Opposition Brief — Signator Insurance Insurance Insurance Agency Agency, Inc. v. Patten (No. 06-49)

FILED

(D | ers

No. 06-49 | SUPREME COURT, U.S. | |

IN THE

Supreme Court of the United States

JOHN HANCOCK LIFE INSURANCE COMPANY, ET AL.,

Petitioners,

Vv.

RALPH F. PATTEN, JR.,

Respondent.

On Petition for a Writ of Certiorari to the United States

Court of Appeals for the Fourth Circuit

RESPONDENT?’S BRIEF IN OPPOSITION

DOUGLAS B. MCFADDEN ScoTT L. NELSON

Counsel of Record DEEPAK GUPTA

JOHN M. SHOREMAN PUBLIC CITIZEN LITIGATION

MCFADDEN & SHOREMAN GROUP

1420 New York Ave.,N.W. 1600 20th Street, N.W.

Suite 700 Washington, D.C. 20009

Washington, DC 20005 (202) 588-1000

(202) 638-2100

Attorneys for Respondent

September 2006

TABLE OF CONTENTS

TABLE OF AUTHORITIES

INTRODUCTION

I. Petitioners Did Not Properly Raise the Questions

Presented in the Fourth Circuit

Il. There Is No Conflict Among the Circuits Over

Manifest Disregard

A. The Manifest Disregard Doctrine Applied Be-

low Has Been Settled Law for Decades. ..:.......:.0000-.-. 7

B. The Fourth Circuit Did Not Adopt a “New Test”

Permitting Vacatur of Merely “Unreasonable”

Contract Interpretations

. Semantic Differences Among the Circuits in

Describing the Manifest Disregard Standard Do

Not Amount to a Conflict

D. The Seventh Circuit’s Decisions Do Not Create

a Conflict Among the Circuits. .........cccc.cccessesessecoeses 16

Il]. There Is No Genuine Conflict over the Application

of the “Essence of the Agreement” Standard. .............. 20

IV. Petitioners’ Request That the Court Reject All

“Non-Statutory” Grounds for Vacatur, Including

Manifest Disregard, Does Not Merit Review

CONCLUSION

il

TABLE OF AUTHORITIES

Page(s)

Cases:

Advest, Inc. v. McCarthy, 914 F.2d 6 (Ist Cir. 1990) .... 13, 14

Am. Cent. E. Tex. Gas Co. v. Union Pac. Res. Group,

Ee Se gt A | Se ee 16

Amicizia Societa Navegazione v. Chilean Nitrate &

Iodine Sales Corp., 274 F.2d 805 (2d Cir. 1960)....... 8, 24

Apex Plumbing Supply v. U.S. Supply Co., 142 F.3d

Fe Ee Fd wcevcaseinirblidclrtisieicnciniiniesinniamaens 8, 10

ARW Exploration Corp. v. Aguirre, 45 F.3d 1455

CTT Ce, a sitesi iacieetitsecicitchedicibstlaiiicedadaneciininid 14

B.L. Harbert Int'l, LLC v. Hercules Steel Co., 441

me} its > | Ce 12, 25, 26

Baxter Int'l, Inc. v. Abbott Labs., 315 F.3d 829 (7th

COD, GUD ancsichitisiinteiibiccvianieinissitcenindhitesiassinihaidiaiiataebidiniiaaiits 19

BEM I, L.L.C. v. Anthropologie, Inc., 301 F.3d 548

gt FEE CA Ses SAE tnie arte Ne 17

Black Box Corp. v. Markham, 127 F. Appx. 22 (3d

CR Fe sicncclicccinibaeiiiieiaihanac hii cat ace elie dae ated ates 13

Brabham vy. A.G. Edwards & Sons, 376 F.3d 377 (Sth

CO, FIED xcsssiccse:shenisiienstsiditniaiceitinicaailadiniaidaiiagsiabaiaatipi 14, 16

Bridas S.A.P.1.C. v. Gov't of Turkmenistan, 345 F.3d

347 (Sth Cir. 2003), cert. denied, 541 U.S. 937

CPP ED scecnvsinssuncensasshenuitiannsiiaateeesissauiidlbditidialinisabbialvesileahdiiae 16

Bull HN Info. Sys. v. Hutson, 229 F.3d 321 (1st Cir.

Pe scvscssvinsissaresatesibeuriinciiaapenesianiiaiasimaasa cacniaiaaseuiibinanddtainl il

Butler Mfg. Co. v. United Steelworkers of Am., 336

F356 GED CIs Cas, FOGG ectertinisienennniistiierinavibisninnioniones' 19

lil

Carter v. Health Net of Cal., Inc., 374 F.3d 830 (9th

Nai AOD savcticsbiinschcincnahaeciinivietaiaeetintensiiin aniebearensieniaiiaedin 8

Cement Divs., Nat'l Gypsum Co. v. United Sieelwork-

ers of Am., 793 F.2d 759 (6th Cir. 1986) ...........scseeeeees 23

Chisom v. Roemer, 501 U.S. 380 (1991)........cccsessssscreeeeeeeee 24

Cole v. Burns Int'l Sec. Servs., 105 F.3d 1465 (D.C.

ah BO FD cissisicnitnsessdninidenitisaniiveippataiiinaienibenieiactanieeiniinbeines 27

Cytyc Corp. v. DEKA Prods. Ltd. P’ship, 439 F.3d 27

UIE Sanat IOI caicecincosinssnasiicesassuiarencsegclniecteiebcandindeilenilinsahignueosi 8

Dluhos v. Strasberg, 321 F.3d 365 (3d Cir. 2003) ienidaleeinaineei 8

Dominion Video Satellite, Inc. v. Echostar Satellite

L.L.C., 430 F.3d 1269 (10th Cir. 2005)..........ceeeeeeseeeeee 8

Duferco Int'l Steel Trading v. T: Klaveness Shipping

ASS, FT3. F.34 SES (2d Cie. ZOOS) ..ecncevervscsororserevenssoresoves 13

Dulien Steel Prods. Inc. of Wash. v. The Ogeka, 147

Fc A: BT Ce a WOU BO ie ijetcstcancpewveteneietcereeniies 7

First Options of Chicago, Inc. v. Kaplan, 514 U.S.

RRR TD uaeiilahatep ilaalbaaipebatiasieapiaeinatsi ‘aa

Flex-Foot, Inc. v. CRP, Inc , 238 F.3d 1362 (Fed. Cir.

ee Piciiciaysittiharieesiacesiuiiinieindeaiiieibsndanensiedainbisiclianiionnesndins 8,13

Folkways Music Publishers v. Weiss, 989 F.2d 108

GE AG PCE iiccessctpsnllisaehtheaidetesiabicaibaaascehlethisa salen 14

Gen. Dynamics Land Sys. v. Cline, 540 U.S. 581

UIT pissshinllchsteatsiecdamsialigiuaibaaeuinsaisaonapeastunmbenpacaniouadaibn 24

George Watts & Son, Inc. v. Tiffany & Co., 248 F.4 aa

EE PE Gly SNE Piissispiuiieiecniiintanionctiasent 16. °°, 18, 19, 25

Gilmer v., Interstate/Johnson Lane Corp., 500 U.S. 20

ITED icceateienitaciisivsmninsischapaliniilaieiutiaclbieiacapiaddbinidannbbbnichan 26

Gramling v. Food Mach. & Chem. Corp., 151 F.

IG, ee 0 We Ries HUET sistccosicccenritsisinnacistiniinsiciacetindien 7

iv

Gupta v. Cisco Sys.,274 F.3d 1 (1st Cir. 2001)... cece 11

Harris v. Parker Coll. of Chiropractic, 286 F.3d 790

Se es cainvicdeececncinseiensaseneciaietiinenieeienneneniavententen 16

Health Servs. Mgmt. Corp. v. Hughes, 975 F.2d 1253

PRRs SD cstenibicnchurlanstenhainclotseniscerenianesausecbess 8, 18, 19

Hibbs v. Winn, 542 U.S. 88 (2004) .......c.ccscccccssssssssssscsesesees 24

Hoeft v. MVL Group, 343 F.3d 57 (2d Cir. 2003).........--+0++ 8

IDS Life Ins. Co. v. Royal Alliance Assocs., 266 F.3d —

RS EPG OED ies his initectishcnticeincnsstisivist Ucaivtesecnancic 19

Jacada (Europe), Ltd. v. Int’l Mktg. Strategies, 401

F.3d 701 (6th Cir.), cert. denied, 126 S. Ct. 735

IS sein vicieentescksiszoneanininndibhiivtetnideoeianainiesnceipidiliieilecoegien 11

Kergosien v. Ocean Energy, Inc., 390 F.3d 346 (Sth

as SPE siiesicieinessvetinintinasapahtscvinlaanicttasasiioies peunianicnanid 16

Koveleskie v. SBC Capital Markets, Inc., 167 F.3d

361 (7th Cir.), cert. denied, 528 U.S. 811 (1999).......... 18

Kurke v. Oscar Gruss & Son, Inc., 454 F.3d 350

Ga Se ies eirindotvbendietivisev cis ccnictaansnetennanebeecnincntbiel 8

Kyocera Corp. v. Prudential-Bache Trade Servs., 341

F.3d 987 (9th Cir. 2003), cert. dism'd, 540 U.S.

