By Mark Kantor
I draw to your attention an interesting recent approach from the U.S. Court of Appeals for the Second Circuit towards an argument that an arbitration award should be set aside for manifest disregard of the law – Weiss v. Sallie Mae, Incorporated (2d Cir. Dkt No. 18-2362, September 12, 2019, available here – https://cases.justia.com/federal/appellate-courts/ca2/18-2362/18-2362-2019-09-12.pdf?ts=1568298609). Instead of vacating the arbitration award for “manifest disregard,” the Court of Appeals remanded the case to the lower court to require the arbitrator to seek to clarify material inconsistencies in the arbitration award. The Court of Appeals also took steps to assure that the same District Court judge and the same 3-person panel of Court of Appeals judges would be the ones to review any effort by the arbitrator to resolve the “irreconcilable determinations.”
The summary for the Court of Appeals opinion states the relevant circumstances and the appellate order succinctly. The lower court (the U.S. District Court for the Western District of New York) had vacated the underlying arbitration award due to irreconcilable determinations relating to the effectiveness of a general release in a judicial class action versus an award of damages in the arbitration award (“the arbitrator ignored the unambiguous terms of the general release”). The Court of Appeals (Peter Hall, J., for a unanimous 3-person appellate tribunal) in turn vacated that decision of the District Court and instead remanded to the lower court with instructions “to require the arbitrator to clarify whether he intended to deem the class notice sufficient and, if determined to be sufficient, to construe the general release in the first instance and vacate or modify the award as necessary.”
[The district court granted] Defendant‐Appellee’s motion to vacate an arbitration award based on the arbitrator’s failure to apply a general release provision in a settlement agreement that barred all of Plaintiff‐Appellant’s claims. We agree with the district court that the arbitrator ignored the unambiguous terms of the general release and therefore conclude that the award of statutory damages for a subset of Plaintiff’s claims is irreconcilable with the arbitrator’s determination that Plaintiff was a member of the settlement class and that she received adequate notice of its terms. The arbitrator’s failure to provide an explanation for these mutually exclusive determinations renders this Court unable to ascertain whether the arbitrator adhered to applicable substantive law as required by the parties’ arbitration agreement and, consequently, whether the arbitral award was issued in manifest disregard of the law, as the district court held. We therefore vacate the decision and order of the district court and remand the case to provide an opportunity for the district court to require the arbitrator to clarify whether he intended to deem the class notice sufficient and, if determined to be sufficient, to construe the general release in the first instance and vacate or modify the award as necessary.
The doctrine of manifest disregard sets a very high barrier for successful application in the Second Circuit. Vacatur is appropriate only in “exceedingly rare instances where some egregious impropriety on the part of the arbitrator is apparent ….” (citations omitted here and below).
“A litigant seeking to vacate an arbitration award based on alleged manifest disregard of the law bears a heavy burden, as awards are vacated on grounds of manifest disregard only in those exceedingly rare instances where some egregious impropriety on the part of the arbitrator is apparent.” …. We will uphold an arbitration award under this standard so long as “the arbitrator has provided even a barely colorable justification for his or her interpretation of the contract.” …. Vacatur is only warranted, by contrast, “when an arbitrator strays from interpretation and application of the agreement and effectively dispenses his own brand of industrial justice.”
Here, the appeals court made clear that the failures in the arbitration award indeed appeared egregious.
The arbitral award granted Weiss $108,500 in statutory damages under the Telephone Consumer Protection Act (“TCPA”), 47 U.S.C. §§ 227 et seq. The arbitrator, however, determined simultaneously that Weiss was a class member in a class action against Defendant‐Appellee Sallie Mae, Inc. that had been resolved by a settlement agreement containing a general release barring class members from bringing TCPA claims against Sallie Mae and its successors. We agree with the district court’s conclusion that the arbitrator ignored the unambiguous general release provision in that settlement agreement.
… ignored the unambiguous terms of the general release ….
The arbitrator’s failure to provide an explanation for these mutually exclusive determinations ….
… it is impossible to square that conclusion [that a notice of class proceedings “entitled Weiss to recover for ATDS calls made prior to the consent revocation deadline] with the general release provision [in the consequent class action] barring Weiss’s recovery for “any and all” TCPA claims ….
… the arbitrator’s finding … appears to rest on a parsing of the applicable law grounded neither in a constitutional due process analysis nor in a faithful exercise in contract interpretation.
… the incoherence of the arbitrator’s decision ….
… the arbitrator did not even mention the release in his decision ….
Judge Hall saw nothing in the arbitration award addressing the impact of the “unambiguous” general release. Unlike the District Court, however, the Court of Appeals did not set aside the arbitration award for manifest disregard of the law.
