Setting aside arbitration awards and the manifest disregard of the law standard.

Parties who lose in arbitration proceedings and then move their disputes into the court system should take notice of a recent decision issued by the 11th Circuit Court of Appeals. In B.L. Harbert International, LLC v. Hercules Steel Company, 441 F.3d 905 (11th Cir. 2006), the court reviewed the "manifest disregard of the law" standard and, in doing so, clarified the requirements that must be satisfied in order to establish that an arbitrator acted in manifest disregard of the law. To meet the exacting requirements of this standard, an arbitration loser must prove the arbitrator recognized a clear rule of law and deliberately chose to ignore it. The court's opinion affirmed a decision by the U.S. District Court for the Northern District of Alabama denying Harbert's motion to vacate. The court's holding sends a strong message about overuse of the post-arbitration review procedures and reminds litigants that proving an arbitrator acted in manifest disregard of the law will be the exception rather than the norm. Although the Harbert decision involved a construction dispute rather than an employment arbitration, the analysis applies to arbitration of any type under the Federal Arbitration Act (FAA) (1), including arbitration of employment claims.

The FAA sets forth four statutory grounds for vacating an arbitration award. Additionally, the 11th Circuit Court of Appeals recognizes three nonstatutory grounds. This article will discuss one of the non-statutory grounds--manifest disregard of the law--and the impact Harbert should have on a losing party's consideration before seeking judicial relief through a motion to vacate. (2)

Harbert v. Hercules

B.L. Harbert International, LLC, is a general contractor on large construction projects. Hercules Steel Company manufactures structural steel for construction projects. In August 2000, the U.S. Army Corp of Engineers awarded Harbert a contract for construction at Fort Bragg, North Carolina. Less than one month later, Harbert awarded Hercules a subcontract for steel fabrication and erection. The subcontract between Harbert and Hercules included a provision requiring the parties to submit disputes between them to binding arbitration before the American Arbitration Association. In a separate document, the parties agreed that the Federal Arbitration Act would control arbitration proceedings. Harbert also released two different schedules for the project.

Hercules began work on the project in April 2001 and finished the project in January 2002. After disagreement arose between the parties as to the timeliness of Hercules' work on the project, Harbert stopped making payments and demanded that Hercules pay delay damages. Those damages exceeded the amount Hercules was due to receive on the subcontract. In January 2003, Hercules filed a demand for arbitration seeking to recover the unpaid balance due under the subcontract, other damages, interest, and attorneys' fees. Harbert proceeded to file a counterclaim seeking delay damages, acceleration costs, miscellaneous back charges, interest, and attorneys' fees.

The arbitration took seven days in February and May 2004. In September 2004, the arbitrator issued an award denying Hercules' additional damages claim, Harbert's counterclaims including the claims for delay damages, and each party's attorneys' fees claims. The arbitrator awarded $369,775 to Hercules representing the subcontract balance plus interest. Hercules believed the arbitrator made a scrivenor's error with respect to the amount of unpaid balance under the subcontract, so it submitted a request for clarification. Harbert also sought clarification and modification from the arbitrator, claiming that the arbitrator's award lacked the detail requested by the parties on each of the six issues outlined in the decision. Subsequently, the arbitrator corrected the scrivener's error by increasing Hercules' award from $369,775 to $469,775. The arbitrator's corrected award also provided additional findings on the six issues.

Harbert filed a motion to vacate the arbitration award (as corrected) in the U.S. District Court for the Northern District of Alabama. Harbert claimed that the arbitrator's rationale reflected a manifest disregard of the applicable law. Hercules filed a motion requesting the court to confirm the award. (3)

The district court entered judgment enforcing the arbitration award and, by doing so, denied Harbert's motion to vacate the award and granted Hercules' motion to confirm it. After reviewing the pre- and post-hearing briefs the parties submitted to the arbitrator and an affidavit from Harbert's lead attorney during the arbitration proceedings, the court concluded that there was no evidence of manifest disregard for the law. The court's decision distinguished Harbert's case from Montes v. Shearson Lehman Bros., Inc., 128 F.3d 1456 (11th Cir. 1997). Harbert proceeded to file a notice of appeal and a motion for stay judgment pending appeal, which the district court granted.

