Opinion ID: 202422
Heading Depth: 4
Heading Rank: 2

Heading: The Second Remand Order

Text: The district court's application of the manifest disregard of the law standard to the Modified Award presents a different story. We again quote the reasoning of the Second Panel in the Modified Award: The Panel heard testimony from [McCarthy] and witnesses of both parties and considered documentary evidence from each side as well. The Arbitrators fully considered all claims and defenses, including the applicability of the New Hampshire Wage Laws, which were heavily argued by both sides. After full consideration of the matter, the Panel decided to deny all claims with prejudice. The district court focused on the Second Panel's statement that it had fully considered all claims and defenses, including the applicability of the New Hampshire Wage Laws, and found in that statement a troubling ambiguity. As the court explained in its Second Remand Order: [t]he [Second] panel did not say whether it concluded that the wage laws were applicable or not applicable or whether it had applied that law in making its decision. Therefore, while the second panel's statement did not clearly demonstrate a manifest disregard of the governing law, as the first panel did, the second panel left open the possibility that, contrary to the court's direction in the [First] remand order, the panel concluded that the New Hampshire wage laws do not apply. -12- The district court acknowledged that the mere possibility that . . . the panel concluded that the New Hampshire wage laws do not apply is not itself a manifest disregard of the law.8 As the district court put it: [T]he second panel's statement did not clearly demonstrate a manifest disregard of the governing law, as the first panel did. In the absence of such an expression of manifest disregard of the law in the Modified Award itself, the district court decided to pursue a further inquiry: In the first award, the panel stated that the New Hampshire wage laws were irrelevant. As such, the panel explicitly disregarded the governing law so that it was not necessary to look behind that decision to determine its basis. (Emphasis added.) There is authority in our precedents for a court to go behind the award of an arbitration panel to the record itself in 8 We disagree with the district court that the Modified Award of the Second Panel can be read as a possible statement that the New Hampshire wage law is irrelevant, particularly in light of the explicit statement by the Second Panel that it fully considered all claims and defenses, including the applicability of the New Hampshire Wage Laws, which were heavily argued by both sides. If the court had vacated the award of the Second Panel on this basis alone, we would have simply vacated its judgment on this misreading of the Modified Award. However, as we explain below, the district court also identified a second possibility in the Modified Award – namely, that the Second Panel had applied the New Hampshire wage law and still found the CAP lawful. In looking behind the award of the Second Panel to determine its basis, the court explained in its decision why this second possibility would also be a manifest disregard of the law. Focusing on that explanation in the balance of our opinion, we explain its incompatibility with the narrow scope of review that a court must observe in reviewing the decision of an arbitration panel. -13- conducting a manifest disregard of the law inquiry. For example, we have said that there must be some showing in the record, other than the result obtained, that the arbitrators knew the law and expressly disregarded it. Advest, 914 F.2d at 10 (emphasis added). But resorting to the record in search of manifest disregard of the law is constrained by the narrow scope of the manifest disregard of the law standard itself. To repeat, manifest disregard of the law means, at its core, that arbitrators knew the law and explicitly disregarded it. P.R. Tel. Co., 427 F.3d at 32 (internal quotation marks omitted). Put differently, disregard implies that the arbitrators appreciated the existence of a governing legal rule but wilfully decided not to apply it. Id. (internal citation and quotation marks omitted). The manifest disregard of the law inquiry must not run afoul of the well-established principle that courts do not sit to hear claims of factual or legal error by an arbitrator as an appellate court does in reviewing decisions of lower courts. United Paperworkers Int'l Union v. Misco, Inc., 484 U.S. 29, 38 (1987); see also Poland Spring Corp. v. United Food & Commercial Int'l Union, 314 F.3d 29, 33 (1st Cir. 2002) (a court does not conduct appellate review to hear claims of factual or legal error by an arbitrator or to consider the merits of an award). Even where such error is painfully clear, courts are not authorized to -14- reconsider the merits of arbitration awards. Advest, 914 F.2d at 8 (internal quotation marks and citation omitted). The district court did not observe this limitation on its authority to review an arbitration award. Instead of finding manifest disregard of the law by the Second Panel, it found an application of the Wage Law with which it disagreed. To demonstrate this point, we quote several excerpts from the court's Second Remand Order: CGMI's arguments to the arbitration panel, that the CAP was lawful because McCarthy's compensation, paid in cash and restricted stock, conferred a benefit to him, because McCarthy had agreed to participate in the CAP and was a sophisticated and intelligent financial consultant, and because McCarthy had benefitted in the past from the CAP, are not pertinent to the principles of New Hampshire law. Instead, CGMI's argument is based