Opposition Brief — Coffee Beanery, Ltd., The v. WW, LLC (No. 08-1396)

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(3) ; AUG 2 5 2008

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No. 08-1396 a

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IN THE

Supreme Court of the Gnited States

THE COFFEE BEANERY, LTD., ET AL.,

Petitioners,

Vv.

WW, LLC, RICHARD WELSHANS, AND

DEBORAH WILLIAMS,

Respondents.

On Petition for a Writ of Certiorari to the

United States Court of Appeals for the Sixth Circuit

RESPONDENTS’ BRIEF IN OPPOSITION

HARRY M. RIFKIN DEEPAK GUPTA

1447 York Road Counsel of Record

Lutherville, MD 21093 Scott L. NELSON

(410) 583-0099 PUBLIC CITIZEN

LITIGATION GROUP

1600 20th Street NW

Washington, DC 20009

(202) 588-1000

Counsel for Respondents

August 2009

i)

QUESTION PRESENTED

1. Under the Federal Arbitration Act, courts may

vacate arbitration awards when arbitrators have “ex-

ceeded their powers.” 9 U.S.C. § 10(a)(4). Every circuit

to squarely address the issue has held that arbitrators

may exceed their powers under Section 10(a)(4) by mani-

festly disregarding the law, and no circuit has foreclosed

that manifest-disregard standard. In the absence of a

circuit split, should this Court grant certiorari to decide

whether the manifest-disregard standard is consistent

with Section 10(a)(4)?

2. Should the Court grant certiorari to decide

whether, assuming the manifest-disregard standard is

consistent with Section 10(a)(4), the decision below mis-

applied that standard to the facts of this case?

-ji-

DISCLOSURE STATEMENT

WW, LLC has no parent corporations, and no pub-

licly held company owns 10% or more of its stock.

-lli-

TABLE OF CONTENTS

QUESTION PRESENTED .o..ccccccccssessssesssecessesecsseesseeesees

DISCLOSURE STATEMENT ......ccccccssescsseccecesececseeeeeeess ii

TABLE OF AUTHORITIES .....csccscsscscsseessesesersecenseeerees iv

TIT POPES TION oo occcsccscssisecessosccosssscssccsinssevensnrnocoseassusvee 1

CEN, |, RE TNO ney 2

REASONS FOR DENYING THE WRIT .......csscesseeseeees 7

I. The Manifest-Disregard Standard Under Section

10 of the FAA Has Been Settled Law for Decades.

ORE Oe eh Saye an PRP ARIN A srr SAMO oC iiSs et 7

If. Hall Street Did Not Foreclose Review for Manifest

Disvewara Under Section 10. o..cscccsisssssescescsessseas 9

I{I. There Is No Circuit Split Over Manifest Disregard.

