The document discusses the history and development of the 'manifest disregard of the law' standard for vacating arbitration awards. It traces how the standard originated in the Supreme Court's Wilko v. Swan decision and was later developed by various circuit courts. However, in Hall Street Associates v. Mattel, the Supreme Court ruled that the statutory grounds under the Federal Arbitration Act are exclusive for vacating an award. This created uncertainty over whether manifest disregard remains a valid standard, leading to a circuit split that the Supreme Court has so far declined to resolve by denying certiorari in four relevant cases."
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“[T]he Court has abandoned all pretense of ascertaining
congressional intent with respect to the Federal
Arbitration Act, building instead, case by case, an edifice
of its own creation.”
Justice Sandra Day O’Connor
Allied-Bruce Terminix Cos. v. Dobson (1995)
4. 4
Pre-FAA
• Prior to the passage of the Federal Arbitration Act
(FAA), courts commonly refused to enforce
arbitration agreements.
• Why?
“There is no sound principle upon which such [arbitration] agreements can
be specifically enforced.” Ins. Co. v. Morse (U.S. Sup. Ct. 1874)
“Some centuries ago, because of the jealousy of the English courts for their
own jurisdiction, they refused to enforce specific agreements to arbitrate
upon the ground that the courts were thereby ousted from their
jurisdiction.” H.R. REP. NO. 68-96 (1924)
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The FAA
• In 1925, Congress passed the FAA with the purpose of placing
arbitration agreements “upon the same footing as other
contracts.” H.R.Rep. No. 68-96 (1924)
• However, the Supreme Court would later expand upon
Congress’ intent, holding that the FAA created a “liberal federal
policy favoring arbitration.” Moses H. Cone Mem’l Hosp. v.
Mercury Constr. (1983)
“By reading the federal policy favoring arbitration broadly to confer special
status on arbitration clauses, courts have misapplied it and consequently
have over-enforced arbitration clauses in ways that are inconsistent with
the intent and purpose of the FAA.” Richard Frankel, The Arbitration Clause
as Super Contract, Washington University Law Review (2014)
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Wilko v. Swan (1953)
• Action by investor against broker for Securities Act violations.
• Broker moved to stay the proceeding pursuant to an arbitration
clause in the customer agreement.
• S.D.N.Y. denied motion: “It is very clear that the intent of the
Congress was to require that the provisions of the Securities
Act should be strictly complied with so that the purchaser of
securities would be protected as fully as reasonably possible.”
• Second Circuit reversed: “If Congress had intended to forbid
arbitration in a suit based on [the Securities Act]…it would have
expressed such intent.”
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Wilko v. Swan (1953)
• Issue: Was the agreement to arbitrate in conflict with the
Security Act’s provision allowing claimants to bring an action in
court?
• Holding: Intent of Congress was for arbitration agreements to
be invalid by security actions.
• Why? Because arbitration is flawed: (1) arbitral award may be
made without explanation; (2) arbitrator’s understanding of the
legal meaning of statutory requirements under the Securities
Act, such as “burden of proof,” “reasonable care,” or “material
fact,” cannot be examined.
“[T]he interpretations of the law by the arbitrators in contrast to manifest
disregard are not subject, in the federal courts, to judicial review for error
in interpretation.”
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“Manifest Disregard of the Law”
FAA §10(A) lists four grounds to vacate an award:
• Corruption
• Fraud
• Impartiality
• Misconduct or Incompetence
These grounds involve instances of bias/procedural
unfairness.
Does not mention “Manifest Disregard of the Law.”
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Initially, “Manifest Disregard” was Ignored
“[T]he Supreme Court’s use of the words ‘manifest disregard’, has
caused us trouble here. Conceivably the words may have been used
to indicate that whether an award may be set aside for errors of law
would be a question of degree. Thus if the award was based upon a
mistaken view of the law, but in their assumption of what the law
was, the arbitrators had not gone too far afield, then, the award
would stand; but if the error is an egregious one, such as no sensible
layman would be guilty of, then the award could be set aside. Such a
‘degree of error’ test would, we think, be most difficult to apply.
Results would likely vary from judge to judge. We believe this is not
what the court had in mind when it spoke of ‘manifest disregard.’”
San Martine Compania de Navegazione v. Saguenay Terminals (9th
Cir. 1961)
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1960s: Adaptation of “Manifest Disregard”
Standard
• Second Circuit (1968): “[A]n arbitration award is
subject to review in the courts for misbehavior of the
arbitrators, or manifest disregard of the law.”
