Manifest Disregard of the Law and the Arbitrability of Class ClaimsPrint Article
- Posted on: Jun 26 2023
By: Jeffrey M. Haber
Under Section 10(a) of the Federal Arbitration Act (“FAA”), a court will vacate an arbitral award for the following reasons: (1) the award was procured by corruption, fraud, or undue means; (2) there was evident partiality or corruption in the arbitrators . . . ; (3) the arbitrators were guilty of misconduct in refusing to postpone the hearing, or in refusing to hear evidence pertinent and material to the controversy, or of any other misbehavior by which the rights of any party have been prejudiced; or (4) the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made.1
Apart from Section 10(a) of the FAA, courts have vacated arbitral awards when an arbitrator manifestly disregards the law.2 Importantly, the doctrine does not apply to the facts.3
Application of the doctrine is limited.4 It is a doctrine of last resort.5 It requires more than a simple error in law or a failure by the arbitrators to understand or apply it; and, it is more than an erroneous interpretation of the law.6 The doctrine is “limited to the rare occurrences of apparent egregious impropriety on the part of the arbitrators.”7
To modify or vacate an award on the ground of manifest disregard of the law, a court must find both that (1) the arbitrators knew of a governing legal principle yet refused to apply it or ignored it altogether, and (2) the law ignored by the arbitrators was well defined, explicit, and clearly applicable to the case.8 Essentially, the movant must show that the arbitrator “willfully flouted the governing law by refusing to apply it.”9
The petitioner bears a heavy burden when invoking the doctrine. As one district court observed, the manifest disregard standard is so difficult to satisfy that it “will be of little solace to those parties who, having willingly chosen to submit to inarticulated arbitration, are mystified by the result; for a party seeking vacatur on the basis of manifest disregard of the law ‘must clear a high hurdle.’”10
The Appellate Division, First Department recently examined the manifest disregard doctrine in Matter of Scientific Games Corp. v. Mohawk Gaming Enterprises LLC, 2023 N.Y. Slip Op. 03423 (1st Dept. June 22, 2023) (here). As discussed below, the Court held that the arbitrator did not manifestly disregard the law in holding that the arbitration clause agreed upon by the parties permitted class treatment of plaintiffs’ claims.
[Eds. Note: the discussion below (e.g., the facts and arguments) comes from the parties’ briefing on appeal.]
Scientific Games concerned the lease by plaintiffs Light & Wonder, Inc. (f/k/a Scientific Games Corporation) and LNW Gaming, Inc. (f/k/a SG Gaming, Inc.) (together, “LNW” or “plaintiffs”) of automatic card shufflers to defendant Mohawk Gaming Enterprises LLC (“Mohawk”), which used them in its casino.
On November 9, 2020, Mohawk filed a class arbitration claim with the American Arbitration Association (“AAA”) alleging antitrust violations against LNW on behalf of itself and all other similarly situated consumers. Among other things, plaintiffs alleged that LNW charged consumers (i.e., casinos) supracompetitive prices for inferior products.
Plaintiffs maintained that the agreement with Mohawk allowed their claims to be brought in arbitration as a class action. In this regard, the arbitration clause provided: “The parties agree that any and all controversies, disputes or claims of any nature arising directly or indirectly out of or in connection with this Agreement (including without limitation claims relating to the validity performance, breach, and/or termination of this Agreement) shall be submitted to binding arbitration for final resolution.”
Whether plaintiffs’ claims could be decided on a class-wide basis was hotly contested. Consequently, the parties agreed to brief the issue before addressing the merits of the action.
On February 8, 2022, the Arbitrator issued a Partial, Final Clause Construction Award regarding the threshold issue of class arbitrability. (the “Award”). After examining the applicable U.S. Supreme Court jurisprudence on the matter,11 the Arbitrator concluded that the language of the arbitration clause was “exceedingly broad” and permitted class arbitration.
On February 11, 2022, LNW petitioned the court to vacate the Award. Mohawk filed a cross-motion to confirm the Award on March 11, 2022.
The motion court denied LNW’s petition and granted Mohawk’s cross-motion. First, the motion court held that the Arbitrator did not exceed his authority under the FAA because it was “clear that the parties submitted to the arbitrator the question of whether the arbitration agreement permitted class arbitration,” and “the arbitrable decision … clearly construe[d] and applie[d] the contract.” As such, the motion court concluded that, pursuant to the U.S. Supreme Court’s decision in Oxford Health, confirmation of the Award was required.
