October 7, 2008
On July 7, 2008, the U.S. District Court for the Southern District of New York became one of the first courts to apply the United States Supreme Court’s recent decision in Hall Street Associates, LLC v. Mattel, Inc., 128 S. Ct. 1396 (2008) to the judicial vacatur of arbitration awards. In Robert Lewis Rosen Associates, Ltd. v. Webb, No. 07 Civ. 11403 (RJH), 2008 WL 2662015 (S.D.N.Y. July 7, 2008) ("Rosen"), the Southern District held that the grounds for judicial vacatur of an arbitration award under the expeditious review provisions of sections 9-11 of the U.S. Federal Arbitration Act ("FAA") are limited to the four grounds expressly enunciated in Section 10 of the Act. Acknowledging that previous Second Circuit decisions had relied on the Supreme Court’s decision in Wilko v. Swan, 346 U.S. 427 (1953) to hold that "manifest disregard of the law" provides an additional, judicially created, basis for vacatur, the Southern District in Rosen held that this line of cases was superseded by Hall Street and that "the manifest disregard of the law standard is no longer good law." Id. at *4.
Historic Approach to Judicial Vacatur of Arbitration Awards
For almost 50 years, the U.S. Court of Appeals for the Second Circuit has held that, in addition to the four grounds for vacatur identified in Section 10 of the Federal Arbitration Act, a finding of "manifest disregard of the law" constitutes an independent ground for overturning an arbitration award. See, e.g., Rich v. Spartis, 516 F.3d 75, 82 (2d Cir. 2008); Amicizia Societa Navegazione v. Chilean Nitrate & Iodine Sales Corp., 274 F.2d 805 (2d Cir. 1960). The "manifest disregard" standard was derived from the Supreme Court case Wilko v. Swan, 346 U.S. 427 (1953), in which the Court stated that "the interpretations of the law by the arbitrators in contrast to manifest disregard are not subject, in the federal courts, to judicial review for error in interpretation." Id. at 436-37 (emphasis added).
The other U.S. circuit courts of appeals have taken the same position in upholding the Wilko standard. See, e.g., McCarthy v. Citigroup Global Mkts. Inc., 463 F.3d 87, 91 (1st Cir. 2006) ("‘Courts do, however, retain a very limited power to review arbitration awards outside of section 10.’ . . . In some of our cases, we have referred to this non-statutory standard of review as ‘manifest disregard of the law.’"); Sherrock Bros., Inc. v. DaimlerChrysler Motors Co., 260 Fed. Appx. 497, 499 (3d Cir. 2008) (same); Choice Hotels, Int’l, Inc. v. SM Property Mgmt., LLC, 519 F.3d 200, 207 (4th Cir. 2008) (same); Bridas S.A.P.I.C. v. Gov’t of Turkmenistan, 345 F.3d 347, 363 (5th Cir. 2003) (same); M & C Corp. v. Erwin Behr GmbH & Co., KG, 87 F.3d 844, 850-51 (6th Cir. 1996) (same); Halim v. Great Gatsby’s Auction Gallery, Inc., 516 F.3d 557 (7th Cir. 2008) (same); St. John’s Mercy Med. Ctr. v. Delfino, 414 F.3d 882, 884 (8th Cir. 2005) (same); Collins v. D.R. Horton, Inc., 505 F.3d 874, 879 (9th Cir. 2007) (same); Lewis v. Circuit City Stores, Inc., 500 F.3d 1140, 1150 (10th Cir. 2007) (same); Montes v. Shearson Lehman Bros., Inc., 128 F.3d 1456, 1458-62 (11th Cir. 1997) (same); Clark Constr. Group, Inc. v. Alcon Demolition, Inc., No. 96-7148, 1997 WL 159407, *1 (D.C. Cir. Feb. 18, 1997) (same).
In Hall Street Associates, LLC v. Mattel, Inc., 128 S. Ct. 1396 (2008), decided in March of this year, the Supreme Court considered the question of whether the statutory grounds for vacatur and modification of arbitration awards pursuant to the expedited judicial review process contemplated by sections 9, 10, and 11 of the FAA may be supplemented by contract.
Hall Street and Mattel had entered into an arbitration agreement which provided that the District Court of Oregon could vacate or correct any arbitration award if the court found that the arbitrator’s conclusions of law were erroneous. 128 S. Ct. at 1400-01. The parties later arbitrated their dispute and the arbitrator entered an award in Mattel’s favor. Hall Street filed a motion to vacate, modify, or correct the decision, and the District Court vacated the award, invoking the legal error provision of the arbitration agreement. On remand, the arbitrator found for Hall Street, and the District Court upheld this award on review, again invoking the legal error provision. On appeal, Mattel argued that the judicial review provision of the agreement was unenforceable under a prior Ninth Circuit decision. The Ninth Circuit agreed and reversed the District Court’s ruling.
