Supreme Court declines to revisit Hall Street and manifest disregard
Contributed by K&L Gates
May 08 2014
Background
Arbitral award
Appellate court decision
Federal Arbitration Act and manifest disregard of law
Hall Street and continued viability of manifest disregard
Walia petition and opportunity to clarify Hall Street
In Walia v Dewan the Supreme Court recently declined to hear a case that would have permitted it to decide whether manifest disregard of the law remains an accepted basis for vacating arbitral awards subject to Chapter 1 of the Federal Arbitration Act.
(1) The
decision is significant for international arbitration practitioners because it reaffirms the need to consider local legal requirements in each jurisdiction where enforcement of an award may be sought.
Background
Walia arose out of an employment dispute between an individual accountant (the employee) and an accounting firm that had employed him (the employer) in 2003 pursuant to a written employment agreement. In 2006 the employer and the employee entered into a new employment agreement that imposed non-compete and nonsolicitation obligations on the employee, and that also required disputes arising out of or relating to the employment agreement to be resolved by arbitration administered by the American Arbitration Association (AAA) in Maryland.
By 2009 the relationship between the employer and the employee had deteriorated and they decided to end their association. In connection with that decision, the parties executed a release which broadly extinguished any claims that the employee could bring against the employer in exchange for a payment of money to the employee.
Notably, the release also contained an arbitration clause that called for any disputes
"concerning" the release or "its performance" to be resolved by arbitration administered by the AAA in Maryland.
(2)
Shortly after the parties executed the release, the employer commenced an arbitration against the employee under both the 2006 agreement and the release. The employer alleged that the employee had violated his non-compete and non-solicitation obligations under the 2006 agreement, as well the release, by filing administrative claims against the employer. The employee counterclaimed in the arbitration for alleged breaches of the 2006 agreement and other matters.
Arbitral award
A sole arbitrator was appointed and a hearing on the merits was held in 2012. After the hearing was concluded, the arbitrator issued an award which found in relevant part that: l l l l both parties' claims under the 2006 agreement were time barred; the employee was bound by the release that he had voluntarily signed; the release extended only to claims that the employee might assert in court, and not in arbitration; and the employee was entitled to damages extending back to 2003, even though 2006 claims were time barred.
In short, the award acknowledged that the release was valid and binding, but awarded the employee damages extending back to 2003 – beyond the 2006 time-barred claims.
After the award was issued, the employer commenced proceedings in a federal trial court to vacate the award on the grounds that the arbitrator had acted in manifest disregard of the law by awarding the employee damages for claims that he had
Authors
JP Duffy
Ngofeen Mputubwele
Eryn F Correa

released.
(3) In response, the employee filed a cross-petition to confirm the award.
In the confirmation proceedings, the federal trial court acknowledged the limited role that US courts play in reviewing arbitral awards and concluded that the employer was simply asking the court to revisit the merits of the underlying arbitration that the employer lost. Therefore, the trial court denied the employer's request to vacate the award and instead granted the employee's petition to confirm it. The employer subsequently appealed the trial court decision to the US Court of Appeals for the Fourth
Circuit.
Appellate court decision
On appeal, the Fourth Circuit took an entirely different view of the matter and vacated the award. In relevant part, the Fourth Circuit agreed with the trial court that judicial review of arbitral awards is limited under Chapter 1 of the Federal Arbitration Act "because to allow full scrutiny of such awards would frustrate the purpose of having arbitration at all", but concluded that the arbitrator's interpretation of the release was in manifest disregard of Maryland contract law.
Specifically, the Fourth Circuit found it inherently contradictory for the arbitrator to conclude that the release was valid and binding, but then to award the employee damages for claims that were subject to the release. The Fourth Circuit found that approach to be in manifest disregard of Maryland contract law, stating that "we hold that the Arbitrator manifestly disregarded the law by holding the Release valid and enforceable but nevertheless arbitrating Walia's counterclaims arising out of his
employment with the Company".
(4)
In reaching its conclusion, the Fourth Circuit further stated that manifest disregard is either "'an independent ground for review [of arbitral awards] or... a judicial gloss' on the
enumerated grounds for vacatur set forth in [Section 10(a) of] the FAA".
(5)
To appreciate the significance of that ruling, it is necessary to understand the history of the manifest disregard doctrine and the role that it plays under Chapter 1 of the Federal Arbitration
Act.
Federal Arbitration Act and manifest disregard of law
Section 10(a) of Chapter 1 enumerates four specific grounds for vacating arbitral awards. Those four grounds, which are generally consistent with the grounds set forth in Article V.1(a)-(e) of the New York Convention, are as follows: l The award was procured by corruption or fraud. l The arbitrators were biased. l The arbitrators denied due process to the complaining party. l The arbitrators exceeded their powers or executed them imperfectly such that a final award was not rendered.
(6)
Notably, manifest disregard, which generally requires an arbitrator consciously to ignore a known law, is not listed in Section 10(a) of the act and has historically been viewed as a judicially created basis for vacating an arbitral award.
Manifest disregard of the law has become a controversial doctrine and has garnered a good deal of commentary, primarily because it does not appear in Section 10(a) of the act as a basis for vacating an award and is perceived to lead to questionable judicial challenges to the underlying merits of awards. Manifest disregard has generated particular criticism in the context of awards that are subject to the New York or Panama
Convention. In 2008 the US Supreme Court weighed in on the manifest disregard debate in Hall Street Associates, LLC v Mattel, Inc.
