United States Court of Appeals
For the First Circuit
No. 07-1231
KASHNER DAVIDSON SECURITIES CORP.; VICTOR L. KASHNER;
MATTHEW MEISTER; TIMOTHY VARCHETTO,
Plaintiffs, Appellees,
v.
STEVEN MSCISZ; MARK MSCISZ; LYNDA MSCISZ
Defendants, Appellants.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Joseph L. Tauro, U.S. District Judge]
Before
Lipez and Howard, Circuit Judges,
and Oberdorfer,* Senior District Judge.
John A. Sten, with whom Jason C. Moreau, Greenberg Traurig,
LLP, and William P. Corbett, Jr., were on brief, for appellees.
Richard J. Babnick Jr., with whom Marc J. Ross and Sichenzia
Ross Friedman Ference LLP, were on brief, for appellant.
June 27, 2008
*
Of the District of Columbia, sitting by designation.
LIPEZ, Circuit Judge. Courts must accord substantial
deference to the decisions of arbitrators. Nevertheless, there are
limits to that deference. This case tests those limits in an
appeal arising from a National Association of Securities Dealers,
Inc. ("NASD") arbitration proceeding between defendants-appellants
Steven Mscisz, Mark Mscisz, and Lynda Mscisz ("appellants" or
"Mscisz") and plaintiffs-appellees Kashner Davidson Securities
Corporation, Victor L. Kashner, Matthew Meister, and Timothy
Varchetto (together "appellees"). In the course of resolving a
contract and securities dispute between the parties, the
arbitration panel ("Panel") dismissed several of appellants'
counter-claims against Kashner Davidson Securities Corp. ("Kashner
Davidson") and third-party claims against Kashner, Meister, and
Varchetto ("Third-Party Appellees"). The Panel first stated in the
presence of the parties that its decision to dismiss these claims
involved consideration of the merits. Then, after recessing for a
brief executive session, the Panel announced that the dismissal was
a sanction pursuant to NASD Code Rule 10305. After the dismissal,
the Panel took evidence on the remaining claims and entered an
arbitration award in favor of appellees.
Appellees filed a motion with the District Court of
Massachusetts to Confirm the Arbitration Award, which appellants
opposed. Appellants also filed a cross-motion seeking vacatur of
the Award. The district court granted appellees' motion and denied
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the appellant's cross-motion. On appeal, Mscisz asserts, inter
alia, that the Panel deprived them of a fundamentally fair hearing
by sua sponte dismissing their counterclaims and third-party claims
with prejudice on the merits or, alternatively, that the Panel
acted in manifest disregard of the law by dismissing the claims
with prejudice as a sanction.
After carefully reviewing the provisions of the NASD Code
(the "Code"), which were incorporated into the parties' arbitration
agreement, and the Panel's explanation of its decision, we hold
that the Panel manifestly disregarded the law by dismissing
appellants' counterclaims and third-party claims as a sanction in
contravention of the explicit terms of the Code, which specify that
such a sanction can be entered only after lesser sanctions have
been imposed and have proven ineffective. We therefore reverse the
decision of the district court and remand the case for entry of an
order vacating the arbitration award.
I.
The relationship between Mscisz and Kashner Davidson, a
broker-dealer registered with the U.S. Securities and Exchange
Commission ("SEC") and a member of the NASD, began in 2003 when
Mscisz opened several non-discretionary brokerage accounts with
Kashner Davidson. The accounts, one established solely by Steven
Mscisz and another jointly by Mark and Lynda Mscisz, each held a
large number of shares in the initial public offering of Vaso
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Active Pharmaceuticals, Inc. ("Vaso"). In early 2004, the
appellants purchased additional shares of Vaso, using margin credit
previously established with Kashner Davidson and its clearing firm,
Sterne, Agee & Leach, Inc. ("Sterne"). For reasons unrelated to
this dispute, the SEC suspended trading in Vaso's stock in April
2004, and subsequently lifted that suspension several weeks later,
causing the price of Vaso's common stock to drop significantly.
