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The Eighth Circuit Court of Appeals reversed a lower court order vacating an arbitration award on public policy grounds because the party challenging the award failed to demonstrate that the arbitrators' application of California law undermined the public policy of the forum state.
In Twin Cities Galleries, LLC v. Media Arts Group, Inc., No. 06-1777, 2007 WL 429551 (8th Cir. Feb. 9, 2007), Twin Cities Galleries (TCG) owned and operated four galleries featuring the art of Thomas Kinkade. TCG obtained its inventory of Kinkade's artwork through dealer agreements with Media Arts.
When the galleries failed to generate the anticipated revenue, TCG sued Media Arts for fraudulent inducement. The dispute was later submitted to arbitration in accordance with the dealer agreements.
The arbitrators dismissed TCG's claims under the Minnesota Franchise Act (MFA) because they determined that California law governed the parties' relationship. They also dismissed TCG's claims under the California Franchise Investment Law (CFIL) because TCG had not paid a "franchise fee" as is necessary to trigger CFIL's application.
TCG filed a motion to vacate the arbitration award. The district court granted the motion and vacated the award on the ground that the award, in permitting noncompliance with the MFA, violated Minnesota's public policy of protecting its franchisees. See Twin Cities Galleries, LLC v. Media Arts Group, Inc., 415 F.Supp.2d 967, 976-77 (D. Minn. 2006).
On appeal, the Court noted that "an award may be vacated on the non-statutory basis that it is contrary to a 'well-defined and dominant' public policy embodied in laws and judicial precedent." The question for the Court was whether the "public policy exception" warranted vacatur in this case.
The Court held that the public policy exception did not warrant vacatur because TCG failed to demonstrate that there was a material difference between California law and Minnesota law, thus precluding a determination that the arbitrators' application of California law undermined Minnesota's policy of protecting its franchisees. Specifically, the Court found that there was no material difference between California and Minnesota law because both states use an objective standard in determining whether a minimum purchase commitment constitutes a franchise fee.
The public policy exception is one of two widely recognized non-statutory bases for vacating an arbitration award. The other is manifest disregard of the law, which some courts treat as a statutory basis for vacatur by deeming it an instance of an arbitrator exceeding their powers. See Wise v. Wachovia Securities, LLC, 450 F.3d 265, 268 (7th Cir. 2006) ("[W]e have defined 'manifest disregard of the law' so narrowly that it fits comfortably under the first clause of the fourth statutory ground – 'where the arbitrators exceeded their powers.'"); U.S. ex rel. Watkins v. AIT Worldwide Logistics, Inc., 441 F.Supp.2d 762 (E.D. Va. 2006).
Some jurisdictions do not even recognize these non-statutory bases for vacatur. See Wittich v. Wittich, No. 06-CA-418, 2006 WL 3421252 (La. Ct. App. Nov. 28, 2006) (rejecting manifest disregard of the law as a basis for vacatur); K.R. Swerdfeger Construction, Inc. v. Board of Regents, 142 P.3d 962 (N.M. Ct. App. 2006) (rejecting the public policy exception as a basis for vacatur). In those jurisdictions, parties can ensure a well-reasoned, legally sound award by agreeing that the arbitrator must follow the law. See, e.g., Rule 20D of the National Arbitration Forum Code of Procedure.
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