I I E iiicttietiaschcsietebiintineintsisinintesecnenaionnatanmteanesansneels 24

Marshall v. Green Giant Co., 942 F.2d 539 (8th Cir.

SIUPE Basccihisiichecciiiciida deta Liesedtecanenteisovalaseaswdiiiatiniaasb-deauigelaesinenien 14

McGrann v. First Albany Corp., 424 F.3d 743 (8th

SD se shnasicksncdbdsnonbateubintiartdnentbistuiendcimencenticbapeamnsadieicones 8

Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Bob-

ker, 808 F.2d 930 (2d Cir. 1986).......-.ssessesssssssesseressnees 14

Missouri River Servs., Inc. v. Omaha Tribe of Neb.,

267 F.3d 848 (8th Cir. 2001), cert. denied, 535

Fis Te ET ini siesecrsdistininnccnstaetnmsbeniensbicaninaeotenciivts 10, 22

v

Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth,

Rk S| Th...) EERE epee 26

Montes v. Shearson Lehman Bros., 128 F.3d 1456

OA 2, IRE SIO ee Reise Maes ar ar benod ane aan: 15

Nat'l Wrecking Co. v. Teamsters, Local 731,990 F.2d

Sa an II tissilichetaeciscltedsasldduenieiniiciebenibiatineiatalnininass 18

Peebles v. Merrill Lynch, Pierce, Fenner & Smith

pm em eer fiel lo my.) 8

Prestige Ford v. Ford Dealer Computer Servs., 324

F.3d 391 (Sth Cir.), cert. denied, 540 U.S. 878

SPITE schilvslinietsisesinnidebubiatniemaciesndibabuonnitinlictnisabepuameenadonniinetis 16

Raiford v. Merrill Lynch, Pierce, Fenner & Smith,

Inc., 903 F.2d 1410 (11th Cir. 1990)... eeeeeeeenees 14

Remmey v. PaineWebber, Inc., 32 F.3d 143 (4th Cir.

1994), cert. denied, 513 U.S. 1112 (1995).....4, 5, 6, 9, 14

Rodriguez de Quijas v. Shearson/Am. Exp. Inc., 490

EF ee ici alsesiihipieanincicntbinecininndianteenniaintess 7

San Martine Compania De Navegacion, S. A. v. Sa-

guenay Terminals Ltd., 293 F.2d 796 (9th Cir.

ST sbeadodiatiircoticslaelennpietatieagpslietip elinielisddesiahiinaetiehiniindntionsenitanstine 8

Sarofim v. Trust Co. of the West, 440 F.3d 213 (Sth

cit SEDI Lisshicihcleivctibedinincccibiskdcadahitelacipipsiinisiaeiiioanansiiiakin 8, 15, 16

Shearson/Am. Exp., Inc. v. McMahon, 482 U.S. 220

PIE scisiasstehsbidicinslebdiciinécinnsnetetatinhaleiorbaiiieds ilasiaiedhiatinaSibies 7, 26

Siegel v. Titan Indus. Corp., 779 F.2d 891 (2d Cir

rnTraiiiviseesismabice bach silcdaiantibadnalstapbbeoebebiiiaanacébegedin 9

Solvay Pharms. v. Duramed Pharms., 442 F.3d 471

he ERE RT Iae Dare Nee ON a SELON LER ONT RATE 8

Thomas v. Union Carbide Agr. Prods. Co., 473 U.S.

Pr OTE bshisisstirecrnscissasdntenieresedighakadihueestidequsonnnibenhibesiiinntl 7

vi

United Steelworkers of Am. v. Warrior & Gulf Nav.

Sg Se CP AOD sansiiensekcenseCoiailsniteiendtensiieastbiaditag 20

Upshur Coals Corp. v. United Mine Workers, Dist.

Fog FOSS A BA CC, BGT asececncnsivcvinvesonnsones 4,9, 10

Westerbeke Corp. v. Daihatsu Motor Co., 304 F.3d

Rr E cnitalincinchaiiieraniuiseieuecheibchianeictaentl 9,21

Wilko v. Swan, 346 U.S. 427 (1953) .....cccceccessecssssecssessseceee 7,8

Williams v. Cigna Fin. Advisors, 197 F.3d 752 (5th

Cir. 1999), cert. denied, 529 U.S. 1099 (2000).. 15, 16, 27

Wise v. Wachovia Sec., LLC, 450 F.3d 265 (7th Cir.

See itevssncishcsibiiahiijaiadiemsastictinnsmemniaiedinilidinnn 11,17, 18, 19

Wisniewski v. United States, 353 U.S. 901 (1957)......--ss00ee 19

Wonderland Greyhound Park v. Autotote Sys., 274

Fd 0 GUE Gals IEE Peco iastanssidbininticrsistienicneoninanstiisnitiain ll

Youakim v. Miller, 425 U.S. 231 (1976) .......cccccsssesessseseeseecers 5

Yusuf Ahmed Alghanim & Sons v. Toys “R” Us, Inc.,

126 F.3d 15 (2d Cir. 1997), cert. denied, 522 U.5.

LL). SANA RC RO Mem I MTEN WN Wehr een 21

Statutes and Rules:

_ Federal Arbitration Act, 9 U.S.C. §§ 1 fff .......eeceeseeeees passim

PO ON i ee

By Bes i nich chsicerhtecetesdasichinecheteeebieisciendaticlahdeainasiiuaiehiiptaaaciaits 9, 23

i 5

Fe a Ge vcercsciitctsinnin ine teesiiaaiipiibainbahiicinihniaitiiaiiaiiaiie ae

Vil

Other:

Robert L. Stern, et al., Supreme Court Practice

er A IIE inchcheinbndeccnabesiaduaes Suctuten dni ud 19

INTRODUCTION

In this case, petitioners seek review of an issue they never

contested below and on which the federal courts of appeals

are in unanimous agreement: Whether a court may vacate an

arbitration award for “manifest disregard of the law.” Every

court of appeals agrees that it may—and this Court has said

$0, too. Petitioners try to conjure up a conflict by identifying

minor differences in the wording the courts use to define

manifest disregard, but the differences are semantic. The con-

sensus view of the courts of appeals is that an arbitrator

manifestly disregards the law when he deliberately refuses to

follow what he knows to be the law. The decision below is

merely a fact-bound application of that consensus view.

Only in the Seventh Circuit is there uncertainty about the

manifest disregard standard. Although petitioners suggest

that the Seventh Circuit has rejected manifest disregard as a

basis for overturning an arbitration award, all the decisions of

that court acknowledge that manifest disregard for the law is

a ground for vacating an arbitration award. There are, how-

ever, two lines of authority in the Seventh Circuit, one of

which agrees with the consensus definition of manifest disre-

gard, while another seems to define it more narrowly to in-

clude only the unusual circumstance where an arbitrator or-

ders the parties to violate the law. The panel that devised the

latter definition, however, limited it to cases where an arbi-

tration agreement did not specify a rule of decision, and

hence it would not apply to this case, where: the parties’

agreement states that it is governed by Massachusetts law.

In any event, the Seventh Circuit’s apparent internal un-

certainty about the manifest disregard standard, until defini-

tively resolved by that court, does not establish a conflict

among the circuits, and this Court does not sit to resolve in-

tra-circuit disagreements that a court of appeals is fully capa-

ble of handling through the en banc rehearing process. If and

when the Seventh Circuit conclusively adopts a manifest dis-

regard standard that is out of step with the consensus of the

circuits—and applies it in a case where it makes a difference

to the outcome—this Court can address the conflict that will

then have arisen. Until then, there is no need for review.