The decline created a margin debt in appellants' accounts and led
Sterne to issue margin call notifications to Steven Mscisz and Mark
and Lynda Mscisz.
On May 25, 2004, Kashner Davidson initiated the NASD1
arbitration proceeding at issue in this appeal, asserting claims of
breach of contract and fraud in connection with the approximately
$350,000 in alleged margin debt owed by appellants in connection
with their investment in Vaso. In August, appellants submitted
their answer, denying Kashner Davidson's allegations and raising a
number of defenses and claims against Kashner Davidson as well as
against the Third-Party Appellees, all registered representatives
of Kashner Davidson at the time these events were occurring.
1
The NASD was the primary self-regulatory organization
responsible for the regulation of the securities industry in the
United States, with delegated authority from the U.S. Securities
and Exchange Commission. In July 2007, the NASD was consolidated
with the enforcement, arbitration, and member regulation arm of the
New York Stock Exchange, known as NYSE Regulation, Inc., to create
the Financial Industry Regulatory Authority (FINRA). See About
FINRA, http://www.finra.org/AboutFINRA/CorporateInformation/
index.htm (last visited May 27, 2008).
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Specifically, Mscisz alleged in their answer that Kashner Davidson,
through its representatives, committed fraud in contravention of
several state and federal securities laws, as well as a number of
common law violations.2 Both parties agreed to submit the dispute
to arbitration "in accordance with the Constitution, By-Laws,
Regulations and/or Code of Arbitration Procedures of the sponsoring
organization," the NASD, and each accepted the three arbitrators
appointed to the Panel, including Arthur Giacommara, who served as
the Panel's Chairperson.
In December 2004, the parties filed discovery requests
seeking documents and other information related to their respective
claims.3 Both parties subsequently filed oppositions to each
other's motions. On February 1, 2005, Giacommara issued a
2
Specifically, appellants asserted twelve counter-claims
against Kashner Davidson and third-party claims against Kashner,
Meister, and Varchetto, including: (1) violations of Section 7 of
the Securities Exchange Act of 1934 [15 U.S.C. § 78g], Section 9
[15 U.S.C. § 78i], and Section 10(b) [15 U.S.C. § 78j(b)]; (2)
violations of the Florida Securities Act [Fla. Stat. § 517.301];
(3) violations of the Massachusetts Uniform Securities Act [Mass.
Gen. Laws ch. 110A]; (4) violations of NASD Business Conduct
Standards; (5) common law fraud; (6) unjust enrichment; (7)
conversion; (8) breach of contract; (9) violations of the Racketeer
Influenced and Corrupt Organization Act [18 U.S.C. § 1962]; (10)
abuse of process; and (11) violations of the Massachusetts Consumer
Protection Act [Mass. Gen. Laws ch. 93A, § 2].
3
The NASD Discovery Guide (the "Guide") supplements the
section in the Securities Industry Conference on Arbitration
publication entitled The Arbitrator's Manual and provides guidance
to the arbitrators on a wide-range of commonly encountered
discovery issues. See FINRA Discovery Guide,
http://www.finra.org/web/groups/med_arb/documents/mediation_arbit
ration/p009420.pdf (last visited June 2, 2008).
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discovery order granting some of the parties' discovery requests
and denying others. The order required the parties to comply by
February 10, 2005.
Days before the February 10 deadline, appellants filed an
emergency motion asking the Panel for an additional seven days to
produce the requested documentation and declaring their "inten[t]
to comply fully with the Chairman's order directing them to provide
information to the Third Party Respondents and Claimant/Respondent-
Counter-claim." Mscisz contemporaneously filed an Emergency Motion
to Postpone the Hearing, which was scheduled to begin on March 2,
2005. The Panel granted both of appellants' motions, extending the
production deadline a week and postponing the arbitration hearing
to May.
On February 22, 2005, after the extended time period for
compliance with the discovery order had lapsed, Kashner Davidson
sent a letter to the Panel, informing it of appellants' failure to
comply with the discovery order and seeking a sanction against
appellants for such failure. That same day, however, Kashner
Davidson received 320 pages of documents from Mscisz pursuant to
the discovery request, along with several emails questioning the
veracity and ethics of appellees' counsel. The accusations
contained in these emails, as well as a number of others, were also
included in a letter sent by appellant to the Panel the following
day.
