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Bench & Bar of Minnesota is the official publication of the Minnesota State Bar Association.

Arbitration’s Appeal: The Grounds Have Narrowed

The United States Supreme Court decision in Hall Street Associates v. Mattel appears to sound the death knell for challenges to arbitral awards on ground of “manifest disregard for the law.” Circuit courts have reached different conclusions in this regard, but the current state of the law is cautionary if you are considering whether to recommend arbitration or litigation for resolving a dispute.

The binding nature of an arbitration agreement and the limited judicial review of an arbitration award are great if the arbitrator decides in your client’s favor. But what if the arbitrator decides against your client? Even worse, what if the arbitrator rules against your client and does not even follow the controlling law? Under the Federal Arbitration Act (“FAA”), an arbitrator’s failure to follow the law is not one of the grounds specifically enumerated that would allow a court to vacate an arbitration award. Not to worry, you say, most jurisdictions—including the 8th Circuit—have recognized nonstatutory grounds for vacating an arbitration award, such as where the award exhibits a “manifest disregard of the law.”1 Not anymore.

In Hall Street Associates, L.L.C. v. Mattel, Inc., the United States Supreme Court held that the statutory grounds are the exclusive means for vacating an arbitration award under the FAA.2 Nonetheless, lower courts that have interpreted and applied Hall Street are coming to different conclusions as to whether manifest disregard of the law remains a proper basis to overturn an arbitration award.

Hall Street Decision
The litigation in Hall Street arose from a dispute over a lease that Mattel, Inc., entered into with Hall Street Associates, LLC for commercial property. The parties proposed to arbitrate a claim that the lease required Mattel to indemnify Hall Street for the costs of cleaning up the lease site. A federal district court approved the arbitration agreement, which included a provision requiring the court to “vacate, modify, or correct any award: (i) where the arbitrator’s findings of facts are not supported by substantial evidence, or (ii) where the arbitrator’s conclusions of law are erroneous.”3

The district court twice vacated the arbitrator’s award for legal error, and the parties twice appealed to the 9th Circuit. Each time, the 9th Circuit reversed the district court’s decision on the basis that the terms controlling judicial review were unenforceable and ordered the arbitration award reinstated. The Supreme Court then granted certiorari to determine whether the grounds for vacatur and modification provided by Sections 10 and 11 of the FAA are exclusive.

In a 6-3 decision, the Supreme Court rejected the parties’ attempt to expand the court’s review beyond the specific provisions of the FAA. The Court observed that Section 9 of the FAA instructs courts that they “must” confirm an arbitration award, “unless” it is vacated or modified “as prescribed” by Sections 10 and 11. In a nutshell, Section 10 allows a court to vacate an arbitration award where (1) the award was procured by corruption or fraud; (2) the arbitrators were impartial or corrupt; (3) the arbitrators committed some type of misconduct such as refusing to consider material evidence; and (4) the arbitrators exceeded their powers.4

Section 11 of the FAA allows a court to modify an arbitration award to correct nonsubstantive matters that do not affect the merits of the case.5 Ultimately, the Supreme Court concluded that Sections 10 and 11 of the FAA are the exclusive grounds for vacating and modifying an arbitration award.

Manifest Disregard
But wait—wouldn’t the widespread judicial recognition of manifest disregard of the law as a nonstatutory ground for vacatur suggest that Section 10 is not exclusive? Apparently not. The Supreme Court rejected manifest disregard of the law as an independent ground for vacatur and stood by its holding that Section 10 of the FAA provides the exclusive grounds for vacating an arbitration award.

But what if we simply fold manifest disregard of law into Section 10(a)(4)—where arbitrators exceed their powers? That is, does manifest disregard of the law survive as a valid ground for vacatur under the umbrella of Section 10(a)(4) because arbitrators have exceeded their authority when they do not follow the applicable law? Or did Hall Street put an end to this type of expanded judicial review? Not surprisingly, many courts have reached opposing conclusions.

Split Among Circuits
Five circuits have addressed the impact of Hall Street and whether manifest disregard of the law is still a valid basis for challenging arbitration awards. The 1st Circuit, in dictum, concluded that manifest disregard of the law is not a valid ground for vacating an arbitral award in cases brought under the FAA.6 The 6th Circuit stopped short of abolishing the doctrine; instead, it found that Hall Street’s reference to the “exclusive” statutory grounds for obtaining relief “casts some doubt” on the continuing vitality of the manifest-disregard doctrine.7

The 5th Circuit has concluded that Hall Street abolished manifest disregard of the law as an independent ground for vacatur because the Supreme Court “unequivocally held that the statutory grounds are the exclusive means for vacatur under the FAA.”8 It is worth noting that each one of these circuits addressed Hall Street’s express holding that the available grounds for vacatur in Section 10 are exclusive.

The 2nd and 9th circuits, however, reached the opposite conclusion by holding that manifest-disregard challenges survive after Hall Street.9 Both the 2nd and 9th circuits found that manifest disregard of the law was mere shorthand for Section 10(a)(4) of the FAA—where arbitrators exceed their powers. Ironically, both of these circuits had previously classified manifest disregard of the law as a nonstatutory basis for challenging arbitration awards.10

If the manifest-disregard standard falls squarely within the statutory criteria of Section 10 of the FAA, then why did the 2nd and 9th circuits ever perceive the need to treat this standard as “nonstatutory” in the first place? In light of the Supreme Court’s clear language that Section 10 of the FAA provides the exclusive grounds for vacating an arbitration award, it is hard to reconcile how the 2nd and 9th circuits now classify this doctrine as part of the statutory criteria for vacating an award.