snl skeea wleuilecagaanueecad Petteun ae tee ee edaee ee 10

IV. The Petition’s Predictions About the Impact Of

Allowing Review For Manifest Disregard Are

PORTE. ovsesesscicsecsstenccce anes 17

V. This Case Is A Poor Vehicle For Exploring The

PUTING FING i eiccnccsvaccacedsacccsvinnssacseuabdasioets 21

CAP PIG Ie vsrevnsavensscavenscavackbuseneeseeeeneeeareee 23

-1V-

TABLE OF AUTHORITIES

Amicizia Societa Navegazione v. Chilean Nitrate

& Iodine Sales Corp.,

BEE Fe Ie Ce IE, BD) on cccsssscccsenesscctscsoncsseosnenes 8

Apex Plumbing Supply v. U.S. Supply Co.,

Be Fe Fe GE FI csinvatisveineesisiceiisivsiccrzesves 8

Arbitration Between Bosack v. Soward,

__ -F8d __, 2009 WL 2182898 (9th Cir.

MIE vassacuduhieatldundadencicenexchtaneesemeacicoe iagdectodauan 11, 16

Augusta Capital, LLC v. Reich & Binstock,

2009 WL 2065555 (M.D. Tenn. 2009) ................... 15

B.L. Harbert International v. Hercules Steel Co.,

Bay FP Ber FI i Ch, Fd ican vtncivcisedicvessovcncssss 19

Carter v. Health Net of California,

STH Be Ba COE Ci. BF) eo reicesscsssvensccnssacecenvnesecaes 8

Chisom v. Roemer,

Be ee ee Ce ivi ccinsesbaceeicteenieleimnccnan 18

Citigroup Global Markets, Inc. v. Bacon,

562 F.3d 349 (Sth Cir. 2009)...........ccccscccesee 13, 14,2

Cole v. Burns International Security Services,

SOE Fe PA Ca I isis cecemncvcssncmntcnnn 20

Comedy Club, Inc. v. Improv West Associates,

BES FB UST 7 CE Cr FO one evenccccicncecesicnsscss 41, 23

Cytyc Corp. v. DEKA Products Ltd. Partnership,

GO Fa Sr CE Cr Fe aves vnc convecsecsseccicesivicns 8

Dealer Computer Services, Inc. v. Dub Herring

Ford,

GOT FOG GES (GG Cir, BODE) « ccnceencesensecenscosivcouvsneses 15

Dluhos v. Strasberg,

ek, Fe ee I, BD a cieccsidccsccnesvesssonsesanvecannss 8

Dominion Video Satellite, Inc. v. Echostar Satellite,

4950 FSG 1260 CIO Cit’. BOOB) ......cccccecooccevccssscconccese 8

First Options of Chicago, Inc. v. Kaplan,

ee ose ice ee eae 7

Flex-Foot, Inc. v. CRP, Inc.,

Bee © a Ee Ch OG. AP, DD ev cesececesnscaccccsenseticces 9

General Dynamics Land System v. Cline,

BN NE CE vntnninsesavecsnviseupassbosiecenamminlzinneyias 17

George Watts & Son, Inc. v. Tiffany & Co.,

CE FP Te CPR CA. BE) vsccvecascncsisanssacieninne 2. 77

Gilmer v. Interstate/Johnson Lane Corp.,

ee Be a rivcsentcncaeicissaancirenassenaenel 19, 20

Grain v. Trinity Health, Mercy Health Services Inc.,

CEE Fe Te CE Ga, BE a rnc nisdcciescscccsnconsess 15, 16

Hall Street Associates, L.L.C. v. Mattei, Inc.,

552 U.S. _, 128 S. Ct. 1396 (2008)............. passim

Health Services Management Corp. v. Hughes,

F716 F206 1258 CTU Ci. TOBE) on. cecssseesecennnacesnsvesseces 8

-vi-

Hibbs v. Winn,

ee I oo ccwnctonacsnnvedserecasteanbermruiielan Om

Hoeft v. MVL Group,

ee CE ey BO? hes vivnntncessscnscscisvovenvercveiens 8

Kashner Davidson Securities Corp. v. Mscisz,

531 F.3d 68 (1st Cir. 2008) ............... peuuieaseamaniceaeh 12

Kurke v. Oscar Gruss & Son, Inc.,

BSE FB Ba CEE, CEP, BEG) once cceccccccccrvcnsccessvcovecsss Y

Kyocera Corp. v. Prudential-Bache Trade Services,

BET Fe GET (COG Cit’. BOGE) noes scccossscccccreaceess 8, 10, 12

Martin Marietia Materials, Inc. v. Bank of

Oklahoma,

304 Fed. Appx. 360 (6th Cir. 2008)... eeeeseeeee 16

McGrann v. First Albany Corp.,

GE Fe Fe Gt CAF. BIO) ovevessacensacssrccccensscersrecesse 8

Mitsubishi Motors Corp. v. Soler Chrysler

Plymouth, Inc.,

Ie Fr i ee EE vsinesscivcnsicincesceseansnceiihsneanasieinmantans 20

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

Inc.,

431 Fd 1920 (1 Tt Cir, BOOS) ...cnccccseccvsscccsonsenerersee 8

Qorvis Communications, LLC v. Wilson,

AD Fe re (AGE CAP, FOI) vicenccnscccccnseresecnvnscssevese 15

Ramos-Santiago v. United Parcel Service,

Be Fe TED CBBC Ci, DOG) ovcnsssctencexcassssecscesetasenns 12

Mie

Sarofim v. Trust Co. of the West,

440 F.3d 213 (Sth Cir. 2006)..................sscessrcesesconees 8

Shearson/America K'xpress, Inc. v. McMahon,

Re Sis iene tiki sctscnernsdoncedcttiemesieionss 7, 20

Solvay Pharmaceuticals v. Duramed Pharmaceu-

ticals,

BE Fe 470 GE Cis TG) vives a sssisvencenecssccnsseessscees 8

Stolt-Nielsen SA v. Animalfeeds International,

548 F.3d 85 (2d Cir. 2008) .............. 11, 14, 17, 18, 21

Thomas v. Union Carbide Agricultural Products,

Ee he ee i aiviiicctksnticisrcscsieetenaennes 7

Wilko v. Swan,

ee ee ee eh a pact ousuoasaesmanae cans 7

Williams v. Cigna Financial Advisors,

TOT Fe Tee Se Gh, TI) veiisscisssccscsnnssessescoeeniss 20

Wise v. Wachovia Securities, LLC,

450 F.3d 266 (7th Cir. 2006) ..............00c000.000 8, 12,18

STATUTES AND RULES

ee icra cecant tap basstnavesnaplaaicamaconeed passim

ee ee ae ae icc ee ai ssa ea le 16

Md. Bus. Reg. Code Ann. § 14-216(8)(1) ........ cece eeeeee 4

Beamer CE TR 0G oasis csccsicsnasessastvssmescuapeaons 2, 22

-Vili-

MISCELLANEOUS

Stephanie Mencimer,

Franchise Fraud: Wake Up and Smeli the

Fine Print, Mother Jones, Feb. 24, 2009,

available at http://;www.motherjones.com/

politics/2009/02/franchise-fraud-wake-and-

SIU TRI i niscssssstaszescinsdistavetusassasaanateneenarwuniaas 3

James E. Berger and Charlene Sun,

Fifth Circuit Addresses ‘Manifest Disre-

gard’ Review Under Federal Arbitration

Act, Paul Hastings, available at

http://www. paulhastings.com/assets/publicati

ons/1265.pdf?wt.me_ID=1265.pdf. ...................- mF

INTRODUCTION

For half a century, federal courts have held that

arbitration awards may be set aside in the rare event

that an arbitrator manifestly disregards the law. This

extremely limited and deferential standard—adopted by

every federal circuit—has historically been viewed as an

application of Section 10(a)(4) of the Federal Arbitration

Act (FAA), because manifest disregard of the law is, by

definition, one way in which arbitrators can “exceed |

their powers.” 9 U.S.C. § 10(a)(4).

Coffee Beanery wants this Court to jettison that

half-century of jurisprudence. It urges the Court to

grant certiorari to resolve a purported circuit split over

“whether manifest disregard of the law survives in any

form as a ground for vacating arbitration awards under

the FAA.” Pet. 3 (emphasis added). The split, the peti-

tion contends, has developed since this Court’s decision

in Hall Street Associates, L.L.C. v. Mattel, Inc., 552 U.S.

___, 128 S. Ct. 1396, 1403 (2008), which held that Section

10 “provide[s] the FAA’s exclusive grounds for expedited

vacatur.”