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On February 24, appellants followed up the letter with a
Motion for Reconsideration of the February 1 Discovery Order, a
Motion to Compel Appellees' Compliance with the same Discovery
Order, and a Motion to Withdraw their Counter-claims and Third-
Party Claims Without Prejudice. Appellants argued in their Motion
to Withdraw that the Panel's denial of discovery requests essential
to their defenses deprived them of a fundamentally fair hearing.
Kashner Davidson responded on February 28 with a second motion for
sanctions against Mscisz for their deliberate disobedience of the
order compelling production.
Mscisz opposed the Motion for Sanctions on two grounds.
First, they argued that their refusal to produce documents was a
result of their intention to have the counter-claims withdrawn from
the arbitration, which would remove "any basis for the [appellee]'s
attempt to rummage through their personal financial records."
Second, appellants asserted that their noncompliance was justified
by their recent filing of a Motion for Reconsideration of the
Discovery Order, and they maintained that they would comply fully
with any Panel order once their motion was addressed.
On March 30, the Panel denied Appellants' Motions to
Withdraw their Counter-claims and Third-Party Claims Without
Prejudice, and instead dismissed the claims with prejudice.4 On
4
The Panel's order dismissing appellants' claims with
prejudice was inadvertently omitted from the district court record.
However, the parties agree that the order included the following
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May 11, appellants' counsel sent a letter to the NASD in which he
challenged the Panel's decision to dismiss his party's claims with
prejudice and inquired as to the basis of the decision. The
explanation was provided on May 17 when the parties began the
arbitration hearing. After the appellants again inquired as to the
basis of the Panel's decision to dismiss counterclaims and third-
party claims with prejudice at the outset of the hearing, the
following exchange ensued between appellants' attorney and
Giacommara:
Appellants: Rule 10305 of the [NASD] Code allows
dismissal under three circumstances: You
can dismiss an entire proceeding with the
agreement of the parties; you can dismiss
the claims at issue without prejudice at
the request of the parties, which is what
we requested; or you can dismiss claims
with prejudice, but only after, as a
sanction, when other sanctions have
proven ineffective for eliminating
willful disobedience with panel
authority.
There's never been a finding of willful
disobedience of a panel order by the
Msciszes, there's never been a sanction
assessed against them, and this [Order]
was not phrased in terms of a sanction
either.
Giacomarra: I think you're missing the point. I
think we do have authority beyond what
you've quoted, and that was what our
ruling was based on. It was after
thoughtful consideration that the panel
elements: (1) the arbitration hearing was postponed until May 17-
20, 2005; (2) appellants' motion to withdraw its claims was denied;
and (3) appellants' counter-claims and third-party claims were
dismissed with prejudice.
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reviewed that and made that ruling. So
we feel we do have authority.
Appellants: Did the Panel consider the merits of the
counterclaim?
Giacomarra: We did.
Appellants: When? They weren't briefed, they weren't
argued. I never had an opportunity --
Giacomarra: We had the claim in front of us, but we
had -- we'll go off the record, take an
executive session for a moment here, and
if you could leave the room again.
(Brief Recess)
Giacomarra: We're going back on the record. After
review of the matter, the panel is
upholding their decision of dismissing
the counterclaims with prejudice. We
feel it's within our rights under rule
1035 -- 10305.
After the colloquy, the hearing continued on the remaining claims,
with appellants having the opportunity to present testimonial and
documentary evidence in support of its defenses.
After the hearing, the appellees were awarded $421,000.00
by the Panel, inclusive of attorneys' fees and costs. Kashner
Davidson and the Third-Party Appellees then filed an Amended
Complaint in the District of Massachusetts in July 2005, seeking to
confirm the arbitration award and modify its allocation among the
various appellants. Appellants responded by raising a number of
affirmative defenses and counterclaims attacking the arbitration
award, and requested that the award be vacated. In November 2006,
the district court confirmed the arbitration award and declined to
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modify the allocation of damages among appellants. This appeal
ensued.5
II.