Arbitration Awards and Montes v. Shearson Lehman

Congress enacted the FAA in 1925 as a response to hostility in American courts to the enforcement of arbitration agreements. (4) Over the years, courts have interpreted the FAA as compelling judicial enforcement of a wide range of written arbitration agreements (5) and even pre-empting state antiarbitration laws to the contrary. (6) Today, employment contracts often include a provision requiring an employee or job applicant to settle any claims and disputes exclusively by final and binding arbitration before a neutral arbitrator. Generally speaking, an employment contract requiring the arbitration of disputes arising out of the employment relationship falls within the scope of the FAA whether or not the parties specify FAA coverage. (7)

The FAA creates a strong presumption in favor of confirming arbitration awards (8) and federal courts will generally defer to an arbitrator's award. (9) In the Harbert decision, the court summed up the rationale for the deference afforded to arbitration awards as follows:

The laudatory goals of the FAA will be achieved only to the extent that courts ensure arbitration is an alternative to litigation, not an additional layer in a protracted contest. If we permit parties who lose in arbitration to freely relitigate their cases in court, arbitration will do nothing to reduce congestion in the judicial system; dispute resolution will be slower instead of faster; and reaching a final decision will cost more instead of less.

A party seeking to set aside an arbitration award under the FAA bears the significant burden of persuading a reviewing court that one of the permissible statutory or non statutory grounds for obtaining relief warrants vacatur of the award. (10) The FAA includes four statutory bases for vacating an award: (11) 1) Where the award was procured by corruption, fraud, or undue means; where there was evident partiality or corruption in the arbitrators, or [any] of them; 2) 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; 3) or of any other misbehavior by which the rights of any party may have been prejudiced; 4) or where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter was not made.

Additionally, the 11th Circuit has recognized three nonstatutory grounds for vacating an arbitration award: 1) When the award is arbitrary and capricious; (12) 2) when enforcement of the award would be contrary to public policy; (13) or 3) when the award is made in manifest disregard for the law. (14)

The 11th Circuit first adopted manifest disregard of the law as a legal basis for challenging an arbitration award in Montes v. Shearson Lehman Brothers, Inc. In Montes, an arbitration panel denied Delfina Montes' claim for overtime pay pursuant to the Fair Labor Standards Act (FLSA) (15) from her former employer, Shearson Lehman Brothers, Inc. After Montes filed a petition to vacate the arbitration board's award, the U.S. District Court for the Southern District of Florida denied the petition and Montes appealed to the 11th Circuit Court of Appeals.

In her appeal, Montes did not argue that any of the statutory grounds for reversal of the arbitration board's decision were applicable. Instead, she sought to vacate the award because Shearson's counsel explicitly urged the arbitrators to disregard the law. (16) Since the claim arose under the FLSA, the arbitrators were bound to follow those laws in the absence of a valid and legal agreement not to do so. (17) After reviewing the record and finding no indication that the arbitrators rejected Shearson's counsel's pleas to disregard the applicable law, the court concluded that a manifest disregard for the law can constitute a ground to vacate an arbitration decision. (18) The court reversed and remanded with instructions to refer the matter to a new arbitration panel.

It is important to emphasize that the facts in Montes present the exception instead of the norm. Case law from the 11th Circuit makes it apparent that arbitration awards rarely produce a set of facts sufficient to establish that the arbitrator acted in manifest disregard of the law. Four facts present in Montes led the court to conclude the arbitrators acted in manifest disregard of the law. First, the prevailing party in the arbitration conceded to the arbitration panel that his position was not supported by the law. In fact, he urged the arbitrators not to follow the FLSA. Second, the arbitration panel issued an award in which it expressly acknowledged the prevailing party's pleas to disregard the law. Third, the arbitration award included no indication suggesting that the arbitration panel disapproved or rejected the plea to rule contrary to controlling law. Fourth, the court found that the evidence supporting the arbitration award was marginal, at best. Montes is the only decision in which the 11th Circuit found circumstances sufficient to satisfy the manifest disregard of the law standard.