Petitioners also seek resolution of a purported conflict

over the Fourth Circuit’s alternative rationale: that the arbi-

trator’s decision did not draw its essence from the contract

between the parties. Petitioners assert that this aspect of the

Fourth Circuit’s decision conflicts with Second Circuit deci-

sions holding that the “essence of the agreement” doctrine is

limited to labor arbitration and is inapplicable to commercial

arbitration under the Federal Arbitration Act (FAA). Peti-

tioners did not raise this issue in a timely manner below, and

in any event, there is no conflict. The Second Circuit has

made clear that a concept indistinguishable from the “essence

of the agreement” standard applies under the FAA, where, as

a corollary to the manifest disregard of law standard, an arbi-

trator’s award may be vacated where it is in manifest disre-

gard of the terms of the agreement. That standard is not

meaningfully distinct from the “essence of the agreement”

standard applied by the Fourth Circuit here, and thus there is

no circuit conflict that requires review.

Finally, petitioners ask this Court to decide, contrary to

the holdings of all the circuits, that neither manifest disregard

of the law nor any ground of vacatur not explicitly set forth

in the FAA may be used to challenge an arbitration award.

Again, petitioners did not preserve this argument below, and

it is therefore not properly presented by the petition for cer-

tiorari. In any event, petitioners’ radical attempt to overturn

long-settled law in every circuit does not merit plenary re-

view by this Court. A well established consensus of the lower

courts, supported by statements of this Court, should not be

upset merely because a litigant is dissatisfied with the appli-

cation of the law to the facts of its case, and there are no.

other reasons necessitating review of the issue by this Court.

3

STATEMENT OF THE CASE

1. Arbitration Agreements. Ralph Patten worked for

petitioner John Hancock Life Insurance Company and its af-

filiates for nearly thirty years, until he was fired in 2001. Pet.

App. 2a-3a. This case arises out of Patten’s attempt to arbi-

trate his claim that he was wrongfully terminated and dis-

-criminated against based on age.

Patten and his employers had entered into two mandatory

arbitration agreements. The 1992 “Mutual Agreement” pro-

vided that any claims not asserted within one year would be

waived. Pet. App. 2a. In 1998, Patten entered into a new

“Management Agreement” with petitioner Signator Investors,

one of the John Hancock affiliates. Pet. App. 3a. Like the

Mutual Agreement, the Management Agreement contained a

mandatory arbitration clause. Unlike the Mutual Agreement,

the Management Agreement did not limit the time for assert-

ing claims. The Management Agreement expressly provided

that it superseded all prior agreements and was governed_by

Massachusetts law.

2. District Court and Arbitration Proceedings. In

August 2001, eight months after he was notified of his termi-

nation, Patten informed petitioners in writing that he was

preparing to file suit alleging wrongful termination and age

discrimination. Pet. App. 3a. In March 2002, after settlement

attempts proved unsuccessful, Patten submitted a demand for

arbitration asserting contract claims and state and federal

employment discrimination claims. Pet. App. 4a. Petitioners

refused to arbitrate because they maintained that the demand

for arbitration was untimely under the superseded Mutual

Agreement’s one-year limitations period. Pet. App. 4a. Patten

successfully filed suit in federal court to compel arbitration.

After extensive discovery, petitioners filed a summary

judgment motion in the arbitration, arguing that Patten had

failed to comply with the Mutual Agreement’s one-year limi-

tations period. Patten argued that he had complied with both

agreements—that is, he had :)»\tantially complied with the

Mutual Agreement’s one-year notice requirement, and the

Management Agreement contained no such requirement.

The arbitrator ruled that the arbitration was governed by

both agreements. He acknowledged that the Management

Agreement contained no time limit, but nevertheless declared

that it “necessarily contain[ed] an implied time limit.” He

adopted the superseded Mutual Agreement’s one-year limit

as the “implied” limit for the Management Agreement, and

ruled that Patten’s claims were time-barred. Pet. App. Sa-6a.

Patten moved in the district court to vacate the arbitration

award on the grounds that it was in manifest disregard of the

law and did not draw its essence from the parties’ agreement.

The district court denied the motion and Patten appealed.

3. Decision Below. On appeal, Patten sought only to va-

cate the arbitrator’s dismissal of his claims under the Man-

agement Agreement against Signator Investors, arguing that

the ruling that the Agreement contained a time limit—in the

face of the arbitrator’s acknowledgement that it did not and

its express supersession of all prior agreements—constituted

a manifest disregard of the law and failed to draw its essence

from the agreement. The Fourth Circuit agreed.

The court explained that a party claiming manifest disre-

gard of the law has the “heavy burden” of showing that the

“arbitrator[] understand{s] and correctly state[s] the law, but

proceed[s] to disregard the same.” Pet. App. 9a (quoting

Remmey vy. PaineWebber, Inc., 32 F.3d 143, 149 (4th Cir.

1994); Upshur Coals Corp. v. United Mine Workers, Dist.

31, 933 F.2d 225, 229 (4th Cir. 1991)). Applying that stan-

dard, the court concluded that the arbitrator had “revised the

governing arbitration agreement on the basis of his own ‘per-

sonal notions of right and wrong’ and imposed a limitations

period on the parties that they had specifically rejected.” Pet.

App. 12a-13a (citations omitted). The error went beyond a

mere misapplication of contract law or an erroneous contract

interpretation, which courts may not correct. Pet. App. 13a.

Instead, the arbitrator had effectively amended or altered the

agreement and acted beyond the scope of his authority. Jd.

Judge Luttig, in dissent, agreed with the majority that the

arbitrator’s decision was “clearly erroneous,” and that the

appropriate standard was supplied by Remmey, Pet App. 14a,

but he would have applied the standard differently to the

facts and, “with some reluctance,” would have affirmed the

district court’s refusal to vacate the award. Pet. App. 16a.

Petitioners’ request for en banc rehearing was denied be-

cause “no member of th{e] Court or the panel requested a

poll on the petition.” Pet. App. 44a. See 4th Cir. R. 35(b).

REASONS FOR DENYING THE WRIT

I. Petitioners Did Not Properly Raise Any of Their

Questions Presented in the Fourth Circuit.

In this Court, petitioners assert that the Fourth Circuit’s

manifest disregard of law standard is legally erroneous and

contrary to the law of other circuits; that the Fourth Circuit

improperly applied the “essence of the agreement” doctrine

to a non-labor arbitration and in a manner contrary to deci-

sions of other circuits; and, finally, that ai] “non-statutory”

grounds for vacatur of arbitration awards (including manifest

disregard and the “essence of the agreement” doctrine) are

contrary to the FAA. Petitioners did not properly raise any of

these issues in the Fourth Circuit. Accordingly, they are not

properly before this Court. “Ordinarily, this Court does not

decide questions not raised or resolved in the lower court.”

Youakim v. Miller, 425 U.S. 231, 234 (1976).

In their brief below, petitioners expressly argued that the

Fourth Circuit’s definition of the manifest disregard standard

in Remmey, 32 F.3d at 149—the very standard applied by the

panel—correctly stated the law applicable to this case. See

Br. for Appellees 4-6. Even in their petition for rehearing en

banc, when they were no longer arguably constrained from

arguing that Fourth Circuit law was incorrect and should be

overruled, petitioners argued only that the panel had misap-

6

plied the Remmey standard to the facts, not that the standard

itself was incorrect. See Pet. for Reh’g 13-15. The Fourth

Circuit never had the opportunity to address the arguments

petitioners now advance—namely, that its manifest disregard

standard is legally erroneous and should be abandoned or re-

placed by what petitioners claim are the more stringent stan-

dards applied in other circuits.

Similarly, although respondent argued in his opening

brief below that the arbitrator’s award did not draw its es-

sence from the parties’ contract (see Br. for Appellant 10),

petitioners’ brief did not argue that the “essence of the agree-

ment” standard is restricted to labor arbitration. See Br. for

Appellees 3-7. Nor did petitioners argue, as they do now, that

the circuits vary in how stringently they apply the “essence of

_ the agreement” test, and petitioners nowhere urged the court

to select some variant of the standard they deemed more fa-

vorable. See id. Rather, their brief ignored the “essence of the

agreement” issue altogether. Only in their rehearing petition

did they first argue that the standard is inapplicable to this

case. There is no reason, however, that that argument could

not have been pressed in their briefs before the panel.

Finally, petitioners’ papers below never so much as

hinted at the broadest argument they now advance—that the

FAA completely forecloses all “non-statutory” grounds for

vacatur, including manifest disregard. In both their brief and

their petition for rehearing en banc, petitioners expressly

urged the Fourth Circuit to apply its existing manifest disre-

gard standard, a position flatly inconsistent with their current

view that the standard violates the FAA. Petitioners might

legitimately claim it would have been futile to advance this

argument in their brief;-since the panel could not have ig-

nored the circuit’s adoption of the manifest disregard stan-

dard in Remmey and other cases, but there is no excuse for

not raising the claim in their petition for rehearing en banc.