Our review of an arbitration panel award is bifurcated.
Bull HN Info. Sys., Inc. v. Hutson, 229 F.3d 321, 330 (1st Cir.
2000). Although we review the district court's decision de novo,
McCarthy v. Citigroup Global Mkts. Inc., 463 F.3d 87, 91 (1st Cir.
2006), we remain "exceedingly deferential" to the decisions of the
arbitrator because the arbitrator's decision is the product of a
contract between the parties to have their dispute settled by an
arbitrator, Bull, 229 F.3d at 330; see also Teamsters Local Union
No. 42 v. Supervalu, Inc., 212 F.3d 59, 61 (1st Cir. 2000).
An arbitration award, however, is not "utterly
impregnable." Cytyc Corp. v. DEKA Prods. Ltd. P'ship, 439 F.3d 27,
5
Although not raised in this appeal, appellants also sought
to have the arbitration award vacated by the Massachusetts Supreme
Judicial Court (SJC), arguing that Kashner Davidson was improperly
represented by out-of-state attorneys at the arbitration hearing.
After the Panel rejected Appellants' Motions to Disqualify Counsel
in late 2004 and early 2005, Mscisz filed a petition before a
single Justice of the SJC, raising similar claims. The Justice
rejected appellants' claims, declaring "I conclude that the lawyer
defendants will not engage in the unauthorized practice of law by
representing [Kashner Davidson] at this particular arbitration
hearing in Massachusetts . . . ." Mscisz v. Kashner Davidson Sec.
Corp., No. SJ-05-0088 (Mass. May 6, 2005). On appeal to the entire
SJC after the arbitration award had been handed down by the Panel,
the court held that "even if an out-of-State attorney's
representation of a party at an arbitration proceeding in
Massachusetts might constitute the practice of law, this conduct
does not provide a basis to vacate the arbitration award, and, as
such, the plaintiffs are not entitled to relief." Mscisz v.
Kashner Davidson Sec. Corp., 844 N.E.2d 614, 616 (Mass. 2006).
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32 (1st Cir. 2006); Georgia-Pacific Corp. v. Local 27, United
Paperworkers Int'l Union, 864 F.2d 940, 944 (1st Cir. 1988)
("[C]oncluding that our role is limited is not the equivalent to
granting limitless power to the arbitrator."). Although we "do not
sit to hear claims of factual or legal error by an arbitrator as an
appellate court does in reviewing decisions of lower courts,"
United Paperworkers Int'l Union AFL-CIO, v. Misco, Inc., 484 U.S.
29, 38 (1987), there are limited "exceptions to the general rule
that arbitrators have the last word," Cytyc, 439 F.3d at 33.
Specifically, we must ensure that arbitration decisions comply with
section 10 of the Federal Arbitration Act ("FAA"), 9 U.S.C. § 10,
and certain common law principles. See id.
"[S]ection 10 authorizes vacatur of an award in cases of
specified misconduct or misbehavior on the arbitrators' part,
actions in excess of arbitral powers, or failures to consummate the
award." Advest, Inc. v. McCarthy, 914 F.2d 6, 8 (1st Cir. 1990).
The common law requires vacatur if the party opposing confirmation
of an award can show that the "award is '(1) unfounded in reason
and fact; (2) based on reasoning so palpably faulty that no judge,
or group of judges, ever could conceivably have made such a ruling;
or (3) mistakenly based on a crucial assumption that is concededly
a non-fact.'" Id. at 8-9 (quoting Local 1445, United Food &
Commercial Workers v. Stop & Shop Cos., 776 F.2d 19, 21 (1st Cir.
