vacate arbitration award

Pick up any textbook or treatise on arbitration law, and you’ll find the same thing in the chapter on enforcing arbitral awards: courts cannot conduct a merits review of awards. Courts, in other words, do not second guess the conclusions of the arbitrators about law or facts.

Or at least they’re not supposed to do so.

Still, losing parties often try to convince a reviewing court that the arbitrator “exceeded her powers.”  These sorts of excess of authority arguments have become quite common.

That’s exactly the sort of argument at issue in a hot-off-the-presses Tenth Circuit case, MEMC II, LLC v. Cannon Storage Sys., Inc., No. 18-6079, 2019 WL 549633 (10th Cir. Feb. 12, 2019).

In the case, the parties entered into a standard form construction contract, containing an arbitration clause. Cannon was supposed to build a commercial storage facility for MEMC. A dispute arose because Cannon decided that it needed to make some changes to the structural plans. When MEMC discovered this, it refused to continue to pay Cannon. Cannon then initiated arbitration to recover the payments.

MEMC defended by saying that Cannon had committed a material breach. It maintained that, under applicable Texas law, Cannon’s unilateral decision to depart from the specifications constituted a per se material breach discharging it from its duty to pay under the contract. The arbitrator listened to the arguments at a three-day hearing, reviewed over 100 exhibits, and concluded that MEMC had breached by failing to pay Cannon. She also found that Cannon had breached by not getting approval for several of the changes it made, but that the cost of remediating Cannon’s breaches had not be sufficiently proven by MEMC. Accordingly, she awarded $143,608 in damages to Cannon and nothing to MEMC.

MEMC challenged the award on the basis of excess of authority. The argument was essentially that “the arbitrator was required to apply the law and by awarding damages when the law would not allow for recovery of damages, the arbitrator exceeded her authority.”

The Tenth Circuit took the opportunity to give us all an Arbitration 101 lesson. Citing another Tenth Circuit case from last year – which indicates that parties may not be learning the lesson – the Court said, “[E]rrors in either the arbitrator’s factual findings or his interpretation of the law (unless that interpretation shows a manifest disregard of controlling law) do not justify review or reversal on the merits of the controversy.” (quoting Dish Network L.L.C. v. Ray, 900 F.3d 1240, 1243 (10th Cir. 2018)).

[F]ederal courts strongly defer to an arbitrator’s decisions. Because of this, “a party seeking relief under § 10(a)(4) bears a heavy burden.” [Oxford Health Plans LLC, 569 U.S. 564, 564 (2013) (quotations omitted).] “[C]onvincing a court of an arbitrator’s error—even his grave error—is not enough” to warrant vacatur under § 10(a)(4). Id. at 572. “Because the parties ‘bargained for the arbitrator’s construction of their agreement,’ an arbitral decision ‘even arguably construing or applying the contract’ must stand, regardless of a court’s view of its (de)merits.” [citations omitted]

The Fourth Circuit recently affirmed that it will consider “manifest disregard of the law” as a separate basis for attacking an arbitration award, in addition to the four bases set forth in Section 10 of the Federal Arbitration Act.  Wachovia Secs., LLC v. Brand, __ F.3d ___, 2012 WL 507022, at *8 (4th Cir. Feb 16, 2012) (“[M]anifest 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.”)  The federal circuits are now split on whether “manifest disregard” lives on after the Supreme Court decisions in Hall Street and Stolt-Nielsen.

For many years, courts have overturned arbitration awards on the grounds that the arbitrator showed a “manifest disregard of the law,” but the Supreme Court questioned the validity of that basis in Stolt-Nielsen v. Animalfeeds Int’l Corp., 130 S. Ct. 1758, 1768 n.3 (2010) and Hall Street Associates, L.L.C. v. Mattel, Inc., 552U.S. 576, 585 (2008).  In those cases, the Court suggested that the four statutory bases in Section 10 are the exclusive bases for vacating an arbitration award.

In the wake of those two decisions, the circuits are split into opposing camps about the vitality of “manifest disregard.”  The First, Fifth, Seventh, Eighth and Eleventh Circuits have determined that “manifest disregard” is no longer viable.  See Affymax, Inc. v. Ortho-McNeil-Janssen Pharmaceuticals, Inc., 660 F.3d 281, 285 (7th Cir. 2011); Frazier v. CitiFinancial Corp., 604 F.3d 1313, 1324-25 (11th Cir. 2010); Medicine Shoppe Intern., Inc. v. Turner Investments, Inc., 614 F.3d 485, 489 (8th Cir. 2010); Citigroup Global Mkts., Inc. v. Bacon, 562 F.3d 349, 358 (5th Cir. 2009); Ramos-Santiago v. UPS, 524 F.3d 120, 124 n.3 (1st Cir. 2008). 

On the other hand, in addition to the Fourth Circuit, the Second, Sixth,  Ninth and Tenth Circuits have continued to analyze cases under the “manifest disregard” standard. Biller v. Toyota Motor Corp., __ F.3d __, 2012 WL 336135, at *5-6 (9th Cir. Feb. 3, 2012); Jock v. Sterling Jewelers, 646 F.3d 113, 121-22 (2d Cir. 2011); Lynch v. Whitney, 419 Fed. Appx. 826 (10th Cir. 2011); Coffee Beanery Ltd. v. WW, LLC., 300 F. App’x 415, 419 (6th Cir. 2008).

 The Third Circuit has taken a middle ground, finding cases did not meet the “manifest disregard” standard, assuming it was still valid.  Rite Aid New Jersey, Inc. v. UFCW, 2011 WL 5075657, at *2 (3d Cir. Oct. 26, 2011).

Given how active the Supreme Court has been in this area, I predict it is simply waiting for the perfect “manifest disregard” case, and then it will resolve this circuit split (most likely against the vitality of any bases other than those in Section 10).