5th Circuit Rules Manifest Disregard of Law Not Grounds for Vacating Award

In light of the 6th Circuit Court of Appeals decision in The Coffee Beanery case covered here on Blue MauMau, a decision from the 5th Circuit rules to the contrary. As background to the franchise case, the American Arbitration Association had entered an award in favor of Coffee Beanery resulting in the franchisee plaintiffs filing a motion to vacate the award in Michigan federal court followed by an appeal to the U.S. 6th Circuit. That court entered an order vacating the arbitration award for manifest disregard of law and ordered the parties to try their claims in court. The 6th Circuit denied Coffee Beanery’s petition for rehearing and rehearing en banc on February 9, 2009. One month later on March 2, the court issued the mandate.

But this morning in a Law.com article author John Council declares, “Abandon all hope, ye who seek to overturn an arbitration award, because the 5th U.S. Circuit Court of Appeals has ruled that manifest disregard of the law by arbitrators is no longer a ground for vacatur under the Federal Arbitration Act.” He states the March 5 decision in Citigroup Global Markets Inc. v. Bacon will make parties think twice—or three times before agreeing to submit to arbitration to settle their cases.

The Citigroup case dealt with an arbitration regarding an individual retirement account where a husband had withdrawn money by forging his wife’s signature. The arbitration panel had granted the wife damages and attorney fees. Citigroup, according to the article, filed motion to vacate the arbitration award with a U.S. District judge in Houston. He granted the motion, finding that the award was made in manifest disregard of the law because the wife was not harmed by the withdrawal because her husband used the money for her benefit and he promised to pay her back; her claims were barred by Texas law because they were lodged too late; and Texas law required apportionment among the liable parties, which included the wife’s husband. She then appealed to the 5th Circuit.

Council continues, “To arrive at its decision that blocks one of the most common arguments litigants use to vacate an arbitration award -- that the arbitrator failed to follow the law -- the 5th Circuit cited the 2008 U.S. Supreme Court opinion in Hall Street Associates v. Mattel.

While federal courts are usually loath to overturn arbitration awards, the 6-3 opinion in Hall Street was an even further restriction on a court's ability to vacate an arbitration award. That ruling found that the FAA is the exclusive ground for vacating or modifying an arbitration award and parties cannot go beyond the act by contracting to expand the grounds for modification or vacatur of an award. The Supreme Court issued Hall Street after Hughes vacated the arbitration award in Citigroup Global Markets.

The opinion notes that, under §10 of the FAA, courts are only permitted to vacate an arbitration award for four reasons. They are:

1. if the award was procured by corruption, fraud or undue means;

2. if there was evident partiality or corruption by the arbitrators;

3. if the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, 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. if the arbitrators exceeded their powers or so imperfectly executed them that a mutual, final and definite award upon the subject matter was not made.

The opinion further states, according to the article:

Four other circuits have considered the same vacatur issue after Hall Street was issued and have come up with different results. The 1st U.S. Circuit Court of Appeals found in dicta that Hall Street abolished manifest disregard of the law as a ground for vacatur, and the 6th U.S. Circuit Court of Appeals found that the holding of Hall Street only applied to contractual expansions of the grounds for review.

But the 2nd U.S. Circuit Court of Appeals found that manifest disregard as a ground for vacatur survived Hall Street, as did the 9th U.S. Circuit Court of Appeals. Both courts found that manifest disregard was shorthand for the fourth tenet of §10 of the FAA, which allows for vacatur when arbitrators exceed their powers.

But the 5th Circuit disagreed. "In the light of the Supreme Court's clear language that, under the FAA, the statutory provisions are the exclusive grounds for vacatur, manifest disregard of the law as an independent, non-statutory ground for setting aside an award must be abandoned and rejected," wrote Judge E. Grady Jolly in an opinion joined by Judges Rhesa Barksdale and Catharina Haynes.

"Indeed, the term itself, as a term of legal art, is no longer useful in actions to vacate arbitration awards," Jolly continued. "Hall Street made it plain that the statutory language means what is says: 'courts must (confirm the award) unless the award is vacated ... as prescribed in section 10 ...' and there is nothing malleable about 'must,'" Jolly wrote, ordering Hughes' decision vacated and remanded to the district court for further rulings.

To read full Law.com article click on this link:  5th Circuit Nixes Manifest Disregard as Ground for Vacatur of