The Fourth Circuit and particularly Judge Quattlebaum are inadvertently the focus of today’s “Highlights.”  Within the last two weeks, that court has issued three significant decisions, and Judge Quattlebaum not only sat on all three panels, but he issued a dissent in the most important of those cases.

Manifest Disregard, FINRA arbitrations and termination

Warfield v. Icon Advisers, Inc., 2022 U.S. App. LEXIS 5066 (4^th Cir. February 24, 2022), is a short case with great significance – and with important law buried in the footnotes.

Plaintiff was a securities broker whom Icon terminated.  An arbitration panel found that the firing was “without just cause” and awarded him approximately $1.2 million.  The District Court vacated the award, holding that it was in manifest disregard of North Carolina law, which provides that employment is at-will and that the employer need not have cause for termination.  The Fourth Circuit, with Judge Motz writing for herself and Judges Thacker and Quattlebaum, reverses.

The case centers on the familiar “manifest disregard” standard, which courts have grafted onto the Federal Arbitration Act. The panel recites the two-step test applied in the Circuit for considering such challenges to an award.   First, the disputed legal principle must be “clearly defined and . . . not subject to reasonable debate.”  Second, the arbitrator must have “refused” to apply that principle. The court here finds that Icon failed to demonstrate that either prong was satisfied.  In the course of reaching that conclusion, the decision touches on several issues and demonstrates the importance of reading footnotes.

The court characterizes vacating an arbitral award as a “herculean task.” Its rationale on the arbitrator’s application of North Carolina law, which the parties agreed applied, makes cleaning stables and killing nine-headed monsters seem easy by comparison.  Although the panel recognizes that North Carolina is an at-will state, it opines that the presence of an arbitration clause could, although it need not, change that analysis.  Thus, it holds the party challenging an arbitration award under the manifest disregard standard must bring forward “clearly on-point and controlling precedent” contrary to the arbitrator’s award.  Specifically, Warfield argued that the existence of an arbitration clause implicitly abrogates at-will status.  The panel places the burden on Icon to demonstrate, not only that North Carolina courts might uniformly take the contrary position if they faced the question,  but that the state’s courts have already done so.  “ICON has not cited, either to the arborators or to us, any North Carolina case rejecting the specific proposition that the arbitrability of an employment relationship implies for-cause protections.  We have previously explained that in the absence of clearly on point-and controlling precedent, the fact that the courts disagree on a particular legal question weighs against second-guessing an arbitrator’s award.” (Emphasis added).  In finding that the precedents cited by ICON are irrelevant, the panel implicitly raises this standard to an exceptionally high level.  In essence, it holds that “on-point and controlling” means that the precedents relied upon by the party seeking to vacate the award are indistinguishable by any stretch of legal reasoning from the case before the court.  (As an aside, while not stating whether the Eighth Circuit’s decision is correct, the court cites PaineWebber, Inc. v. Agron, 49 F. 3d 347 (8^th Cir. 1995), which opines that the mere invocation of FINRA arbitration “necessarily alters the employment relationship from at-will “to something else”).

As to the second prong of the manifest disregard test, the panel holds that the record is unclear as to whether Icon’s counsel specifically argued to the arbitral panel that North Carolina law did not require just cause for termination in cases resolved through arbitration. “ICON therefore cannot establish manifest disregard because even if it made the arbitrators aware of the ‘general [employment at-will] defense,’ it did ‘not present[] evidence’ on the ‘specific[]’ point at issue.” (Brackets in original; citation omitted).  Further, since the award, as is common in FINRA arbitrations, did not explain the panel’s reasoning, the court holds that it is unable to exclude decisional bases which might have demonstrated that the arbitrators did not deviate from North Carolina law.

In footnote 3, the panel, in dictum, addresses the question of whether SCOTUS abolished the manifest disregard theory in Hall Street Associates, LLC v. Mattel, Inc. 552 U.S. 576 2008).  Recognizing the Circuit split on the question, the panel opines that “at some point, the Supreme Court or Congress will have to resolve the issue.  We see little value in adding to this confusion now.”

Lessons to advocates.  First, be sure that any state precedents that you cite to the panel are indistinguishable – even by the broadest stretch of logic – from the exact point that you are advocating and memorialize those precedents either in briefing or a transcript. Second, if you are opposing vacatur on the basis of manifest disregard, use Hall Street to argue that the theory is dead.  Third, be wary of standard awards if you believe that there is any chance that you might want to vacate the award; even though, without a reasoned award, you will save on fees to the arbitrator, you will lose what slight chance that you might otherwise have of demonstrating that the panel strayed from the law.

Appellate Jurisdiction

It is black letter law that Section 16 of the Federal Arbitration Act precludes direct appeal of orders compelling arbitration. Lyons v. PNC Bank, N.A., 2022 U.S. App. LEXIS 4182 (4^th Cir. February 15, 2022), addresses the situation where the District Court compels arbitration of only some of the claims before it.

