Kashner Davidson Securities Corp. v. Mscisz

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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