• Third Circuit (1969): “[T]he interpretation of labor
arbitrators must not be disturbed so long as they are
not in ‘manifest disregard’ of the law, and that
‘whether the arbitrators misconstrued the contract’
does not open the award for judicial review.”
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1980s: Adaptation of Manifest Disregard
Standard 1980s (Part I)
• Sixth Circuit (1982): An arbitrator’s interpretation of
federal law did not demonstrate “a ‘manifest disregard
of the law.’”
• Eight Circuit (1986): “[A]n arbitrator’s conclusions on
substantive matters may be vacated only when the
award demonstrates a manifest disregard of the
law[.]”
• Ninth Circuit (1986): The award “was neither
‘completely irrational’ nor a ‘manifest disregard of the
law.’”
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• Tenth Circuit (1988): Discusses acceptance of manifest
disregard standard:
• In fact, just one year earlier...
“[F]ederal courts have never limited their scope of review to a strict reading
of this statute. Viewed either as an inherent appurtenance to the right of
judicial review or as a broad interpretation of subsection (d) prohibiting
arbitrators from exceeding their powers, the arbitration award has
traditionally been subjected to a sort of ‘abuse of discretion’ standard.”
1980s: Adaptation of Manifest Disregard
Standard (Part II)
“Judicial review is still substantially limited to the four grounds listed in § 10
of the Arbitration Act and to the concept of ‘manifest disregard’ of the
law[.]”
Shearson/American Express v. McMahon (1987) (Blackmun, J., dissenting in
part)
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1990s: Adaptation of Manifest Disregard
Standard (Part I)
• First Circuit (1990): “[I]n order to prevail, [appellant] … must prove
that the arbitrator’s choice of redress was in manifest disregard of
the law.”
• Fourth Circuit (1991): “[L]egal interpretation of an arbitrator may
only be overturned where it is in manifest disregard of the law.”
• D.C. Circuit (1991): Holding that “[t]he panel did not manifestly
disregard the law, and we shall not disturb its award.”
• Seventh Circuit (1992): Holding that in order to vacate an arbitration
award for manifest disregard of the law, the arbitrators must have
“deliberately disregarded what they knew to be the law in order to
reach the result they did.”
But the 5th and 11th Circuits still refused to adopt the standard.
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1990s: Adaptation of Manifest Disregard
Standard (Part II)
First Options of Chicago v. Kaplan (1995)
•Dispute between First Options of Chicago -- a firm that cleared trades on the
Philadelphia Stock Exchange -- the Kaplans and their wholly owned investment company
MKI.
•Parties had entered into four separate “workout” agreements which focused on debts
that MKI and the Kaplans’ owed to First Options.
•MKI lost an additional $1.5M and First Options brought an arbitration action against
both MKI and the Kaplans for repayment of the debts.
•Kaplans argued that arbitration was not proper since only one of the four workout
agreements contained an arbitration clause and that document was signed only by MKI
and First Options, not the Kaplans.
•Arbitrators found in favor of First Options, and the district court confirmed the award.
•Third Circuit reversed the confirmation, agreeing with the Kaplans that the matter was
not arbitrable.
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1990s: Adaptation of the Manifest
Disregard Standard (Part II)
First Options of Chicago v. Kaplan (1995)
Supreme Court affirmed the Third Circuit’s decision:
•The Court explained the practical importance of the issue: Since judicial
review of arbitral awards is so narrow, if the arbitrator has the ability to
determine its own authority, its decision would be nearly invulnerable.
•The Court detailed the limited scope of arbitral review, citing first to
the four reasons listed in §10(a), and then to its Wilko decision, stating
that “parties [are] bound by arbitrator’s decision not in ‘manifest
disregard’ of the law.”
•Hence, the Court again signaled its approval of manifest disregard of
the law as an accepted standard for arbitral review.
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1990s: Adaptation of Manifest Disregard
Standard (Part III)
• Eleventh Circuit (1997): Explained that First Options made it
clear that the manifest disregard standard exists, and thus a
situation, such as the one before it, where the panel “was
flagrantly and blatantly urged” to ignore the law “constitute[d]
grounds to vacate an arbitration decision.”
• Fifth Circuit (1999): “[C]lear approval of the ‘manifest
disregard’ of the law standard in the review of arbitration
awards under the FAA was signaled by the Supreme Court’s
statement in First Options that ‘parties [are] bound by [an]
arbitrator’s decision not in ‘manifest disregard’ of the law.”
