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The First Circuit Court of Appeals reversed a district court finding of manifest disregard of the law because there was nothing in record to indicate that the arbitration panel expressly disregarded the law.
In McCarthy v. Citigroup Global Markets Inc., No. 06-1001, 2006 WL 2673424 (1st Cir. Sep. 19, 2006), McCarthy initiated arbitration against his former employer, Citigroup, to recover contributions he made to his stock option plan during his employment at Citigroup. McCarthy relied on New Hampshire wage law for his theory of recovery.
The arbitration panel issued an award in favor of Citigroup, stating that it considered New Hampshire wage law “irrelevant” to a dispute concerning a compensation plan that is widely used in the securities industry. In vacating the award and remanding the matter for further arbitration proceedings, the district court found that the award demonstrated manifest disregard of the law because the use of the word “irrelevant” indicated that the panel “set aside governing law in favor of its perception of an equitable result and industry practices.”
At the second arbitration, the new arbitration panel also ruled in favor of Citigroup but stated that it “had fully considered all claims and defenses, including the applicability of the New Hampshire Wage Laws.” Upon McCarthy’s motion to vacate, the district court found that the award “did not clearly demonstrate manifest disregard of the governing law” because the panel left open the possibility that the New Hampshire wage laws did not apply.
However, the district court proceeded “to look behind” the panel’s decision in search of manifest disregard of the law. In conducting this inquiry, the district court analyzed Citigroup’s arguments before the arbitration panel and concluded that the award must have been made in manifest disregard of the law because there was “no arguable or plausible basis” for ruling that New Hampshire law did not apply. The district court vacated the award and remanded the matter for a third arbitration, instructing the parties to request “that the arbitration panel provide an explanation or reasons for its decision to allow meaningful judicial review.”
On appeal, the Court agreed that the initial award demonstrated manifest disregard of the law but found several errors in the district court ruling that the second award demonstrated manifest disregard. First, the district court did not examine the record for manifest disregard of the law but instead conducted its own legal analysis. Second, by insisting that the third arbitration panel explain its decision, the district court “ignored the basic principle that arbitrators need not explain their award at all.” Finally, the Court found that the district court’s “elaborate rejection” of the premise that the New Hampshire wage laws did not apply “delivered an unmistakable message to a third panel [that] such a decision would be difficult to justify.”
This decision presents one of the rare instances where an award was properly vacated for manifest disregard of the law – namely, the initial award. It also reinforces the principle that courts cannot pry into the merits of an award to find manifest disregard of the law. If such a probing inquiry is necessary, there is no manifest disregard.
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