REVISED MARCH 18, 2009
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
March 5, 2009
No. 07-20670 Charles R. Fulbruge III
Clerk
CITIGROUP GLOBAL MARKETS INC, formerly known as Salomon Smith
Barney Inc
Movant - Appellee
v.
DEBRA M BACON
Respondent - Appellant
Appeal from the United States District Court
for the Southern District of Texas
Before JOLLY, BARKSDALE, and HAYNES, Circuit Judges.
E. GRADY JOLLY, Circuit Judge:
An arbitration panel ordered Citigroup Global Markets to pay Debra
Bacon $256,000. Citigroup moved the district court to vacate the award, and the
district court obliged on the basis that the arbitrators had manifestly
disregarded the law. On appeal, we consider whether manifest disregard of the
law remains a valid ground for vacatur of an arbitration award in the light of the
Supreme Court’s recent decision in Hall Street Associates, L.L.C. v. Mattel, Inc.,
128 S.Ct. 1396, 1403 (2008).1 We conclude that Hall Street restricts the grounds
1
The Supreme Court decided Hall Street after the district court issued its opinion in this
case.
No. 07-20670
for vacatur to those set forth in § 10 of the Federal Arbitration Act (FAA or Act),
9 U.S.C. § 1 et seq., and consequently, manifest disregard of the law is no longer
an independent ground for vacating arbitration awards under the FAA. Hall
Street effectively overrules our previous authority to the contrary, so we must
VACATE the district court’s judgment and REMAND for reconsideration in
accord with the exclusivity of the statutory grounds.
I.
Debra Bacon’s quarrel with Citigroup began in 2002 when she discovered
that her husband had withdrawn funds from her Citigroup Individual
Retirement Accounts without her permission. By forging her signature, he made
five withdrawals totaling $238,000. As soon as Bacon discovered the
unauthorized withdrawals, she notified Citigroup.
In 2004, Bacon submitted a claim in arbitration against Citigroup seeking
reimbursement for the unauthorized withdrawals. The arbitration panel
granted Bacon $218,000 in damages and $38,000 in attorneys’ fees. Citing § 10
of the FAA, Citigroup made an application to the district court requesting
vacatur of the award.
The district granted the motion to vacate, holding that the award was
made in manifest disregard of the law. The court based its holding on three
grounds: 1) Bacon was not harmed by the withdrawals because her husband
used the money for her benefit and subsequently promised to pay her back;
2) Bacon’s claims were barred by Texas law, which permits such claims only if
the customer reports the unauthorized transaction within thirty days of the
withdrawal; and 3) Texas law requires apportionment among the liable parties,
which, in this case, includes Bacon’s husband.
Bacon appeals. We review de novo the vacatur of an arbitration award.
Kergosien v. Ocean Energy, Inc., 390 F.3d 346, 352 (5th Cir. 2004).
2
No. 07-20670
II.
A.
Although Hall Street clearly has the effect of further restricting the role
of federal courts in the arbitration process, there is nothing revolutionary about
its holding.
Even before the enactment of the United States Arbitration Act in 1925,2
courts of equity would set aside an arbitration award only in narrowly defined
circumstances. Burchell v. Marsh, 58 U.S. 344, 349-50 (1854); Karthaus v.
Ferrer, 26 U.S. 222, 228 (1828). If the arbitration award was “within the
submission, and contain[ed] the honest decision of the arbitrators, after a full
and fair hearing of the parties, a court of equity [would] not set it aside for error,
either in law or fact.” Burchell, 58 U.S. at 349. This deference was appropriate
because a submission agreement–a document executed by both parties and
presented to the arbitrators in order to outline the dispute and the desired
arbitration procedures–was a valid and enforceable contract. District of
Columbia v. Bailey, 171 U.S. 161, 171 (1898). Thus, a provision in the
submission agreement requiring the parties to abide by the arbitrator’s decision
made the arbitration award binding. Even when a submission agreement did
not contain an express agreement to adhere to the decision of the arbitrators,
courts implied such an agreement and enforced the awards as binding. See
Smith v. Morse, 76 U.S. 76, 82 (1869) (“The law implies an agreement to abide
the result of an arbitration from the fact of submission.”). Although arbitration
was binding and final, awards could be set aside in the following circumstances:
(1) where the arbitrators engaged in fraud, corruption, or improper conduct;
(2) where the arbitrators failed to decide all of the issues submitted; (3) where
the arbitrators exceeded their powers by deciding issues not submitted; and
2
United States Arbitration Act, 43 Stat. 883 (1925). The FAA, enacted in 1945, was
based upon the United States Arbitration Act.