Manifest Disregard of the Law

When a losing party in an arbitration proceeding considers whether to file a motion in the trial court to vacate the award based on a manifest disregard of the law theory, the party and counsel must fully understand the significant burden that lies ahead. Manifest disregard of the law is an exacting standard (19) and should not be confused with situations in which the arbitrator merely misinterpreted, misstated, or misapplied the law. A losing party in an arbitration proceeding may correctly believe an arbitrator misinterpreted or misapplied the law, but such errors fall far short of the standard for proving manifest disregard of the law. (20)

So, what constitutes a manifest disregard of the law? In Montes, the court attempted to clarify the scope of the standard by relying on the definitions of "manifest" (21) and "disregard." (22) Decisions issued after Montes offer even greater clarity into what constitutes a manifest disregard of the law. "A manifest disregard for the law involves a conscious and deliberate decision to ignore the applicable law." (23) It is not enough to simply prove that the arbitration panel incorrectly interpreted the law or committed legal error. (24) An arbitration panel's award which reflects nothing more than a misunderstanding of the effect and weight to be given to cases cited by the parties does not constitute a manifest disregard of the law. The arbitration award will not be overturned unless the court finds proof that the arbitrator recognized a clear rule of law and chose to ignore it. (25) "When faced with questions of law, an arbitration panel does not act in manifest disregard of the law unless 1) the applicable legal principle is clearly defined and not subject to reasonable debate; and 2) the arbitrators refused to heed that legal principle." (26) Thus, even if the district court reviews the record and concludes it would have decided the case differently than the arbitrator, in the absence of proof that the arbitrator acted in manifest disregard of the law, the court is constrained to affirm the award.

An Exasperated Appellate Court 

In order to preserve arbitration's allure, the arbitrator should be "the last decision maker in all but the most unusual cases." (27) The Harbert decision sends a clear and unmistakable message aimed at preserving this allure and deterring parties from seeking to attack arbitration awards in court without any real legal basis. The court said, "the notice [this decision] provides, hopefully to even the least astute reader, is that this court is exasperated by those who attempt to salvage arbitration losses through litigation that has no sound basis in the law applicable to arbitration awards." (28) In rejecting Harbert's suggestion that the arbitration panel acted in manifest disregard of the law, the court said, "[t]he facts of this case do not come within shouting distance of the Montes exception." (29) The court even went so far as to say, "[t]he only manifest disregard of the law evident in this case is Harbert's refusal to accept the law of this circuit which narrowly circumscribes judicial review of arbitration awards." (30) The court affirmed the arbitration award.

Well-settled case law from the 11th Circuit Court of Appeals leaves little doubt that the purpose of the FAA is to provide parties with a meaningful alternative to litigation. Arbitration of claims under the FAA should provide the parties with some measure of confidence that the resolution of their dispute will be less costly and less time consuming than resolving matters in the courts. (31) This is especially important in employment litigation where the sums of money at issue are often smaller than disputes involving commercial contracts. Harbert makes it clear that "Harbert's refusal to accept that there is no basis in the law for attacking the award" (32) and its "never-say-die" approach to the litigation meant the resolution of the dispute cost the parties more and took longer to resolve than if the matter were decided without arbitration. Additionally, by involving both the district court and the circuit court in the ultimate resolution of the dispute, Harbert deprived the parties and the judicial system of one of the principal benefits of arbitration--resolution of disputes outside the court system.

Although the court considered ordering Harbert and its counsel to show cause why sanctions should not be imposed, the court cited three reasons for deciding against doing so. First, the court found that there was speculative dicta in one of its prior opinions which "provided Harbert with a little cover for its actions." (33) Second, Hercules did not move for sanctions against Harbert in either the district court or the circuit court. Third, when Harbert commenced its review of the arbitration loss in the district court and later in the circuit court, it did not have the benefit of the notice and warning prospectively provided by the court's opinion.

