Tag 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

U.S. Supreme Court: Piecemeal, Schpiecemeal

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The United States Supreme Court, in a very short opinion, has vacated the judgment of a Florida state appellate court that had refused to compel arbitration after concluding that some of the claims in the case were non-arbitrable.  The case is KPMG, LLP v. Cocchi, No. 10-1521, and clarifies the procedures that a trial court (state or federal) must employ when considering whether to compel arbitration of a dispute that involves a mix of artibrable and non-arbitrable claims.

The KPMG case is one speck amongst the avalanche of litigation involving disgraced financier Bernie Madoff.  The plaintiffs in KPMG were investors in various limited partnerships that had (indirectly) been audited by KPMG.  The partnerships invested the funds in question with Madoff.  When the Madoff scandal came to light, and the investors were left holding the bag, they sued (among others) KPMG.  KPMG pointed to an arbitration agreement between itself and one of the management entities of the limited partnerships; this agreement provided that any dispute “arising out of or relating to .,. the services provided” was arbitrable.  Both the trial court and the court of appeals refused to compel arbitration.

Importantly, the court of appeals recognized that the plaintiffs had not signed any agreements with KPMG, much less agreements containing an arbitration clause.  They could thus be bound to arbitrate ”if respondents’ claims were derivative in that they arose from the services KPMG performed for the [management entities] pursuant to the audit services agreement.”  There were four claims pled in the Complaint, and the court of appeals found that two of them were direct claims, rather than derivative claims, and that the presence of these direct claims precluded compulsory arbitration.

That was the wrong answer, according to the Supreme Court

The [Federal Arbitration] Act has been interpreted to require that if a disputepresents multiple claims, some arbitrable and some not,the former must be sent to arbitration even if this will lead to piecemeal litigation.  Dean Witter Reynolds Inc. v. Byrd, 470 U.S. 213 (1985).  From this it follows that state and federal courts must examine with care the complaints seeking to invoke their jurisdiction in orderto separate arbitrable from nonarbitrable claims. A court may not issue a blanket refusal to compel arbitration merely on the grounds that some of the claims could beresolved by the court without arbitration.  See ibid. [emphasis added].

This type of “blanket refusal” was exactly what the Florida court of appeals had issued.  Moreover, neither the trial court nor the court of appeals had made a determination as to whether the remaining three of the five claims in the case were arbitrable (whether due to their derivative status or otherwise).  The Supreme Court remanded the case so that these determinations could be made.

This issue – the mixing of arbitrable and nonaribtrable claims in the same pleading - comes up occasionally in the employment context, but is likely to arise more frequently as more employers, encouraged by the arbitration-friendly recent decisions from the Supreme Court, begin to insist upon arbitration agreements and arbitration programs for their employees.  KPMG, makes it clear that parties to an arbitration agreement cannot evade arbitration of their core dispute by sprinkling non-arbitrable claims into their pleading – per KPMG, such a plaintiff will only create a bifurcated proceeding.  But KPMG also clarifies that a need to include third parties in a lawsuit (for example, a company who is employing a recently-departed employee who is violating a noncompetition agreement) will not necessarily, by that fact alone, preclude the possibility of mandatory arbitration of the core dispute between the employer and the employee.