“Manifest Disregard Of The Law” Is Alive And Well And Vacating Arbitrations In Fourth Circuit

Four season treeThe 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.

Topics:  Arbitration, Arbitration Awards, Contract Interpretation, Federal Arbitration Act

Published In: Alternative Dispute Resolution (ADR) Updates, Civil Procedure Updates, General Business Updates, Labor & Employment Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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