There is no circuit split. In the 16 months since Hall

Street, not one circuit has held that the manifest-

disregard standard does not survive in any form. No cir-

cuit, in other words, follows the approach that Coffee

Beanery advocates. On the contrary, the only two cir-

cuits to have squarely decided the issue since Hall

Street—the Second and the Ninth—have held that the

manifest-disregard standard remains valid as an applica-

tion of section 10(a)(4). These courts have taken their cue

from Hall Street itself, which acknowledged (in a pas-

sage the petition conspicuously omits) that manifest dis-

regard may be viewed as “shorthand” for section

10(a)(4). 128 S. Ct. at 1404. Reviewing for manifest dis-

2

regard as a gloss on section 10(a)(4) is also consistent

with pre-Hall Street precedent from the Seventh and

Ninth Circuits describing manifest disregard as falling

comfortably within section 10(a)(4).

No circuit has rejected the approach of the Second,

Seventh, and Ninth Circuits. Coffee Beanery’s claim of a

circuit split rests on the assertion that two circuits—the

First and the Fifth—have foreclosed the manifest-

disregard standard altogether. But that assertion is in-

correct. The First Circuit decision cited in the petition

expressly declined to reach that question, and a subse-

quent First Circuit decision (not mentioned in the peti-

tion) in fact reviewed an arbitration award for manifest

disregard. Nor has the Fifth Circuit created a split. The

Fifth Circuit’s careful and narrow decision holds only

that manifest disregard is unavailable to the extent that

it constitutes an independent, nonstatutory ground for

vacatur, and leaves for another day the question whether

maniest-disregard survives as a gloss on _ section

10(a)(4). That approach is entirely consistent with the

approach of the Second, Seventh, and Ninth Circuits—as

the Fifth Circuit itself acknowledged. Finally, the peti-

tion mischaracterizes the law of the Fourth and Sixth

Circuits, neither of which has produced any published

post-Hall Street precedent on the question presented.

Absent a split on the first question presented, the

petition boils down to a case-specific plea for error cor-

rection. But an alleged “misapplication of a properly

stated rule of law” is generally not an appropriate

ground for certiorari. S. Ct. Rule 10.

STATEMENT

1. Factual Background. After Richard Welshans

left his job at a chemical manufacturer in 2003, he and

his wife, Deborah Williams, decided to use his severance

‘

»

“>

package to open a coffee shop in their hometown of An-

napolis, Maryland. They arranged to meet with repre-

sentatives of The Coffee Beanery, a company whose

primary business is selling coffee shop franchises. App.

2, 30.’

Richard and Deborah attended a “discovery day”

for potential franchisees at Coffee Beanery’s Michigan

headquarters, where they met with the company’s vice

president, Kevin Shaw. Although the couple went to the

meeting interested in a traditional coffee shop franchise,

Shaw persuaded them to purchase a full-scale “Café

Store,” which was far more expensive to open and oper-

ate, but which he claimed would be more lucrative. Shaw

asked the couple, “Can you get by on $125,000?” and

showed them optimistic income projections. App. 3. That

same day, they entered into a contract to purchase and

operate a Café Store franchise for an initial franchise fee

of $25,000. The contract included a mandatory binding

arbitration clause.

Coffee Beanery hid from Richard and Deborah the

fact that its sales pitch made the café franchises look

much more profitable than they actually were. Most of

the café shops closed within three years, leaving their

owners deep in debt. By the time Richard and Deborah

agreed to buy their franchise, approximately 40 cafe

franchises had failed. About 60 more have failed since.

The company also concealed the fact that Shaw had been

convicted of a felony (grand larceny)—despite a Mary-

land Franchise Act provision requiring disclosure to

' See Stephanie Mencimer, F’ranchise Fraud: Wake Up ari

Smell the Fine Print, Mother Jones, Feb. 24, 2009, available at

http://www. motherjones.com/politics/2009/02/franchise-fraud-wake-

and-smell-fine-print (detailing Richard and Deborah’s experience

with Coffee Beanery).

-4.

franchisees of felony convictions for “misappropriation of

property.” Md. Bus. Reg. Code Ann. § 14-216(8)(i).

Richard and Deborah were likewise unaware that

Coffee Beanery had experienced serious financial diffi-

culties, and that its business relied on selling franchises

and equipment to franchisees at inflated prices. For ex-

ample, Coffee Beanery required the couple to buy from

the company a discontinued lighting system for about

$14,000, and a defective display case for $8,000. By 2004,

they had been forced to invest approximately $90,000 in

personal funds, $300,000 from a Small Business Admini-

stration loan, and $40,000 from a home equity loan—just

to keep the business afloat. As a result of their experi-

ence with Coffee Beanery, Richard and Deborah were

eventually forced to mortgage their home and file for

bankruptcy.

2. State Enforcement Action. In January 2006, in

response to Richard and Deborah's case, the Maryland

Securities Commissioner issued an administrative order

to show cause against the Coffee Beanery and Kevin

Shaw, alleging that they had violated the disclosure and

anti-fraud provisions of the Maryland Franchise Act.

App. 4-5. The Commissioner’s claims were nearly identi-

cal to those that Richard and Deborah independently

brought in this case—that Coffee Beanery had made

numerous material misrepresentations in connection

with the offer and sale of the Café Store franchises, that

Shaw improperly told buyers they could expect a specific

income level from the operation of a Café Store, and that

Coffee Beanery had failed to timely provide certain re-

quired disclosures. /d. 5.

