A recent decision from the 10th Circuit shows there is a whole new way to invalidate an arbitration agreement.  In Citizen Potawatomi Nation v. Oklahoma, 2018 WL 718606 (10th Cir. Feb. 6, 2018), the court found the arbitration agreement unenforceable because the parties provided for de novo review of any arbitration award in federal court, which is prohibited under the Hall Street decision from SCOTUS in 2008.

The agreement at issue was a Tribal-State gaming compact between the Citizen Potawatomi Nation and the State of Oklahoma.  The Compact had a dispute resolution procedure providing for arbitration under AAA rules.  But it also stated that “notwithstanding any provision of law, either party to the Compact may bring an action against the other in a federal district court for the de novo review of any arbitration award …”

The parties then had a dispute over liquor licensing and taxes, which was heard in arbitration.  The Potawatomi Nation moved to confirm the award in federal court, and argued for narrow review under FAA Section 10.  Oklahoma moved to vacate the award,  seeking de novo review of the dispute under the Compact.  The district court applied the narrow review in Section 10 and confirmed the award.

On appeal, the 10th Circuit upended the entire arbitration agreement.  It noted that the 2008 Hall Street decision makes clear that parties cannot alter the standard of review in Section 10.  It also found that the provision for de novo review could not just be severed, because it was material to the parties’ decision to choose arbitration, as evidenced by a review of the Compact as a whole.  As a result, the court found the arbitration agreement as a whole unenforceable.

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Three years ago, this blog catalogued where all the federal circuits stood on the issue of whether an arbitration award that “manifestly disregarded the law” could be vacated under the Federal Arbitration Act, as that is not one of the four bases for vacatur listed in Section 10.  There was a circuit split then, and that circuit split has not gone away.  An analysis this summer shows that, while some circuits have shifted their position slightly, there is still no clear majority on whether the basis is valid.

Three federal appellate courts have maintained a strict reading of SCOTUS’s 2008 Hall Street decision.  The Fifth, Eighth, and Eleventh circuits continue to hold that manifest disregard is no longer an applicable basis for vacating an arbitration award. See McVay v. Halliburton Energy Servs., Inc., 2015 WL 1810950, at *2 (5th Cir. Apr. 22, 2015); Medicine Shoppe Intern., Inc. v. Turner Invs., Inc., 614 F.3d 485, 489 (8th Cir. 2010); Campbell’s Foliage, Inc. v. Federal Crop Ins. Corp., 562 Fed. Appx. 828, 831 (11th Cir. 2014).

The Second, Fourth, Seventh, Ninth, and Tenth circuits take the opposite view and have allowed arguments to vacate an arbitration award based on manifest disregard of the law. See A & G Coal Corp. v. Integrity Coal Sales, Inc., 565 Fed. Appx. 41, 42-3 (2nd Cir. 2014); Dewan v. Walia, 544 Fed. Appx. 240, 248 (4th Cir. 2013); Renard v. Ameriprise Fin. Servs., Inc., 778 F.3d 563, 567- 69 (7th Cir. 2015); Wetzel’s Pretzels, LLC v. Johnson, 567 Fed. Appx. 493, 494 (9th Cir. 2014); Adviser Dealer Servs., Inc. v. Icon Advisers, Inc., 557 Fed. Appx. 714, 717 (10th Cir. 2014).

Interestingly, more circuit courts have opted for a middle ground in the last few years, declaring that the issue is undecided. The First Circuit recently reversed a district court’s decision to vacate an arbitration award for manifestly disregarding the law. Raymond James Fin. Servs., Inc., v. Fenyk, 780 F.3d 59, 63-4 (1st Cir. 2015). The court stated that whether the manifest disregard doctrine remains good law is “uncertain,” but that the alleged error in the arbitrator’s award did not meet that high standard in any case.