Where does the 8th Circuit stand on this issue? At present, it has not addressed whether Hall Street has eliminated manifest disregard of the law as a basis for challenging arbitration awards. But the 8th Circuit has acknowledged Hall Street by stating that “[a]n arbitral award may be vacated only for the reasons enumerated in the FAA.”11 Historically, the 8th Circuit has characterized manifest disregard of the law as a nonstatutory ground for challenging arbitration awards.12Because Hall Street held that Sections 10 and 11 of the FAA provide the “exclusive” grounds for challenging an arbitration award, it seems unlikely that the 8th Circuit would now classify this doctrine as part of the statutory criteria for vacating an award.

As for the federal district court in Minnesota, there is only one published decision that has addressed the impact of Hall Street, and in that case, the court held that manifest disregard of the law is no longer a valid basis for challenging an arbitration award.13

Weighing Arbitration
The Supreme Court signaled the death knell for manifest-disregard challenges when it held that Sections 10 and 11 of the FAA provide the exclusive grounds for vacating and modifying an arbitration award. It reaching this conclusion, the Court made clear that supplementing Sections 10 and 11 would run counter to Section 9 of the FAA, which explicitly tells courts that they “must” confirm an arbitration award, “unless” it is vacated or modified “as prescribed” by Sections 10 and 11. Indeed, the Supreme Court stated that there is no hint of flexibility in this language. Thus, it is difficult to see how an independent nonstatutory ground such as manifest disregard of the law—a standard not expressly provided for by the FAA—can survive after Hall Street.

What does all this mean for someone considering an arbitration agreement? It means that it may be a good time to reevaluate whether arbitration would be appropriate for disputes that could arise in the future. The fact that there is no viable appeal mechanism—at least in some jurisdictions—even if an arbitrator manifestly disregards the applicable law should serve as a strong warning to those who are thinking about adding an arbitration clause to their contracts.

If the potential disputes involve substantial rights or sums of money, then arbitration may not be the best forum to resolve such disputes. Yet, it is also important to recognize that arbitration is not designed to be a perfect dispute resolution forum. Rather, it is designed primarily to avoid the time-consuming and costly alternative of litigation.14 The Supreme Court made it clear in Hall Street that a restrictive standard of review is necessary to preserve these benefits so that arbitration does not become a mere dress rehearsal for litigation. Nevertheless, the developing split of authority among the courts on this issue makes it likely that the Supreme Court will be asked once again to address whether an arbitrator can really disregard the law.

Notes
Hoffman v. Cargill, Inc., 236 F.3d 458, 461 (8th Cir. 2001).
Hall Street Associates, L.L.C. v. Mattel, Inc., No. 06-989, __ U.S. __, 128 S. Ct. 1396, 1403 (2008).
Id. at 1400-01.
See 9 U.S.C. §10(a).
5 9 U.S.C. §11.
Ramos-Santiago v. UPS, 524 F.3d 120, 124 n. 3 (1st Cir. 2008).
Grain v. Trinity Health, 551 F.3d 374, 380 (6th Cir. 2008).
Citigroup Global Markets, Inc. v. Bacon, 562 F.3d 349, 355 (5th Cir. 2009).
Stolt-Nielsen SA v. AnimalFeeds Int’l Corp., 548 F.3d 85, 94-95 (2d Cir. 2008); Comedy Club, Inc. v. Improv W. Assocs., 553 F.3d 1277, 1290 (9th Cir. 2009).
10 See Luong v. Circuit City Stores, Inc., 368 F.3d 1109, 1112 (9th Cir. 2004) (explaining that “both the [2]nd Circuit and the [9]th recognize a non-statutory escape valve from an arbitral award where the arbitrator has manifestly disregarded the law.”) (citing DiRussa v. Dean Witter Reynolds Inc., 121 F.3d 818, 821 (2d Cir. 1997) (referring to the doctrine as “judicially-created”)).
11 Crawford Group, Inc. v. Holekamp, 543 F.3d 971, 976 (8th Cir. 2008) (citing Hall Street, 128 S. Ct. at 1403).
12 Hoffman, 236 F.3d at 461.
13 See Prime Therapeutics LLC v. Omnicare Inc., 555 F. Supp. 2d 993, 999 (D. Minn. 2008) (“It would be somewhat inconsistent to say that the parties cannot contractually alter the FAA’s exclusive grounds for vacating or modifying an award, but then allow the courts to alter the exclusive grounds by creating extra-statutory bases for vacating or modifying an award.”).
14 Hoffmansupra, at 462.



TIMOTHY M. O’SHEA
 is a commercial-litigation attorney at Fredrikson & Byron, P.A. in Minneapolis, Minnesota. Prior to joining Fredrikson & Byron, O’Shea served as a judicial law clerk for the Hon. Richard H. Kyle and the Hon. Arthur J. Boylan of the United States District Court for the District of Minnesota. He can be reached at toshea@fredlaw.com.

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