Lyons sued PNC alleging violation of the Truth-in-Lending Act. The District Court held that the Dodd-Frank Act barred arbitration of claims in relation to his 2014 account.  However, because the relevant portion of the Act only became effective as of June 1, 2013, arbitration provisions related to Lyons’ 2010 account were enforceable.  Therefore, the lower court compelled arbitration of the 2010 claims, but denied such relief as to the 2014 claims. PNC and Lyons both appealed. PNC argued that, by virtue of Section 16(b) of the FAA, the Court of Appeals lacked jurisdiction to review the order compelling arbitration. Chief Judge Gregory, writing for himself and Judge Floyd, holds that the “narrow and limited” pendent appellate jurisdiction doctrine allows consideration of the appeal. The majority cites to Rux v. Republic of Sudan, 461 F. 3d 461 (4^th Cir. 2006), which holds that the doctrine may be applied where “(1) an issue is ‘inextricably intertwined’ with a question which is the proper subject of an immediate appeal; or when (2) review of a jurisdictionally insufficient issue is ‘necessary to ensure meaningful review’ of an immediately appealable issue.” (Internal citations omitted).  The panel then opines that review of the District Court’s decision on the 2010 account is “inextricably intertwined” with consideration of the merits related to arbitration of the 2014 account “because our consideration of the latter order necessarily resolves the former.” Addressing the merits of both claims, it holds that PNC may not compel arbitration as to either.

Judge Quattlebaum dissents on the pendent jurisdiction issue and would have held that the Court of Appeals lacks subject matter jurisdiction over that portion of the District Court order compelling arbitration of the 2010 claims.  Unlike other pendent jurisdiction cases, he opines, the decision here flies in the face of a specific statutory prohibition of appeal.  To hear the case, therefore, would inappropriately “expand [the court’s] jurisdiction.”  Perhaps to emphasize his bright line, Judge Quattlebaum reserves his opinion that the appeal would not lie even under the pendent appellate jurisdiction doctrine to a footnote.  The dissent acknowledges the practical problems its approach would create.  “Of course, addressing the cross-appeal may be more efficient in this particular case.  But, our task should be to follow the law wherever it takes us, not fashion the most efficient remedy in a particular case. . . .”

SCOTUS, as currently constituted, seems interested in issues concerning the Federal Arbitration Act.  It currently has one argued case awaiting an opinion and four matters scheduled for argument next month.  Judge Quattlebaum’s dissent presents the Circuit split over the viability of pendent jurisdiction in cases governed by the FAA.  Hopefully, the Supreme Court will use this case to resolve that split during the 2022-23 term.

There is a great analysis of Lyons in Professor Bryan Lammon’s blog, Final Decisions, at Arbitration, Pendent Appellate Jurisdiction, and Appealable “Orders” – Final Decisions.

Limits on arbitration

Every once in awhile it is good to be reminded that, despite presumptions in favor of arbitration, the parties must either agree to the process or be compelled to do so by binding legislation.  Krueger v. Angelos, 2022 U.S. App. LEXIS 4187 (4^th Cir. February 15, 2022)(Quattlebaum, J., writing for himself and Chief Judge Gregory and Judge Floyd) reasserts this principle.

The dispute arises out of trust agreements between the Steamship Trade Association of Baltimore (“STA”) and the International Longshoremen’s Association, which are designed to fund employee benefits under the Labor Management Relations Act.  The SLA and the Union trustees deadlocked over amending the agreements to expand the definition of “Employer” to include non-STA employers at the same port.  The Union then sought arbitration of the dispute under provisions of both the trust agreements and 29 U.S.C. § 186(c)(5)(B), which requires arbitration over the “administration” of employee benefit trust funds. The District Court dismissed the complaint for failure to state a claim.  The Court of Appeals affirms.

The court first opines that arbitration is not appropriate under the statute.  “Administration” of the fund, it holds, is limited to “a narrow set of circumstances,” which do not extend to “quasi-legislative functions, such as amending an agreement.” Therefore, the statute “does not provide a valid reason to compel arbitration over the proposal of the Union Trustees to expand the definition of ‘employer’ in the trust agreements.”

Likewise, the trust agreements’ provisions prohibit arbitration of the issue.  While the agreements mandate arbitration where the Trustees cannot decide a matter because of a tie vote, which occurred here, it also provides that “the arbitrator shall not have the power or authority to change or modify the basic provisions of this Agreement.”  (citation omitted). The court holds that the expansion of the definition of “Employer” is such a “basic provision.”  That specific limitation overcomes any presumption of arbitration by providing “the ‘positive assurance’ as required by AT&T [Technologies, Inc. v. Communication Workers of America, 475 U.S. 643 (1986)] that the parties never agreed to arbitrate disputes about the definition of ‘Employer.’”

In summary, regardless of any presumptions, arbitration still a matter of specific direction; its applicability does not simply float in the wind.

President Biden has nominated Judge Ketanji Brown Jackson as a Justice of the Supreme Court.  In true arbitration nerd fashion, I will take a look over the weekend at what she may have written on ADR topics and include some thoughts next week.

Have a good weekend.

David A. Reif, FCIArb
Reif ADR
Dreif@reifadr.com
Reifadr.com