In September 2006, the Commissioner, Coffee

Beanery, and Shaw entered into a consent order,

whereby Coffee Beanery and Shaw acknowledged that

-

-.)-

“Coffee Beanery violated . .. the Maryland Franchise

Act by making material misrepresentations of fact or

omissions of material fact” to prospective Maryland

franchisees, and by failing to make required disclosures.

Id. 34-35. The order required Coffee Beanery and Shaw

to cease selling franchises in Maryland unless they com-

plied with the Franchise Act’s disclosure requirements

and to offer recission to franchisees. /d.

3. District-Court and Arbitration Proceedings. One

month before the Securities Commissioner’s order to

show cause, Richard, Deborah, and WW, LLC (the cor-

poration they had formed to run the café) sued Coffee

Beanery in federal district court in Maryland. App. 4. In

response, Coffee Beanery filed a petition to compel arbi-

tration in federal district court in Michigan. /d. 5. The

latter court granted the petition and Coffee Beanery

commenced arbitration. The Maryland case was stayed

pending the outcome of the arbitration.

The arbitrator selected by Coffee Beanery, JoAnne

Barron, shared an accountant with Coffee Beanery—a

critical conflict of interest given the centrality of Coffee

Beanery’s accounting to the dispute. Although this con-

flict was disclosed to the arbitral forum, it was not dis-

closed to Richard and Deborah until after Barron’s ap-

pointment. The couple asked that Barron be replaced

because “financial disclosures by Coffee Beanery are at

issue in this case,” but Barron was not removed.

Despite the Securities Commissioner’s conclusions,

the arbitrator ruled against Richard and Deborah in all

respects and found no violations of the Franchise Act. /d.

50-58. Barron also ordered Richard and Deborah to pay

Coffee Beanery $13,710 in unpaid royalties (which Coffee

Beanery had not even requested in its counterclaim) and

$187,452 in legal fees and arbitration expenses, including

-6-

$16,800 for the arbitrator’s services, $35,571 for a court

reporter and transcription, and $504 for the Beanery

lawyers’ lunches. /d. 57. The federal district court in

Michigan confirmed the award and denied Richard and

Deborah’s motion to vacate. Jd. 30-49

4. The Sixth Circuit’s Decision. On appeal, Rich-

ard and Deborah raised four arguments in favor of vaca-

tur: (1) that the Franchise Act claims fell outside the ar-

bitrator’s authority, (2) that the franchise agreement was

unconscionable, (3) that the arbitrator had a conflict of

interest that rose to the level of bias, and (4) that the ar-

bitrator manifestly disregarded the law. App. 10.

In an unpublished and non-precedential decision,

the Sixth Circuit reversed, cencluding that the arbitrator

manifestly disregarded the law because she “expressly

chose not to follow clearly established law regarding the

disclosure of Shaw’s prior felony.” /d. 14. The arbitrator,

in other words, knew that Maryland law required disclo-

sure of a felony conviction involving “misappropriation of

property,” but nevertheless refused to follow that law.

The panel emphasized that the FAA “expresses a pre-

sumption that arbitration awards will be confirmed,” and

that the applicable standard is “one of the narrowest

standards” in “all of American jurisprudence.” /d. 7-8. In

response to Coffee Beanery’s petition for rehearing, the

panel added a single paragraph discussing Hall Street,

which the court interpreted as leaving open the possibil-

ity of review for manifest disregard of the law. App. 9.

Coffee Beanery again petitioned for rehearing en

bane. No judge requested a vote on whether to rehear

the case en banc, and the petition was denied. /d. 65. The

Sixth Circuit has yet to issue a precedential decision con-

cerning the availability of manifest-disregard review un-

der section 10 of the FAA.

-7-

REASONS FOR DENYING THE WRIT

The Manifest-Disregard Standard Under Section

10 Of The FAA Has Been Settled Law For Dec-

ades.

In keeping with its uniform national policy in favor

of arbitration, the FAA does not authorize ordinary judi-

cial review of the legal merits of arbitration awards. On

the contrary, the Act authorizes federai courts to set

aside arbitration awards only under very limited circum-

stances, including when arbitrators have “exceeded their

powers.” 9 U.S.C. § 10(a)(4).

For half a century, the federal courts have exer-

cised their authority under section 10 to review arbitra-

tior awards for manifest disregard of the law—that is, to

determine whether an arbitrator has deliberately re-

fi.sed to follow what he or she knows to be the law. That

extremely deferential standard had its genesis in Wilko

v. Swan, 346 U.S. 427, 4386-37 (1953), which contrasted

manifest disregard with ordinary judicial review of the

merits: “[I|nterpretations of the law by the arbitrators

in contrast to manifest disregard |of the law] are not

subject, in the federal courts. to judicial review for error

in interpretation” (emphasis added). This Court recog-

nized the availability of the manifest-disregard standard

in several subsequent decisions. See First Options of

Chicago, Inc. v. Kaplan, 514 U.S. 938, 942 (1995) (listing

manifest disregard of the law among the “very unusual

circumstances” in which courts will set an arbitrator’s

decision aside); 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).

Although courts have often loosely referred to

manifest disregard as a “nonstatutory” or “common law”

basis for vacatur, the standard has historically been

-8-

viewed as an application of the “exceeded their powers”

clause of Section 10(a)(4) because manifest disregard of

the law is, by definition, one way in which an arbitrator

exceeds his or her powers. See Wise v. Wachovia Sec.,

LLC, 450 F.3d 265, 268-69 (7th Cir. 2006) (““[Wle 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.”’); Kyocera Corp. v. Prudential-Bache Trade

Servs., 341 F.3d 987, 1002-03 (9th Cir. 2008) (“The ‘ex-

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

vacatur only when arbitrators purport to exercise pow-

ers that the parties did not intend them to possess or

otherwise display a manifest disregard of the law.”);

Amicizia Socreta Navegazione v. Chilean Nitrate & Io-

dine Sales Corp., 274 F.2d 805, 808 (2d Cir. 1960) (first

court of appeals decision applying the manifest-

disregard standard; describing the standard as a gloss

on the “exceeded their powers” clause).

