apparently, someone at 24 Hour Fitness thought that parachuting a mandatory arbitration “clause” in their handbook (but only the handbook) was a good idea, and that trying to enforce it against some employee who had the nerve to show up in court was an even better idea. The problem is that 24 Hour Fitness’s handbook – like most handbooks – had a disclaimer which emphasized that the handbook isn’t an “agreement” at all, and that the company is always free to change it:

I acknowledge that, except for the at-will employment, [the Company] has the right to revise, delete, and add to the employee handbook. Any such revisions to the handbook will be communicated through official written notices approved by the President and CEO …

Every first year law student knows that you can’t have a true contract if one of the parties isn’t really agreeing to anything–that’s called an “illusory” bargain. And that was the problem with this “agreement.”  24 Hour Fitness was trying to reserve for itself the right to monkey with the handbook (including the arbitration clause), even on a retroactive basis, while at the same time pointing to the arbitration clause as a binding, enforceable “contract.”

The Fifth Circuit was having none of it:

the fundamental concern … is the unfairness of a situation where two parties enter into an agreement that ostensibly binds them both, but where one party can escape its obligations under the agreement by modifying it. Requiring notice alone does not fully address this concern: … this [notice of modification] could still arguably allow [the company] to avoid its promise to arbitrate as to claims that were already in progress, unless there were some provision preventing changes from applying to in-progress disputes.

The Fifth Circuit did note a Texas Supreme Court case from 2002 (In re Halliburton Co., 80 S.W.3d 566 (Tex. 2002)), where that Court had enforced an arbitration agreement which also allowed the company to modify the deal–but that other arbitration agreement contained a “savings clause” which essentially allowed only prospective changes to the agreement, and banned the company from changing the rules concerning claims that had already matured or had been asserted by the time of the change. No such savings clause was present in this case.  Whoops.

Image: savit keawtavee / FreeDigitalPhotos.net

No Reason to Be Bored with This Board

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The National Labor Relations Board is once again making headlines after a series of controversial decisions, rulemaking, and President Obama’s decision to maintain the Board’s operating quorum through three “recess” appointments.

These actions have resulted in legislation to limit the Board’s authority and/or undo the effect of recent Board rules and, to date, two lawsuits.  Although the recess appointments will almost certainly face legal challenges on constitutional grounds, the fully-staffed “activist” Board is poised to continue to exercise its authority to skew the labor law landscape further toward unions and against employers.

Read more about it in the official Zashin & Rich firm newsletter as well as in The Personnel Files’ post earlier today about the new decision in D.R. Horton.