Welcome back to a short work week.  While we were wrapping gifts last week, the Sixth Circuit issued a must-read decision on vacatur. Because of the importance of the case, today’s “Highlights” focuses just on that opinion.

 “Manifest Disregard” as a Basis for Vacatur

One of the splits among the Circuits is the availability of “manifest disregard” as a grounds for vacating an award under the Federal Arbitration Act.  In Buck v. Compton, 2023 U.S. App. LEXIS 33988 (6^th Cir. December 20, 2023), the Sixth Circuit takes a fulsome look at the doctrine.  Judge Griffin, writing for himself and Judges Batchelder and Larsen, tees up, but doesn’t decide, the question of whether the “manifest disregard” doctrine is even viable after SCOTUS opined in Hall Street Associates, L.L.C. v. Mattel, Inc., 552 U.S. 576 (2008), that, to quote Judge Griffin, “the grounds listed in § 10(a) are the ‘exclusive’ grounds on which a federal court may vacate an arbitrator’s decision.” (At some point, SCOTUS must resolve the important issue of whether “manifest disregard” allows vacatur.  There needs to be single standard; the results of a vacatur claim should not hinge on the fortuity of the Circuit in which it is raised).

Acting on the assumption that “manifest disregard” is still alive, the Court expands on the doctrine’s two prerequisites.  First, “the applicable legal principle is clearly defined and not subject to reasonable debate;” second, “the arbitrators [must] refuse[] to heed that legal principle.”  The first test, the Court opines, “demands the existence of controlling legal authority on the issue.” (Emphasis added).  The court leans heavily into a holding that the doctrine does not apply where “no authority controls the precise question.” (Emphasis added by the court to its cited authority).  Further, while an arbitrator “cannot reject the law,” he or she “can disagree with nonbinding precedent without disregarding the law.” (Emphasis added by the court to its cited authority).

The second element requires “evidence that, during the arbitration proceedings, ‘one of the parties clearly stated the law and the arbitrators expressly chose not to follow it.’” (Internal citation omitted).  Therefore, Judge Griffin opines, “evidence of the arbitrators’ reasoning is key.”  If the arbitrator filed a standard award, as is the norm in FINRA arbitrations absent a motion from counsel for a fully reasoned award, “it is all but impossible to determine whether they acted in manifest disregard for the law,” quoting Dawahare v. Spencer, 210 F.3d 666, 669 (6^th Cir. 2000).

The court, then, applies its two tests to each of the five challenges which the appellant raised.  Two themes run through this analysis.  First, the panel interprets “controlling law” very strictly.  Thus, “district court cases are not controlling,” nor are arbitration cases or decisions which might potentially have been limited by subsequent authority.  Second, if there is any way to uphold an arbitrator’s award, a court will do so.  For example, the panel discusses four separate ways to defend the arbitrators’ alleged miscalculation of damages – the record is insufficient to resolve the issue, the arbitrators might have made their mathematical computation in a way consistent with their award, Buck did not seek a reasoned award, and the matter was inadequately raised in the court below.

Finally, the court addresses the requirements for counsel raising an issue in an application for vacatur. Buck sought review of the arbitrators’ computation of damages.  However, he raised the issue only in a reply brief, not in the original motion.  Even though Compton addressed the issue in a sur-reply and Buck also raised it in response to Compton’s motion to confirm, the court refuses to consider the question, holding that, by failing to raise the issue directly within his motion to vacate, Buck forfeited the right to do so and that the District Court did not err in failing to consider the issue and in confirming the award.  “[T]o reserve this issue as a ground for vacatur, Buck needed to present it in his motion to vacate – his response brief to Compton’s motion to confirm does not suffice.”(Emphasis added)[1]

This case is a vital precedent for every arbitration litigator to read and have in his or her notebook.  It is a roadmap on both how to raise and how to attack a “manifest disregard” claim – and a reminder that those opposing a vacatur claim based thereon should actively oppose the very viability of the doctrine. (Check the law in the relevant Circuit – it may have already slain the dragon for you).

From a less lofty perch, the Eastern District of New York also addressed the “manifest disregard” standard, this time in the context of a labor arbitration, Construction Council 175 v. New York Paving, Inc., 2023 U.S. Dist. LEXIS 228012 (E.D.N.Y. December 21, 2023).  Judge Matsumoto, following Second Circuit precedent, describes the principles behind the doctrine slightly differently, but reaches a similar conclusion. “A court may not vacate an arbitration award based on a ‘simple error in law or a failure by the arbitrator[] to understand or apply it’ but rather only when the arbitrator ‘intentionally defied the law.’” (Brackets in opinion, internal citation omitted). He confirms the award in favor of the union in the amount of approximately $1.4 million, plus interest.

Bottom line – if you have to fall back on the “manifest disregard” standard to vacate an adverse award, it’s time to start talking settlement.

David Reif, FCIArb
ReifADR
Dreif@Reifadr.com
ReifADR.com

[1] The Court remands for the limited purpose of the District Court’s computation of pre- and post-judgment interest.  While not a purely arbitration issue, the case is worth reading in this regard, as counsel normally (or certainly should ask) the court to award interest upon the confirmation of an award.