The federal court of appeals—the First through

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

adopted manifest disregard as a valid standard for vacat-

ing arbitration awards under the FAA.’ Contrary to Cof-

2 See Cytyce Corp. v. DEKA Prods. Ltd. P’ship, 439 F.3d 27, 35

(1st Cir. 2006); Hoeft v. MVL Group, 343 F.3d 57, 69 (2d Cir. 2003);

Dluhos v. Strasberg, 321 F.3d 365, 370 (3d Cir. 2003); Apex Plumb-

ing Supply Vv. 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 (5th Cir.

2006); Solvay Pharms. v. Duramed Pharm., 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., 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 (1th Cir.

(Footnote continued...)

2.

fee Beanery’s assertion, no circuit has categorically fore-

closed the standard as an application of section 10(a)(4),

which should be unsurprising given Hall Street’s discus-

sion of manifest disregard.

II. Halli Street Did Not Foreclose Review For Mani-

fest Disregard Under Section 10.

Last year, in Halil Street, this Court held that fed-

eral courts lack authority to vacate arbitration awards

under the FAA for reasons other than those enumerated

in the statute. Hall Street, 128 S. Ct. at 1400 (“We hold

that the statutory grounds are exclusive.”). The parties

in Hall Street had agreed by contract to give the district

court authority to vacate or modify their arbitration

award for insufficient evidence or for ordinary legal er-

rors—grounds not listed in the FAA. /d. The question

for the Court was whether that aspect of the agreement

could be enforced.

In Hall, one of the petitioner’s arguments in favor

of expanded review by contract was that “expandable

judicial review authority has been accepted as the law

since Wilko.” Jd. at 1403. The petitioner read Wilko as

“recognizing ‘manifest disregard of the law’ as a further

ground for vacatur on top of those listed in § 10.” Id. at

1403 (emphasis added). If courts can add grounds for va-

catur, the petitioner argued, then so can contracting par-

ties.

This Court accepted neither the petitioner’s argu-

ment nor its premise that manifest disregard is

untethered to the statute—the same premise on which

(...continued)

2005); Kurke v. Oscar Gruss & Son, Inc., 454 F.3d 350, 354 (D.C.

Cir. 2006); F'lex-F'oot, Inc. v. CRP, Inc., 238 F.3d 1362, 1365-66 (Fed.

Cir. 2001).

-10-

Coffee Beanery’s petition rests. First, the Court ob-

served that Wilko’s reference to manifest disregard “ex-

pressly rejects ... general review for an arbitrator’s le-

gal errors.” /d. at 1404. Second, the Court explained that

manifest disregard may properly be viewed not as an

additional, nonstatutory ground but as shorthand for

those grounds enumerated in section 10. Manifest disre-

gard may refer “to § 10 grounds collectively, rather than

adding to them. Or, as some courts have thought, ‘mani-

fest disregard’ may have been shorthand for § 10(a)(3) or

§ 10(a)(4), the subsections authorizing vacatur when the

arbitrators were ‘guilty of misconduct’ or ‘exceeded their

powers.” /d. at 1404 (citing Kyocera, 341 F.3d at 997). In

other words, the Court recognized that review for mani-

fest disregard of the law may be consistent with Section

10.

Tellingly, Coffee Beanery’s petition completely

omits Hall Street’s recognition that the manifest-

disregard standard may properly be regarded as a gloss

on Section 10 and its “exceeded their powers” clause.

That recognition is fatal to the petition’s argument (at

24-27) that the manifest-disregard standard is in “sub-

stantial tension” with Hall Street. To the contrary, the

most that can be said for Coffee Beanery’s argument is

that Hall Street left the manifest-disregard standard

open to further development in the circuits. As discussed

below, however, no federal circuit since Hall Street has

adopted the position that Coffee Beanery favors and,

hence, there is no circuit split.

Ill. There Is No Circuit Split Over Manifest Disre-

gard.

The petition contends that there is a “deep, post-

Hall Street split in the circuits over whether manifest

disregard of the law survives in anv form as a ground for

Bie

vacating arbitration awards under the FAA.” Pet. 3. But

since Hall Street was decided, every reported court of

appeals decision to squarely address the issue has held—

consistent with Hall Street—that the FAA’s statutory

grounds are the exclusive grounds for vacating an arbi-

tration award. And no circuit has held that the manifest-

disregard standard, as an application of Section 10 of the

FAA, does not survive Hall Street. In short, there is no

circuit split (much less a “deep” one).

1. In the 16 months since Hall Street, only two cir-

cuits have produced precedent squarely addressing

whether the manifest-disregard standard survives as an

application of the FAA’s enumerated grounds for vaca-

tur. As the petition acknowledges (Pet. 4, 20-21) both of

those circuits—the Second and the Ninth—have held

that manifest-disregard survives as a gloss on Section

10(a)(4), just as this Court suggested in Hall Street. See

Arbitration Between Bosack v. Soward, __ F.8d __,

2009 WL 2182898, at *3 (9th Cir. 2009); Comedy Club,

Inc. v. Improv West Assocs., 553 F.3d 1277, 1281 (9th

Cir. 2009); Stolt-Nielsen SA v. Animalfeeds Int’l, 548

F.3d 85, 95 (2d Cir. 2008).* That approach is consistent

with the pre-Hall Street ~recedent in the Seventh and

Ninth Circuits, which had both already held that an ap-

propriately narrow manifest-disregard standard “fits

7 On June 15, 2009, this Court granted certiorari in Stolt-

Nielsen (No. 08-1198). As Coffee Beanery acknowledges, the peti-

tion in Stolt did not present a question about the manifest-disregard

standard’s continued vitality; it sought review “only of an unrelated

question regarding class arbitration.” Pet. 33. Accordingly, there is

no reason to hold this ease for Stolt.

