The First Circuit Court of Appeals held that if an NASD arbitration panel disregards the NASD arbitration rules that are expressly incorporated into an arbitration agreement, the panel is disregarding the parties' contract and the subsequent award should be vacated for manifest disregard of the law.

In Kashner Davidson Securities Corp. v. Mscisz, No. 07-1231, 2008 WL 2553337 (1st Cir. June 27, 2008), Mscisz, an investor, and Kashner, a broker-dealer and member of the NASD, entered into a contract that contained an arbitration agreement, and the agreement expressly provided that the arbitration would be governed by NASD's arbitration rules.

Kashner initiated arbitration for breach of contract, and Mscisz answered with several counterclaims. Mscisz subsequently failed to respond to the arbitration panel's discovery order in a timely manner, so Kashner sought sanctions against Mscisz.

Mscisz opposed the sanction request, arguing that once his motion to have his counterclaims withdrawn without prejudice and motion for reconsideration of the discovery order were addressed, he would fully comply with any panel order.

The panel denied Mscisz's motion to withdraw his counterclaims without prejudice, and instead dismissed the claims with prejudice. Mscisz challenged the panel's decision, arguing that NASD Rule 10305 allows dismissal with prejudice as a sanction in only one circumstance: when other sanctions have proven ineffective for eliminating willful disobedience with panel authority. Mscisz argued that he did not willfully disobey a panel order, and even if he did, there was never a sanction assessed against him.

The panel rejected Mscisz's argument, first insinuating that its decision was based on the merits of the claims, but then holding that it was within the panel's power to dismiss the claims with prejudice under Rule 10305. The panel subsequently issued an award in favor of Kashner for $421,000. Kashner moved to confirm and Mscisz moved to vacate, and the trial court confirmed the award. Mscisz appealed.

On appeal, the Court held that the manifest disregard of the law was a basis for vacatur of an arbitration award, and that an award is in manifest disregard of the law if it is contrary to the plain language of the contract. The Court then held that, based on the arbitration panel's statement to the parties that its decision to dismiss with prejudice was based on Rule 10305, the panel manifestly disregarded the plain language of 10305 because other sanctions had not yet proven ineffective for eliminating Mscisz's disobedience. Thus, the panel manifestly disregarded Rule 10305, which was a part of the parties' contract.

Kashner argued that the panel could not have manifestly disregarded the law because the NASD Rules are private rules, not law. The Court rejected this argument, holding that because the NASD Rules were a part of the contract, a disregard of those Rules was a disregard of the contract and, accordingly, a disregard of the law. Consequently, the Court reversed the trial court's decision and vacated the award.