on the reasoning of the Court of Appeals of New York . . . . CGMI represented to the arbitration panel that the New Hampshire wage laws allowed deductions as long as they accrued 'to the benefit of the employee,' . . . that the New Hampshire laws, like the New York law, allowed [such] a deduction . . . . [But] under New Hampshire law, unlike New York law, a deduction is not lawful simply because it accrues to the benefit of an employee . . . . CGMI also argued that the CAP was a lawful deduction as a payment into a savings fund held by someone other than the employer and that it was empowered by the federal tax treatment of similar plans to offer the CAP . . . . Neither argument is persuasive. Nevertheless, it is perhaps arguable that the panel was sufficiently confused or misled by CGMI's arguments to conclude that the CAP deductions comported with New Hampshire law. Even assuming that the CAP deductions were lawful, however, CGMI did not offer the arbitration panel any justification under New Hampshire law for its failure to pay McCarthy the compensation that he had -15- earned before he resigned. CGMI's oft-repeated theory . . . does not comport with New Hampshire law. After this extensive merits review, the district court concluded: In the absence of any explanation, there appears to be no arguable or plausible basis for the [Second] panel to have ruled either that the New Hampshire wage laws did not apply to McCarthy's claims or that CGMI's failure to pay McCarthy earned compensation, based on the forfeiture provision in the CAP, was lawful. In either case, the panel's decision necessarily was made in manifest disregard of the law. To make its meaning unmistakable, the district court added in a footnote to its decision that [b]ecause neither alternative basis for the decision is reasonable, given the governing law, a remand for clarification would not be beneficial here. Therefore, if there were to be a third arbitration proceeding, the district court directed that a new panel be convened. In that circumstance, the court said the parties were to request that the arbitration panel provide an explanation or reasons for its decision to allow meaningful judicial review. Although the district court's legal analysis of the relationship between the Wage Law and the CAP Plan was thoughtful (indeed, the court was thoughtful about this case throughout the lengthy proceedings), there are several errors in the district court's Second Remand Order. First, with its insistence that the next arbitration panel, if one were constituted, provide an explanation or reasons for its decision to allow meaningful -16- judicial review, the court ignored the basic principle that arbitrators need not explain their award at all. P.R. Tel. Co., 427 F.3d at 32 (internal citation omitted). Second, although it theoretically left open the possibility that a third arbitration panel could explain why McCarthy's claim failed under New Hampshire law, the court's elaborate rejection of that possibility in its Second Remand Order delivered an unmistakable message to a third panel -- such a decision would be difficult to justify. Courts should avoid such messages when remanding cases to arbitration panels. See Domke, § 30:6 ([C]areful consideration should also be given that remanding the case does not make the court itself decide the issue in controversy or instruct the arbitration in such direction.). Third, in looking behind the Modified Award, the court did not examine the record of proceedings before the panel for manifest disregard of the law -- that is, some showing in the record, other than the result obtained, that the arbitrators knew the law and expressly disregarded it. Advest, 914 F.2d at 10 (internal citation omitted). Instead, the court conducted its own analysis of the compatibility of the CAP Plan with the Wage Law and concluded that the Modified Award in favor of CGMI, absent some further explanation, was wrong. Moreover, in conducting that legal analysis, the court did not find that rare instance of manifest disregard we described in Advest, where the governing law may have -17- such widespread familiarity, pristine clarity, and irrefutable applicability that a court could assume the arbitrators knew the rule and, notwithstanding, swept it under the rug. 914 F.2d at 10. Instead, the court's analysis reveals a legal landscape devoid of statutory language or a decision of the New Hampshire Supreme Court that irrefutably proscribes the CAP Plan under the Wage Law. At most, after a merits analysis of the Modified Award, the district court arguably found a legal error in its result. However, our precedents forbid a district court from conducting such a review of an arbitration award. See Poland Spring Corp., 314 F.3d at 33 (a court does not conduct appellate review to hear claims of factual or legal error by an arbitrator or to consider the merits of an award). We must therefore vacate the district court's Second Remand Order and direct the court to enter a judgment confirming the Second Panel's Modified Award.9 Each party is to bear its own costs. So ordered. 9 Relying on Montes v. Shearson Lehman Bros., Inc., 128 F.3d 1456 (11th Cir. 1997), where the court found an award in manifest disregard of the law, McCarthy also asserts that CGMI undermined the integrity of the Second Hearing by repeatedly urg[ing] the Second Panel during oral argument to disregard the law, and that this conduct constitutes an independent basis for vacating the Modified Award. The district court rejected that argument: the circumstances in this case are not sufficiently similar to those in Montes to permit application here of that narrowly limited decision. We see no reason to disturb this ruling. -18-