A petition for certiorari concerning whether manifest disregard

is a valid standard for vacatur is also pending in Comedy Club (No.

08-1525). The petition in that case should be denied for the same

reasons as the petition here.

-12-

comfortably” within Section 10(a)(4)’s “exceeded their

powers” clause. Wise, 450 F.3d at 268; accord Kyocera,

341 F.3d at 997. No circuit has disagreed.

The petition’s claim of a post-Hall Street conflict

depends entirely on its assertion (at 17-18) that two cir-

cuits—the First and Fifth—have broken ranks with the

others and held that “manifest disregard of the law is no

longer a valid ground under the FAA for vacating an ar-

bitration award.” In fact, neither circuit has decided

whether the manifest-disregard standard is impermissi-

ble as an application of Section 10(a)(4).

The petition’s only support for its characterization

of the First Circuit’s position is one sentence of unex-

plained dictum in an opinion that expressly “decline[d] to

reach the question of whether Hall Street precludes a

manifest disregard inquiry” because the case was not

governed by the FAA. Ramos-Santiago v. United Parcel

Serv., 524 F.3d 120, 124 n.8 (1st Cir. 2008).

Worse still, the petition omits a later First Circuit

decision vacating an arbitration award for manifest dis-

regard of the law in a case brought under the FAA.

Kashner Davidson Securities Corp. v. Mscisz, 5381 F.3d

68 (1st Cir. 2008). Although it does not address Hall

Street and echoes pre-Hall Street descriptions of mani-

fest disregard as a “common law” standard, Kashner

also observes that manifest disregard and the FAA’s

“exceeded their powers” clause may “overlap,” zd. at 77

n.7, and explicitly relies on the Seventh Circuit’s narrow

articulation of the standard, which is limited by the text

of Section 10(a)(4). d. at 77 (citing George Watts & Son,

Inc. v. Tiffany & Co., 248 F.8d 577 (7th Cir. 2001)).

Kushner gives no indication that the First Circuit, when

it eventually decides the issue, will reject the other cir-

cuits’ thus-far uniform understanding of manifest disre-

-13-

gard’s statutory basis. Because the First Circuit contin-

ues to recognize the validity of the manifest-disregard

standard, and because it has yet to weigh in on Hall

Street’s impact, its precedent does not support Coffee

Beanery’s claim of a circuit split.

The Fifth Circuit’s approach in Citigroup Global

Markets, Inc. v. Bacon, 562 F.3d 349, 358 (5th Cir. 2009),

is likewise consistent with that of the Second, Seventh,

and Ninth Circuits. Citigroup’s holding is carefully lim-

ited to whether manifest disregard survives as an inde-

pendent, nonstatutory ground for vacatur. Consistent

with Hall Street, Citigroup holds that “to the extent that

manifest disregard of the law constitutes a nonstatutory

ground for vacatur, it is no longer a basis for vacating

awards under the FAA.” /d. at 355 (emphasis added).

Citigroup expressly did not decide whether the

manifest-disregard standard survives as an application

of the grounds specified by Section 10 of the FAA. In-

stead, it remanded to the district court to determine

“whether the grounds asserted for vacating the award

might support vacatur under any of the statutory

grounds”—a step that would have been unnecessary if

the court were foreclosing review altogether. /d. at 358.

On remand, Citigroup renewed its motion to vacate the

arbitration award, urging the district court to reassess

its manifest-disregard argument under the standard ar-

ticulated by the Second and Ninth Circuits.* That motion

is now pending before the United States District Court

for the Southern District of Texas.

* See Amended Brief in Support of Motion of Citigroup Global

Markets, Inc. to Vacate Arbitration Award, Doc. 45, in Citigroup

Global Markets, Inc. v. Bacon, No. 05-03849 (S.D. Tex).

«18-

Although it left the issue open, Citigroup recog-

nizes that the Second, Seventh, and Ninth Circuits may

be correct that manifest-disregard is permissible as an

application of Section 10(a)(4), and that such an approach

is consistent with Hall Street:

[MJanifest disregard—as the [Second Cir-

cuit in Stolt-Nielsen} describes it—does

not add to the statutory grounds. The court

simply folds manifest disregard into §

10(a)(4). In the full context of the Second

Circuit’s reasoning, this analysis is not in-

consistent with Hall Street’s speculation

that manifest disregard may, among other

things, ‘have been shorthand for § 10(a)(3)

or § 10(a)(4).’

Id. at 357 (quoting Hall Street and citing Second, Sev-

enth, and Ninth Circuit decisions). Cittgroup goes on to

emphasize that this manifest-disregard standard, as lim-

ited by Section 10(a)(4), is “very narrow. Because the ar-

bitrator is fully aware of the controlling principle of law

and yet does not apply it, he flouts the law in such a

manner as to exceed the powers bestowed upon him.” /d.

As some observers have noted, C2tigroup “suggests that

the substance of the doctrine may remain alive in the

Fifth Circuit as a component of Section 10(a)(4) of the

FAA,” just as it does in the circuits that have already de-

cided the issue.”