1985)). We have subsumed these common law grounds into a general
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evaluation of whether a panel has acted in "manifest disregard of
the law." See McCarthy, 463 F.3d at 91; Advest, 914 F.2d at 9. We
have further explained that "[a]n award is in manifest disregard of
the law if either 'the award is contrary to the plain language of
the contract,' or 'it is clear from the record that the arbitrator
recognized the applicable law, but ignored it.'" Wonderland
Greyhound Park, Inc. v. Autotote Sys., Inc., 274 F.3d 34, 36 (1st
Cir. 2001) (quoting Gupta v. Cisco Sys., Inc., 274 F.3d 1, 3 (1st
Cir. 2001)); see also 1 Martin Domke, Domke on Commercial
Arbitration, § 38:9 (2007) ("Although subject to slight variations
in wording, courts generally apply the following two part test in
determining if the award should be vacated for manifest disregard
of the law: (1) Did the arbitrator know of the governing legal
principal yet refused to apply it or ignored it all together? and
(2) Was the law ignored by the arbitrators well defined, explicit
and clearly applicable to the case? Only if the court determines
that both prongs of this test are satisfied will it overturn an
award for manifest disregard of the law." (footnotes omitted)).
III.
Acknowledging the significant deference that we must
afford an arbitrator's decision, Mscisz nonetheless urges us to
vacate the Panel's decisions denying appellants' discovery requests
and dismissing their counterclaims and third-party claims with
prejudice. Although appellants cite numerous grounds upon which
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the arbitration award should be vacated, echoing the various
standards set forth in FAA section 10 and our common law decisions,
their claims, in essence, boil down to two. First, Mscisz claims
that the Panel acted in manifest disregard of the law by
inappropriately relying on NASD Rule 10305, which specifies that
claims can be dismissed with prejudice as a sanction only if lesser
sanctions have failed to achieve the compliance the panel seeks.6
Alternatively, Mscisz contends that if the Panel did not rely on
Rule 10305, but rather dismissed their claims on the merits, it
deprived appellants of a fundamentally fair hearing by deciding
these claims without the benefit of the parties' briefing or oral
arguments. Accordingly, appellants contend vacatur of the
arbitration award is required.
In response, Kashner Davidson asserts that the decision
of the Panel was based on its interpretation of Rule 10305, not on
6
In full, NASD Rule 10305 states:
(a) At any time during the course of an arbitration, the
arbitrators may either upon their own initiative or at
the request of a party, dismiss the proceeding and refer
the parties to their judicial remedies, or to any dispute
resolution forum agreed to by the parties, without
prejudice to any claims or defenses available to any
party.
(b) The arbitrators may dismiss a claim, defense, or
proceeding with prejudice as a sanction for willful and
intentional material failure to comply with an order of
the arbitrator(s) if lesser sanctions have proven
ineffective.
(c) The arbitrators shall at the joint request of all
parties dismiss the proceedings.
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the merits of the claims, and that the Panel did not act in
manifest disregard of the law by dismissing the claims. Appellees
argue that the panel's decision to dismiss must be evaluated within
the context of the entire arbitration proceedings, including their
prior motions for sanctions and appellants' willful disregard of
the Panel's discovery orders. According to the appellees, these
elements, in addition to the Panel's statement after its
"thoughtful consideration" of the issues, indicate that the
dismissal was a sanction rather than a decision on the merits of
appellants' various claims.
A. The Basis for the Panel's Dismissal of the Appellants'
Counterclaims and Third-Party Claims with Prejudice
We agree that the Panel dismissed appellant's
counterclaims and third-party claims primarily as a sanction. When
initially asked at the May hearing to justify its decision to
dismiss, the Panel stated that the decision included consideration
of the merits of those claims. After being challenged on this
point by appellants' counsel, who asserted that the merits of these
claims had not even been briefed or argued, the Panel, before
explaining its decision further, recessed to review the matter.
After its executive session was completed, the Panel reconvened and
stated that its decision to dismiss the counterclaims and third-
party claims with prejudice was based on the dismissal provisions
of Rule 10305, which permit dismissal as a sanction "for willful
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and intentional material failure to comply with an order of the
arbitrator(s) if lesser sanctions have proven ineffective."