The very purpose of the en banc procedure is to allow the

court to overrule prior opinions and address issues that have

7

divided the circuits (as petitioners claim, incorrectly, that this

issue has done). By not raising the issue, petitioners denied

the Fourth Circuit the opportunity to consider whether the

manifest disregard standard should be discarded, and this

Court should not consider that question in the first instance.

IL. There Is No Conflict Among the Circuits Over

Manifest Disregard.

A. The Manifest Disregard Doctrine Applied Below

Has Been Settled Law for Decades.

For half a century, federal courts have reviewed arbitra-

tion awards for manifest disregard of law. The doctrine had

its genesis in this Court’s decision in Wilko v. Swan, 346 U.S.

427, 436-37 (1953), where the Court stated that “interpreta-

tions of the law by ... arbitrators in contrast to manifest dis-

regard are not subject, in the federal courts, to judicial re-

view for error in interpretation” (emphasis added). Although

Wilko’s holding that federal securities claims are nonarbitra-

ble. was overruled in Rodriguez de Quijas v. Shear-

son/American Express, Inc., 490 U.S. 477 (1989), this Court

has reiterated that arbitration awards are subject to review for

manifest disregard of the law on a number of occasions. See

. Shearson/Am. Exp., Inc. v. McMahon, 482 U.S. 220, 259

(1987); Thomas v. Union Carbide Agr. Prods. Co., 473 U.S.

568, 601 (1985). Most recently, in First Options of Chicago,

Inc. v. Kaplan, 514 U.S. 938 (1995), the Court cited Wilko

for the proposition that manifest disregard of the law is

among the “very unusual circumstances” in which the courts

will set an arbitrator’s decision aside. Jd. at 942.

Soon after Wilko, lower federal courts began to review

arbitration awards for manifest disregard of law. The first

district courts to apply the doctrine were Dulien Steel Prod-

ucts Inc. of Washington v. The Ogeka, 147 F. Supp. 167

(W.D. Wash. 1956), and Gramling v. Food Machinery &

Chemical Corp., 151 F. Supp. 853 (W.D.S.C. 1957). The

courts of appeals quickly followed suit, with the Second and

Ninth Circuits addressing the issue in Amicizia Societa Nave-

gazione v. Chilean Nitrate & Iodine Sales Corp., 274 F.2d

805 (2d Cir. 1960), and San Martine Compania De Navega-

cion, S. A. v. Saguenay Terminals Ltd., 293 F.2d 796 (9th

Cir. 1961). As the Second Circuit explained in Amicizia, the

FAA provides that “an award may be vacated where the arbi-

trators have ‘exceeded their powers,’”” and “[a]pparently rely-

ing upon this phrase, the Supreme Court in Wilko v. Swan, ...

suggested that an award may be vacated if in ‘manifest disre-

_gard’ of the law.” 274 F.2d at 808. The Ninth Circuit simi-

larly invoked Wilko and, cautioning that review for manifest

disregard must be very limited, stated that “[w]e apprehend

that a manifest disregard of the law ..: might be present when

arbitrators understand and correctly state the law, but proceed

to disregard the same.” 293 F.2d at 801. |

In the 46 years since the Second Circuit’s decision in

Amicizia, the federal courts of appeals—the First through

Eleventh, D.C. and Federal Circuits—have unanimously held —

that manifest disregard of the law is a basis for vacating arbi-

tration awards subject to the FAA.’ While the circuits’ for-

mulations of the manifest disregard standard vary slightly in

wording, the overwhelming consensus is that the critical

element of manifest disregard is an arbitrator’s refusal to fol-

' See Cytyc Corp. v. DEKA Prods. Lid. P’ship, 439 F.3d 27, 35 (Ist

Cir. 2006); Hoeft v. MVL Group, 343 F.3d 57, 69 (2d Cir. 2003); Diuhos

v. Strasberg, 321 F.3d 365, 370 (3d Cir. 2003); Apex Plumbing Supply v.

U.S. Supply Co., 142 F.3d 188, 193 (4th Cir. 1998); Sarofim v. Trust Co.

of the West, 440 F.3d 213, 216-17 (Sth Cir. 2006); Solvay Pharms. v.

Duramed Pharms., 442 F.3d 471, 475 n.3 (6th Cir. 2006); Health Servs.

Mgmt. Corp. v. Hughes, 975 F.2d 1253 (7th Cir. 1992); McGrann v. First

Albany Corp., 424 F.3d 743, 749 (8th Cir. 2005); Carter v. Health Net of

Cal., Inc.., 374 F.3d 830, 838 (9th Cir. 2004); Dominion Video Satellite,

Inc. v. Echostar Satellite L.L.C., 430 F.3d 1269, 1274 (10th Cir. 2005);

Peebles v. Merrill Lynch, Pierce, Fenner & Smith Inc., 431 F.3d 1320,

1326 (11th Cir. 2005); Kurke v. Oscar Gruss & Son, Inc., 454 F.3d 350,

354 (D.C. Cir. 2006); Flex-Foot, Inc. v. CRP, Inc., 238 F.3d 1362, 1365-

66 (Fed. Cir. 2001).

9

low what he knows to be the law. See Siegel v. Titan Indus.

_Corp., 779 F.2d 891, 893 (2d Cir. 1985).

In this case, the Fourth Circuit applied the well-settled

principle that an arbitrator’s knowing refusal to follow the

law as he understood it is a ground for vacating an award.

Although petitioners repeatedly say the Fourth Circuit adopt-

ed a “new” variant of the standard, the panel’s opinion em-

phasized, consistent with precedents of the Fourth Circuit

(and the other courts of appeals) that the manifest disregard

standard places a “heavy burden” on a party seeking to va-

cate an award—a burden that can be satisfied “only where

the ‘arbitrator[] understand[s] and correctly state[s] the law,

but proceed[s] to disregard the same.’” Pet. App. 9a (quoting

Remmey, 32 F.3d at 149, and Upshur Coals, 933 F.2d at

229).? Judge Luttig’s dissent acknowledged that the majority

correctly stated the law, and reluctantly took issue only with

the panel’s application of the governing standard. Jd. at 14a-

l6a (Luttig, J., dissenting). Petitioners echo Judge Luttig’s

criticisms of the way the panel applied the standard, but

“misapplication of a properly stated rule of law” is generally

not a ground for granting certiorari. S. Ct. R. 10.

B. The Fourth Circuit Did Not Adopt a “New Test”

Permitting Vacatur of Merely “Unreasonable”

Contract Interpretations.

Petitioners insist that the Fourth Circuit adopted a “new

test” of manifest disregard that permits a court to set aside an

arbitration award whenever it finds an arbitrator’s contract

interpretation unreasonable—a test petitioners say conflicts

with the law in all other circuits. Pet. 12. Petitioners’ argu-

? The court did not require that the arbitrator expressly state the cor-

rect law before disregarding it, but courts agree that “(t]he manifest disre-

gard doctrine is not confined to that rare case in which the arbitrator pro-

vides us with explicit acknowledgment of wrongful conduct....” Wester-

beke Corp. v. Daihatsu Motor Co., 304 F.3d 200, 218 (2d Cir. 2002).

10

ment rests on a distortion of the Fourth Circuit’s ruling—a

ruling that is fully consistent with the way other courts of ap-

_ peals apply the manifest disregard standard to blatant devia-

tions from unambiguous contracts.

The Fourth Circuit made clear that a court may not vacate

an award “merely because [it] concludes that an arbitrator

has ‘misread the contract.’” Pet. App. 9a. Citing Fourth Cir-

cuit precedent, the court held that vacatur is appropriate

“only when the result is not ‘rationally inferable from the

contract.’” Id. at 10a (quoting Apex Plumbing Supply, 142

F.3d at 193 n.5). The court also emphasized that the manifest

disregard standard requires the court to find that the arbitrator —

correctly understood but ignored the law. Jd. That standard

was satisfied, the court held, when the arbitrator understood

the unambiguous import of contractual language but instead

“based his award on his own personal notions of right and

wrong.” Jd. (quoting Upshur Coals, 933 F.2d at 229).

Contrary to petitioners’ assertion, the Fourth Circuit's

holding that an arbitrator’s knowing refusal to give effect to

unambiguous contractual language can evidence manifest

disregard of law does not conflict with the law of other cir-

cuits. In fact, courts in circuits whose law petitioners claim

conflicts with the Fourth Circuit’s so-called “new rule” agree

that manifest disregard of clear contractual terms is a basis

for vacating an arbitration award.

