Abandon all hope, ye who seek to overturn an arbitration award, because the 5th U.S. Circuit Court of Appeals has ruled that manifest disregard of the law by arbitrators is no longer a ground for vacatur under the Federal Arbitration Act.

The 5th Circuit’s March 5 decision in Citigroup Global Markets Inc. v. Bacon will make parties think twice — or three times — before agreeing to submit to arbitration to settle their cases.

The background in Citigroup Global Markets , according to the opinion, is as follows: Debra Bacon alleged her husband had withdrawn $238,000 from her Citigroup Individual Retirement Accounts without her permission by forging her signature. Bacon submitted a claim in arbitration against Citigroup, seeking reimbursement for the unauthorized withdrawal. The arbitration panel granted Bacon $218,000 in damages and $38,000 in attorneys fees in 2004.

Citigroup then filed a motion to vacate the arbitration award with U.S. District Judge Lynn Hughes of Houston, the opinion continues. Hughes granted the motion, finding that the award was made in manifest disregard of the law because: Bacon was not harmed by the withdrawal because her husband used the money for her benefit and he promised to pay her back; Bacon’s claims were barred by Texas law because they were lodged too late; and Texas law required apportionment among the liable parties, which included Bacon’s husband.

Bacon appealed Hughes’ ruling to the 5th Circuit.

To arrive at its decision that blocks one of the most common arguments litigants use to vacate an arbitration award — that the arbitrator failed to follow the law — the 5th Circuit cited the 2008 U.S. Supreme Court opinion in Hall Street Associates v. Mattel .

While federal courts are usually loath to overturn arbitration awards, the 6-3 opinion in Hall Street was an even further restriction on a court’s ability to vacate an arbitration award. That ruling found that the FAA is the exclusive ground for vacating or modifying an arbitration award and parties cannot go beyond the act by contracting to expand the grounds for modification or vacatur of an award. The Supreme Court issued Hall Street after Hughes vacated the arbitration award in Citigroup Global Markets.

The opinion notes that, under §10 of the FAA, courts are only permitted to vacate an arbitration award for four reasons. They are: 1. if the award was procured by corruption, fraud or undue means; 2. if there was evident partiality or corruption by the arbitrators; 3. if 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; or of any other misbehavior by which the rights of any party have been prejudiced or; 4. if the arbitrators exceeded their powers or so imperfectly executed them that a mutual, final and definite award upon the subject matter was not made.

Four other circuits have considered the same vacatur issue after Hall Street was issued and have come up with different results, notes the opinion. The 1st U.S. Circuit Court of Appeals found in dicta that Hall Street abolished manifest disregard of the law as a ground for vacatur, and the 6th U.S. Circuit Court of Appeals found that the holding of Hall Street only applied to contractual expansions of the grounds for review.

But the 2nd U.S. Circuit Court of Appeals found that manifest disregard as a ground for vacatur survived Hall Street , as did the 9th U.S. Circuit Court of Appeals. Both courts found that manifest disregard was shorthand for the forth tenet of §10 of the FAA, which allows for vacatur when arbitrators exceed their powers.

But the 5th Circuit disagreed. “In the light of the Supreme Court’s clear language that, under the FAA, the statutory provisions are the exclusive grounds for vacatur, manifest disregard of the law as an independent, non-statutory ground for setting aside an award must be abandoned and rejected,” wrote Judge E. Grady Jolly in an opinion joined by Judges Rhesa Barksdale and Catharina Haynes.

“Indeed, the term itself, as a term of legal art, is no longer useful in actions to vacate arbitration awards,” Jolly continued. ” Hall Street made it plain that the statutory language means what is says: ‘courts must (confirm the award) unless the award is vacated . . . as prescribed in section 10 . . .’ and there is nothing malleable about ‘must,’ ” Jolly wrote, ordering Hughes’ decision vacated and remanded to the district court for further rulings. [See the court's opinon.]

Interpreting Hall Street

Brady Sparks, a Dallas solo who represents Debra Bacon in the case, is pleased with the 5th Circuit’s decision.

“The Hall Street case was very clear. And there are four circuits who have gone different directions,” Sparks says. “And I think the 5th Circuit stood up at the plate and made the right decision and said that there is no such thing as manifest disregard of the law” in terms of motions to vacate arbitration awards. “In fact, I was surprised they didn’t just render the decision.”

To equate manifest disregard of the law with arbitrators who exceed their powers, as two other circuit courts have done, is troublesome, Sparks says.

“Not following the law is different than exceeding authority,” Sparks says. “Just making a genuine mistake . . . or applying common sense, as long as there is a way to support it in law — that is not exceeding one’s powers.”

Andrew Harvin, a partner in the Houston office of Doyle, Restrepo, Harvin & Robbins who represents Citigroup, has not decided whether to appeal the decision. But he believes Hall Street does not give courts and lawyers enough guidance on whether manifest disregard of the law is statutory grounds for vacatur, as evidenced by the split in the circuit courts over that issue.

“Arbitration awards have always been difficult to appeal. There are limited grounds. But before Hall Street , manifest disregard of the law was probably the leading ground for the appeal of an arbitration award,” Harvin says. “And there are several circuit courts that differ with the 5th Circuit.”

The 5th Circuit certainly hasn’t made the issue any clearer by driving a further split between the circuits, says Lonny Hoffman, a professor at the University of Houston Law Center who teaches civil procedure.

“Instead of following its sister circuits, the 5th Circuit exacerbates a circuit split, creating confusion and also real unfairness that it need not have,” Hoffman says. “The panel could easily have preserved manifest disregard in one of two ways: first it could construe Hall Street narrowly to apply only to contractual — that is, party-driven — expansion of judicial review.”

“But Hall Street says nothing about voiding well-recognized judicial grounds for vacatur,” Hoffman says “The second route they could have gone, they could have treated manifest disregard as coming within the statute [as an arbitrator exceeding his authority] . . . which by the way is almost surely what Congress intended.”

Mark Watler, of counsel at Houston’s Ross Banks May Cron & Cavin, who handles securities cases in arbitration, says brokerage firms have been pushing since the 1980s to have their cases resolved by arbitration instead of courts.

“But be careful what you ask for. The industry really wanted to see the day come where they wanted to be in arbitration. Now the day has come. And now they want to get out,” Watler says. “And now we’re back where we started from.”

Joe Cox, a partner in the Dallas office of Patton Boggs who is also an arbitrator, believes the 5th Circuit read Hall Street correctly but came up with an unfortunate result by finding that manifest disregard of the law is not grounds for vacatur.

“This further erodes the public’s confidence in arbitration. And that, in itself, is unfortunate,” Cox says. “And it will require lawyers to shoehorn an attempt to vacate an award [into] one of the four reasons under §10 of the FAA and see what flies.”

Ultimately, the decision doesn’t benefit any party who uses the federal arbitration process, Cox says.

“You can see how you’re spanning the globe now. It will hurt everybody equally, in my opinion,” Cox says. “For me, it doesn’t make my job [as an arbitrator] easier or harder because I’m going to follow the law. But you get that because I’m a former district judge.”

Len Wade, another former state district judge who joined the Fort Worth office of Kelly Hart & Hallman this month and is planning to do arbitrations, says the 5th Circuit’s decision may discourage litigants from using the process.

“I think at some point parties aren’t going to enter into a process if there is really no reasonable basis for ensuring that the case is going to be based upon the law,” Wade says. “There are broad policy reasons for favoring arbitration. And obviously in the vast majority of cases you have hard working arbitrators who follow the law. It’s not really fair to impugn the entirety of the process because of one or two problems, but there needs to be a way to address the problems.”