The sanction issue was certainly before the Panel at the
time of its ruling. The appellees' numerous petitions in the
months leading up to the hearing were framed as requests for
sanctions rather than as arguments contesting the viability of
appellants' claims. That the appellees would seek a sanction in
response to the appellants' conduct during discovery is not
surprising. The appellants readily admit that they had failed to
comply fully with the discovery requests in February and March of
2005. The discovery material that the appellee did receive, on
February 22, was "unintentionally convoluted." Further, Kashner
Davidson had sought a sanction against appellants on several
separate occasions.
Nevertheless, we cannot ignore the Panel's own statement,
offered immediately before the executive session, that it
considered the merits of appellants' claims in deciding to dismiss
them. That consideration could not plausibly disappear during the
brief executive session. Thus, in some fashion, the Panel's
assessment of the merits of these claims informed its decision to
dismiss them as a sanction.
B. Manifest Disregard of the Law
We review the Panel's decision to invoke section 10305(b)
of the Code as the basis for its dismissal decision. Both sections
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(a) and (c) are silent on the issue of sanctions, and address only
dismissals without prejudice. According to Rule 10305(b), the
Panel may dismiss a claim with prejudice if two elements are
satisfied. First, the dismissal must be a response to the "willful
and intentional material failure to comply with an order of the
arbitrator(s)." Second, it may be imposed only "if lesser
sanctions have proven ineffective." The Guide confirms these
elements. Noting that a Panel has "wide discretion to address
noncompliance with discovery orders," the Guide states that in
"extraordinary cases, the panel . . . may, pursuant to Rule
10305(b), dismiss a claim . . . with prejudice as a sanction for
intentional failure to comply with an order of the arbitrator(s) if
lesser sanctions have proven ineffective." NASD Discovery Guide 18
(emphasis added).
Although the first element was arguably satisfied here
because the Panel could have concluded that the appellants
willfully and materially failed to comply with an order, the second
element was not met. The Panel had not previously imposed lesser
sanctions on the appellant and therefore had not demonstrated that
sanctions short of a dismissal were ineffective. Indeed, only
weeks before the claims were dismissed in March, the Chairman of
the Panel expressly denied the appellees' requests for sanctions.
It is clear, therefore, that the unambiguous language of the Rule
was disregarded. Cf. Bradley v. Davis, 777 So. 2d 1189, 1190 (Fla.
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4th Dist. Ct. App. 2001) (suggesting that plaintiff would have "in
all likelihood" won her appeal challenging the dismissal of her
arbitration claims with prejudice under 10305(b) because no lesser
sanctions had proven ineffective).
Acknowledging this fact in their brief, the appellees
nevertheless raise several arguments in defense of the Panel's
action. First, they contend that the Panel could not have acted in
manifest disregard of the law because the NASD Code is a set of
private dispute resolution rules, not a body of law. Accordingly,
the Panel's disregard of the Code cannot constitute manifest
disregard of the law.
The "manifest disregard" standard is most often applied
to the arbitrator's decision on the merits of the dispute that
requires resort to the arbitral forum. For example, there may be
a claim that the arbitral award is in manifest disregard of the law
because it is contrary to the plain meaning of the contract that
the arbitrator has been asked to apply. See, e.g., Cytyc, 439 F.3d
at 33. However, the manifest disregard standard can also be
applied to the agreement to arbitrate itself. All arbitrations are
conducted pursuant to a contract between the parties. See First
Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 943 (1995)
("[A]rbitration is simply a matter of contract between the parties;
it is a way to resolve those disputes-but only those disputes-that
the parties have agreed to submit to arbitration."). That
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agreement to arbitrate often determines the procedural rules that
the arbitrator applies in resolving the underlying dispute. If the
arbitrator ignores the plainly stated procedural rules incorporated
in the agreement to arbitrate while arriving at the arbitral award,
that award is subject to a manifest disregard of the law challenge.
See Patten v. Signator Insurance Agency, Inc., 441 F.3d 230, 235
(4th Cir. 2006) (finding that an arbitrator "acted in manifest
disregard of the law" where she "disregarded the plain and
unambiguous language of the governing arbitration agreement"); cf.