Petitioners contend, for example, that the outcome below

conflicts with Eighth Circuit case law. Pet. 12. But the Eighth

Circuit, in a decision relied upon by the Fourth Circuit (but

virtually ignored by petitioners), has held that an arbitrator

may not “disregard or modify unambiguous contract provi-

sions” and that an arbitrator “acts without authority” if he

refuses to give effect to the “plain meaning” of “unambigu-

ous language.” Missouri River Servs., Inc. v. Omaha Tribe of

Neb., 267 F.3d 848, 855 (8th Cir. 2001). Unlike petitioners,

but like the Fourth Circuit, the Eighth Circuit saw no incon-

sistency between these propositions and the principle that

11

“[a]n award ‘manifests disregard for the law where the arbi-

trators clearly identify the applicable, governing law and then

proceed to ignore it.”” Jd. at 854 (citation omitted).

Similarly, although petitioners claim that the result below

could not be sustained under the law of the First Circuit, that

court has stated repeatedly that, under its manifest disregard

standard, an award may be vacated if the arbitrator knew it

was “contrary to the plain language of the contract.” Gupta v.

Cisco Sys., 274 F.3d 1, 3 (1st Cir. 2001); accord, Wonder-

land Greyhound Park v. Autotote Sys., 274 F.3d 34, 36 (ist

Cir. 2001); Bull HN Info. Sys. v. Hutson, 229 F.3d 321, 330

(1st Cir. 2000). And petitioners’ assertion that the result be-

low conflicts with the law of the Sixth Circuit is contradicted

by the very opinion they cite, Jacada (Europe), Ltd. v. Int’]

Mktg. Strategies, 401 F.3d 701 (6th Cir. 2005), which says an

award may be overturned if the arbitrator was not “even ar-

guably construing or applying the contract.” Jd. at 712.

Indeed, even the Seventh Circuit precedents cited by peti-

tioners, which petitioners contend reflect the narrowest view

of manifest disregard taken by any federal appellate court,

acknowledge that “in the typical arbitration,” which like the

one in this case “is concerned with interpreting a contract,”

an arbitration award may be overturned if the arbitrators

“failed to interpret the contract at all” (as opposed to inter-

preting it in a way that is “incorrect or even wacky”), because

in such a case the arbit-stors “excee[d] the authority granted

to them by the contract arbitration clause.” Wise v. Wacho-

via Sec., LLC, 450 F.3d 265, 269 (7th Cir. 2006). That view

is fully consistent with the Fourth Circuit’s ruling. here,

which permits vacatur only when the court finds that the arbi-

trator based an award not on the contract but on “his own

personal notions of right and wrong” or some other basis not

even “rationally inferable from the contract.” Pet. App. 10a.

Petitioners cite no authority holding that disregard of un-

ambiguous contract terms, no matter how blatant and obvi-

ously deliberate by the arbitrator, may never constitute mani-

12

fest disregard of law.’ Absent such authority, their claim that

the Fourth Circuit’s extremely limited definition of the cir-

cumstances where disregard of contract terms may justify

vacatur creates no conflict among the circuits.

C. Semantic Differences Among the Circuits in De-

scribing the Manifest Disregard Standard Do

Not Amount to a Conflict.

Beyond incorrectly claiming that the Fourth Circuit is

alone in permitting the manifest disregard test to be satisfied

by an arbitrator’s deliberate disregard of unambiguous con-

tractual language, petitioners assert that there is a four-way

conflict among the circuits over the standard of manifest dis-

regard. In fact, aside from minor semantic differences in the

way the circuits describe the standard, there is a remarkable

consensus among the circuits over the essential elements of a

manifest disregard claim.

The fundamental requisite of a claim of manifest disre-

gard is, as the majority and dissent acknowledged below and

the overwhelming majority of the circuits agree, that “a

manifest disregard of the law is established only where the

‘arbitrator[] understand[s] and correctly state[s] the law, but

proceed{s] to disregard the same.’” Pet. App. 9a (citation

omitted); accord id. at 14a (Luttig, J., dissenting). The cases

petitioners cite make clear that such knowing and deliberate

disregard of the law is the key element of the manifest disre-

gard standard in the First, Second, Fifth, Sixth, Eighth, Ninth,

Tenth, and Eleventh Circuits. See Pet. 12-13. Although peti-

tioners contend that the Third Circuit has not explained what

> Petitioners say the Fourth Circuit’s decision conflicts with B.L.

Harbert Int'l, LLC v. Hercules Steel Co., 441 F.3d 905 (11th Cir. 2006).

The Eleventh Circuit’s holding there—that an error in contract construc-

tion does not justify vacatur unless the arbitrators recognized and deliber-

ately disregarded an applicable rule of law, id. at 912—does not conflict

with the Fourth Circuit’s ruling here, which also permits vacatur only

where an arbitrator both understands and disregards the law. Pet. App. 9a.

13

manifest disregard means (see Pet. 12 n.4), that court, too,

has said a party seeking to vacate an award for manifest dis-

regard “bears the burden of proving that the arbitrators were

fully aware of the existence of a clearly defined governing

legal principle, but refused to apply it, in effect, ignoring it.”

Black Box Corp. v. Markham, 127 F. Appx. 22, 25 (3d Cir.

2005) (quoting Duferco Int'l Steel Trading v. Tr: Klaveness

‘Shipping A/S, 333 F.3d 383, 389 (2d Cir. 2003)).*

To be sure, courts do not always use exactly the same

words to describe the manifest disregard standard, but as the

First Circuit has observed (Advest, Inc. v. McCarthy, 914

F.2d 6, 9 (ist Cir. 1990) (citation omitted)):

This standard of judicial review has taken on various

hues and colorations in its formulations in this, and

other, circuits. ... Although the differences in phraseol-

ogy have caused a modicum of confusion, we deem

them insignificant. We regard the standard of review

undergirding these various formulations as identical, no

matter how pleochroic their shadings and what “terms

of art have been employed to ensure that the arbitrator’s

decision relies on his interpretation of the contract as

contrasted with his own beliefs of fairness and justice.”

... However nattily wrapped, the packages are fungible.

Despite the circuits’ general agreement that manifest dis-

regard involves an arbitrator’s conscious refusal to follow the

law, petitioners attempt to tease out a conflict among the cir-

cuits by arguing that the Second, Sixth, Ninth and D.C. Cir-

cuits have adopted a more stringent test than the First,

Fourth, Eighth, Tenth, and Eleventh. Petitioners base this as-

sertion on the fact that the former circuits often say that the

Petitioners do not mention the Federal Circuit, but while that court

has had little occasion to apply the manifest disregard standard, there is

no reason to think its standard differs from the consensus of the regional

courts of appeals. See Flex-Foot, Inc. v. CRP. Inc., 238 F.3d at 1365-66.

14

law disregarded by the arbitrators must be “well defined, ex-

plicit, and clearly applicable to the case.” Pet. 13.°

There is no reason to think, however, that the use of this

phrase reflects any real disagreement over the proper stan-

dard. In the 20 years since the Second Circuit first stated in

Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Bobker, 808

F.2d 930, 933 (2d Cir. 1986), that the law disregarded by the

arbitrator must be “well defined, explicit, and clearly appli-

cable to the case,” no court of appeals has disagreed with that

gloss on the basic standard. Indeed, the Eighth Circuit, which

petitioners categorize as not requiring that the law be clearly

applicable, has expressly agreed with Bobker that the law

ignored by the arbitrator must be “clearly governing.” Mar-

shall v. Green Giant Co., 942 F.2d 539, 550 (8th Cir. 1991).

The First, Tenth, and Eleventh Circuits have cited Bobker

with approval, without any suggestion that they disagreed

with any aspect of the way Bobker described the standard.

See Advest, 914 F.2d at 9; ARW Exploration Corp. v.

Aguirre, 45 F.3d 1455, 1463 (10th Cir. 1995); Raiford v.

Merrill Lynch, Pierce, Fenner & Smith, Inc., 903 F.2d 1410,

1412 (11th Cir. 1990). Similarly, the Fourth Circuit, in Rem-

mey, 32 F.3d at 149-150, approvingly cited the Second Cir-

cuit’s description of manifest disregard in Folkways Music

Publishers v. Weiss, 989 F.2d 108, 111-12 (2d Cir. 1993).

Folkways, in turn, used the “well defined, explicit, and

clearly applicable” language from Bobker.