Because the arbitrator did not even mention the release in his decision, we are unable to ascertain from the record whether the arbitrator in fact based his decision on the four corners of the Arthur Settlement agreement and its accompanying class notice, as Weiss appears to contend, or whether he instead discarded the agreement in favor of his own policy preferences.
Significantly, the Court of Appeals did not then conclude that the arbitrator had actually manifestly disregarded applicable law. Rather than vacate the arbitration award entirely on grounds of manifest disregard as the District Court had done, the appeals judges instead remanded the case, instructing the lower court to require the arbitrator to clarify the inconsistency.
In light of the incoherence of the arbitrator’s decision, we hereby VACATE the district court’s order and REMAND the case to the district court to remand to the arbitrator with instructions to clarify whether the class notice was or was not sufficient and, if determined to be sufficient, then to construe the general release provision in the first instance and to vacate or modify the arbitral award if necessary. See Hardy v. Walsh Manning Sec., L.L.C., 341 F.3d 126, 134 (2d Cir. 2003) (acknowledging this Court’s “authority to seek a clarification of whether an arbitration panel’s intent in making an award evidences a manifest disregard of the law” (internal quotation marks and alterations omitted)).
The citation in the above quote to the Hardy decision for authority to order a remand to the arbitrator for clarification is interesting in the context of an application to vacate an arbitration award for manifest disregard of the law. The Hardy decision finds its authority for remanding to the arbitrator to resolve problems with the award in only one other cited opinion, Americas Insurance Company, v. Seagull Compania Naviera, S.A., 774 F.2d 64 (2d Cir. 1985). Neither Hardy nor Americas Insurance, however, refer to a statutory or juridical basis for that asserted authority. As the 2nd Circuit appeals court in Hardy had stated:
Although certainly not the normal course of things, we do have the authority to remand to the Panel for purposes broader than a clarification of the terms of a specific remedy. That is, we have the authority to seek a clarification of whether an arbitration panel’s intent in making an award “evidence[s] a manifest disregard of the law.” Americas Ins. Co., 774 F.2d at 67. The Panel should be afforded such an opportunity. In Americas Insurance, 774 F.2d at 67, we directed a district court to remand awards to an arbitration panel for clarification of whether the panel intended awards to be subject to principles of subrogation. We believe that this is the proper result here.
In addition to instructing the arbitrator to seek to clarify the arbitration award, Judge Hall also took steps in his Weiss v. Sallie Mae opinion to assure that any resulting reinterpretation of the arbitration award returned to the same District Court judge and then to the same Second Circuit appellate panel, rather than moving to another set of judges.
The arbitrator shall be instructed either to interpret and apply the terms of the Arthur Settlement agreement’s general release provision or to explain why that provision does not bar Weiss’s claims. Further, the district court shall thereafter hear and rule on any subsequent objections to the arbitrator’s decision, which objections may be advanced by appropriate motion of either party. Any appeal from the district court’s decision thereon may be advanced by letter notice to the Clerk of this Court without necessity of filing a new notice of appeal, and that appeal shall be assigned to this panel.
The uncommon feature of the Court of Appeals ruling in Weiss v. Sallie Mae lies in its remand with instructions to the arbitrator to address and resolve the inconsistent determinations. That judicial approach arguably avoids a common criticism of the doctrine of manifest disregard as unauthorized by the FAA and the New York Convention. Rather, Judge Hall and his appellate colleagues appear to be relying on the appeals court’s general judicial authority to require clarification of a material ambiguity in the underlying arbitral record. That remedy puts the purportedly offending arbitrator back in control of the arbitration award, rather than vacating that award. But the appeals court additionally assured that the same previously-briefed and skeptical judges at the U.S. District Court and Second Circuit Court of Appeals would review any resulting modifications put forward by the arbitrator. Does that suffice for a petitioner seeking vacatur of the award? What do you think?
Mark Kantor is a CPR Distinguished Neutral. Until he retired from Milbank, Tweed, Hadley & McCloy, Mark was a partner in the Corporate and Project Finance Groups of the Firm. He currently serves as an arbitrator and mediator. He teaches as an Adjunct Professor at the Georgetown University Law Center (Recipient, Fahy Award for Outstanding Adjunct Professor). Additionally, Mr. Kantor is Editor-in-Chief of the online journal Transnational Dispute Management.
This material was first published on OGEMID, the Oil Gas Energy Mining Infrastructure and Investment Disputes discussion group sponsored by the on-line journal Transnational Dispute Management (TDM, at https://www.transnational-dispute-management.com/), and is republished with consent.