Cytyc, 439 F.3d at 32 ("[T]he award must 'draw its essence from the
contract' that underlies the arbitration proceeding." (quoting
Misco, 484 U.S. at 38)).
In this case, the parties agreed to "submit the present
matter in controversy . . . to arbitration in accordance with the
Constitution, By-Laws, Regulations, and/or Code of Arbitration
Procedure of the sponsoring organization," in this case, the NASD.
See NASD Rule 10331 ("This Code shall be deemed a part of and
incorporated by reference in every agreement to arbitrate under the
Rules of the Association including a duly executed Submission
Agreement."). Thus, the NASD rules became part and parcel of the
arbitration contract, serving as the procedural rules governing the
arbitration proceeding. See 11 Richard A. Lord, Williston on
Contracts § 30:25 (4th ed. 2008) ("Where a writing refers to
another document, that other document, or the portion to which
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reference is made, becomes constructively a part of the writing,
and in that respect the two form a single instrument. The
incorporated matter is to be interpreted as part of the writing.").
If the Panel disregarded those rules, it necessarily disregarded
the arbitration contract as well. See George Watts & Son, Inc. v.
Tiffany and Co., 248 F.3d 577 (7th Cir. 2001) (hypothesizing that
if an arbitration agreement specifies that a dispute is to be
resolved under Wisconsin law, and the arbitrator states that she
prefers New York law, or no law at all, that the award could be
deemed a "manifest disregard of the law" or, alternatively, as
exceeding the arbitrator's powers).7 Thus, if "the [Panel]
disregarded the plain and unambiguous language of the governing
arbitration agreement . . . . , [it] acted in manifest disregard of
the law and failed to draw [its] award from the essence of the
agreement." Patten, 441 F.3d at 235.
The appellees also argue that even if the NASD code was
the governing law in the arbitration proceeding, the Panel did not
7
We acknowledge that there may be instances when the various
statutory and common law grounds for reviewing an arbitration award
overlap, leading courts to evaluate different standards, or
different iterations of the same standard. For example, if an
arbitration panel has acted in contravention of the clear,
unambiguous language of the arbitration contract, it has arguably
both manifestly disregarded the applicable law and exceeded its
power as arbitrators. We think that the manifest disregard of the
law approach works well here. We are not suggesting that the
"exceeding its power" rationale could not work as well. As we have
stated before, the "standard of judicial review has taken on
various hues and colorations in its formulations in this, and
other, circuits." Advest, Inc., 914 F.2d at 9.
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"intentionally or willfully" disregard the law because its decision
was made in good-faith after thoughtful consideration and based on
its overall interpretation of the Code provisions and authority.
Appellees cite Rule 103248 as providing authority for the Panel's
interpretation of 10305(b) and their actions taken in accordance
with that interpretation. According to appellees, Rule 10324
provides the Panel with authority to interpret Rule 10305(b)
broadly in order to "obtain compliance with any ruling by the
arbitrators." Because the Panel was merely interpreting, in a
good-faith manner, the text of Rule 10305(b) in accordance with
Rule 10324, appellees argue, it could not have "intentionally or
willfully" disregarded the law in this case.
The appellees also offer the Guide as additional support
for their claim. The Guide specifically contains a section
discussing sanctions in connection with discovery disputes.
Confirming that a panel maintains "wide discretion to address
noncompliance with discovery orders," it encourages the use of
sanctions "if any party fails to produce documents or information
required by a written order." NASD Discovery Guide 18; see Howsam
8
In full, NASD Rule 10324 states:
The arbitrators shall be empowered to interpret and
determine the applicability of all provisions under this
Code and to take appropriate action to obtain compliance
with any ruling by the arbitrator(s). Such
interpretations and actions to obtain compliance shall be
final and binding upon the parties.
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v. Dean Witter Reynolds, Inc., 537 U.S. 79, 85 (2002) ("[T]he NASD
arbitrators, comparatively more expert about the meaning of their
own rule, are comparatively better able to interpret and to apply
it."). Further, the Guide repeats the language of 10305(b) as an
option "in extraordinary cases." NASD Discovery Guide 18.