Difficulties Proving Manifest Disregard of the Law

Even though courts cannot prevent an arbitration loser from litigating its case in court and trying to convert an arbitration loss into a court victory, a losing party intent on pursuing this route should carefully consider whether there is a legal basis for seeking judicial relief. Harbert serves as a harsh reminder of the power parties relinquish to an arbitrator when they agree to subject the resolution of their dispute to binding arbitration and the difficulty one may have in proving that an arbitrator acted in manifest disregard of the law. The party seeking to set aside the award must refute every rational basis upon which the arbitrator could have relied. (34) A party who attempts to establish that an arbitrator acted in manifest disregard of the law will likely be frustrated by two realities common in arbitration proceedings: 1) Arbitrators may render a "barebones statement of the award" (35) with little or no explanation for their resolution of certain questions of law; and 2) rarely is a transcript of the arbitration proceedings available. Brief statements reflecting an arbitrator's award and the absence of a transcript can leave a reviewing court with an inadequate record from which to glean the facts necessary to prove manifest disregard of the law. (36) In such cases, the court will most likely have no choice but to confirm the arbitration award.

A Look Ahead

Although the Harbert court used its opinion to illustrate a good example of the "poor loser problem," the court also used the occasion to express its intent to further the purposes of the pro-arbitration policy contained within the FAA by discussing a potential solution--sanctions. Litigants who seek court review of adverse arbitration awards should be aware that the 11th Circuit Court of Appeals stands ready, willing, and able to consider imposing sanctions in appropriate cases in furtherance of protecting arbitration as a remedy for resolving disputes outside of the judicial forum. "A realistic threat of sanctions may discourage baseless litigation over arbitration awards and help fulfill the purposes of the pro-arbitration policy contained in the FAA." (37)

When losing parties and their counsel intend to seek relief from an adverse arbitration award based on a manifest disregard of the law argument, they should focus on the manner in which the arbitrator determined the issue. (38) Parties and counsel who erroneously focus on the correctness of the arbitrator's application of the law may find themselves in the unenviable position of facing sanctions for pursuing court review.

(1) 9 U.S.C. [subsection] 1-16.

(2) This article will not address the Florida Arbitration Code which sets forth five specific grounds for vacating an arbitration award governed by Florida law. FLA. SWAT. [section] 682.13(1)(a)-(e).

(3) See 9 U.S.C. [section] 9.

(4) Circuit City Stores, Inc. v. Adams, 532 U.S. 105.

(5) Id.

(6) Southland Corp. v. Keating, 465 U.S. 1 (1984).

(7) 9 U.S.C. [section] 1 only exempts coverage from FAA contracts of employment of transportation workers. Circuit City Stores, Inc. v. Adams, 532 U.S. 105 (2001).

(8) 9 U.S.C. [section] 9.

(9) Peebles v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 431 F.3d 1320, 1326 (11th Cir. 2005) (arbitration awards are afforded great deference); see also Gianelli Money Purchase Plan & Trust v. ADM Investor Servs., Inc., 146 F.3d 1309 (11th Cir. 1998), cert. denied, 525 U.S. 1016 (1998) ("Judicial review of arbitration awards is 'narrowly limited,' and the FAA presumes that arbitration awards will be confirmed").

(10) 9 U.S.C. [section] 10-11; see Wachovia Securities, LLC v. Vogel, 918 So. 2d 1004 (Fla. 2d D.C.A. 2006) ("[t]he burden of persuasion falls upon the party seeking to vacate the award").

(11) 9 U.S.C. [section] 10(a).

(12) Ainsworth v. Skurnick, 960 F.2d 939,941 (11th Cir. 1992), cert. denied, 507 U.S. 915 (1993).