3
No. 07-20670
(4) where the award was not certain, final, and mutual. See Burchell, 58 U.S.
at 351 ((1) and (3)); Carnochan v. Christie, 24 U.S. 446, 460–67 (1826) ((2), (3),
and (4)). These limited grounds are akin to the provisions of § 10 of the FAA.
Importantly, awards were affirmed even if based upon error in law or fact.
Burchell, 58 U.S. at 349. “A contrary course would be a substitution of the
judgment of the chancellor in place of the judges chosen by the parties, and
would make an award the commencement, not the end, of litigation.” Id.
Burchell also cautioned against assuming improper conduct from mere error:
“We are all too prone, perhaps, to impute either weakness of intellect or corrupt
motives to those who differ with us in opinion.” Id. at 350. The Supreme Court
has continued to emphasize the importance of respecting the arbitration process.
In Hall Street, the Court explained: permitting vacatur and modification of
arbitration awards on more expansive grounds “opens the door to the full-bore
legal and evidentiary appeals that can rende[r] informal arbitration merely a
prelude to a more cumbersome and time-consuming judicial review process, and
bring arbitration theory to grief in post-arbitration process.” 128 S.Ct. at 1405
(citations and internal quotation marks omitted) (alteration in Hall Street).
In short, strictly confining the perimeter of federal court review of
arbitration awards is a widely accepted practice that runs throughout
arbitration jurisprudence–from its early common law and equity days to the
present.
B.
1.
Congress embraced this notion that arbitration awards should generally
be upheld barring some sort of procedural injustice, and §§ 10 and 11 of the FAA
enumerate the circumstances under which an award may be vacated, modified,
or corrected when the action is one brought under the Act. Under § 10, courts
are permitted to vacate an arbitration award
4
No. 07-20670
(1) where the award was procured by corruption, fraud,
or undue means;
(2) where there was evident partiality or corruption in
the arbitrators, or either of them;
(3) where 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) where the arbitrators exceeded their powers, or so
imperfectly executed them that a mutual, final, and
definite award upon the subject matter submitted was
not made.
9 U.S.C. § 10(a).
As we have earlier noted, the Supreme Court in Hall Street has recently
addressed the extent to which courts may vacate or modify the work of
arbitrators on grounds beyond those found in §§ 10 and 11. In their agreement
to arbitrate, the Hall Street parties agreed contractually to give the district court
the authority to vacate or modify the award on grounds that were not provided
in §§ 10 and 11. The agreement was negotiated during the litigation of the case
and was entered as an order by the district court. It required the district court
to “vacate, modify or correct any award: (i) where the arbitrator’s findings of
facts are not supported by substantial evidence, or (ii) where the arbitrator’s
conclusions of law are erroneous.” Hall Street, 128 S.Ct. at 1400-01. After
arbitration, the district court vacated the award for legal error. Ultimately, the
Ninth Circuit held that the terms controlling judicial review were unenforceable
and ordered the arbitration award reinstated. The Supreme Court then
“granted certiorari to decide whether the grounds for vacatur and modification
provided by §§ 10 and 11 of the FAA are exclusive.” Id. at 1401. The petitioner
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No. 07-20670
argued that the agreement to expand the court’s review beyond the specific
provisions of the statute should be respected because “arbitration is a creature
of contract, and the FAA is motivated, first and foremost, by a congressional
desire to enforce agreements into which parties ha[ve] entered.” Id. at 1404
(citations and internal quotation marks omitted) (alterations in Hall Street).
The Court rejected this argument.
