On January 22, 2016, the United States Court of Appeals for the Third Circuit held that legal error alone is not a sufficient basis to vacate the results of an arbitration in Whitehead v. Pullman Group LLC, 15-1627, 2016 WL 279015 (3d Cir. Jan. 22, 2016).
Singer-songwriters Gene McFadden and John Whitehead, were an influential Philadelphia R&B band in the 1970s, best known for their signature tune “Ain’t No Stoppin’ Us Now.” In 2002, appellant David Pullman approached Whitehead and McFadden about purchasing their song catalogue. The parties signed a contract, but never finalized the sale. Whitehead and McFadden died in 2004 and 2006, respectively, and Pullman became embroiled in a series of disputes with their respective estates over ownership of the song catalogue. The parties ultimately agreed to arbitrate.
A panel of three arbitrators issues its final award in September of 2014. While the panel agreed with Pullman that the May 2002 agreement with Whitehead and McFadden was a valid contract, it also concluded that Pullman had failed to introduce evidence sufficient to prove that he had ever notified Whitehead and McFadden that he had completed his due diligence. Consequently, the panel ruled that Pullman’s option to purchase the song catalogue had lapsed and the May 2002 agreement was no longer enforceable.
Pullman then moved to vacate the arbitral award contending, among other things, that the arbitrators’ actions amounted to a “manifest disregard of the law.” The District Court denied the motions, giving way to an appeal.
The Federal Arbitration Act specifies four circumstances under which a district court can vacate an arbitral award. The available federal statutory grounds for vacatur include: award procured by corruption, evident partiality of the arbitrator, refusal to postpone the hearing for good cause, refusal to consider material evidence, and arbitrators exceeding their powers. Most jurisdictions also permit vacatur if the arbitrator’s award exhibits “manifest disregard of the law,” and some recognize other judicially created grounds: “contrary to public policy,” “irrational,” and “arbitrary and capricious.”
The Third Circuit held that legal error along is not a sufficient basis to vacate the results of an arbitration. The court opined that for an error to justify vacating an arbitration award, it must be “not simply an error of law, but [one] which so affects the rights of a party that it may be said that he was deprived of a fair hearing.” Ultimately, the court discerned no unfairness justifying vacating an arbitration award, concluding that the arbitral panel reasonably chose not to consider potentially self-servicing evidence about communications with persons who are no longer able to present their side of the story.
Generally speaking, the odds are stacked heavily against a successful vacatur action. When the American Bar Association reviewed 182 vacatur applications, they found that 120 were brought in state courts and only 62 were brought in the federal courts. Of the state court cases, 31, or about 25.8 percent, resulted in vacatur. By contrast, in the federal cases, only six awards were vacated, or about 9.7 percent. As to the most potential grounds for vacatur, the ABA found that the most frequently asserted and most frequently successful of all of the statutory and other grounds advanced by parties seeking vacatur was the allegation that the arbitrators had “exceeded their powers, or so imperfectly executed them that a . . . final and definitive award upon the subject matter submitted was not made.” The next most active category was that the arbitrators allegedly “manifestly disregarded the law,” but motions on this ground succeeded in only two cases, or about 4 percent of the time. The third most frequently advanced ground was that the arbitrators had committed “misbehavior by which the rights of a party were prejudiced,” a catch-all category encompassing various judge-made grounds for vacatur other than “manifest disregard.” This ground includes allegations that the award was “irrational,” “violated public policy,” or was “arbitrary and capricious.”
In sum, it is extremely difficult for parties to obtain vacatur of an arbitration award, and the decision to apply for vacatur should not be made lightly. Thanks to Hillary Ladov for her contribution the this post. Please email Brian Gibbons with any questions.