Hall Street and continued viability of manifest disregard
In Hall Street the Supreme Court called manifest disregard's continued viability into question by ruling that the four grounds listed in Section 10(a) of Chapter 1 of the
Federal Arbitration Act were the only four on which an arbitral award could be vacated,
and that those grounds could not be contractually modified or expanded.
(7)
However, the Supreme Court also stated in Hall Street that "'manifest disregard' may [merely be] shorthand for § 10(a)(3) or § 10(a)(4)" of the act, and that it might therefore fall within the
ambit of the four bases for vacating an award set forth in Section 10(a) of the act.
(8) In
short, the Supreme Court ruled that only the Section 10(a) grounds for vacating an award were valid, but did not expressly state whether manifest disregard fell within those four grounds.
In the wake of Hall Street , US appellate courts have interpreted its ruling on manifest disregard differently and have split as to whether manifest disregard survived Hall
Street . For instance, the Fifth, Seventh, Eighth and Eleventh Circuits have expressly

ruled that Hall Street eliminated manifest disregard as a basis for challenging arbitral
awards.
(9)
In contrast, the Second, Fourth, Sixth and Ninth Circuits have all ruled that manifest disregard did survive Hall Street and continue to allow manifest disregard
challenges in enforcement proceedings.
(10) Other circuits have reserved judgment on the issue, awaiting further guidance from the Supreme Court.
(11)
Walia petition and opportunity to clarify Hall Street
The Walia petition invited the Supreme Court to decide whether "the Federal Arbitration
Act permits a court to vacate an arbitral award as the product of 'manifest disregard of
the law'".
(12) By declining that invitation, the Supreme Court chose not to endorse any of
the competing views between federal appellate courts, but instead allowed the various stances taken by the different circuits to stand until a later time.
Accordingly, the ability to challenge awards for manifest disregard of the law will continue to vary by federal jurisdiction until such time as a universal consensus is reached or the Supreme Court decides the matter. Therefore, practitioners should continue to follow developments in this area in order to understand the legal landscape in any jurisdictions in which they might seek to enforce an award.
JP Duffy
jp.duffy@klgates.com
Ngofeen Mputubwele or Eryn Correa
ngofeen.mputubwele@klgates.com
or eryn.correa@klgates.com
).
www.klgates.com
Endnotes
(1) No 13-722, 2014 WL 1343626 (US April 7 2014).
(2) Dewan v Walia , 544 F App'x 240, 242 (4th Cir 2013).
(3) In the federal trial court, the employer sought broader relief that is not germane for purposes of this update.
(4) Dewan , 544 F App'x at 248 (4th Cir 2013).
(5) Dewan , 544 F App'x at 246 n 5 (quoting Wachovia Secs, LLC v Brand , 671 F 3d 472,
483 (4th Cir 2012)).
(6)  See 9 USC § 10(a)(1) -(4); compare with New York Convention Article V.1(a)
(incapacity of the parties or invalidity of the arbitration agreement); V.1(b) (failure to give a party notice of the arbitration or an opportunity to present its case); V.1(c) (issuing an award that deals with matters beyond the arbitrator's jurisdiction); V.1(d) (composition of the tribunal or procedure not in accordance with the agreement or law).
(7) Hall Street Assocs, LLC v Mattel, Inc , 552 US 576, 578 (2008).
(8) Hall Street Assocs, LLC , 552 US at 585.
(9) See, for example, Citigroup Global Mkts, Inc v Bacon , 562 F 3d 349, 350 (5th Cir
2009); Affymax, Inc v Ortho-McNeil-Janssen Pharm, Inc , 660 F 3d 281, 284-85 (7th Cir
2011); Med Shoppe Int'l, Inc v Turner Invs, Inc , 614 F 3d 485, 489 (8th Cir 2010); Frazier v Citifinancial Corp , 604 F 3d 1313, 1324 (11th Cir 2010).
(10) See Giller v Oracle USA, Inc , 512 F App'x 71, 72 (2d Cir 2013) (recognising continued viability of manifest disregard postHall Street ); Wachovia , 671 F 3d at 482-83
(4th Cir 2012) (concluding that manifest disregard continues to exist); Coffee Beanery,
Ltd v WW, LLC , 300 F App'x 415, 418-19 (6th Cir 2009) (finding that manifest disregard survived Hall Street ); Johnson v Wells Fargo Home Mortg, Inc , 635 F 3d 401, 415 n 11
(9th Cir 2011) (continuing to recognise manifest disregard postHall Street ).
(11) See Bangor Gas Co v HQ Energy Servs US , 695 F 3d 181, 187 (1st Cir 2012)
(noting that Hall Street called the continued viability of manifest disregard into question, but then considering its application); Rite Aid NJ, Inc v United Food Commercial
Workers Union, Local 1360, 449 F App'x 126, 129 n 3 (3d Cir 2011) (noting that the
Third Circuit has not concluded whether manifest disregard survived Hall Street );
Abbott v Law Office of Patrick J Mulligan , 440 F App'x 612, 620 (10th Cir 2011) (noting circuit split and declining to decide whether manifest disregard survived Hall Street ).
(12) Petition for a Writ of Certiorari, Walia v Dewan , No 13-722 (US December 13 2013).
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