The Supreme Court observed that § 9 of the FAA, which states that upon
the application for an order confirming an arbitration award the court “must
grant such an order unless the award is vacated, modified, or corrected as
prescribed in sections 10 and 11 . . .,” suggests that judicial review is constrained
by the statute. There “is nothing malleable about ‘must grant,’ which
unequivocally tells courts to grant confirmation in all cases, except when one of
the ‘prescribed’ exceptions applies.” Id. at 1405.
Hall Street also found that the Act’s legislative history indicated that
Congress intended the statutory grounds for vacatur and modification to be the
exclusive means for setting aside or changing an arbitration award challenged
under the FAA. In a brief submitted to the House and Senate Subcommittees
of the Committees on the Judiciary, one of the primary drafters of the Act said,
“The grounds for vacating, modifying, or correcting an award are limited. If the
award [meets a condition of § 10], then and then only the award may be vacated.
. . . If there was [an error under § 11], then and then only it may be modified or
corrected . . . .” Id. at 1406 n. 7 (citing Arbitration of Interstate Commercial
Disputes, Joint Hearings before the Subcommittees of the Committees on the
Judiciary on S. 1005 and H. R. 646, 68th Cong., 1st Sess., 34 (1924)) (additions
and omissions in Hall Street).
Based both on the text and on the legislative history, Hall Street concluded
that §§ 10 and 11 provide the exclusive regimes for review under the FAA. The
Court reiterated this holding several times: “We hold that the statutory grounds
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No. 07-20670
are exclusive”; “We agree with the Ninth Circuit that they are [exclusive] . . .”;
“We now hold that §§ 10 and 11 respectively provide the FAA’s exclusive grounds
for expedited vacatur and modification”; “In holding that §§ 10 and 11 provide
exclusive regimes for the review provided by the statute . . . .” Hall Street, 128
S.Ct. at 1400, 1401, 1403, 1406. This rule, Hall Street determined, is consistent
with the “national policy favoring arbitration with just the limited review needed
to maintain arbitration’s essential virtue of resolving disputes straightaway.”
Id. at 1405.
2.
Before we leave Hall Street, we must point out that the petitioner, citing
Wilko v. Swan, 346 U.S. 427, 436-37 (1953), argued that the widespread judicial
recognition of manifest disregard of the law as a nonstatutory ground for vacatur
suggests that §§ 10 and 11 are not exclusive. Hall Street, 128 S.Ct. at 1403.
They argued that if this judicial expansion is permissible, then the instant
contractual expansion similarly should be accepted. The Supreme Court,
however, questioned whether Wilko should even be read as creating an
independent ground for vacatur. Id. at 1404. That issue, Hall Street observed,
was not before the Court in Wilko, and Wilko’s language, upon which the circuit
courts have based the standard, is vague. The Hall Street Court speculated and
concluded:
Maybe the term “manifest disregard” was meant to
name a new ground for review, but maybe it merely
referred to the § 10 grounds collectively, rather than
adding to them. Or, as some courts have thought,
“manifest disregard” may have been shorthand for
§ 10(a)(3) or § 10(a)(4), the subsections authorizing
vacatur when the arbitrators were “guilty of
misconduct” or “exceeded their powers.” We, when
speaking as a Court, have merely taken the Wilko
language as we found it, without embellishment, and
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No. 07-20670
now that its meaning is implicated, we see no reason to
accord it the significance that [the petitioner] urges.
Id. (citations omitted) (emphasis added). In short, Hall Street rejected manifest
disregard as an independent ground for vacatur, and stood by its clearly and
repeatedly stated holding, as noted in the earlier paragraph, that §§ 10 and 11
provide the exclusive bases for vacatur and modification of an arbitration award
under the FAA.
C.
It is certainly true that over the years this circuit, like most other circuits,3
ultimately came to recognize manifest disregard of the law as a nonstatutory
basis for vacatur. See, e.g., Kergosien, 390 F.3d at 353; Prestige Ford v. Ford
Dealer Computer Servs., Inc, 324 F.3d 391, 395-96 (5th Cir. 2003). Even so,
manifest disregard of the law was defined as a standard difficult to satisfy.
Manifest disregard of the law
means more than error or misunderstanding with
respect to the law. The error must have been obvious
and capable of being readily and instantly perceived by
the average person qualified to serve as an arbitrator.
