As the United States Court of Appeals for the Fifth Circuit decides more “manifest disregard” of the law cases, we thought that you might be interested in reading our guest-post published at the Loree Reinsurance and Arbitration Law Forum earlier this year. Check it out! Hall Street Meets S. Maestri Place: What Standards of Review will the Fifth Circuit Apply to Arbitration Awards Under FAA Section 10(a)(4) after Citigroup? By Victoria VanBuren May 4, 2009 I. Introduction I am delighted to be invited to guest-blog today by Philip J. Loree Jr. of the Loree Reinsurance and Arbitration Law Forum. I was thrilled that Phil jumped right on it when I suggested that we should guest-post on each others blogs in the near future. Phil did an outstanding job discussing the Arbitration Fairness Act of 2009 (read the post here) last week as a guest-blogger at Disputing. He suggested that I explore the topic of “manifest disregard” of the law in light of the United States Supreme Court decision Hall Street Associates, LLC v. Mattel, Inc. 128 S.Ct. 1396 (2008) and the Fifth Circuit ruling in Citigroup Global Markets, Inc. v. Bacon, 562 F.3d 349 (5th Cir. 2009). So, after conquering some initial, mild trepidation about my first guest-blogging experience, here I am. II. Discussion: Hall Street and Citigroup In Hall Street, the Supreme Court concluded that the Sections 10 and 11 provide the exclusive bases for vacatur and modification of arbitration awards under the Federal Arbitration Act (”FAA”). Under Section 10, the grounds to vacate an arbitration award are: (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). The Court stated that “manifest disregard” of the law was not an independent ground for vacating awards. The Court, however, observed that in the past it may have used the term “manifest disregard” to refer collectively to all FAA Section 10 grounds, or as a “shorthand” for situations where the arbitrators were “guilty of misconduct” under Section 10(a)(3), or “exceeded their powers” under Section 10 (a)(4). Over the past year, the circuit courts have differed over whether the “manifest disregard” doctrine survives the Supreme Court’s holding in Hall Street. Recently, in Citigroup, it was the Fifth Circuit’s turn to decide the doctrine’s fate. There, Debra Bacon discovered that her husband had made five fund withdrawals from her Citigroup Individual Retirement account without her authorization. Bacon notified Citigroup as soon as she discovered what happened, but this notification was seven months after her husband had withdrawn $50,000, and five months after her husband had withdrawn another $150,000. Bacon filed for divorce. Citigroup refused to reimburse Bacon, and in 2004, she submitted her claim to an arbitration panel as required by her contract with Citigroup. The panel ordered Citigroup to pay Bacon $256,000 ($218,000 in damages and $38,000 in attorneys’ fees). Citigroup petitioned to vacate the award claiming that the arbitration panel had “manifestly disregarded” the law. The United States District Court for the Southern District of Texas vacated the award on the ground that the arbitration panel “manifestly disregarded” the law. According to the District Court: Bacon was not harmed by the fund withdrawals because her husband used the money for their benefit and subsequently promised to pay her back; Bacon’s claims were barred by Texas law, which permits such claims only if the customer reports unauthorized transactions within thirty days of the withdrawal; and Texas law requires apportionment among liable parties, which in this case, includes Bacon’s husband. The District Court said that although Citigroup “briefed and argued the requirements of Texas’s law on [bank] accounts, the panel ignored its contents obdurately.” The court concluded that “[a] lawless award must be vacated.” When the District Court decided the case (Aug. 2, 2007), Hall Street had not been decided. On appeal, the Fifth Circuit, citing Hall Street, held that Sections 10 and 11 provide the exclusive grounds for vacatur and modification of arbitral awards. Citing case law within the Fifth Circuit, the Court observed that the Fifth Circuit was “among the very last [of the circuit courts] to adopt manifest disregard,” and added that case law reflected that the narrow doctrine had a “standard difficult to satisfy.” The Court also stated that “the term itself, as a term of legal art, is no longer useful in actions to vacate arbitration awards.” The court ultimately ruled that “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.” III. Manifest Disregard in the Fifth Circuit: The Future In Citigroup, the Fifth Circuit rejected “manifest disregard” as an independent, nonstatutory ground for setting aside an award. Nevertheless, the court remanded the case to the District Court to determine whether vacatur is available under any of the FAA statutory grounds. While “manifest disregard” is no longer an independent ground for vacatur in the Fifth Circuit, Citigroup may be able to use Section 10(a)(4) of the FAA as an alternative basis for relief. The court in Brabham v. A.G. Edwards & Sons, Inc., 376 F.3d 377 (5th Cir. 2004) clarified that the “essence of the agreement” test — under which an arbitration decision can be vacated if it does not draw its essence from the contract — is not a separate nonstatutory ground for vacatur but is part of Section 10(a)(4) of the FAA. Citigroup may have a legitimate argument that the arbitrators “exceeded their powers” […]