2. In an effort to make the case for a split, Coffee

Beanery also overstates dicta in various circuits’ post-

‘James E. Berger and Charlene Sun, Fifth Circuit Addresses

‘Manifest Disregard’ Review Under Federal Arbitration Act, Paul

Hastings, available at http:/Awww.paulhastings.com/assets/

publications/1265.pdf?wt.me_ID=1265.pdf.

o-

Hall Street decisions. For example, the petition contends

that the Fourth Circuit “implicitly” decided the question

presented here in Qorvis Communications, LLC v. Wil-

son, 549 F.3d 303 (4th Cir. 2008). But Qorvis merely re-

jected out of hand the argument that an arbitrator had

“manifestly disregarded the law of damages.” /d. at 311.

Because the argument that the arbitrator had manifestly

disregarded the law rested on a misunderstanding of the

arbitrator’s decision, the court did not (and did r.ot need

to) discuss the manifest-disregard standard. /d.

The petition similarly mischaracterizes the position

of the Sixth Circuit, which also has yet to produce a

precedent on point. Because the Sixth Circuit decision in

this case is unpublished, the petition points to Dealer

Computer Services, Inc. v. Dub Herring Ford, 547 F.3d

558 (6th Cir. 2008). But that case held that jurisdiction

was lacking because the award was not ripe for review.

Only a scrap of dictum in a footnote mentions manifest

disregard, and even that footnote appears to appropri-

ately contrast vacatur on “non-statutory grounds” with

Hall Street’s holding. /d. at 561 n.2.

More significantly, the petition fails to mention a

subsequent Sixth Circuit decision making clear that that,

“under Hall Street, ‘the enumerated grounds in §§ 10

and 11 provide the ‘exclusive’ grounds for obtaining re-

”

lief from an arbitration decision.” Grain v. Trinity

Health, Mercy Health Services Inc., 551 F.3d 374, 379

(6th Cir. 2008); see Augusta Capital, LLC v. Reich &

Binstock, LLP, 2009 WL 2065555, at * 4 (M.D. Tenn.

2009) (citing Grain for that proposition). Graz observes

that this Court’s holding in Hall Street casts “doubt on

the continuing vitality of [the] theory” that manifest dis-

regard survives as a “judicially created’ supplement to

the enumerated forms of FAA relief,” and notes Hall

Street’s recognition that manifest disregard may be un-

-16-

derstood as “shorthand” for Section 10. 551 F.3d at 379-

80. Nevertheless, Grain did not concern a motion for va-

catur, but rather a request for modification under 9

U.S.C. § 11, which does not include the “exceeded their

powers” language. Grain therefore did not decide the

question presented for the Sixth Circuit. See also Martin

Marietta Materials, Inc. v. Bank of Oklahoma, 304 Fed.

Appx. 360, 362 (6th Cir. 2008) (assuming, without decid-

ing, that the manifest-disregard standard survives Hall

Street).°

3. In the absence of a circuit split over the ques-

tions presented, Coffee Beanery conjures up another cir-

cuit split. It claims that the Second, Seventh, and Ninth

Circuits have each “adopted a different rule of what

manifest disregard includes, creating further conflict in

the law.” Pet. 20. Because the petition does not present a

question concerning the substance of the manifest-

disregard standard (as opposed to its availability as a

categorical matter), this additional alleged conflict pro-

vides no justification for certiorari here.

In any event, the conflict over the standard’s scope

is nonexistent. The Second, Seventh, and Ninth Circuits

all reject the notion that the manifest-disregard stan-

dard encompasses judicial review for mere legal errors.

See Bosack, __ F.8d ___ , 2009 WL 2182898, *4 (explain-

ing that manifest disregard requires much more than

“mere error in the law or failure on the part of the arbi-

trators to understand and apply the law”; it requires that

* The losing party in Crain filed a petition for certiorari (No. 08-

1446), currently pending before this Court, raising the question

whether an arbitration award may be modified (as opposed to va-

cated) based on the manifest-disregard standard. As the brief in

opposition in Grain explains, there is no circuit split on that question

either. See BIO in Grain v. Trinity Health (No. 08-1446), at 30-33.

-17-

an arbitrator was aware of the law and “intentionally

disregarded” it); Stolt-Nielsen, 548 F.3d at 95 (adopting

Seventh Circuit’s admonition that manifest-disregard

does not entail “judicial review of the arbitrator’s deci-

sions”); Watts, 248 F.3d at 579 (“If the parties specify

that their dispute is to be resolved 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 resolution, and

thus justify relief”).

IV. The Petition’s Predictions About The Impact

Of Allowing Review For Manifest Disregard

Are Overblown.

Coffee Beanery contends that leaving in place lim-

ited review of arbitration awards for manifest disregard

of the !aw—a standard that federal courts have been ap-

plying for half a century—will have “sweeping national

consequences” and threaten the “continued vitality of

arbitration.” Pet. 28. But it is Coffee Beanery that is

seeking a sweeping change, one that has not been

adopted by a single circuit. At the very least, given the

need for stability and certainty in the arbitration proc-

ess, the untested nature of Coffee Beanery’s preferred

approach counsels strongly in favor of allowing the issue

to percolate .

If Coffee Beanery is correct, then Congress has

stood silently by for 50 years as every federal circuit has

radically misinterpreted the FAA. Such “prolonged con-

gressional silence in response to a settled interpretation

of a federal statute provides powerful support for main-

taining the status quo.” H2bbs 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

half century of silence “can be likened to the dog that did

-18-

not bark.” Chisom v. Roemer, 501 U.S. 380, 396 n.238

(1991).

The petition, moreover, assumes that the manifest-

disregard standard, even when properly limited as a

gloss on Section 10(a)(4), allows “judicial review for legal

errors.” Pet. 28. But it is has been clear at least since

Wilko that such review is impermissible. And it is even

clearer after Hall Street, which explains that the FAA

reflects a “national policy favoring arbitration with just

the limited review needed to maintain arbitration’s es-

sential virtue of resolving disputes straigtaway.” 128 S.

