Arbitrator's Disregard of the Law Not Grounds for Vacating Award

This posting was written by Pete Reap, Editor of CCH Business Franchise Guide.

The U.S. Supreme Court determined in Hall Street Associates, LLC v. Matel, Inc. (CCH Business Franchise Guide ¶13,871) that manifest disregard for the law was not a valid basis for vacating an arbitration award under the Federal Arbitration Act (FAA), according to a federal district court in St. Louis.

Thus, a franchisee’s attempt to vacate or modify an arbitrator’s award in favor of its franchisor—on the ground that the award was based on a manifest disregard for the law—was rejected.

Transfer of Franchise

The franchisee argued that the evidence before the arbitrator demonstrated that the franchisor attempted, without authorization, to transfer the pharmacy franchise at issue from the franchisee to another entity. The arbitrator’s knowing disregard of the unauthorized attempted transfer constituted a blatant and manifest disregard of the law, according to the franchisee.

However, because the Supreme Court in Hall Street held that manifest disregard was not a valid basis to vacate or modify an award under the FAA, a reviewing court could not engage in a general review of an arbitrator’s award to search for legal error, the court decided.

Ninth Circuit’s View

The district court’s interpretation of the Supreme Court’s reasoning in Hall Street differed markedly from the Ninth Circuit’s view, as recently announced in Comedy Club, Inc. v. Improv West Assoc., LP (CCH Business Franchise Guide ¶14,055). According to the Ninth Circuit, the Supreme Court in Hall Street did not reach the question of whether the manifest disregard of the law doctrine fit within the FAA's exclusive grounds to modify or vacate an arbitration award.

Instead, the Supreme Court listed several possible readings of the doctrine, including the Ninth Circuit's view that the manifest disregard doctrine was shorthand for a statutory ground under the FAA—specifically the section of the FAA stating that a court could vacate "where the arbitrators exceeded their powers." Thus, manifest disregard of the law remained a valid ground for vacatur or modification of an award in the Ninth Circuit.

Attorney Fees and Costs

The arbitrator’s award of attorney fees and costs to the pharmacy franchisor had a valid basis, the district court held. The court construed the franchisee’s contention that the award of attorney fees and costs was not supported by any factual or legal basis as invoking the FAA’s stipulation that awards could be modified where an arbitrator entered an award upon a matter not submitted to him.

Contrary to the franchisee’s contention, the parties’ agreement expressly permitted an arbitrator to make an award of attorney fees and costs. Thus, the award drew its essence from the agreement and was not subject to modification.

The opinion, Medicine Shoppe Int’l, Inc. v. Simmonds, DC Mo., Dckt. No. 4:08CV90 FRB, was decided February 11, 2009. It will appear in the CCH Business Franchise Guide.