Moreover the term “disregard” implies that the
arbitrator appreciates the existence of a clearly
governing principle but decides to ignore or pay no
attention to it.
3
See Comedy Club, Inc. v. Improv West Assocs., 514 F.3d 833, 846 (9th Cir. 2008),
vacated, 129 S.Ct. 45; McCarthy v. Citigroup Global Markets, Inc., 463 F.3d 87, 91, 92 n.6 (1st
Cir. 2006) (explaining that “manifest disregard” is extrastatutory); Kurke v. Oscar Gruss and
Son, Inc., 454 F.3d 350, 354 (D.C. Cir. 2006); Stark v. Sandberg, Phoenix & von Gontard, P.C.,
381 F.3d 793, 799 (8th Cir. 2004); Hoeft v. MVL Group, Inc., 343 F.3d 57, 64 (2d Cir. 2003);
Dluhos v. Strasberg, 321 F.3d 365, 370 (3d Cir. 2003); Bowen v. Amoco Pipeline Co., 254 F.3d
925, 932 (10th Cir. 2001); Flex-Foot, Inc. v. CRP, Inc., 238 F.3d 1362, 1365 (Fed. Cir. 2001);
Dawahare v. Spencer, 210 F.3d 666, 669 (6th Cir. 2000); Apex Plumbing Supply, Inc. v. Supply
Co., Inc., 142 F.3d 188, 193 (4th Cir. 1998); Montes v. Shearson Lehman Bros., Inc., 128 F.3d
1456, 1461-62 (11th Cir. 1997). But see Wise v. Wachovia Sec., LLC, 450 F.3d 265, 268-69 (7th
Cir. 2006) (noting that in the Seventh Circuit manifest disregard of the law fits within
§ 10(a)(4)).
8
No. 07-20670
Prestige Ford, 324 F.3d at 395 (citing Merrill Lynch, Pierce, Fenner & Smith, Inc.
v. Bobker, 808 F.2d 930, 933-34 (2d Cir. 1986)). In addition, we have stated that
an award may be vacated for manifest disregard of the law only when “the
award resulted in a ‘significant injustice.’” Kergosien, 390 F.3d at 355 (citing
Williams v. CIGNA Fin. Advisors, Inc., 197 F.3d 752, 762 (5th Cir. 1999)).
Our circuit did not accept manifest disregard of the law as a nonstatutory
ground for vacatur with immediate confidence and certainty. Compare McIlroy
v. PaineWebber, Inc., 989 F.2d 817, 820 n.2 (5th Cir. 1993) (declining “to adopt
‘manifest disregard’, or any other standard, as an addendum to section 10”), with
Williams, 197 F.3d at 759. Indeed, manifest disregard of the law does not have
a compelling origin as a ground for vacatur. Its modest debut occurs in a vague
phrase found in Wilko v. Swan: “the interpretations of law by the arbitrators in
contrast to manifest disregard are not subject, in the federal courts, to judicial
review for error in interpretation.” 346 U.S. at 436-37. That is all Wilko said
about it.
Thus, it is not surprising that the lower courts initially grappled with the
uncertain implications of this clause. See, e.g., O.R. Sec., Inc. v. Prof’l Planning
Assocs., 857 F.2d 742, 746-47 (11th Cir. 1988); Nat’l R.R. Passenger Corp. v.