In addition to the First Circuit, the Sixth and Third Circuits leave unanswered the question whether manifest disregard is a legitimate basis to vacate an arbitration award. In 2008, the Sixth Circuit decided to continue accepting manifest disregard and overturned an arbitration award on that basis, yet in 2014 it held that the legitimacy of using manifest disregard has not been settled and evaded applying it. See Coffee Beanery, Ltd. v. WW, LLC, 300 Fed. Appx. 415, 419 (6th Cir. 2008); Schafer v. Multiband Corp., 551 Fed. Appx. 814, 818-19 (6th Cir. 2014). Although the Third Circuit has allowed manifest disregard arguments in the past, it recently held that “this court has not yet ruled” on whether manifest disregard is an allowable basis to vacate an award. Bellantuono v. ICAP Secs. USA, LLC, 557 Fed. Appx. 168, 173-74 (3d Cir. 2014).

Litigants hoping to overturn arbitration awards should not take great comfort in the fact that five circuit courts allow manifest disregard arguments.  Even those five circuits are reluctant to vacate arbitration awards on that basis.  In fact, we were able to find only two federal appellate courts, the Fourth and Ninth, that have overturned an arbitration award on that basis since 2009. See Dewan, 544 Fed. Appx. at 248; Comedy Club, Inc. v. Improv West Assocs., 553 F. 3d 1277, 1289-90 ( 9th Cir. 2009)

Here’s the scorecard:

Manifest Disregard Lives Manifest Disregard Dead Status Uncertain
2015 2d, 4th, 7th, 9th, 10th 5th, 8th, 11th 1st, 3d, 6th
2012 2d, 4th, 6th, 9th, 10th 1st, 5th, 7th, 8th, 11th. 3d

ArbitrationNation thanks Bri’An Davis, a law student at the University of Iowa College of Law, for researching and drafting this post.

The Federal Arbitration Act sets forth only four bases for vacating arbitration awards.  See 9 U.S.C. § 10 (a).    After SCOTUS’s 2008 decision in Hall Streetat least half of the circuit courts have concluded that those four bases are exclusive, de-legitimizing the creative bases that judges had developed over the years.  However, a recent Fourth Circuit opinion vacated an arbitration award for “manifest disregard of the law,” a judicially-created basis for vacating arbitration awards that is not contained in Section 10 of the FAA.

In Dewan v. Walia, 2013 WL 5781207 (4th Cir. Oct. 28, 2013), there was an arbitration between a company and its former employee.  Each side made claims against the other.  Critically, however, the employee had executed a Release Agreement in exchange for $7,000 just three months before the arbitration, which allegedly released all his employment claims.  After the hearing, the Arbitrator concluded that the Release Agreement was enforceable, but still awarded damages to the employee.  The district court confirmed the arbitrator’s award.

On appeal, the Fourth Circuit reversed.  It instructed the district court to vacate the arbitration award because it was “the product of a manifest disregard of the law by the Arbitrator.”  The court conducted its own analysis of the release language and concluded that the employee had released all claims against the company, including those he pursued in the arbitration, and therefore the arbitrator should not have awarded the employee any damages on his claims in the arbitration.

One judge dissented.  The dissent, while never citing Sutter, invokes the same standard used in Sutter, noting that the arbitrator did her job and interpreted the contract.  “Because the arbitrator unquestionably construed the release agreement at issue, we are not at liberty to substitute our preferred interpretation for the arbitrator’s.”

It does seem nearly impossible to square Justice Kagan’s language in Sutter, instructing courts to confirm arbitration awards whether “good, bad or ugly” and even if containing “grave error,” with this Dewan opinion from the Fourth Circuit.  While the insurer in Sutter moved to vacate under a legitimate FAA basis (that the arbitrator exceeded his power), and the company in this case moved to vacate claiming “manifest disregard,” the same standard should apply to all claims that arbitrators got the law wrong: as long as the arbitrator even arguably construed the contract, that construction holds.

**Finally, a short update on a previous post.  In April, the Ninth Circuit ducked the question of whether California’s Broughton-Cruz rule was preempted by the FAA.  (That rule exempted claims for public injunctive relief from arbitration under California law.)  Last week, however, the Ninth Circuit determined that Broughton-Cruz is preempted.  Ferguson v. Corinthian Colleges, Inc., __ F.3d __, 2013 WL 5779514.  The court relied on Concepcion as well as Marmet Health Care Center, and Mastrubuono to reach its result.