The Sixth Circuit Court of Appeals has recognized manifest disregard of the law as a valid ground for vacatur of an arbitration award under the Federal Arbitration Act (FAA) after the Supreme Court's Hall Street decision, citing the high court's "hesitation" to reject manifest disregard in all circumstances and the doctrine's previously universal recognition.

In Coffee Beanery, Ltd. v. WW, L.L.C., No. 07-1830, 2008 WL 4899478 (6th Cir. Nov. 14, 2008), WW entered into a contract as a franchisee of Coffee Beanery. As part of the contract, WW signed a broadly-worded arbitration agreement.

After a dispute arose over the unsuccessful franchise, WW demanded mediation and arbitration in accordance with the parties' agreement. After some initial confusion as to the scope of the agreement and at least one aborted attempt to litigate the matter, a consent order was entered by Maryland's Securities Commissioner in which Coffee Beanery and its principal admitted that they violated Maryland's Franchise Act by making material misrepresentations to prospective franchisees. Md. Bus. Reg. Code § 14-216(8)(i). Under the consent order, WW was entitled to rescission of the contract at its election within 30 days of the notice.

WW did not elect rescission and instead submitted its claims to arbitration. The arbitrator entered an award in favor of Coffee Beanery. WW then moved to vacate the award. The district court denied the motion, holding that WW had failed to demonstrate evident partiality or manifest disregard of the law. The Coffee Beanery Ltd. v. WW L.L.C., No. 06-10408, 2007 WL 1500533 (E.D. Mich. May 23, 2007).

On appeal, WW argued that the arbitrator knew of Coffee Beanery's material misrepresentations under the Maryland Franchise Act and demonstrated manifest disregard of the law by nevertheless entering an award in favor of Coffee Beanery.

In addressing this argument, the Court acknowledged the United States Supreme Court's recent decision in Hall Street Assocs., L.L.C. v. Mattel, Inc., 128 S.Ct. 1396 (2008), holding that parties cannot contractually supplement grounds for vacatur under the FAA. The Court agreed that Hall Street did not recognize expanded judicial review for errors of law.

However, the Court noted that Hall Street did not expressly reject manifest disregard of the law and noted the universal application of the doctrine by all federal appellate courts prior to the Hall Street opinion. As a result, the Court characterized manifest disregard as a "universally recognized principle" and "well-established precedent" and thus examined the Coffee Beanery award for manifest disregard.

Having recognized manifest disregard as a valid basis for vacatur, the Court held that the arbitrator knew of the Coffee Beanery principal's felony conviction and of Maryland's requirement that such convictions be disclosed to prospective franchisees, and nevertheless issued an award in favor of Coffee Beanery. The arbitrator had found that the principal had a felony conviction for grand larceny, but held that a grand larceny conviction need not be disclosed under the law. According to the Court, this finding demonstrated the arbitrator's awareness of the law and her ignorance of the law, thus demonstrating manifest disregard.

Accordingly, the Court reversed the district court's order, and directed vacatur of Coffee Beanery's award.