Jottings By An Employer's Lawyer

Monday, July 12, 2004

5th Circuit Rejects Arbitrary and Capricious as Review Standard Under the FAA

Although not an employment case Brabham v. A.G. Edwards & Sons, Inc. (5th Cir. 6/28/04) [pdf] deals with the important question of what standard of review is available under the FAA to set aside the award of an arbitrator. The parties had not availed themselves of the opportunity to set their own standard, so the court was left only with review under the FAA. Reversing the District Court's reversal of the arbitrator's award, the Court held that while "manifest disregard of the law" is an appropriate FAA review standard, "arbitrary and capricious is not." The latter it notes is a case of first impression in the 5th Circuit.

The Court also had occasion to review the state of law on this issue in its sister circuits. In one of the longer footnotes in recent memory it noted:
The other circuits are in disarray on this question. Cf. George Watts & Son v. Tiffany & Co., 248 F.3d 577, 580 (7th Cir. 2001) (recounting confusion in the Seventh Circuit and commenting that “[t]he law in other circuits is similarly confused, doubtless because the Supreme Court has been opaque”). The Eleventh Circuit has accepted that an award may be vacated as arbitrary and capricious. See Lifecare Int’l, Inc. v. CD Med., Inc., 68 F.3d 429, 435 (11th Cir. 1995). The Eleventh Circuit, however, stands alone. See Larry E. Edmondson, 1 Domke on Commercial Arbitration § 39:10 (3d ed. 2003) (characterizing the idea that an award may be vacated as arbitrary and capricious as a “construct of the Eleventh Circuit”).

The Fourth, Seventh, and Tenth Circuits have implicitly rejected the Eleventh Circuit’s position by enunciating accepted grounds for vacatur and rejecting all others. See, e.g., Sheldon v. Vermonty, 269 F.3d 1202, 1206 (10th Cir. 2001); IDS Life Ins. Co. v. Royal Alliance Assocs., 266 F.3d 645, 650 (7th Cir. 2001); Apex Plumbing Supply, Inc. v. U.S. Supply Co., 142 F.3d 188, 193 (4th Cir. 1998). (However, these three circuits do not agree on what those accepted
nonstatutory grounds for vacatur are. The Fourth Circuit accepts only manifest disregard. Apex, 142 F.3d at 193. The Seventh Circuit accepts only a limited version of manifest disregard. See IDS, 266 F.3d at 650. The Tenth Circuit accepts manifest disregard, violation of public policy, and denial of a fundamentally fair hearing. See Sheldon, 269 F.3d at 1206.)

The First, Second, and D.C. Circuits have neither accepted nor rejected arbitrariness and capriciousness but have emphasized that vacatur is available only in very limited circumstances. See, e.g., Greenberg v. Bear, Stearns & Co., 220 F.3d 22, 27 (2d Cir. 2000); Morani v. Landenberger, 196 F.3d 9, 11 (1st Cir. 1999); Al-Harbi v. Citibank, N.A., 85 F.3d 680, 682 (D.C. Cir. 1996).

The Third, Eighth, and Ninth Circuits have recognized that an award may be vacated as completely irrational. See, e.g., Schoch v. InfoUSA, Inc., 341 F.3d 785, 788 (8th Cir. 2003), cert. denied, 124 S. Ct. 1414 (2004); G.C. & K.B. Invs. v. Wilson, 326 F.3d 1096, 1105 (9th Cir. 2003), cert. dismissed, 124 S. Ct. 980 (2004); Roadway Package Sys., Inc. v. Kayser, 257 F.3d 287, 292 n.2 (3d Cir. 2001). This test is “similar in nature in thrust to the ‘arbitrary and capricious’ test of the Eleventh Circuit.” 1 Domke, supra, § 39:11. Some cases from these Circuits, however, suggest that “complete irrationality” is simply a subset of a statutory ground for vacatur. See, e.g., Kyocera Corp. v. Prudential-Bache Trade Servs., 341 F.3d 987, 997 (9th Cir. 2003) (en banc) (“We have held that arbitrators ‘exceed their powers’ [under section 10(a)(4) of the FAA] not when they merely interpret or apply the governing law incorrectly, but when the award is ‘completely irrational’ or exhibits ‘manifest disregard of law.’”) (internal citations omitted); Mut. Fire, Marine & Inland Ins. Co. v. Norad Reinsurance Co., 868 F.2d 52, 56 (3d Cir. 1989) (considering in context of challenge under § 10(a)(4) whether award was completely irrational).
The court viewed the rejection of the arbitrary and capricious standard as called for by the judicial deference required by the FAA to an abitrator's decision. Given the footnote however, one wonders it if might not also have been a call to the Supreme Court to take a look at where the law stands in this important area.


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