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Although every circuit agreed that manifest disregard of
the law was a viable standard, the question remained:
“What could it mean to say that an arbitrator manifestly disregarded the law? That
the arbitrator made a legal error? ... If ‘manifest disregard’ means only a legal error
… then arbitration cannot be final. Every arbitration could be followed by a suit,
seeking review of legal errors, serving the same function as an appeal within a
unitary judicial system. That would prevent the parties from achieving the principal
objectives of arbitration: swift, inexpensive, and conclusive resolution of disputes. If
‘manifest disregard’ means not just any legal error but rather a ‘clear’ error … again
arbitration could not be final, and the post-arbitration litigation would be even more
complex than a search for simple error-for how blatant a legal mistake must be to
count as ‘clear’ or ‘manifest’ error lacks any straightforward answer.”
George Watts & Son v. Tiffany (7th Cir. 2001)
What does “manifest disregard” mean?
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Hall Street Assocs. v. Mattel (2008)
• Arbitration agreement allowed district court to vacate the
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.”
• Applying the agreement’s standard of review, the district court
modified the award.
• Ninth Circuit reversed since the standard of review applied by
the district court was not prescribed by the FAA.
• The Supreme Court was asked whether parties to an arbitration
agreement may expand the grounds for vacatur and
modification beyond those set forth in the FAA.
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Hall Street Assocs. v. Mattel (2008)
• Hall Street argued that just as Wilko had created an extra-statutory
ground for vacataur through the manifest disregard standard, so to
parties were permitted to contractually expand the grounds to vacate
or modify an award.
• The Court rejected Hall Street’s argument, stating that “the statutory
grounds are exclusive.”
“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 paragraphs
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 now that its
meaning is implicated, we see no reason to accord it the significance that
Hall Street urges.”
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Post Hall Street Chaos
1. Circuits that Still Apply Manifest Disregard of the Law
Standard
2. Circuits That Do Not Use Manifest Disregard
3. Circuits That Refuse to Decide the Status of Manifest
Disregard
4. Split Circuit within the Circuit Split
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Circuits that Still Apply the Manifest
Disregard of the Law Standard
• Ninth Circuit (2009): “[T]he manifest disregard ground for vacatur is shorthand
for a statutory ground under” § 10(a)(4) and so “manifest disregard of the law
remains a valid ground for vacatur” post-Hall Street.
• Fourth Circuit (2013): “Merely misinterpreting contract language does not
constitute a manifest disregard of the law[.]”
“In the short time since Hall Street was decided, courts have begun to grapple with
its implications for the ‘manifest disregard’ doctrine. Some have concluded or
suggested that the doctrine simply does not survive. Others think that ‘manifest
disregard,’ reconceptualized as a judicial gloss on the specific grounds for vacatur
enumerated in section 10 of the FAA, remains a valid ground for vacating
arbitration awards. We agree with those courts that take the latter approach.”
Second Circuit (2008)
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Circuits That Do Not Use Manifest Disregard
• Fifth Circuit (2009): “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.”
• Eighth Circuit (2010): “In 2008 … Hall Street, resolving a circuit split, held
that ‘the text [of the FAA] compels a reading of the §§ 10 and 11 categories
as exclusive.’”
• Eleventh Circuit (2010): States that after Hall Street, section 10 of the FAA
provided the exclusive grounds for vacating an arbitral award.
• Seventh Circuit (2011): “‘[M]anifest disregard of the law’ is not a ground on
which a court may reject an arbitrator’s award under the Federal Arbitration
Act.”
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Circuits That Refuse to Decide the Status of
Manifest Disregard
• Tenth Circuit (2009): “Whether manifest disregard for the law
remains a valid ground for vacatur is an interesting issue, but as the
district court noted, one not central to the resolution of this case.”
• Third Circuit (2010): Hall Street “did not ... expressly decide whether
the judicially created doctrine allowing vacatur of an arbitration
award for manifest disregard of the law by an arbitrator would
continue to exist as an independent basis for vacatur[,]” and the Third
Circuit saw “no need to decide the issue[.]”
• D.C. Circuit (2012): “Assuming without deciding that the ‘manifest
disregard of the law’ standard still exists after” Hall Street.
• First Circuit (2015): “Whether the manifest-disregard doctrine
remains good law, however, is uncertain.”
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Split within the Sixth Circuit
• 2008: Although 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 … it did not foreclose
federal courts’ review for an arbitrators’ manifest disregard of
the law.”
• 2014: The Sixth Circuit has only applied the manifest disregard
standard post-Hall Street in unpublished opinions and in this
case “we need not decide whether a manifest disregard of the
law legitimately forms a basis for vacatur in the first place.”