When the case reached the Supreme Court, Hall Street advanced two arguments in support of its argument that the provision was enforceable. First, Hall Street argued that "expandable judicial review authority has been accepted as the law since Wilko . . . ." 128 S. Ct. at 1403. The Court addressed this argument by noting the ambiguity of the Wilko Court’s use of the term "manifest disregard":
Maybe the term "manifest disregard" was meant to name a new ground for review, but maybe it merely referred to the § 10 grounds collectively, rather than adding to them. . . . Or, as some courts have thought, "manifest disregard" may have been shorthand for § 10(a)(3) or § 10(a)(4), the subsections authorizing vacatur when the arbitrators were "guilty of misconduct" or "exceeded their powers."
Id. at 1404 (citations omitted). The Court declined to interpret Wilko as allowing expansion of the grounds for vacatur by contract.
Hall Street also argued that an agreement to permit review of an arbitration award for legal error should be enforceable "because arbitration is a creature of contract, and the FAA is ‘motivated, first and foremost, by a congressional desire to enforce agreements into which parties ha[ve] entered.’" Id. (citations omitted). The Court rejected this argument as well, finding that the "FAA has textual features at odds with enforcing a contract to expand judicial review following the arbitration." Id. The Court explained that under section 9 of the FAA,
[o]n application for an order confirming the arbitration award, the court "must grant" the order "unless the award is vacated, modified, or corrected as prescribed in sections 10 and 11 of this title." There is nothing malleable about "must grant," which unequivocally tells courts to grant confirmation in all cases, except when one of the "prescribed" exceptions applies.
Id. at 1405. Therefore, the Court held, "§§ 10 and 11 respectively provide the FAA’s exclusive grounds for expedited vacatur and modification." Id. at 1403.
Robert Lewis Rosen Associates
On July 7 of this year, the Southern District of New York looked to the Supreme Court’s decision in Hall Street in considering a motion to vacate an arbitration award on the grounds of manifest disregard of the law. Though ultimately finding that, even if the manifest disregard standard were applicable, the challenged arbitration award did not satisfy it, the Southern District in Robert Lewis Rosen Associates, Ltd. v. Webb, No. 07 Civ. 11403 (RJH), 2008 WL 2662015 (S.D.N.Y. July 7, 2008) ("Rosen"), held that Hall Street had invalidated prior Second Circuit law endorsing the "manifest disregard" standard. Judge Holwell explained that
[a]s the Second Circuit’s traditional understanding of Wilko and § 10 – that Wilko endorsed manifest disregard and that § 10’s grounds are not exclusive – is inconsistent with the basis for the holding in Hall Street, the Court finds that the manifest disregard of the law standard is no longer good law.
2008 WL 2662015, at *4.
Post-Rosen and Hall Street Decisions
In a decision published last month, the Second Circuit Court of Appeals had occasion to consider the Rosen decision and the continuing validity of "manifest disregard," but declined to rule on whether it agreed with Judge Holwell’s reading of Hall Street. In ESSO Exploration and Production Chad, Inc. v. Taylors International Services, Ltd., No. 06-5673-cv, 2008 U.S. App. LEXIS 20042 (2d Cir. Sept. 17, 2008), the Second Circuit reviewed an arbitration award under the "manifest disregard of the law" standard despite the holdings in Robert Lewis and Hall Street. The court stated that its decision reflected no opinion on whether the holding in Rosen was or was not an accurate interpretation of Hall Street, noting that in Esso, the lack of any "manifest disregard of the law" was so clear that it was unnecessary to analyze the question:
We note that one district court in our Circuit has recently held that, after Hall Street, "the manifest disregard of the law standard is no longer good law." Robert Lewis Rosen Assocs., Ltd. v. Webb, 2008 U.S. Dist. LEXIS 51446, 2008 WL 2662015 at *4, No. 07 Civ. 11403 (S.D.N.Y. July 7, 2008); see also Ramos-Santiago v. UPS, 524 F.3d 120, 124 (1st Cir. 2008) ("[M]anifest disregard of the law is not a valid ground for vacating or modifying an arbitral award in cases brought under the FAA."). We express no opinion as to the correctness of this decision. Rather, in light of the fact that the manifest disregard standard has so clearly been satisfied in this case, and that confirmation of the arbitral award is so plainly warranted, we see no useful purpose to be served here by a discussion of the standard’s continued validity.