Second, the motion court held that the Arbitrator did not manifestly disregard the law, because the Arbitrator did not refuse to apply a governing legal principle. In that regard, the motion court found that the Arbitrator “grappled with [the relevant] cases, understood the principles, and, as the designated decider of the question, made a ruling.” The motion court also found that the Arbitrator provided a “robust, good faith analysis” of the issues. In short, the motion court held that merely because the Arbitrator “reached an outcome adverse to the petitioner [did not] mean that he disregarded the relevant law.”
LNW argued, among other things, that the Arbitrator manifestly disregarded the law – namely, the U.S. Supreme Court’s decisions in Oxford Health and Lamps Plus. LNW claimed that the motion court addressed an issue that was not argued – i.e., whether the U.S. Supreme Court’s decision in Lamps Plus overturned Oxford Health. In doing so, said LNW, the motion court conflated Oxford Health’s holding that “the arbitrator ha[s] the power, based on the parties’ … agreement, to reach a certain issue [of arbitrability]” with the standard for establishing when an Arbitrator has in fact exceeded that broad power.
In Oxford Health, the Supreme Court considered whether the arbitrator “exceeded [his] powers” under Section 10(a)(4) of the FAA.12 The arbitrator had not, according to the Supreme Court, because he had not “strayed from his delegated task of interpreting [the] contract”, even if that interpretation was wrong.13 However, the Supreme Court said that an arbitral award should be set aside when the arbitrator goes beyond “perform[ing a] task poorly” and instead “abandon[s] their interpretive role”.14 Notably, the Supreme Court did not decide whether the arbitrator manifestly disregarded his authority in reaching his conclusion about the meaning of the agreement. Instead, the Supreme Court limited its analysis to the question of whether the arbitrator exceeded his authority to construe the question of arbitrability under an agreement.
In Lamps Plus, the U.S. Supreme Court considered whether an agreement that was ambiguous as to the availability of class arbitration could be read to permit class arbitration. The Supreme Court concluded that it could not.15 The Supreme Court explained that “[c]lass arbitration is not only markedly different from the ‘traditional individualized arbitration’ contemplated by the FAA, it also undermines the most important benefits of that familiar form of arbitration” as it “sacrifices … informality … and makes the process slower, more costly, and more likely to generate procedural morass”.16 The Supreme Court concluded that “courts may not infer consent to participate in class arbitration absent an affirmative contractual basis for concluding that the party agreed to do so.”17
Based upon the foregoing, LNW argued that had the motion court applied the proper legal standard, it would have determined that the Arbitrator manifestly disregarded the law as set forth by Lamps Plus and held that the arbitration clause at issue did not permit class arbitration.
Plaintiffs argued, among other things, that Oxford Health provided the foundation for the motion court’s decision because there, the U.S. Supreme Court addressed a situation substantially similar to the facts before the First Department: the arbitration clause covered “any dispute”; the arbitrator “focused on the text of the arbitration clause”; and, based on his analysis, the arbitrator “found that the arbitration clause unambiguously evinced an intention to allow class arbitration.”18
Plaintiffs noted that other courts also have upheld the findings by arbitrators with respect to class arbitrability, even when the clauses at issue did not include the same “exceedingly broad language” found in Scientific Games.19
Plaintiffs maintained that it was not necessary to “incant” the words “class arbitration” or similar words in order to affirm the Award. According to plaintiffs, multiple courts have explicitly held that the U.S. Supreme Court has never established “a bright line rule that class arbitration is allowed only under an arbitration agreement that incants ‘class arbitration’ or otherwise expressly provides for aggregate procedures.”20
Plaintiffs further argued that Lamps Plus had no application to the case at hand. In Lamps Plus, plaintiffs said, the issue before the U.S. Supreme Court was narrow: “whether, consistent with the FAA, an ambiguous agreement can provide the necessary ‘contractual basis’ for compelling class arbitration.”21 In holding that “it cannot”,22 plaintiffs explained that the U.S. Supreme Court “defer[red] to the Ninth Circuit’s interpretation and application of state law and thus accept[ed] that the agreement should be regarded as ambiguous.”23 Thus, plaintiffs concluded that the U.S. Supreme Court had no occasion to decide what contractual basis may support a finding that a contract is ambiguous regarding class arbitration.
The First Department agreed with plaintiffs and unanimously affirmed.
