Sunday, March 25, 2012

Manifest Disregard of the Facts: A Valid Basis to Vacate an Arbitration Award?

Motions to vacate arbitration awards are becoming more and more common. For example, as noted in the Wall Street Journal, state and federal courts issued 141 written decisions on motions to vacate arbitration awards in 2005. In 2010, the number was 208, a 48% increase from 2005.

Section 10 of the Federal Arbitration Act ("FAA") sets forth the statutory grounds to vacate an arbitration award; namely: (1) where the award was procured by corruption, fraud, or undue means; (2) where an arbitrator evidenced partiality or corruption; (3) where the arbitrators were guilty of misconduct; and (4) where the arbitrators exceeded their power. 9 U.S.C. § 10(a)(1)-(4). In Hall Street Assoc. v. Mattel, Inc., 552 U.S. 576 (2008), the Supreme Court stated that “[w]e now hold that §§ 10 and 11 respectively provide the FAA’s exclusive grounds for expedited vacatur and modification.”

"Manifest distregard of the law" is a judicially created exception to the exclusivity of the grounds for vacatur set forth in the FAA. An arbitration panel acts with manifest disregard if (1) the applicable legal principle is clearly defined and not subject to reasonable debate; and (2) the arbitrators consciously refused to heed that legal principle. However, there is currently a circuit split as to whether Hall Street abrogated this judicially created doctrine.

A party disappointed with the decision of the arbitrator(s) will likely argue that the arbitrators acted with "manifest disregard of the law," and may also try to argue that the decision is in "manifest distregard of the facts." However, the "manifest disregard of the facts" argument is almost certainly destined to fail.

“Insufficient evidence or even wholesale disregard of evidence by an arbitrator is not a sufficient basis for a court to vacate an award.” Williams v. Mexican Restaurant, Inc., No. 1:05-CV-841, 2009 WL 531859, *5 (E.D. Tex. February 27, 2009) (citing Stolt-Nielsen SA v. AnimalFeeds Intern. Corp., 548 F.3d 85, 91 (2d Cir.2008) (stating that “manifest disregard of the evidence” is not a proper ground for vacating an arbitrator’s award); see also Fairchild Corp. v. Alcoa, Inc., 510 F.Supp.2d 280, 286 (S.D.N.Y. 2007) (finding that “[m]anifest disregard of evidence is also not a proper ground justifying vacating an arbitrator’s award.”); Smith v. Rush Retail Centers, Inc., 291 F.Supp.2d 479 (W.D.Tex. 2003) (“[T]o the extent plaintiff is merely alleging that the arbitrators engaged in manifest disregard of the facts, the allegation is not a basis for vacating the award[.]”); ABS Brokerage Services, LLC v. Penson Financial Services, Inc., Civ. No. 09–4590 (DRD), 2010 WL 2723173 at *7 (D.N.J. July 8, 2010) (stating that plaintiffs’ arguments that the arbitrators exceeded their power by acting in “manifest disregard” of the facts were, in essence, an invitation for court to review the arbitrators’ factual determinations, which the court is prohibited from doing); Buechner v. Mid-America Energy, Inc., No. 1:07-CV-109, 2007 WL 2174723, at *4 (W.D.Ky. Aug. 2, 2007) (“To the extent that Respondents seek for this Court to review the arbitrator’s determination of the facts based on proof presented by the Petitioners, the Court cannot; such considerations exceed the scope of the Court’s review.”).

For example, in Mays v. Lanier Worldwide, Inc., 115 F.Supp.2d 1330, 1346 (M.D.Ala. 2000), the plaintiff asserted that, because the arbitrator “totally ignore[d] much favorable evidence,” the award must be vacated under 9 U.S.C. § 10(a)(4). In other words, plaintiff asserted that the arbitrator exceeded his powers or so imperfectly executed his powers because the arbitrator disregarded plaintiff’s evidence. The court stated that it could locate no case authority establishing that an arbitrator’s disregard of alleged “much favorable evidence” was a ground for vacatur under 9 U.S.C. § 10(a)(4). Id. The court found that, rather than asserting a proper basis for vacating the arbitration award, plaintiff's arguments were “nothing more than thinly veiled attempts to obtain appellate review of the arbitrator’s decision, which is not permitted under the FAA.” Id. at 1347 (citing Gingiss Intern., Inc. v. Bormet, 58 F.3d 328, 333 (7th Cir. 1995)).

In sum, while an argument that the arbitrator(s) acted in "manifest disregard of the law" may have traction in some judicial circuits, the "manifest disregard of the facts" argument will likely fail to gain recognition in any judicial circuit.

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