2008 U.S. App. LEXIS 20042, at *3 n.1.
Similarly, the Fifth Circuit, in Rogers v. KBR Tech. Servs., Inc., No. 08-20036, 2008 U.S. App. LEXIS 12320 (5th Cir. June 9, 2008) recognized the decision in Hall Street and noted that its prior decisions were thus called into doubt, but declined to analyze the effect of the decision on prior Fifth Circuit case law:
The Supreme Court has recently held that the provisions of the FAA are the exclusive grounds for expedited vacatur and modification of an arbitration award, which calls into doubt the non-statutory grounds which have been recognized by this Circuit. See Hall Street Assocs., L.L.C. v. Mattel, Inc., 128 S. Ct. 1396, 1403, 170 L. Ed. 2d 254 & n.5 (2008). However, because we affirm the district court and hold that the arbitration award is confirmed, there is no need in the instant case to determine whether those non-statutory grounds for vacatur of an arbitration award remain good law after Mattel.
2008 U.S. App. LEXIS 12320 at *5-*6.
The ultimate effect of the Supreme Court’s decision in Hall Street remains to be seen. The reasoning in Rosen is persuasive and we expect a growing number of courts to refuse to recognize manifest disregard of the law as a valid basis to challenge arbitral awards under the FAA. If so, this will result in a significant change in the law applicable to award challenges under the Federal Arbitration Act and could cause losing parties to be more creative in seeking to keep award challenges out of the federal courts.
In practice, however, this potential shift in the law may have little impact on parties seeking to challenge arbitral awards in the federal courts. The courts that have recognized the manifest disregard standard in the past have consistently emphasized that the bar is set extremely high for parties seeking vacatur on such grounds. Consequently, parties seeking to overturn an arbitral award on the ground of manifest disregard of the law alone rarely succeed.
In addition, two positive aspects of this potential change in the law should be highlighted. First, the elimination of the manifest disregard standard would reinforce the finality of arbitration. Parties could be certain of exactly which criteria a court will apply when considering challenges to an award, and prevailing parties would no longer need to worry about the individual views of a federal judge leading to vacatur on the grounds of a subjective manifest disregard standard.
Second, taking the manifest disregard standard out of the picture when it comes to enforcement of arbitration awards under Chapter 1 of the FAA would bring the standards for vacatur provided by Chapter 1, which, among other things, governs international arbitrations where the seat of arbitration is in the United States, closer to those permissible under Chapter 2, which governs international arbitral awards where the arbitration took place in a foreign state. Chapter 2 of the FAA limits the grounds for refusing to enforce an award to those provided by the New York Convention. The manifest disregard standard has never applied to international arbitrations covered by Chapter 2. Therefore, if, as the Rosen court held, the result of Hall Street is that the manifest disregard standard no longer applies to arbitrations falling under Chapter 1 of the FAA, international arbitrations with the seat of arbitration in the U.S. will no longer be seen as outliers subject to vacatur on an additional, subjective, ground. The sense of consistency that Hall Street (as interpreted by Rosen) adds to the review of international arbitration awards would be a significant positive development.
 The four grounds are where: (1) "the award was procured by corruption, fraud or undue means;" (2) "there was evident partiality or corruption in the arbitrators;" (3) "the arbitrators were guilty of misconduct in refusing to postpone the hearing . . . or in refusing to hear evidence pertinent and material to the controversy; or of any other misbehavior by which the rights of any party have been prejudiced;" or (4) "the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made." 9 U.S.C. § 10.
 Pursuant to the New York Convention, "[r]ecognition and enforcement of [an] award may be refused" only if the party opposing enforcement shows that: (a) "The parties to the agreement . . . were . . . under some incapacity, or the said agreement is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law of the country where the awards was made;" (b) "The party against whom the award is invoked was not given proper notice of the appointment of the arbitrator or of the arbitration proceedings or was otherwise unable to present his case;" (c) "The award deals with a difference not contemplated by or not falling within the terms of the submission to arbitration, or it contains decisions on matters beyond the scope of the submission to arbitration . . . ;" (d) "The composition of the arbitral authority or the arbitral procedure was not in accordance with the agreement of the parties, or, failing such agreement, was not in accordance with the law of the country where the arbitration took place;" or (e) "The award has not yet become binding on the parties, or has been set aside or suspended by a competent authority of the country in which, or under the laws of which, that award was made."
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