(13) Delta Air Lines, Inc. v. Air Line Pilots Ass'n, F.2d 665,671 (11th Circ. 1988), cert. denied, 493 U.S. 871 (1989).

(14) Montes v. Shearson Lehman Brothers, Inc., 128 F.3d 1456 (11th Cir. 1997).

(15) 29 U.S.C. [section] 201 et seq.

(16) Shearson's counsel at the arbitration made the following statements to the panel: "This law [FLSA] is not right;" "The law says one thing. What equity demands and requires and is saying is another;" and, "You know as arbitrators you have the ability, you're not strictly bound by case law and precedent." Montes, 128 F.3d at 1459.

(17) "By agreeing to arbitrate a statutory claim, a party does not forego the substantive rights afforded by the statute; it only submits to their resolution in an arbitral, rather than a judicial, forum." Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 26 (1991) (quoting Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 628 (1985)).

(18) Montes, 128 F.3d at 1461-1462.

(19) "We emphasize again that this ground is a narrow one." Id. at 1462.

(20) "We do not permit review under these circumstances and reject any argument that to err legally always equates to a 'manifest disregard of the law.'" Id. at 1461.

(21) "'Manifest' means '[e]vident to the senses, especially to the sight, obvious to the understanding, evident to the mind, not obscure or hidden, and is synonymous with open, clear, visible, unmistakable, undubitable, indisputable, evident, and self-evident.'" Id. at 1461, quoting BLACK'S LAW DICTIONARY 962 (6th ed. 1990).

(22) '"Disregard,' in turn, means '[t]o treat as unworthy of regard or notice; to take no notice of; to leave out of consideration; to ignore; to overlook; to fail to observe.'" Id. at 1461, quoting BLACK'S LAW DICTIONARY 472 (6th ed. 1990).

(23) Peebles v. Merrill Lynch, 431F.3d at 1327 (a misinterpretation, misstatement, or misapplication of the law will not constitute manifest disregard of the law).

(24) Wachovia Securities, LLC v. Vogel, 918 So. 2d 1004 (Fla. 2d D.C.A. 2006).

(25) Univ. Commons-Urbana, Ltd. v. Universal Constructors, Inc., 304 F.3d 1331, 1338 (11th Cir. 2002).

(26) Wachovia Securities, LLC v. Vogel, 918 So. 2d 1004 (Fla. 2d D.C.A. 2006).

(27) Harbert, 441 F.3d at 913.

(28) Id. at 914.

(29) Id. at 911.

(30) Id. at 913.

(31) Caley v. Gulfstream Aerospace Corporation, 428 F.3d 1359 (11th Cir. 2005).

(32) Harbert, 441 F.3d at 913.

(33) Id. at 914.

(34) Brown v. Rauscher Pierce Refsnes, Inc., 994 F.2d 775 (11th Cir. 1993).

(35)' Univ. Commons-Urbana, Ltd. v. Universal Constructors, Inc., 304 F.3d at 1337.

(36) Wachovia Securities, 918 So. 2d at 1008 ("Unfortunately for the parties in this case, when arbitrators do not, as here, explain their decision-making process, judicial vacatur of that unsubstantiated award is virtually impossible."); Univ. Commons- Urbana, Ltd. v. Universal Constructors, Inc., 304 F.3d 1331 (11th Cir. 2002) (without a transcript, the 11th Circuit Court of Appeals was unable to examine the arbitrators' questions or remarks or ascertain whether the arbitrators' chose to ignore a principle of law).

(37) Harbert, 441 F.3d at 914.

(38) Wachovia Securities, 918 So. 2d 1004 (Fla. 2d D.C.A. 2006).

Eric D. Dunlap serves as assistant general counsel for the Orange County Sheriff's Office. He is an arbitrator and a certified circuit, county, appellate, and federal court mediator. He received his J.D. from Cumberland School of Law and his M.B.A. from Samford University.

This column is submitted on behalf of the Labor and Employment Law Section, Cynthia Sass, chair, and Frank E. Brown, editor.