The Second Circuit reversed a district court’s vacatur of an arbitration award this week, finding that the arbitration panel did not manifestly disregard the law when it refused the respondent’s reading of a state statute.  Sotheby’s Int’l Realty, Inc. v. Relocation Group, LLC, 2015 WL 64265 (2d Cir. Jan. 6, 2015).  In doing so, the Second Circuit suggests that 2014’s theme (arbitrator authority) is continuing into the new year.

The dispute in Sotheby’s was between two realty firms over their commissions from the sale of a $16M property in Greenwich, Connecticut. (See Sotheby’s Int’l Realty, Inc. v. Relocation Group, LLC, 987 F. Supp. 2d 157 (D. Conn. 2013).)  A three-member arbitration panel awarded the Relocation Group the commission it sought.  In accordance with the applicable arbitration rules, the panel offered no rationale for its decision.

The federal district court vacated the arbitration award, finding that the arbitration panel had manifestly disregarded the law.  It ruled that the Relocation Group’s commission was precluded by a Connecticut statute requiring brokers to fulfill certain conditions before recovering commissions.  Because the district court concluded the law was clear, and the arbitration panel knew of it but improperly applied it, it vacated the award.

The Second Circuit reversed, un-vacating the arbitration award.  In just two pages, the appellate court concluded that the district court did not properly apply the test for manifest disregard.  In particular, the district court was wrong in finding the state statute “clear”, and it did not look for any colorable justification for the panel’s decision.  [The three part test for manifest disregard in the Second Circuit is: whether the law that was allegedly ignored was clear; whether the arbitrators erred in their application of the law, thereby affecting the outcome; and whether the arbitrators knew of the law’s existence.]

Two things about this opinion are particularly interesting.  First, although the Second Circuit continues to assert “manifest disregard” as a viable basis for vacating arbitration awards under the FAA after Hall Street, I can find no opinion where the Second Circuit has actually found an arbitrator manifestly disregarded the law.  (Despite the issue coming up at least 30 times since 2008.)  Is that because it is such a high standard, or because the Second Circuit does not want to give SCOTUS a test case for whether manifest disregard survives??  Second, as previously noted, it is very hard to vacate an award without any rationale behind it.

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By Liz Kramer

Liz Kramer is a shareholder at Leonard, Street and Deinard, one of the largest law firms in Minnesota, where she litigates complex business and construction disputes. Liz graduated from Yale Law School and is deeply knowledgeable on arbitration law. Website: www.arbitrationnation.com