In the Winter 2003 Hassett’s Objections entitled “But We Don’t Want All or Nothing,” I addressed the split in the Circuits on whether an arbitration agreement may require a reviewing court to apply an enhanced standard of review. The Fifth, Fourth and Third Circuits had held that federal courts would enforce a contractually-designated enhanced standard of review. Gateway Techs., Inc. v. MCI Telecomms. Corp., 64 F.3d 993, 996 (5th Cir. 1995); Syncor Int’l Corp. v. McLeland, Case No. 96-2261 (4th Cir. 1997); Rodeway Package System, Inc. v. Kayser, 257 F.3d 287 (3rd Cir. 2001). The Ninth and Tenth Circuits had rejected enhanced standards of review. See Kyocera Corp. v. Prudential-Bache Trade Servs., Inc., 341 F.3d 987 (9th Cir. 2003) (en banc); Bowen v. Amoco Pipeline Co., 254 F.3d 925 (10th Cir. 2001). An enhanced standard of review allows the expertise of the arbitration panel to control with respect to evidence, industry custom and conclusions but subjects those decisions, and the application of legal principles to those decisions, to impartial judicial review. Some parties feared that, just as a trial judge can make human errors, so can an arbitrator. The downside to an enhanced standard of review is delay and the dilution of industry custom.
The Supreme Court of the United States has resolved the split in the Circuits. In Hall Street Assocs., LLC v. Mattel, Inc., Case No. 06-989 (March 25, 2008), the Court rejected contractually enhanced standards of review under the Federal Arbitration Act (“FAA”). The arbitration clause at issue allowed a federal district court to reject an award where the arbitrator’s findings of fact were not supported by substantial evidence or where the arbitrator’s conclusions of law were erroneous. This is the standard of review applicable to reviews of federal trial court decisions. See Pullman-Standard v. Swint, 456 U.S. 273, 287-288 (1982).
At the outset, the Court noted that the FAA requires a court to confirm an arbitration award unless it is vacated, modified or corrected as per Sections 10 and 11 of the FAA. “Section 10 lists grounds for vacating an award, while Section 11 names those for modifying or correcting one.” Id. at 5. The Court concluded that “[w]e now hold that Sections 10 and 11 respectively provide the FAA’s exclusive grounds for expedited vacatur and modification” of an arbitration award. Id. at 3. Accordingly, it is now established that parties cannot contractually agree to an enhanced standard of review under the FAA.
But the Court’s opinion did not end there; it implicated two additional points. First, the Court seemed not to accept the judicially created “manifest disregard of law” ground for rejecting an arbitration award. In Wilko v. Swan, 346 U.S. 427, 436-37 (1953), the Court noted that “the interpretations of the law by the arbitrators in contrast to manifest disregard [of the law] are not subject, in the federal courts, to judicial review for error in interpretation….” Since then, federal courts have recognized manifest disregard of law as an additional ground to reject an arbitration award. See e.g. Barnes v. Logan, 122 F.3d 820, 821-822 (9th Cir. 1997); Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Bobker, 808 F.2d 930, 933-934 (2nd Cir. 1986). Even the Supreme Court has acknowledged that standard. First Option of Chicago v. Kaplan, 514 U.S. 938, 942 (1995) (“parties [are] bound by [an] arbitration’s decision not in manifest disregard of law”).
In Hall Street, the Court quoted Wilko and noted that “some Circuits have read that language as “recognizing manifest disregard of the law as a further ground for vacatur on top of those listed in Section 10.” Id. at 7. Without expressly rejecting the manifest disregard of law standard per se, the Hall Street court detachedly speculated that perhaps the standard merely was shorthand for other grounds for review, i.e., “when the arbitrators were guilty of misconduct or exceeded their powers.” Id. at 8 (punctuation omitted). The Court then noted that “the text compels a reading of the Sections 10 and 11 categories as exclusive.” Based upon that language, it is difficult to conclude that manifest disregard of the law continues as a ground for vacating an arbitration award under the FAA. Rather, manifest disregard of law now is relevant only to the extent it evidences misconduct, corruption or the exceeding of authority.
Hall Street was decided on March 28, 2008, but already has spawned different opinions in the lower courts. CompareRamos-Santiago v. United Parcel Svc., Case No. 07-1024 (1st Cir., April 24, 2008) (“We acknowledge the Supreme Court’s recent holding in Hall Street . . . that manifest disregard of law is not a valid ground for vacating or modifying an arbitral award . . . under the [FAA].”), with, Haliburton Energy Svcs., Inc. v. NL Indus., Case No. H-05-4160 (S.D. Tex., March 31, 2008) (Recognizing that Hall Street “calls into question whether the manifest disregard standard” remains a valid ground for rejecting an arbitration award, but applying the standard and upholding the award “in an abundance of caution”), and, Chase Bank USA, NA v. Hale, Case No. 60/044/07 (N.Y. Sup. March 31, 2008) (manifest disregard of law standard survives Hall Street).