The principal reason some courts describing the manifest

disregard standard have not quoted Bobker’s “well defined,

explicit, and clearly applicable to the case” language appears

to be that they thought it either went without saying or was

not pertinent to the facts before them. For example, in the

* Though petitioners do not mention it, the Fifth Circuit also some-

times states that the law disregarded must be “well defined, explicit, and

clearly applicable to the case.” E.g., Brabham v. A.G. Edwards & Sons,

376 F.3d 377, 382 (Sth Cir. 2004).

15

one case in the Eleventh Circuit that vacated an arbitral

award for manifest disregard, the prevailing party in the arbi-

tration had conceded that the law was against it and urged the

arbitrators to ignore the law. Montes v. Shearson Lehman

Bros., 128 F.3d 1456, 1459 (11th Cir. 1997). Because it was

apparent that the legal principle the arbitrators disregarded

was well-defined and clearly applicable, the Eleventh Circuit

had no reason to focus on that aspect of the standard. Simi-

larly, in this case, the legal principle the arbitrator disre-

garded—that wholly unambiguous contract language governs

the obligations of the parties—is clear and well-defined, and

the panel had no need to gild the lily by Saying so.

Petitioners also contend that the Fifth Circuit’s manifest

disregard standard conflicts with that of the other courts of

appeals because that court has stated that the manifest disre-

gard inquiry is a two-step process, in which the court first

determines whether the arbitrator knowingly disregarded a

clearly applicable legal principle and then decides whether

the resulting award works a “significant injustice.” Williams

v. Cigna Fin. Advisors, 197 F.3d 752, 762 (Sth Cir. 1999).

Although the Fifth Circuit is the only circuit that has spoken

of the standard as a two-part one, its formulation does not

reflect a conflict among the circuits.

To begin with, in articulating its two-part standard in Wil-

liams, the Fifth Circuit—the last regional circuit to accept the

manifest disregard standard—did not say it was disagreeing

with any of the previous circuits that had adopted the stan-

dard. The court said only that its formulation “should prove

helpful as a basis for articulating and applying the manifest

disregard doctrine.” Jd. at 762. Later decisions make clear

that the court substantially agrees with decisions of other cir-

cuits defining manifest disregard. See Sarofim v. Trust Co.,

440 F.3d at 219 n.8 (stating that Williams did not reject the

reasoning of the Second Circuit and that Second Circuit cases

on manifest disregard are “persuasive authority” even though

the Fifth Circuit takes Williams as its “starting point”).

16

- Moreover, the “significant injustice” inquiry does not

make the Fifth Circuit’s standard materially different from

that applied by other circuits. In the rare circumstance where

an arbitrator knowingly disregarded a clearly applicable legal

standard, it is difficult to imagine courts finding that an injus-

tice had not occurred. Certainly, the very few cases where

federal appellate courts have found manifest disregard have

involved circumstances that the courts clearly believed re-

flected injustice.° Moreover, the Fifth Circuit has had no oc-

casion to say when it might find an arbitrator’s disregard of

law not to be unjust, because none of its decisions since Wil-

liams has found that an arbitrator knowingly disregarded the

law, and thus none has reached the issue of “significant injus-

tice.”’ The possibility that the Fifth Circuit might find some

deliberate disregard of the law to be acceptable because it

involved no “significant injustice” is, at this point, purely

theoretical and creates no conflict among the circuits.

D. The Seventh Circuit’s Decisions Do Not Create a

Conflict Among the Circuits.

Petitioners’ most significant claim of conflict involves

recent decisions of the Seventh Circuit that state that “when

the parties agree to arbitrate without specifying a rule of de-

cision,” an arbitration award may be overturned for manifest

disregard of law only when it “require[s] the parties to violate

the law.” George Watts & Son, Inc. v. Tiffany & Co., 248

* Indeed, in this case, even Judge Luttig thought the arbitrator’s

“clearly erroneous” dismissal of a timely claim was unjust and voted to

confirm the arbitrator’s decision only “reluctan[tly].” Pet. App. 14a, 16a.

” See, e.g., Williams, 197 F.3d at 762; Harris v. Parker Coll. of Chi-

ropractic, 286 F.3d 790, 795 (Sth Cir. 2002); Prestige Ford v. Ford

Dealer Computer Servs., 324 F.3d 391, 396 (5th Cir. 2003); Bridas

S.A.P.I.C. v. Gov't of Turkmenistan, 345 F.3d 347, 365 (Sth Cir. 2003);

Brabham, 376 F.3d at 382 n.5; Kergosien v. Ocean Energy, Inc., 390 F.3d

346, 355 (Sth Cir. 2004); Am. Cent. E. Tex. Gas Co. v. Union Pac. Res.

Group, 93 F. Appx. 1, 6 (Sth Cir. 2004); Sarofim, 440 F.3d at 213.

17

F.3d 577, 581 (7th Cir. 2001); see also Wise, 450 F.3d at

269. |

The Watts concept that manifest disregard is limited to

the exceedingly unusual circumstance where an arbitrator

tells the parties to break the law, however, applies only when

the parties have not agreed that the arbitrator is to apply par-

ticular legal principles. As Judge Easterbrook conceded in

Watts, “{i}f the parties specify that their dispute is to be re-~

solved under Wisconsin law, then an arbitrator’s declaration

that he prefers New York law, or no law at all, would violate

the terms on which the dispute was given to him for resolu-

tion, and thus justify relief ....” 248 F.3d at 579. Thus, the

Watts decision expressly acknowledges that “an arbitral order

that does not adhere to the legal principles specified by con-

tract [is] unenforceable.” Id. at 581; see also BEM, L.L.C. v.

Anthropologie, Inc., 301 F.3d 548, 555 (7th Cir. 2002).

In this case, the parties’ contract specified that it was to

be governed by the law of Massachusetts. Pet. App. 3a.

Given the parties’ agreement on a rule of decision for dis-

putes between them—Massachusetts law—-Warts does not

conflict with the Fourth Circuit’s holding that the arbitration

award must be vacated because the arbitrator manifestly dis-

_ regarded that law. Indeed, Watts agrees that an arbitrator’s

refusal to adhere to “legal principles specified by contract,”

248 F.3d at 581, requires that the award be vacated.

Similarly, the Seventh Circuit’s recent Wise decision does

not conflict with the result below, as it acknowledges that an

arbitration award in a contract case may be overturned if it

“failed to interpret the contract at all,” because in such a case

the arbitrators “exceed{ed] the authority granted to them by

the contract’s arbitration clause.” 450 F.3d at 269. |

* Watts grounds this principle in Section 10(a)(4) of the FAA, 9

U.S.C. § 10(a)(4), which provides that an arbitration award must be va-

cated if it exceeds the arbitrator’s powers.

18

Thus, even granting that Watts and Wise reflect that the

Seventh Circuit panels that decided them feel some general

discomfort with decisions of other circuits concerning mani-

fest disregard, they do not conflict with the Fourth Circuit’s

decision in this case, because they expressly permit vacatur

of an arbitral decision that manifestly disregards the rules of

decision laid down in the parties’ contract and fails to reflect

a genuine interpretation of that contract.

In any event, it is unclear whether Watts’s purported limi-

tation of manifest disregard (in cases where the contract

specifies no rule of decision) to arbitration awards that order

the parties to violate the law genuinely reflects the law of the

Seventh Circuit. Before Watts, other Seventh Circuit deci-

sions—in particular Health Services Management Corp. v.

Hughes, 975 F.2d at 1267—followed the consensus view that

an award could be vacated for manifest disregard where the

arbitrators “deliberately disregarded what they knew to be the

law in order to reach the result they did.” See also Nat'l

Wrecking Co. v. Teamsters, Local 731, 990 F.2d 957 (7th

Cir. 1993); Koveleskie v. SBC Capital Markets, Inc., 167

F.3d 361, 366 (7th Cir. 1999).

The Seventh Circuit has not yet resolved the internal dis-

agreement among its opinions over the nature of the manifest

disregard standard. The issue has never received en banc

consideration. Seventh Circuit rules provide that a panel

opinion may not overrule another panel opinion unless it is

circulated to all judges of the circuit, and any panel opinion

issued through this process must contain a footnote stating

that “[t]his opinion has been circulated among all judges of

this court in regular active service,” and that a majority did

not vote for en banc rehearing. 7th Cir. R. 40(e). The Watts

opinion contains no such footnote, and as a result could not

overrule Hughes or any other Seventh Circuit precedent.

The Seventh Circuit’s failure to resolve the issue inter-

nally may reflect that it has not yet really been dispositive of

any case. None of the Seventh Circuit decisions that accepted

19

the consensus standard of the other courts of appeals vacated

an arbitration award for manifest disregard. Conversely, in

Watts, the arbitration award would not have been vacated re-

gardless of whether Judge Easterbrook’s “illegality” standard

or the consensus standard of Hughes had been applied. As

Judge Williams, concurring in the judgment in Watts, noted:

“The question of the continuing justification for and the

proper interpretation of the manifest disregard of the law

doctrine is not squarely before this court” because “with little

effort we may dispose of Watts’ claim under the manifest

disregard doctrine as it presently exists.” 248 F.3d at 581.”

