Expanded grounds for judicial review of employment arbitration awards.

• Author: Flanagan, Gary W.

If the arbitration process is not reformed, courts may start to vacate awards on both fact and law grounds, thus impairing the advantages of non-litigation

EXPRESSING frustration with outdated and narrow grounds for vacatur, in 1998 the Second Circuit in Halligan v. Piper Jaffray Inc.(1) set itself apart by holding that a reviewing court could vacate an arbitration award if the arbitrator manifestly disregarded the law, the facts, or both. The overwhelming deference given to arbitration decisions under the framework of the Federal Arbitration Act (FAA) for commercial arbitration awards, the court stated, did not adequately address the strong public policy concerns in employment claims.

HISTORY OF ARBITRATION

The FAA, as enacted effective in 1926 and as interpreted over the years, sharply curtails a court's ability to overturn arbitration awards.(2) Prior to FAA, American courts subjected arbitration awards to virtually unlimited review, adopting the English common law, which displayed hostility to arbitration. This did not mean that courts refused to enforce arbitration awards. It did, however, subject awards to almost unlimited judicial review, potentially eliminating some of the main advantages of arbitration.(3)

In the early 1900s, increased commercial transactions led to increased arbitration, yet there was no consensus on courts' ability to enforce arbitration awards. As a result of confusion on how to deal with the growing number of arbitration awards, Congress passed the FAA, which was designed for the most part by commercial attorneys for the enforcement of arbitration agreements in commercial contracts.

Labor agreements and collectively bargained contracts were mainly left to the forces of moral persuasion and economic power. Not until World War II did arbitration gain widespread acceptance in the context of collective bargaining agreements as a substitute for industrial warfare.(4)

STATUTORY GROUNDS FOR VACATUR

The FAA makes written arbitration agreements valid, irrevocable and enforceable (9 U.S.C. [sections] 2), and it provides a mechanism to enforce these agreements, giving arbitrators power to summon witnesses and subpoena documents. It also severely curtails judicial review of arbitration awards. Under 9 U.S.C. [sections] 10, the only grounds for a court to vacate an award are (1) that the award was procured by fraud; (2) that the arbitrators were not impartial; (3) that the arbitrators refused to postpone the hearing on a showing of sufficient cause or to hear material evidence; or (4) that the arbitrators exceeded their power so that the award was not made solely on the subject matter submitted.

Some commentators have claimed that these extremely limited bases are nothing more than narrow procedural grounds for vacating an arbitration award.(5) Perhaps not surprisingly, therefore, over the past 40 years the U.S. Supreme Court generally has given wide deference to arbitration decisions.(6)

Judicial review of arbitration awards is much more narrow than the scope of review of trial court judgments or jury verdicts. Following the limitations set forth in the FAA, many courts have let errors stand unless the awards were particularly egregious and perhaps intentional.(7) It could be argued that courts were adhering to the legislative intent "to ensure judicial enforcement of privately made agreements to arbitrate."(8) That deference helped promote resolution of disputes with less cost and delay than that typically encountered in litigation.

JUDICIALLY DEVELOPED GROUNDS FOR VACATUR

For almost three decades the FAA's statutory grounds were the only recognized avenues for vacatur. In the early 1950s that presumption began to change. As early as 1932, the Supreme Court had declared FAA constitutional in Marine Transit Corp. v. Dreyfus.(9) However, not until Wilko v. Swan,(10) decided almost thirty years after passage of the FAA, did the Court make its first significant comment on application of the FAA.

In Wilko, a purchaser of securities sued the seller for fraudulent misrepresentation under Securities Act of 1933. The sales contract contained an arbitration clause, and the seller moved for a stay pending arbitration pursuant to FAA. Finding that the Securities Act's purpose was to protect investors, the Court characterized an agreement to arbitrate is necessarily a waiver of substantive law but was the kind of provision that could not be waived under the Securities Act. In particular, the Court expressed concern that an arbitrator might enforce the Securities Act's substantive requirements less effectively than would a court. The Court also worried that an arbitrator's determination that lacked legal accuracy nevertheless might stand up in the face of the narrow powers of review granted by the FAA.