Chesapeake and Ohio Ry. Co., 551 F.2d 136, 143 n.9 (7th Cir. 1977) (“We share
the reservations recently expressed by the Second Circuit as to whether the
Wilko dictum was actually intended to add ‘manifest disregard’ of the law to the
statutory grounds for vacating an award in 9 U.S.C. § 10.”); I/S Stavborg v. Nat’l
Metal Converters, Inc., 500 F.2d 424, 431 & n.13 (2d Cir. 1974); San Martine
Compania de Navegacion, S.A. v. Saguenay Terminals Ltd., 293 F.2d 796, 802
n.4 (9th Cir. 1961) (“Frankly, the Supreme Court's use of the words ‘manifest
disregard’, has caused us trouble here.”). Uncertain about the propriety of
vacating an award for manifest disregard of the law, some courts avoided the
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No. 07-20670
issue by assuming, without deciding, that it was a valid ground for vacatur, but
declining to vacate the award nonetheless. See O.R. Sec., 857 F.2d at 747 (“we
need not decide that issue today because even if we were to accept such a
ground, O.R. has failed to make any showing that the arbitrators acted in
manifest disregard of the law”); Stroh Container Co. v. Delphi Indus., Inc.,783
F.2d 743, 750 (8th Cir. 1986) (“We need not decide, however, whether to adopt
any of these exceptions [including manifest disregard] since, under any one of
them, the award must nevertheless be affirmed.”); MSP Collaborative Developers
v. Fidelity & Deposit Co. of Md., 596 F.2d 247, 251 (7th Cir. 1979); Parsons &
Whittemore Overseas Co. v. Societe Generale de l'Industrie du Papier (RAKTA),
508 F.2d 969, 977 (2d Cir. 1974); Nat’l R.R. Passenger Corp., 551 F.2d at 143
(“Assuming without deciding that in an appropriate case an arbitration award
may be vacated for a ‘manifest disregard’ of applicable law, this is clearly not
such a case.”). Some circuits continued to maintain the exclusivity of the
statutory grounds, in the face of Wilko, for decades. See, e.g., Robbins v. Day,
954 F.2d 679, 684 (11th Cir. 1992). However, despite its uncertain genesis, most
circuits eventually accepted manifest disregard of the law as a valid
extrastatutory ground for vacatur. See note 3, above.
We were among the very last to adopt manifest disregard. After Wilko,
three of our opinions iterated our viewpoint that the statutory grounds are
exclusive. See McIlroy, 989 F.2d at 820 n.2; R.M. Perez & Assocs., Inc. v. Welch,
960 F.2d 534, 539-40 (5th Cir. 1992); Forsythe Int’l, S.A. v. Gibbs Oil Co. of Tex.,
915 F.2d 1017, 1020 (5th Cir. 1990) (“judicial review of a commercial arbitration
award is limited to Sections 10 and 11 of the Federal Arbitration Act”). But in
Williams v. CIGNA, nearly fifty years after Wilko, we finally embraced manifest
disregard as a nonstatutory ground for vacating arbitration awards. 197 F.3d
at 759. We concluded that the departure from precedent was necessary and
justified in the light of the Supreme Court’s opinion in First Options of Chicago,
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No. 07-20670
Inc. v. Kaplan, which cited 9 U.S.C. § 10 and Wilko for the proposition that
courts will set arbitration awards aside “only in very unusual circumstances.”
514 U.S. 938, 942 (1995).
III.
A.
The question before us now is whether, under the FAA, manifest disregard
of the law remains valid, as an independent ground for vacatur, after Hall
Street. The answer seems clear. Hall Street unequivocally held that the
statutory grounds are the exclusive means for vacatur under the FAA. Our case
law defines manifest disregard of the law as a nonstatutory ground for vacatur.
See Kergosien, 390 F.3d at 353; Prestige Ford, 324 F.3d at 395; Harris v. Parker
Coll. of Chiropractic, 286 F.3d 790, 792 (5th Cir. 2002). Thus, to the extent that
manifest disregard of the law constitutes a nonstatutory ground for vacatur, it
is no longer a basis for vacating awards under the FAA.
Four other circuits have considered this issue. The First Circuit, in dictum
and with little discussion, concluded that Hall Street abolished manifest
disregard of the law as a ground for vacatur.4 See Ramos-Santiago v. United
Parcel Serv., 524 F.3d 120, 124 n.3 (1st Cir. 2008) (“We acknowledge the
Supreme Court’s recent holding in Hall Street Assocs., L.L.C. v. Mattel that
manifest disregard of the law is not a valid ground for vacating or modifying an
arbitral award in cases brought under the [FAA].” (citations omitted)). The
Sixth Circuit, in an unpublished opinion, reached the opposite conclusion by
narrowly construing the holding of Hall Street to apply only to contractual
expansions of the grounds for review. Coffee Beanery, Ltd. v. WW, L.L.C., 300
4
This conclusion was dictum because the motion to vacate in Ramos-Santiago was not
brought pursuant to the FAA. The Supreme Court in Hall Street was careful to limit its
holding to the FAA and the scope of expeditious judicial review permitted thereunder: “we do
not purport to say that [§§ 10 and 11] exclude more searching review based on authority
outside the [FAA].” 128 S.Ct. at 1406.