Given the status of the manifest disregard standard in the

Seventh Circuit, petitioners’ claim of a circuit conflict is pre-

mature, at best. To the extent the Seventh Circuit’s own

precedents are in apparent conflict, an intra-circuit conflict

that can be resolved by the court of appeals sitting en banc is

generally not a ground for exercise of this Court’s certiorari

jurisdiction. See Robert L. Stern, et al., Supreme Court Prac-

tice § 4.6, at 235 (8th ed. 2002). “It is primarily the task of a

Court of Appeals to reconcile its internal difficulties.”

Wisniewski v. United States, 353 U.S. 901, 902 (1957).

Should the Seventh Circuit ultimately settle on a manifest

disregard standard that dramatically departs from the consen-

sus of the other circuits (not to mention the precedents of this

Court that endorse manifest disregard as a ground for vacat-

* Later Seventh Circuit cases citing Watts’s manifest disregard stan-

dard have rejected claims that an arbitrator “misunderstood” the law, But-

ler Mfg. Co. v. United Steelworkers of Am., 336 F.3d 629; 636 (7th Cir.

2003), or made a “mistake” of law, Baxter int’l, Inc. v. Abbott Labs., 315

F.3d 829, 831 (7th Cir. 2003), which would not justify relief under the

consensus standard of the other circuits. Other Seventh Circuit decisions

that approvingly cite Watts’s illegality language are even more clearly

dicta because, like Wise, they do not even involve claims of manifest dis-

regard. See, e.g., IDS Life Ins. Co. v. Royal Alliance Assocs., 266 F.3d

645, 650 (7th Cir. 2001) (“The plaintiffs wisely do not invoke ... ‘mani-

fest disregard of the law[.]’”).

20

ing arbitration awards), and should it apply that standard in a

case in which it determines the outcome, it might be appro-

priate for this Court to exercise its certiorari jurisdiction to

bring the Seventh Circuit back in line with the law as it has

prevailed for nearly 50 years. Until then, however, the Sev-

enth Circuit’s decisions do not indicate a need for this Court

to review the consensus manifest disregard standard that pre-

vails in the other circuits—especially not in a case that would

come out the same way even under the more extreme of the

two competing standards within the Seventh Circuit.

If. There Is No Genuine Conflict over the Application

of the “Essence of the Agreement” Standard.

Petitioners assert that the Fourth Circuit’s decision cre-

ates a conflict among the circuits by invoking the concept

that an arbitration award in a case involving a contract issue

must “draw its essence from the agreement” of the parties.

Pet. App. 9a. According to petitioners, the “essence of the

agreement” doctrine properly applies only to labor arbitra-

tion, and is not a ground for vacating awards in other arbitra-

tions governed by the FAA. See Pet. 15-18.'°

Petitioners admit that the First, Third, Fifth, Sixth, Sev-

enth, Eighth, Ninth, and Tenth Circuits agree with the Fourth

Circuit that an arbitration award governed by the FAA may

be vacated if it so plainly ignores the terms of an unambigu- |

ous contract that it does not draw its essence from the agree-

ment. See Fet. 17. But petitioners assert that this consensus of

the circuits conflicts with a Second Circuit decision stating

that the “essence of the agreement” standard applies only to

© Petitioners do not explain why they think review of arbitration

awards under the FAA should be more deferential than review of labor

arbitrations, given that the policies they cite (see Pet. 16, 18) suggest that

labor arbitrators should be given greater leeway in interpreting collective

bargaining agreements in order to maintain “industrial peace” by devel-

oping a “common law of the shop.” United Steelworkers of Am. v. War-

rior & Gulf Nav. Co., 363 U.S. 574, 578, 581-82 (1960).

21

labor arbitration. See Westerbeke Corp. v. Daihatsu Motor

Co., 304 F.3d at 221-22.

Petitioners, however, fail to mention that Second Circuit

precedents also establish that a standard functionally identi-

cal to the “essence of the agreement” doctrine (even if not so

denominated) applies to arbitration awards under the FAA,

which may be vacated if they manifestly disregard terms of

an unambiguous contract. See Yusuf Ahmed Alghanim &

Sons v. Toys “R” Us, Inc., 126 F.3d 15 (2d Cir. 1997). The

Toys “R” Us court, using reasoning strikingly similar to the

Fourth Circuit’s in this case, grounded this concept in the

doctrine of manifest disregard of the law, see id. at 25, and

stated, in language very close to that of the Fourth Circuit

below, that “[w]e will overturn an award where the arbitrator

merely makes the right noises—noises of contract interpreta-

tion—while ignoring the clear meaning of contract terms.”

Id. In Westerbeke, the Second Circuit expressly declined to

hold that Toys “R” Us was not good law. See 304 F.3d at

222. Instead, Westerbeke decided the case before it “assum-

ing the applicability of [the Toys “R” Us] doctrine,” and held

that “vacatur for manifest disregard of a commercial contract

is appropriate only if the arbitral award contradicts an ex-

press and unambiguous term of the contract or if the award

so far departs from the terms of the agreement that it is not

even arguably derived from the contract.” Jd. That is pre-

cisely the standard applied by the Fourth Circuit below. See

Pet. App. 9a-10a.

Petitioners also argue more generally that the Fourth Cir-

cuit’s application of the “essence of the agreement” standard

conflicts with decisions of other circuits that use the standard

in cases governed by the FAA, and that the other circuits dis-

agree with one another about the proper standard. See Pet.

19-22. Petitioners’ claim of a conflict, however, rests on both

a mischaracterization of the Fourth Circuit’s decision and on

a gross exaggeration of insubstantial differences in the ways

the various circuits articulate the standard.

22

Petitioners’ attempt to portray the circuits as broadly in

conflict begins with a misstatement of the Fourth Circuit’s

holding: Petitioners insist that the Fourth Circuit adopted an

“unreasonableness standard” for determining when an award

fails to draw its essence from the parties’ agreement. As we

have explained, however, the Fourth Circuit expressly stated

that an award may not be vacated merely because an arbitra-

tor “misread” an agreement, but only when the arbitrator’s

decision is not “rationally inferable” from the agreement and

reflects his “personal notions of right and wrong” rather than

the unambiguous terms of the contract. Pet. App. 9a-10a.

The very cases petitioners cite show that this standard

does not conflict with that of any of the other circuits, which

similarly ask whether the arbitrator is “even arguably con-

struing or applying the contract,” Pet. 19 (citing First, Third,

Ninth, Tenth, and D.C. Circuit authority); whether the award

“in some logical way, [is] derived from the wording or pur-

pose of the contract,” Pet. 20 (citing 5th Circuit authority);

and whether the award is “derived from the agreement,

viewed in light of the agreement’s language and context, as

well as other indications of the parties’ intention.” Pet. 20

(citing Eighth Circuit authority).'’ Petitioners themselves

admit that the Fourth Circuit’s decision does not conflict with

the Sixth Circuit’s “essence” decisions. Pet. 20-21.

Petitioners’ claims that the circuits are generally in disar-

ray in their statement of the “essence” standard fares no bet-

ter. As petitioners’ own citations show, all the circuits, at bot-

tom, inquire whether the arbitrator’s award reflects an argu-

able effort to interpret the parties’ contract.'? Minor differ-

"' Petitioners’ claim that the decision below conflicts with Eighth

Circuit law is ironic in light of the Fourth Circuit’s reliance on the Eighth

Circuit’s holding in Missouri River Services, 267 F.3d at 855, that an ar-

bitrator may not “disregard or modify unambiguous contract provisions.”

" Petitioners’ assertion that one factor considered by the Sixth Cir-

cuit (whether the award imposes additional requirements not found in the

(Footnote continued)

23

ences in the way the courts articulate the standard from case

to case do not amount to a conflict.

What petitioners really object to is not the legal standard

applied by the Fourth Circuit, but the way the court applied

the standard to the facts here. See Pet. 21 (defending “Arbi-

trator Truesdale’s good-faith decision” and arguing that “at

worst” he “merely ‘fail[ed] to notice’” the contractual lan-

guage that foreclosed his decision). Petitioners’ quibble with

the Fourth Circuit’s application of a “correctly stated rule of

law” is the archetype of a non-certworthy issue. S. Ct. R. 10.

IV. Petitioners’ Request That the Court Reject All

“Non-Statutory” Grounds for Vacatur, Including

Manifest Disregard, Does Not Merit Review.