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“[T]his latest circuit split, developed less than one year after
Hall Street, is heading to the Supreme Court. The Court will
have to decide whether, under the FAA, ‘manifest disregard’ is a
statutory ground for review, and thus permissible, or an extra-
statutory ground, and thus prohibited under Hall Street.”
Jill I. Gross, Hall Street Blues: The Uncertain Future of the Manifest
Disregard, 37 SEC. REG. L.J. 232 (2009)
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The Four Cert Petitions
1. Comedy Club, Inc. v. Improv West Associates (2009)
2. Grain v. Trinity Health, Mercy Health Services (2009)
3. Coffee Beanery, Ltd. v. WW L.L.C (2009)
4. Dewan v. Walia (2014)
“There is no benefit to allowing this issue to percolate further in
the lower courts. The circuit split is deep, and it will not resolve
without intervention by this Court. The Circuits have considered
both this Court’s decision and their own precedent, and have
concluded that their respective positions are binding in their
circuits … Until this court intervenes, parties to arbitration
agreements will encounter different sets of rules on the federal
courts, based solely on where their arbitrations are held.”
Petition for a Writ of Certiorari, Coffee Beanery v. WW (2009)
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Stolt-Nielsen v. Animalfeeds (2010)
Overview
• Arbitration panel determined that the arbitration agreement, which was
silent on class arbitration, allowed for class-wide arbitration.
• S.D.N.Y. vacated that determination on the ground that it was made in
manifest disregard of the law.
• Second Circuit reversed, rejecting the argument that the FAA precludes the
use of class arbitration unless it is expressly provided for in the agreement.
Supreme Court
• Supreme Court believed whether or not manifest disregard standard was
valid was unnecessary in deciding the case.
• Instead, the Court explained that the arbitrators “imposed its own policy
choice and thus exceeded its powers” instead of applying maritime or New
York law. (i.e. § 10(a)(4))
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Stolt-Nielsen v. Animalfeeds (2010)
• Justice Alito in a footnote wrote “[a]ssuming,
arguendo, that [the manifest disregard of the law]
standard applies, we find it satisfied[.]”
• But Justice Alito had joined Justice Souter’s majority
opinion in Hall Street. He understood the confusion
and what Hall Street actually held. Why not address
it?
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Practical Effects of Manifest Disregard
Does the availability of the manifest disregard standard
matter?
Two subsequent studies have shown that the application
of the manifest disregard of law standard has had no
statistical consequence in a court’s ability to overturn an
arbitral decision.
“We do not know who, if anyone, is right, and so cannot say
whether the exclusivity reading of the statute is more of a
threat to the popularity of arbitrators or to that of courts.” Hall
Street
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Practical Effects of Manifest Disregard
The LeRoy Study
•State and Federal employment cases from 1975 to 2010.
•District courts confirmed a similar percentage of arbitration
awards prior to, and after, Hall Street.
•State courts confirmed a slightly higher number of awards
after Hall Street.
Michael H. LeRoy, Are Arbitrators Above the Law? The “Manifest
Disregard of the Law” Standard, 52 B.C. L. Rev. 137 (2011)
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NYCBA Study
• In 2003, the Second Circuit analyzed the use of the manifest
disregard standard, finding that since 1960 it had vacated only 4
out of 48 cases where the standard was used to challenge an
arbitration decision.
• In a 2008 decision, the Second Circuit explained that it had heard
an additional 18 cases involving manifest disregard challenges but
only 1 decision was vacated.
• 2012 NYCBA study found that the Second Circuit had heard 17
cases over the next three years and had vacated 0. The NYCBA
study also examined 367 district court manifest disregard
challenges finding courts either vacated or partially vacated only
17 cases (remanding 5 others).
• Of these 22 cases, the Second Circuit reversed 6.
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Practical Effects of Manifest Disregard
Standard
• Has no significant effect on the confirmation of arbitral awards.
• Often leads to an increase in the overall cost of arbitration.
• As Professor LeRoy explained, the manifest disregard standard
“wastes more judicial resources in reviewing awards than any
other standard.”
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Conclusion
The manifest disregard of the law standard removes key
advantages of arbitration by increasing its cost while decreasing
its efficiency.
![2
“[T]he Court has abandoned all pretense of ascertaining
congressional intent with respect to the Federal
Arbitration Act, building instead, case by case, an edifice
of its own creation.”
Justice Sandra Day O’Connor
Allied-Bruce Terminix Cos. v. Dobson (1995)](data:image/gif;base64,R0lGODlhAQABAIAAAAAAAP///yH5BAEAAAAALAAAAAABAAEAAAIBRAA7)