Significantly, the Court also seemed to suggest that there could be grounds for judicial review of arbitral awards outside the limited provisions of the FAA. In dicta, the Court stated, "In unrestricted submission [to arbitration], ... the interpretations of the law by the arbitrators in contrast to manifest disregard, are not subject, in federal courts, to judicial review."(11)

Wilko was important in several respects. First, lower courts interpreted it to create a "public policy defense" against enforcement of arbitration agreements under the FAA when statutory claims were at issue.(12) Second, courts seized on the "manifest disregard" language to begin creating non-statutory grounds for vacatur.

Over the next half century, federal courts expanded on the judicially created grounds. To counteract the failure of arbitrators to give a coherent explanation of how they applied the law to the facts in making an award, a number of non-statutory grounds have evolved. In addition to the "manifest disregard" standard articulated in Wilko, courts also have held that arbitration awards can be vacated if the arbitrator was "arbitrary and capricious," "completely irrational" or if the award directly conflicted with a well-stated public policy.(13)

1. Manifest Disregard of Law

   Manifest disregard of the law was the first of the non-statutory grounds used.(14) The often-cited dictum from Wilko reads:

   While it may be true ... that a failure of the arbitrators to decide in accordance with the provisions of [relevant law] would constitute grounds for vacating the award pursuant to Section 10 of the Federal Arbitration Act, that failure would need to be made clearly to appear. In unrestricted submissions [to arbitration] ... the interpretations of the law by the arbitrators in contrast to manifest disregard [of the law] are not subject, in federal courts, to judicial review for error in interpretation.(15) It is interesting that since 1953 the Supreme Court has not further elaborated on the meaning of the "manifest disregard" standard. Since Wilko, the Court has made only three collateral references to "manifest disregard."(16)

   What did the Supreme Court mean by "manifest disregard" of the law? An early decision from the Second Circuit concluded that the Court must have relied on the statutory "exceeded their powers" provision in Section 10(d) of the FAA in order to advance this judicially created ground for review.(17) Later, the Second Circuit expressed its frustration by stating, "One man's `interpretation' may be another's `disregard.'"(18) In subsequent opinions, however, the Second. Circuit began to express the opinion that manifest disregard of the law could be found in the rare case where the arbitrator understood and correctly stated the law but proceeded to ignore it.(19) Judicial inquiry under this standard was further limited because the error must have been obvious and capable of being readily understood by the average person qualified to be an arbitrator.(20)

   In a 1997 decision involving the arbitrator's failure to award clearly mandated attorney's fees in an age discrimination claim, Judge Feinberg, writing for the Second Circuit, cautioned that manifest disregard "clearly meant more than error or misunderstanding with respect to the law."(21) Citing earlier decisions, Judge Feinberg explained that the term "disregard" "implied that the arbitrator appreciated the existence of a clearly governing legal principle but decided to ignore or pay no attention to it." Under this interpretation, a court was required to find both that (1) the arbitrators knew of a governing legal principle yet refused to apply it; and (2) the law ignored by the arbitrators was well-defined, explicit, and clearly applicable. Only a year later, Judge Feinberg greatly expanded this definition in Halligan, another arbitration award involving an age discrimination claim.

   In contrast to the Second Circuit, some other circuits have rejected the "manifest disregard" standard. The 11th Circuit explicitly declined to adopt it, stating that its understanding of the standard required "that there must be some showing in the record, other than the result obtained, that the arbitrators knew the law and expressly disregarded it."(22)

   The 10th Circuit has noted that its standard of review in cases confirming arbitration awards "is the same as for any other district court decision, accepting findings of fact that are not clearly erroneous but deciding questions of law de novo."(23) It went on to state that the district court's standard encompasses the statutory grounds, such as fraud or corruption (which occur "only in very unusual circumstances"), and "manifest disregard of the law," which it equated to "willful inattentiveness to the governing law."(24)

   Similarly, the Sixth Circuit has determined that "manifest disregard" of the law means more than a mere error in interpretation or application of the law.(25)

   In contrast, as late as 1991, the Seventh Circuit unequivocally stated an outright rejection of the of all non-statutory grounds for vacating an arbitration award, including the "manifest disregard" standard, but it cautioned that...