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In affirming confirmation of an arbitration award, the Kentucky Court of Appeals held that the Federal Arbitration Act (FAA) did not preempt Kentucky law governing vacatur of arbitration awards because Kentucky’s limited grounds for vacatur do not undermine the goals of the FAA. Specifically, manifest disregard of the law is not a basis for vacatur under Kentucky law.
In Strausbaugh v. H & R Block Financial Advisors, Inc., No. 2005-CA-001083-MR, 2007 WL 3122257 (Ky. Ct. App. Oct. 26, 2007), Robert and Ginger Strausbaugh held a securities account with H & R Block. After a disappointing return on their investment following the tech-stock bubble burst, the Strausbaughs filed an arbitration claim with the National Association of Securities Dealers (NASD).
The arbitrators dismissed the Strausbaughs’ claims with prejudice and awarded attorney fees and costs to H & R Block. The Strausbaughs moved to vacate the award of attorney fees and costs on the ground that the arbitrators exceeded their powers in awarding them. The trial court denied the motion and confirmed the award in its entirety.
On appeal, the Court held that the arbitrators did not exceed their powers in awarding costs and attorney fees because the NASD arbitration rules give arbitrators authority to award costs and expenses. Since the Strausbaughs agreed to the application of NASD rules, the arbitrators had authority to award attorney fees and costs.
Alternatively, the Strausbaughs argued that the lower court should have applied non-statutory grounds for vacatur, such as manifest disregard of the law. In rejecting this argument, the Court noted that Kentucky law does not recognize any non-statutory grounds for vacatur and, moreover, that federal law does not preempt state law governing vacatur so long as state law does not undermine the goals of the FAA.
As the Court explained, “Kentucky’s statute establishing the standard for vacating arbitration awards is not hostile to arbitration because, while it may affect the enforcement of an arbitration award, it in no way impacts the enforceability of the arbitration agreement.”
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