Petitioners’ final and most sweeping argument asks this

Court to overturn a half-century of settled law and decide that

neither manifest disregard of the law, nor any other “non-

statutory” ground for vacatur, may be used to challenge an

arbitration award. Pet. 22-25. Petitioners never made this ar-

gument below, not even in their petition for rehearing en

banc, and they should therefore be precluded from raising it

in this Court. The argument, in any event, runs counter to this

Court’s repeated recognition of the manifest disregard doc-

trine, see First Options, 514 U.S. at 942, and the settled law

in every federal circuit, see n.1, supra. If petitioners are cor-

_ rect, Congress has stood silently by for 50 years as the fed-

eral courts have radically misinterpreted the FAA. Such “pro-

longed congressional silence in response to a settled interpre-

tation of a federal statute provides powerful support for

contract) conflicts with the way the “essence” standard is applied by other

circuits falters on petitioners’ inability to cite even one case from another

circuit rejecting this criterion. Given that the Sixth Circuit has articulated

the standard the same way for over 20 years, see Cement Divs., Nat'l

Gypsum Co. v. United Steelworkers of Am., 793 F.2d 759, 766 (6th Cir.

1986), if there were in fact a conflict on that issue, one would think some

opinion would have mentioned it by now.

24

maintaining the status quo.” Hibbs v. winn, 542 U.S. 88, 112

(2004) (Stevens, J. concurring); see also Gen. Dynamics

Land Sys. v. Cline, 540 U.S. 581, 594 (2004). Congress’s 50

years of silence “can be likened to the dog that did not bark.”

Chisom v. Roemer, 501 U.S. 380, 396 n.23 (1991).

In the absence of any conflict among the decisions of the

Courts of appeals or this Court, and in the face of longstand-

ing Congressional silence, petitioners raise the abstract ques-

tion whether manifest disregard should be characterized as a

“statutory” or “non-statutory” basis for vacatur. That issue,

too, is more semantic than real. The FAA provides that a fed-

eral court may vacate an arbitration award in any case

“fw]here the arbitrators exceeded their powers ....” 9 U.S.C.

§ 10(a)(4). The manifest disregard doctrine has historically

been viewed as an application of this language, see Amicizia,

274 F.2d at 808, because a manifest disregard of the law is,

by definition, one way in which an arbitrator exceeds his or

her powers. See Kyocera Corp. v. Prudential-Bache Trade

Servs., 341 F.3d 987, 1002-03 (9th Cir. 2003) (“[T]he ‘ex-

ceeded their powers’ clause of § 10(a)(4) ... provides for va-

catur only when arbitrators purport to exercise powers that

the parties did not intend them to possess or otherwise dis-

play a manifest disregard for the law.”).

Although courts sometimes refer to manifest disregard as

a “nonstatutory” or “common law” ground for vacatur, Pet.

App. 7a, that is not the same thing as saying that it is contrary

to, or even untethered to, the FAA. On the contrary, the

manifest disregard doctrine may properly be regarded as part

of the general or common federal law of arbitration that has

developed to supplement the concise language of the FAA

and effectuate the statute’s broad policies. Indeed, even the

Seventh Circuit’s most restrictive decision concerning mani-

fest disregard acknowledges that “manifest disregard of the

law” is “often” covered by § 10(a)(4), and that where, as

here, “the parties specify that their dispute is to be resolved

under” a particular rule of decision and the arbitrator deliber-

25

ately departs from that rule of decision, the arbitrator’s award

“would violate the terms on which the dispute was given to

him for resolution, and thus justify relief under § 10(a)(4).”

Watts, 248 F.3d at 578-89.

Despite their protests about “the kind of merits-based re-

view that has become endemic in the lower courts,” Pet. 23,

. petitioners concede that federal-court vacatur of an arbitra-

tion award is a rarity. Under current law, review by courts

“only occasionally alters the outcome of an award” and chal-

lenges to awards based on manifest disregard “are unsuccess-

ful in the vast majority of cases.” Pet. 26-27. Tellingly, peti-

tioners report that—despite what they characterize as an

overly generous manifest disregard standard throughout the

circuits—their Westlaw search of all federal court of appeals

cases revealed a universe of less than two hundred cases ap-

plying the doctrine, including only six vacated awards, one

of which was reinstated upon remand to the arbitrator.

These small numbers reveal the unimportance of the

questions presented and contradict the petition’s picture of

federal courts run amok. Attempting to explain this incongru-

ity, petitioners argue that “the mere availability” of the mani-

fest disregard doctrine “encourages losing parties to chal-

lenge arbitral awar¢s,” even where doing so is frivolous. Pet.

27. Petitioners’ solution is to cut off this avenue of review

altogether. The only authority petitioners cite for their argu-

ment that frivolous challenges are becoming a problem is

B.L. Harbert International v. Hercules Steel Co., 441 F.3d at

913. There, the court discussed what to do “{w]hen a party

who loses an arbitration award assumes a never-say-die atti-

tude and drags the dispute through the court system without

an objectively reasonable belief that it prevail[.]” Jd. But

Harbert does not say such frivolous claims are any more

common than other kinds of frivolous claims. And, more im-

portantly, Harbert proposes a very different solution than do

petitioners—namely, “insist[ing] that if a party on the short

end of an arbitration award attacks that award in court with-

26

out any real legal basis for doing so, that party should pay

sanctions.” Jd. The availability of such ordinary remedies for

abusive litigation underscores the lack of any pressing need

for this Court’s review.

Moreover, while the Eleventh Circuit’s threat of sanc-

tions may be severe, it is far less extreme than the approach

proposed by the petitioners. Petitioners’ position, if accepted,

would eliminate any safety valve for the rare case in which

an arbitrator truly strays beyond the bounds of his or her au-

thority. The presence of such a safety value bolsters the in-

tegrity of, and public confidence in, the alternative dispute

resolution process as a whole.

Such a safety valve is particularly important in cases such

as this one, in which there is a risk that, absent any possibility

of review, federal statutory rights will devalued. In Gilmer v.

Interstate/Johnson Lane Corp., 500 U.S. 20 (1991)-—a case

that, like this one, included allegations of age discrimination

in violation of federal law—this Court concluded that cases

involving statutory rights are subject to arbitration, but it

rested this conclusion on two fundamental assumptions about

how arbitration operates. First, “by agreeing to_arbitrate a

statutory claim, a party does not forgo the substantive rights

afforded by the statute; it only submits to their resolution in

an arbitral, rather than a judicial forum.” Jd. at 26 (quoting

Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc.,

473 U.S. 614, 628 (1985)). Second, “‘although judicial scru-

tiny of arbitration awards necessarily is limited, such review

is sufficient to ensure that arbitrators comply with the re-

quirements of the statute’ at issue.” Id. at 32 n.4 (quoting

Shearson/Am. Express v. McMahon, 482 U.S. at 232) (em-

phasis added).

As the courts of appeals have recognized, “[t]hese twin

assumptions regarding the arbitration of statutory claims are

valid only if judicial review under the ‘manifest disregard of

the law’ standard is sufficiently rigorous to ensure that arbi-

trators have properly interpreted and applied statutory law.”

27

Cole v. Burns Int'l Sec. Servs., 105 F.3d 1465, 1487 (D.C.

Cir. 1997); see also Williams, 197 F.3d at 761 (‘The federal

courts and courts of appeals are charged with the obligation

to exercise sufficient judicial scrutiny to ensure that arbitra-

tors comply with their duties and the requirements of the

statutes.”). By proposing to discard the manifest disregard

doctrine, petitioners seek to eliminate a fundamental protec-

tion on which the arbitrability of statutory claims is premised.

Petitioners’ sweeping attempt to discard the manifest dis-

regard doctrine would not only overturn the law of every cir-

cuit, but would callinto question the settled expectation that ~

statutory discrimination claims such as respondent’s are sub-

ject to mandatory arbitration. An established consensus in the

lower courts, supported by statements of this Court, should

not be overturned merely because a litigant is dissatisfied

with the application of the law to the facts of its case.

CONCLUSION

For the foregoing reasons, the petition for a writ of certio-

rari should be denied.

Respectfully submitted,

DOUGLAS B. MCFADDEN

Counsel of Record

JOHN M. SHOREMAN

MCFADDEN & SHOREMAN

1420 New York Ave., N.W.

Suite 700

Washington, DC 20005

(202) 638-2100

Date: September 2006

28

Scott L. NELSON

DEEPAK GUPTA

PUBLIC CITIZEN LITIGATION

GROUP

1600 20th Street, N.W.

Washington, D.C. 20009

(202) 588-1000

Attorneys for Respondent