The First Department held that the Arbitrator “did not manifestly disregard the applicable law in reasoning that ‘the plain meaning of the words of the arbitration clause unambiguously permitted class arbitrations.’”24 The Court explained that, as noted by the Arbitrator, plaintiffs “intentionally broadened the standard AAA arbitration clause in five different ways—to ‘any,’ the parties added ‘any and all’; to ‘controversies, disputes or claims,’ they added, ‘of any nature’; ‘arising directly or indirectly’; ‘including without limitation’; ‘arising out of’; or ‘in connection with’—because ‘it wanted the Arbitration Clause to cover every type of dispute, controversy, or claim that could conceivably be related—directly or indirectly—to the Agreement.’”25 The Court noted that the Arbitrator had done that which the parties bargained for – i.e., to construe the arbitration clause.26 As noted by the U.S. Supreme Court in Oxford Health, “[b]ecause the parties ‘bargained for the arbitrator’s construction of their agreement,’ an arbitral decision ‘even arguably construing or applying the contract’ must stand, regardless of a court’s view of its (de)merits.”27
The Court concluded that “[t]o review the merits of that interpretation in the face of an arbitration clause that the arbitrator found unambiguous and premised on a construction of the contract would be inconsistent with Oxford Health Plans (569 US at 569 [“So the sole question for us is whether the arbitrator (even arguably) interpreted the parties’ contract, not whether he got its meaning right or wrong”]), and we decline to do so.”28
- 9 U.S.C. § 10(a)(1)-(4).
- Duferco Intl. Steel Trading v. T. Klaveness Shipping A/S, 333 F.3d 383, 388 (2d Cir. 2003); Goldman v. Architectural Iron Co., 306 F.3d 1214, 1216 (2d Cir. 2002) (citing, DiRussa v. Dean Witter Reynolds Inc., 121 F.3d 818, 821 (2d Cir. 1997)). See also Matter of Daesang Corp. v. NutraSweet, 167 A.D.3d 1, 15-16 (1st Dept. 2018) (citing, Wien & Malkin LLP v. Helmsley-Spear, Inc., 6 N.Y.3d 471, 480-81 (2006)), lv. denied, 32 N.Y.3d 915 (2019)).
- Wein, 6 N.Y.3d at 483.
- Matter of Arbitration No. AAA13-161-0511-85 Under Grain Arbitration Rules, 867 F.2d 130, 133 (2d Cir. 1989).
- Duferco, 333 F.3d at 389.
- Daesang, 167 A.D.3d 1, 15-16.
- Wallace v. Buttar, 378 F3d 182, 189 (2d Cir. 2004) (quoting, Banco de Seguros del Estado v. Mutual Mar. Off., Inc., 344 F.3d 255, 263 (2d Cir 2003)). See also Wien, 6 N.Y.3d at 480-81 (footnotes omitted).
- Westerbeke Corp. v. Daihatsu Motor Co., 304 F.3d 200, 217 (2d Cir. 2002).
- Goldman Sachs Execution & Clearing, L.P. v. Official Unsecured Creditors’ Comm. of Bayou Grp., 758 F. Supp. 2d 222, 225 (S.D.N.Y. 2010).
- Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662 (2010), Oxford Health Plans LLC v. Sutter, 569 U.S. 564 (2013), and Lamps Plus, Inc. v. Varela, 139 S. Ct. 1407 (2019).
- 569 U.S. at 566.
- Id. at 572.
- Id. at 571-72.
- 139 S. Ct. at 1412.
- Id. at 1416 (quoting, AT&T Mobility LLC, 563 U.S. at 348).
- Id. (citations omitted).
- Oxford Health, 569 U.S. at 566-68.
- E.g., Jock v. Sterling Jewelers, Inc., 942 F.3d 617 (2d Cir. 2019) (affirming award where arbitration clause covered “any dispute”); Wells Fargo Advisors LLC v. Tucker, 373 F. Supp. 3d 418 (S.D.N.Y. 2019) (affirming award where arbitration clause covered “any dispute”); NCR Corp. v. Goh, No. 16-cv-00127, 2017 WL 2345695 (W.D. Wash. May 30, 2017) (affirming award where arbitration clause covered “every possible claim”).
- Sutter v. Oxford Health Plans LLC, 675 F.3d 215, 222 (3d Cir. 2012), aff’d, Oxford Health, supra; see also Jock, 646 F.3d at 121 (“It is equally important to note that the Court declined to hold that an arbitration agreement must expressly state that the parties agree to class arbitration.”); Vazquez v. ServiceMaster Glob. Holding, Inc., No. 09-cv-5148, 2011 WL 2565574, at *3 n.1 (N.D. Cal. June 29, 2011) (“The Supreme Court has never held that a class arbitration clause must explicitly mention that the parties agree to class arbitration in order for a decisionmaker to conclude that the parties consented to class arbitration.”).
- Lamps Plus, 139 S.Ct. at 1415 (quoting, Stolt-Nielsen, 559 U.S. at 684).
- Slip Op. at *1.
- Id. (citing, Oxford Health, 569 U.S. at 572).
- Id. (quoting, Oxford Health, 569 U.S. at 569) (internal quotation marks omitted).
Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP.
This article is for informational purposes and is not intended to be and should not be taken as legal advice.