Just how hard is it to vacate an arbitration award? The Sixth Circuit recently held that even if the arbitrator reached a result directly contrary to federal precedent, the arbitration award would be upheld. And the Tenth Circuit found that even if the arbitrator based his award on an agreement that does not support the award, it will be upheld if there is any other basis to confirm.
In Schafer v. Multiband Corp., 2014 WL 30713 (6th Cir. 2014), two directors of a holding company sold that company to Multiband. Everyone involved knew that the federal government was investigating whether the holding company had purchased stock for its ESOP at inflated prices. (ESOP = Employee Stock Ownership Plan.) As part of the deal, Multiband agreed to indemnify the directors if they were found to have wrongly purchased stock. Later, however, when the federal government actually sued the directors, Multiband refused to indemnify them. So, the directors settled the suit with their own funds and started an arbitration against Multiband.
In arbitration, Multiband argued that the indemnification agreement was void against public policy (under ERISA) and therefore unenforceable. The arbitrator agreed. The directors moved to vacate the award, and the district court granted the motion. The district court concluded the arbitration award was in “manifest disregard of the law” because the arbitrator was aware of controlling Sixth Circuit precedent and chose to ignore it. The Sixth Circuit was able to look past the arbitrator’s error and rely on the extraordinary deference to arbitration awards to confirm the award:
Even assuming that manifest disregard of the law is a basis for vacatur of an arbitral decision, the scope of the basis has to be very narrow. Manifest disregard of the law is not just manifest error of law. If the arbitrator expressed disagreement with the law, rather than interpretation of the law, that might suggest “disregard.” But there is little evidence of that in the arbitrator’s decision. Instead, the arbitrator relied on a very broad “plain” reading of the ERISA provision invalidating contractual provisions that relieve a fiduciary of liability, and relied on a narrow and formal meaning of the insurance exception to that provision.
But here’s the opinion’s real kicker:
Moreover, the very idea that an arbitral decision is not appealable for legal error leads to the conclusion that the arbitrator is not necessarily bound by legal holdings of this court. If an arbitrator relies on a colorable meaning of the words of the statute—as the arbitrator did here—the fact that there is Sixth Circuit precedent to the contrary is not necessarily determinative. Sixth Circuit holdings are binding in courts and on agencies whose decisions are appealable to the Sixth Circuit, ultimately because of that appealability. An arbitrator cannot reject the law, but can disagree with nonbinding precedent without disregarding the law.
What can one learn from this opinion? First, in drafting arbitration provisions, parties need to think carefully about whether they want to forego even this type of legal challenge to an arbitrator’s award. If not, consider either staying in court or opting to build in an arbitral appeal. Second, the Sixth Circuit appears to believe “manifest disregard of the law” may be a valid challenge to an arbitration award. But they consider manifest disregard to be so narrow (the arbitrator disagreeing with a controlling statute and refusing to apply it) that it might as well have died with Hall Street. And finally, the Sixth Circuit is willing to say in a published opinion what I have only heard others whisper in select company: that if the grounds for appeal of an arbitration award are this constrained, maybe arbitrators really do not have to follow the law after all…
In a less dramatic opinion, the Tenth Circuit also recently affirmed a portion of an arbitration award that the district court had vacated. In Adviser Dealer Services, Inc. v. Icon Advisers, Inc., 2014 WL 541914 (10th Cir. Feb. 12, 2014), it upheld the arbitration panel’s award forcing Party X to pay attorneys’ fees, even though the award had indicated the fees were “pursuant to the terms of” an agreement, and Party X was not a signatory to that agreement. However, the appellate court found all parties had requested attorneys’ fees and the rules allowed the panel to award attorneys fees in that situation. “Because the arbitration panel had general authority . . . to award attorneys’ fees, an erroneous reference to the [agreement] as a basis for its award was merely an error of fact, which does not justify overturning the panel’s award of attorneys’ fees.”