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No. 07-20670
Fed. Appx. 415, 418-19 (6th Cir. 2008). The Second Circuit has also held that
manifest disregard survives Hall Street. Stolt-Nielsen SA v. AnimalFeeds Int’l
Corp., 548 F.3d 85, 93-95 (2d Cir. 2008). The court, however, recognized that
Hall Street’s holding was in direct conflict with the application of manifest
disregard as a nonstatutory ground for review, but resolved the conflict by
recasting manifest disregard as a shorthand for § 10(a)(4). Id. Finally, the
Ninth Circuit has concluded that Hall Street did not abolish manifest disregard
because its case law defined manifest disregard as shorthand for § 10(a)(4). See
Comedy Club Inc. v. Improv West Assocs., 553 F.3d 1277, 1290 (9th Cir. 2009)
(“Comedy Club II”). We now turn to discuss the opinions of the Sixth, Second,
and Ninth Circuits.
1.
Coffee Beanery only briefly considered the effect of Hall Street on manifest
disregard of the law. 300 Fed. Appx. at 418-19. In what we view as an
understatement, the Sixth Circuit acknowledged that Hall Street “significantly
reduced the ability of federal courts to vacate arbitration awards for reasons
other than those specified in 9 U.S.C. § 10 . . . .” Id. at 418. Citing Hall Street’s
discussion of Wilko, which Coffee Beanery thought demonstrated a “hesitation
to reject the ‘manifest disregard’ doctrine,” and noting the acceptance of the
standard by each and every court of appeals, the court concluded that it would
be imprudent to cease vacating arbitration awards made in manifest disregard
of the law. Id. at 419.
This decision suffers from two significant flaws. First, the opinion utterly
fails to address Hall Street’s express holding that the grounds for vacatur found
in § 10 are exclusive. Instead, the court narrowly construed Hall Street as
applying only to contractual expansions of the grounds for vacatur. Id. In the
light of Hall Street’s repeated statements that “We hold that the statutory
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No. 07-20670
grounds are exclusive,” we think it incorrect so narrowly to construe Hall Street’s
holding. 128 S.Ct. at 1400 (emphasis added).
Second, we believe that Coffee Beanery misread Hall Street’s discussion of
Wilko. We do not see hesitation by Hall Street to reject manifest disregard of the
law as an independent ground for vacating an award under the FAA; instead,
Hall Street’s discussion of Wilko demonstrates the Supreme Court’s
unwillingness to give any significant meaning to Wilko’s vague language. Hall
Street observed that Wilko dealt with an entirely separate issue and, noting the
vagueness of Wilko’s statement, concluded that: “When speaking as a Court, we
have taken the Wilko language as we found it, without embellishment, and now
that its meaning is implicated, we see no reason to accord it the significance that
[the petitioner] urges.” Id. at 1404.
2.
Unlike Coffee Beanery, the Second Circuit in Stolt-Nielsen did not shy from
Hall Street’s holding. The court acknowledged that Hall Street “held that the
FAA sets forth the ‘exclusive’ grounds for vacating an arbitration award.” Stolt-
Nielsen, 548 F.3d at 94. The court also recognized that this holding was in
conflict with its own prior statements regarding manifest disregard, which the
court discounted as dicta. Id. (“[Hall Street’s] holding is undeniably inconsistent
with some dicta by this Court treating the ‘manifest disregard’ standard as a
ground for vacatur entirely separate from those enumerated in the FAA.”).
Instead of directly concluding that Hall Street eliminated manifest disregard as
a ground for vacatur under the FAA, the court reasoned that manifest disregard
of the law should be “reconceptualized as a judicial gloss on the specific grounds
for vacatur enumerated in section 10 of the FAA . . . .” Id.
Describing its “reconceptualization,” the court stated:
We must therefore continue to bear the responsibility to
vacate arbitration awards in the rare instances in
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No. 07-20670
which “the arbitrator knew of the relevant [legal]
principle, appreciated that this principle controlled the
outcome of the disputed issue, and nonetheless willfully
flouted the governing law by refusing to apply it.”