The second curious aspect of the Court’s opinion is its invitation to parties to seek more expansive review outside the FAA. Id. at 13. “The FAA is not the only way into court for parties wanting review of arbitration awards; they may contemplate enforcement under state statutory or common law, for example, where judicial review of a different scope is arguable.” Id. Presumably, the court is inviting parties to incorporate the review provisions of other arbitration laws into their arbitration agreements.
A reasonable interpretation of Hall Street is that, even aside from a heightened standard of review, parties that want application of the “manifest disregard of law” standard should incorporate a particular state’s arbitration laws. Some states, such as Georgia, have statutorily incorporated the manifest disregard of law standard. See Off. Code Ga. Ann. § 9-9-13(b)(5). Other states, following the Supreme Court’s lead in Wilko, 346 U.S. at 436-437, have judicially engrafted the manifest disregard of law standard onto their state’s arbitration statutes. See, e.g., Weiner v. Jones, 610 S.E.2d 850 (S.C. App. 2005); Bohlmann v. Byron John Pritz and Ash, Inc., 96 P.3d 1155 (Nev. 2004); Liberty Mut. Ins. Co. v. Open MRI of Morris & Essex, L.P., 813 A.2d 621 (N.J. Law Div. 2002). Other courts have refused to adopt the manifest disregard of law standard. See, e.g. Moore v. Omnicare, Inc., 118 P.3d 141 (Idaho 2005); Coors Brewing Co. v. Cabo, 114 P.3d 60 (Colo. App. 2004); Hunter, Keith Indust., Inc. v. Piper Capital Mgt., Inc., 575 N.W.2d 850 (Minn. App. 1998).
The manifest disregard of law standard is imprecise. While courts agree that it implies more than legal error, they do not agree on how much more. Some courts interpret the standard to justify the rejection of an arbitration award only where the purportedly disregarded law is well-defined and the record reflects that the arbitrator willfully ignored the governing law.See Merrill Lynch, Pierce, Fenner & Smithy, Inc. v. Bobker, 808 F.2d 930, 933-34 (2d Cir. 1986); see also Bowen v. Amoco Pipeline Co., 254 F.2d 925, 937 (10th Cir. 2001); Barnes v. Logan, 122 F.3d 820, 821-22 (9th Cir. 1997);Prudential-Bache Sec., Inc. v. Tanner, 72 F.3d 234, 239 (1st Cir. 1995); Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Jaros, 70 F.3d 418, 421 (6th Cir. 1995); Lee v. Chica, 983 F.2d 883, 885 (8th Cir. 1993); Upshur Coals Corp. v. United Mine Workers, 933 F.2d 225, 228 (4th Cir. 19912); News Am. Publ’ns, Inc. Daily Racing Form Civ. v. Newark Typographical Union, Local 103, 918 F.2d 21, 24 (3d Cir. 1990); Sargent v. Paine Webber Jackson & Curtis, Inc., 882 F.2d 529, 532 (D.C.Cir. 1989). The Fifth Circuit does not review the arbitrator’s subjective disregard of law, but focuses on whether the award is contrary to law and would cause a significant injustice. See Williams v. Cigna Fin. Advisors, 197 F.3d 752, 761-762 (5th Cir. 1999).
The Supreme Court appears to have evolved from early cases pre-empting state laws as inconsistent with the federal policy of promoting arbitration; to focusing on the terms of the parties’ agreement, even if inconsistent with the FAA; to now refusing to adjust the federal standard as per the parties’ agreement. See Moses H. Cone Mem. Hosp. v. Mercury Const. Corp., 460 U.S. 1, 24 (1983) (FAA evidences “liberal federal policy favoring arbitration, notwithstanding any state . . . policies to the contrary”); Volt Info Svcs. v. Board of Trustees of Leland Stanford Junior University, 489 U.S. 468 (1989) (“There is no federal policy favoring arbitration under a certain set of procedural rules; the federal policy is simply to ensure the enforceability, according to their terms, of private agreements to arbitrate”); Hall Street, supra (FAA “substantiat[es] a national policy favoring arbitration with just the limited review needed … [for] resolving disputes straightaway,” but parties can eschew FAA in favor of state arbitration law). A cynic could view the court as hostile to arbitration under the guise of supporting it. The FAA now comes in only one flavor: the arbitrator’s decision on the merits is final no matter how cockamamie or unjust, and no matter the parties’ agreement as to review, so long as the limited statutory grounds of review do not apply.
Lew Hassett is co-chairman of the firm’s insurance and reinsurance dispute resolution group. His practice concentrates in the areas of complex civil litigation, including insurance and reinsurance matters, business torts and insurer insolvencies. Lew received his bachelor’s degree from the University of Miami and his law degree from the University of Virginia.