We agree that Rule 10324 establishes two distinct and
independent grants of authority -- first, the authority to
"interpret" the Code, and second, the authority to "take
appropriate action to obtain compliance with any ruling by the
arbitrators." Nevertheless, these grants of authority do not save
the Panel's dismissal decision. With respect to the authority to
interpret, the Panel's disregard of the unambiguous text of a Code
provision cannot be deemed a mere interpretation. To find
otherwise and expand the concept of "interpretation" to include the
Panel's dismissal decision in this case would be tantamount to
giving NASD arbitration panels a blank check to dismiss claims with
prejudice in contravention of an explicit provision of the Code.
Our deference to the decisions of arbitrators does not extend that
far.
With respect to the authority to use sanctions to achieve
compliance with panel orders, Rule 10324 authorizes "appropriate
action to obtain compliance with any ruling by the arbitrator(s)."
The sanction of dismissal imposed by the Panel was not intended to
obtain compliance with any ruling by an arbitrator. Indeed, it was
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a sanction that made compliance with outstanding orders by the
Panel irrelevant by removing the underlying claims of appellants
from the case. The dismissal ordered by the Panel has no grounding
in Rule 10324.
Therefore, the dismissal sanction imposed by the Panel
reflects its intentional and willful disregard of the clear and
unequivocal language of Rule 10305(b). That language permits
dismissal with prejudice as a sanction only after lesser sanctions
have failed to achieve compliance with the order(s) at issue.9
There was no history of lesser sanctions having been tried in this
case.10 The Panel, having rejected numerous requests for sanctions
from appellees, certainly knew this to be so, yet it chose to
impose the ultimate sanction of dismissal without taking the
preliminary steps required by the rule. Although the Panel's
9
The Guide also explicitly contemplates imposing less severe
sanctions prior to an outright dismissal with prejudice pursuant to
Rule 10305(b). Additionally, it offers examples of such sanctions,
including "mak[ing] an adverse inference against a party" or
assessing various fees resulting from noncompliance. NASD
Discovery Guide 18.
10
Courts adopt a similar approach of using lesser sanctions
to encourage a party's compliance with a court order and reserving
the sanction of dismissal until others have proven unsuccessful.
See Crossman v. Raytheon Long Term Disability Plan, 316 F.3d 36,
39-40 (1st Cir. 2002); Velazquez-Rivera v. Sea-Land Serv., Inc.,
920 F.2d 1072, 1076 (1st Cir. 1990) ("[D]ismissal should be
employed only if the district court has determined that it could
not fashion an 'equally effective but less drastic remedy.'"
(quoting United States v. Pole No. 3172, Hopkinton, 852 F.2d 636,
642 (1st Cir. 1988))); Richman v. Gen. Motors Corp., 437 F.2d 196,
199 (1st Cir. 1971) ("Dismissal is a harsh sanction which should be
resorted to only in extreme cases.").
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negative view of the merits of appellants' claims, alluded to by
the Panel immediately before the executive session, may help
explain the Panel's decision to invoke Rule 10305 as a basis for
dismissing appellants' claims with prejudice, this negative view
did not justify invoking a rule, "well defined, explicit, and
clearly applicable to this case," 1 Domke, supra, 38:9, that did
not support the sanction rationale offered by the Panel. This
misapplication of the clear language of the rule can only be deemed
an intentional and willful disregard of the law.
IV.
There may well have been grounds for the Panel's
frustration with the discovery conduct of appellants. We are not
questioning the authority of a panel established pursuant to the
NASD Code to use sanctions to achieve compliance with its discovery
order. Rule 10305 of the Code specifically provides for the use of
sanctions to achieve such compliance. But that rule requires that
lesser sanctions be used first in an attempt to achieve compliance
before the ultimate sanction of dismissal is imposed. The Panel
ignored this unmistakable directive. Our considerable deference to
an arbitrator's decision does not permit us to endorse such a
manifest disregard of a rule that the parties agreed should apply
to the resolution of their dispute. Therefore, we reverse the
decision of the district court and remand the case for entry of an
order vacating the arbitration award.
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So ordered.
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