In United Forming, Inc. v. Faulknerusa, LP, No. 09-50073 (5th Cir. Oct. 27, 2009), FaulknerUSA, LP (Faulkner) is the general contractor at a construction project; United Forming, Inc. (United) is a sub-contractor; and Continental Casualty, Co. (Continental) is the surety of their agreement. After a dispute over United’s work, the parties submitted their claims to arbitration before an American Arbitration Association (AAA) panel. The panel ruled for United and Continental. However, when United filed to confirm the award, Faulkner moved to vacate it. The district court ruled for United and Faulkner now appeals. The Fifth Circuit, citing Hall Street v. Mattel, Inc., 552 U.S. 576, 128 S. Ct. 1396, 170 L. Ed. 2d 254 (2008), highlighted that “[o]n a motion to vacate an award brought under the Federal Arbitration Act (“FAA”), the FAA sets forth the exclusive grounds for vacatur.” Then, the court addressed the three arguments raised by Faulkner. First, Faulkner claims that one of the arbitrators failed to make proper pre-arbitration disclosure of conflicts. The court, citing Positive Software Solutions, Inc., v. New Century Mortgage Corp., 476 F.3d 278, 281-85 (5th Cir. 2007) (a decision which discussed circumstances in which nondisclosure is “evident partiality” under the FAA) concluded that in the present case, the undisclosed information was a “speculative impression of bias” and not a “significant compromising relationship.” Next, the court considered Faulkner’s second claim that two of the arbitrators had “actual bias.” The court stated that ‘evident partiality’ under the FAA means ‘bias’ that is ‘clearly evident in the decision makers’ and concluded that Faulkner failed to meet its burden. Finally, the court explained that it did not need to reach Faulkner’s third claim that the AAA panel’s award was so contrary to the law that it constitutes “misconduct” or misbehavior” because the court concluded that “such a situation is not presented here.” Accordingly, the court affirmed the confirmation of the award and denied Faulkner’s motion to vacate. Technorati Tags: arbitration, ADR, law, Fifth Circuit

The ABA Section of Dispute Resolution is seeking three-minute original videos on the topic of mediation. The contest is open to everyone. Videos may be submitted between November 12, 2009 and January 15, 2010. Incomplete submissions will be disqualified. To be considered a complete submission the Contest Entry Form and an ABA Release Form for each person in the video must be received by the ABA Section of Dispute Resolution by midnight January 15, 2010. Instructions for submitting both forms can be found in the Contest Entry Form. All videos must be submitted via YouTube® (www.youtube.com). Submit your video by posting it on YouTube® and entering the YouTube® link into the Contest Entry Form. The video must be uploaded under the categories, Non-Profit and Education and tagged “ABA Section of Dispute Resolution Mediation Video Contest.” Find out more

Alan Scott Rau, Professor at The University of Texas School of Law and contributor to this blog, wrote recently an excellent article entitled Evidence and Discovery in American Arbitration: The Problem of ‘Third Parties,’ American Review of International Arbitration, Fall 2009. We invite you to check out Professor Rau’s well-known skillful writing on the evolving issue of arbitral powers to collect evidence from non-parties to an arbitration agreement. Here is the abstract: One common theme in any discussion of the fact-finding process in arbitration is the extent to which arbitral discretion can be deployed in the service of extracting necessary evidence. Techniques are legion to deal with recalcitrant parties, but where information is in the hands of someone who is not himself a party to the arbitration proceeding, the problem is much exacerbated. For quite a number of years, lower federal courts routinely assumed that the Federal Arbitration Act authorized arbitrators not only to subpoena third parties for the production of documents and testimony at the actual hearing – an uncontroverted proposition – but in advance as well, for purposes of discovery. However, over the last decade, we have seen a sharp and unmistakable retrenchment: And we now have a number of flat and unnuanced holdings to the effect that arbitrators lack any power whatever to make any discovery orders of any kind against third parties. Federal courts of appeal have taken the position that while the FAA allows third parties to be enlisted in arbitration as “witnesses,” the “plain meaning” of the statute is that arbitrators may not compel them to give depositions – or even to produce documents – prior to the time when they give testimony at the actual “hearing.” However, a proper resolution of this problem should recognize that even in the absence of arbitration, strangers every day are commandeered – against their will and at the mere whim of attorneys for the litigants – into serving the adjudicative process. Allowing the state to conscript strangers to produce evidence for the parties to an arbitration agreement may be just another application of the same phenomenon. (In fact it is precisely the arbitration process that attempts to cabin this exercise of litigant power). Nevertheless expecting non-signatories to participate in a pre-arbitration process of discovery does not in the slightest degree imply that we are thereby replicating the domestic litigation order. Under any statutory scheme, the arbitrators must (with the presumed acquiescence of the parties) be entrusted with the power to act as the gatekeepers to the discovery process. This is a necessary reading of the FAA, which allows the tribunal alone to compel testimony or production, and should equally be our model for related statutes, such as statutes permitting discovery in aid of “foreign tribunals” (now increasingly recognized as applicable to foreign commercial arbitral tribunals). The statutes present us with a diversity of procedures and verbal formulations, but what they all nevertheless have in common, is a recognition that priority to the arbitral tribunal will serve to support the distinctive features of the arbitral process. And at the same time they share awareness of the need for a backup role for the courts, in the interest of policing conduct that may affect non-consenting parties. Since arbitrators do not at least for the moment have federal marshals at their disposition, these are equivalent schemes posing the only interesting question – how power is to be shared. In arbitration as in litigation, it is precisely the role of courts to ensure that private self-interest – the self-justifying, self-intensifying, dynamics of adversarial behavior – does not encroach too far on the legitimate interests of strangers: Courts have in fact demonstrated considerable sensitivity to the plight of non-litigants who may “have no dog in the fight” carried on by others, and they have no end of experience in threading their way towards a reasonable accommodation. So the posturing and the striking of poses, the staking out of absolute prohibitions – the blanket assertions of “impossibility” – all so common to much of the case law and commentary, take us absolutely nowhere. Sensitivity to the culture and likely incentives of arbitrators is a useful start. A further step is the opening of a dialogue between arbitrators and courts, where both recognize that collaboration and a sense of common enterprise in shaping a fair arbitral process need not be stigmatized as “interference.” However the balance is struck, the question must not be framed rhetorically as an inquiry into “arbitral power,” but rather as one of the proper allocation of roles between coordinate fora – and in this dialectic the Devil, as he always does, lurks amidst the details. The article can be downloaded (for free) here. Technorati Tags: arbitration, ADR, law, FAA, evidence, discovery