Sixth Circuit Raises the Bar: Apparent Error of Law is Not Manifest Disregard

January 28, 2014

In Schafer v. Multiband Corp., 2014 FED App. 0003N; 2014 U.S. App. LEXIS 288; 2014 WL 30713 (6th Cir. Jan. 6, 2014), an unpublished opinion, the Sixth Circuit reversed and remanded a Michigan district court judgment that had vacated an arbitral award for manifest disregard of the law. The court sidestepped the ongoing debate on whether manifest disregard survives the US Supreme Court’s 2008 decision in Hall St. Assocs., L.L.C. v. Mattel, Inc., 552 U.S. 576, as a basis for vacatur, adopting a narrow interpretation of manifest disregard and relying on the policy of finality in arbitration.                             The dispute concerned indemnification agreements between a holding company and two directors, Bernard Schafer and Henry Block, who were trustees of both company and subsidiary employee stock ownership plans. Upon sale of the holding company, the buyer, Multiband Corporation, assumed the indemnification agreements, but later refused to indemnify the trustees for a settlement with the Department of Labor (DOL) over claims of breach of fiduciary duty. The trustees initiated arbitration; Multiband argued that under the 1974 Employment Retirement Income Act (ERISA), 29 U.S. § 1110, the indemnification agreements were void as against public policy, and the arbitrator agreed. ERISA indeed prohibits relieving a fiduciary from responsibility or liability, but contains an exception – which despite Sixth Circuit precedent and a DOL bulletin the arbitrator found inapplicable – that allows for the purchase of insurance to cover a fiduciary’s potential liability or loss.

The US District Court for the Eastern District of Michigan granted Schafer and Block’s petition to vacate the arbitral award, finding that the arbitrator’s decision manifestly disregarded the law and was “more than ‘a mere error in interpretation or application of the law’” [citation omitted].

The Sixth Circuit disagreed. As a preliminary matter, the court determined that none of the four grounds for vacatur under the Federal Arbitration Act (FAA) applied. Further, while noting that the circuit had, since Hall Street, continued “to acknowledge ‘manifest disregard’ as a ground for vacatur – albeit not in a published holding,” the court found it unnecessary in this case to decide whether manifest disregard “legitimately forms a basis for vacatur in the first place . . . ,” because there had been no manifest disregard of the law in arriving at the arbitral award.

The court did agree that the award appeared legally incorrect: legal precedent, including Sixth Circuit case law, supported the validity of the indemnification agreements. Indeed, the court noted, “we would reverse the decision if it had been made by a district court.” But “[m]anifest disregard of the law is not just manifest error of the law.” The scope of manifest disregard is “very narrow,” and, the court added, a basis of clear legal error for vacatur would undermine the goals of the FAA, which include finality, efficient and speedy dispute resolution, and avoidance of appeals expenses. Ultimately, the court found “little evidence” of disregard. It found that the arbitrator had relied on a broad reading of ERISA, a formal reading of the statutory exception, and “on precedents that [the court could] distinguish,” but this was insufficient for vacatur. Moreover, the court noted that because arbitral awards are not appealable to the court for legal error, an arbitrator is not necessarily bound by circuit precedent. The arbitrator’s “colorable” reading of ERISA was enough to confirm the award.

While this decision reflects the high bar typically associated with the application of the manifest disregard ground for vacatur of an arbitration award, it skirts the issue of whether manifest disregard remains a relevant legal doctrine. The US Supreme Court may soon have the opportunity to resolve this debate. In Dewan v. Walia, No. 13-722 (previously discussed here), the Court will decide whether to grant certiorari to determine the availability of manifest disregard as a basis for vacatur under the FAA. A group of prominent arbitration practitioners and academics recently submitted an amicus curiae brief in support of certiorari, arguing, inter alia, that upholding manifest disregard as an independent basis for setting aside arbitral awards may deter arbitration users from selecting the US as an arbitral forum.

- Cynthia Galvez, CPR Legal Intern