Westerbeke, 304 F.3d at 217. At that point the
arbitrators have “failed to interpret the contract at all,”
Wise, 450 F.3d at 269, for parties do not agree in
advance to submit to arbitration that is carried out in
manifest disregard of the law. Put another way, the
arbitrators have thereby “exceeded their powers, or so
imperfectly executed them that a mutual, final, and
definite award upon the subject matter submitted was
not made.” 9 U.S.C § 10(a)(4).
Stolt-Nielsen, 548 F.3d at 95. Thus, the court seems to conclude that manifest
disregard–as the court describes it–does not add to the statutory grounds. The
court simply folds manifest disregard into § 10(a)(4).5 In the full context of the
Second Circuit’s reasoning, this analysis is not inconsistent with Hall Street’s
speculation that manifest disregard may, among other things, “have been
shorthand for § 10(a)(3) or § 10(a)(4) . . . .” Hall Street, 128 S.Ct. at 1404.
We should be careful to observe, however, that this description of manifest
disregard is very narrow. Because the arbitrator is fully aware of the controlling
principle of law and yet does not apply it, he flouts the law in such a manner as
to exceed the powers bestowed upon him. This scenario does not include an
erroneous application of that principle.6
3.
5
The court relies heavily upon the Seventh Circuit’s decision in Wise v. Wachovia
Securities, LLC, which noted that the Seventh Circuit has defined manifest disregard “so
narrowly that it fits comfortably under the first clause of the fourth statutory ground.” 450
F.3d 265, 268 (7th Cir. 2006).
6
Stolt-Nielsen cites New York Telephone Co. v. Communications Workers of America
Local 1100, 256 F.3d 89 (2d Cir. 2001) (per curiam), as one example. In that case, the
arbitrator deliberately refused to apply a legal principle that he acknowledged to be
controlling. The arbitrator stated: “Perhaps it is time for a new court decision.” New York
Telephone Co., 256 F.3d at 93.
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No. 07-20670
Comedy Club II has a lengthy procedural history. In a decision issued
prior to Hall Street, the Ninth Circuit found that the arbitration award at issue
constituted a manifest disregard of the law. Comedy Club Inc. v. Improv West
Assocs., 514 F.3d 833 (2008) (“Comedy Club I”). The Supreme Court then
vacated the decision in Comedy Club I and remanded for reconsideration in the
light of its recently issued decision in Hall Street. Improv West Assocs. v.
Comedy Club, Inc.,129 S.Ct. 45 (2008).
On remand, the Ninth Circuit, unlike the Second Circuit, had no need to
reconceptualize manifest disregard because its own case law had already defined
it as a shorthand for § 10(a)(4). Comedy Club, 553 F.3d at 1290. The court
therefore held that manifest disregard of the law, as a shorthand for § 10(a)(4),
survived Hall Street. Id. (“manifest disregard of the law remains a valid ground
for vacatur because it is a part of § 10(a)(4)”).
B.
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, nonstatutory ground for setting aside an
award must be abandoned and rejected. Indeed, the term itself, as a term of
legal art, is no longer useful in actions to vacate arbitration awards. Hall Street
made it plain that the statutory language means what it says: “courts must
[confirm the award] unless the award is vacated, modified, or corrected as
prescribed in sections 10 and 11 of this title,” 9 U.S.C. § 9 (emphasis added), and
there’s nothing malleable about “must,” Hall Street, 128 S.Ct. at 1405. Thus
from this point forward, arbitration awards under the FAA may be vacated only
for reasons provided in § 10.
To the extent that our previous precedent holds that nonstatutory grounds
may support the vacatur of an arbitration award, it is hereby overruled.
IV.
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No. 07-20670
The district court, which issued its opinion before Hall Street, held that the
arbitrators in this case manifestly disregarded the law. The judgment of the
district court is therefore VACATED. The court, however, did not consider
whether the grounds asserted for vacating the award might support vacatur
under any of the statutory grounds. Accordingly, we REMAND for further
consideration not inconsistent with this opinion. The judgment of the district
court is VACATED and the case REMANDED.
VACATED and REMANDED.
16