Last week, the U.S. Court of Appeals for the Fifth Circuit issued an opinion holding that "manifest disregard of the law as an independent, nonstatutory ground for setting aside an award must be abandoned and rejected." Citigroup Global Mkts. Inc. v. Debra M. Bacon, No. 07-20670, slip op. at 15 (5th Cir. March 5, 2009) (opinion available at 2009 WL 542780). While the court’s decision should eliminate "manifest disregard" as an independent ground for vacatur, the court’s commentary on the post-Hall Street jurisprudence in other circuits leaves some doubt as to how conclusively the court has rejected manifest disregard.

In a domestic arbitration between Citigroup and Bacon, the arbitration panel awarded Bacon nearly all requested damages and attorney’s fees. Citigroup applied to the U.S. District Court for the Southern District of Texas for vacatur of the award. The district court granted Citigroup’s motion on the grounds the arbitrator appreciated the law but ignored it, resulting in an award made "in manifest disregard of the law." Citigroup Global Mkts. Inc. v. Bacon, No. 4:05-cv-3849 (S.D. Tex. August 3, 2007) (available at 2007 WL 2255114). Importantly, the district court did not consider any statutory grounds for vacatur. Instead, the district court based its opinion on a common law description of manifest disregard of the law. Id. at 2-3. According to this judicially developed standard, an arbitrator manifestly disregards the law when he or she fully understands the law’s prescriptions but chooses to disregard them to make an award that works a substantial injustice. Id. 
 
The Fifth Circuit focused its review on whether manifest disregard of the law remains a valid ground to vacate or modify an arbitration award in light of the opinion issued by the United States Supreme Court in Hall Street Associates, L.L.C. v. Mattel, Inc., 128 S.Ct. 1396 (2008). The Fifth Circuit ultimately vacated the district court’s judgment as inconsistent with Hall Street and remanded the case for further consideration. Id. at 15.

In Hall Street, the Supreme Court held that parties cannot contract to expand the scope of a court’s review of an arbitration award. Based on a close textual analysis of the bases for vacatur and modification of an award in the Federal Arbitration Act (the Act), the Supreme Court concluded that those enumerated bases are the exclusive grounds on which a court may vacate an award. 123 S.Ct. at 1407.

Importantly, Hall Street did not resolve the question of whether "manifest disregard" of the law or facts constitutes a basis for vacatur. The court observed that the definition of "manifest disregard" is unclear. Perhaps "manifest disregard" refers to a new ground for review, in which case it could not survive the Hall Street holding. Alternatively, "manifest disregard" may merely refer to the statutory grounds for vacatur collectively or to 9 U.S.C. § 10(a)(3) and § 10(a)(4), the subsections of the Act authorizing vacatur when arbitrators were "guilty of misconduct" or "exceeded their powers." Id. at 1404.

Guided by Hall Street’s holding, the Fifth Circuit squarely rejects manifest disregard of the law to the extent that it is an independent, nonstatutory ground for vacating arbitration awards under the Act. Citigroup, slip. op. at 11. The court held that:

In light of the Supreme Court’s clear language [in Hall Street], 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.

Id. at 15. The court accordingly vacated the district court’s judgment on the grounds that the district court failed to apply the exclusive grounds for vacatur set forth in the Act.

A critical factor in the court’s decision is Fifth Circuit precedent defining manifest disregard as a "nonstatutory ground for vacatur." So defined, the standard directly conflicts with Hall Street and therefore cannot be a basis for vacatur of an arbitration award. Id. at 11.

In its opinion, the Fifth Circuit closely examines the Second Circuit’s holding that manifest disregard survives Hall Street. Id. at 13-14; Stolt-Nielsen SA v. AnimalFeeds Int’l Corp., 548 F.3d 85, 93-95 (2d Cir. 2008). In Stolt-Nielsen, the Second Circuit acknowledged that its prior statements identifying manifest disregard as an independent ground for vacatur were at odds with Hall Street. Id. However, instead of abolishing manifest disregard, the Second Circuit re-cast the standard "as a judicial gloss on the specific grounds for vacatur in § 10(a)(4) of the FAA." Id. According to this re-conceptualization, manifest disregard of the law applies under § 10(a)(4) when arbitrators are fully aware of the controlling law but refuse to apply it. Id. Consistent with Hall Street’s holding, the Second Circuit folds manifest disregard into the Act.

One commentator has observed that the Fifth Circuit appears to accept the Second Circuit's description as consistent with Hall Street, noting the Fifth Circuit’s emphasis that under Stolt-Nielsen, "manifest disregard" applies only where the arbitrator knew the law but ignored it and only where a court reads this failure into the Act’s bases for vacatur.¹ Citigroup, slip op. at 14.

Although rhetorically the Fifth Circuit abandons manifest disregard as an independent basis for vacatur, it instructs the district court to "consider whether the grounds asserted for vacating the award might support vacatur under any of the statutory grounds." Id. The Fifth Circuit thus seems to embrace the Second Circuit’s approach, opening a narrow avenue for courts to apply manifest disregard as a "gloss" on § 10(a)(4) of the Act.

For more information on this topic, please contact V&E International Dispute Resolution lawyer James L. Loftis or Teresa Cigarroa Keck. Visit our website to learn more about V&E's International Dispute Resolution practice, or e-mail one of the V&E IDR practice contacts. 

¹Comments from Professor Anthony Cole, University of Warwick, in email communications with the authors on March 9, 2009.