Ct. at 1405 (warning against opening the door to “full-

bore legal and evidentiary appeals”). As discussed above,

the circuits that have addressed the issue since Hall

Street have all been emphatic that manifest-disregard

under Section 10(a)(4) cannot encompass mere legal er-

ror. The petition approvingly quotes Judge Posner’s re-

marks in Wise, 450 F.3d at 269, concerning the need to

avoid ordinary judicial review of arbitration awards. But

Wise itself recognizes the validity of manifest disregard

of the law as an application of Section 10(a)(4). 7d. at 268-

69. And the Second Circuit’s conclusion that manifest-

disregard can be appropriate applied under Section

10(a)(4) relied heavily on Wise, including the same pas-

sage quoted in the petition. See Stolt-Nielsen, 548 F.3d

at 95.

Despite the petition’s dire predictions about the po-

tential for merits-based review, Coffee Beanery cannot

deny that federal-court vacatur of an arbitration award

for manifest disregard is extraordinarily rare, having

occurred in only a handful of reporting federal decisions

in the more than 50 years the doctrine has been applied

by the courts. The rarity of vacatur underscores the lack

of importance of the questions presented.

-19-

The petition suggests that the mere availability of

the manifest-disregard standard encourages losing par-

ties to challenge arbitral awards, even where doing so is

frivolous. Coffee Beanery’s solution to this perceived

problem is to cut off this avenue of review altogether.

The only authority the petition cites for the argument

that frivolous challenges are becoming a problem is B.L.

Harbert Intl v. Hercules Steel Co., 441 F.3d 905, 918

(11th Cir. 2006), which discussed what to do “[w]hen a

party who loses an arbitration award assumes a never-

say-die attitude and drags the dispute through the court

system without an objectively reasonable belief that it

prevaill.]” Jd. But Harbert does not say such frivolous

claims are any more common than other kinds of frivo-

lous claims. More importantly, Harbert proposes a very

different solution than does petitioner—namely, “in-

sistfing] that if a party on the short end of an arbitration

award attacks that award in court without any real legal

basis for doing so, that party should pay sanctions.” /d.

The availability of such ordinary remedies for abusive

litigation underscores the lack of any need for this

Court’s review.

Moreover, while the Eleventh Circuit’s threat of

sanctions may be severe, it is far less extreme than the

approach proposed by the petition. Coffee Beanery’s po-

sition, if accepted, would eliminate any safety valve for

the rare case in which an arbitrator truly strays beyond

the bounds of his or her authority. The presence of such

a safety value bolsters the integrity of, and public confi-

dence in, the alternative dispute resolution process as a

whole.

Such a safety valve is also particularly important in

cases such as this one, in which there is a risk that, ab-

sent any possibility of review, statutory rights will be de-

valued. Thus, in Gilmer v. Interstate/Johnson Lane

2h).

Corp., 500 U.S. 20 (1991), this Court held that cases in-

volving statutory rights are subject to arbitration, but

rested that conclusion on two fundamental assumptions

about how arbitration would operate 1.. such cases. 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.” /d. at 26 (quoting Mitsubishi Mo-

tors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S.

614, 628 (1985)). Second, ““although judicial scrutiny 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/American Express v. McMahon, 482 U.S. at

232) (emphasis 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 ‘mani-

fest disregard of the law’ standard is sufficiently rigor-

ous” to ensure that arbitrators do not exceed their au-

thority under a given statute. Cole v. Burns Int'l Sec.

Servs., 105 F.3d 1465, 1487 (D.C. Cir. 1997); see also Wil-

liams v. Cigna Fin. Advisors, 197 F.3d 752, 761 (5th Cir.

1999) (“The federal courts and courts of appeals are

charged with the obligation to exercise sufficient judicial

scrutiny to ensure that arbitrators comply with their du-

ties and the requirements of the statutes.”). By propos-

ing to discard the manifest-disregard standard, peti-

tioner seeks to eliminate a fundamental protection on

which the arbitrability of statutory claims is premised.

Petitioner’s attempt to discard the manifest-

disregard standard would overturn the law of every cir-

cuit and call into question the settled expectation that

statutory claims are subject to mandatory arbitration.

An established consensus in the lower courts, supported

-2]-

by statements of this Court, should not be overturned

merely because a litigant is dissatisfied with the applica-

tion of the law to the facts of its case.

V. This Case Is A Poor Vehicle For Exploring The

Questions Presented.

Even apart from the complete absence of a circuit

split on the first question presented, this case is a poor

vehicle for exploring whether the manifest-disregard

standard is valid in any form.

At the very least, this Court should await a case in

which the court below has thoroughly analyzed, and cre-

ated precedent, on the question presented. The decision

below has little discussion of the statutory basis for the

manifest-disregard standard, and tine panel did not have

the benefit of the more thorough analysis in cases such

as Stolt-Nielsen, Comedy Club, and Citigroup. See Citi-

group, 562 F.3d at 356 (noting that “Coffee Beanery only

briefly considered the effect of Hall Street on manifest

disregard of the law.”). Moreover, the decision below is

unpublished and the Sixth Circuit has yet to provide a

definitive answer concerning the availability of manifest-

disregard review under Section 10(a)(4). The Court

should also wait until at least one circuit has adopted

Coffee Beanery’s theory. In the absence of such a deci-

sion, review would not only be premature and unneces-

sary, but unfocused and without the benefits of a full air-

ing in the lower courts.

This case is also poor vehicle because it involves

several alternative, factbound grounds for vacatur. The

petition contends that this case is an acceptable vehicle

because “|t|he arbitrator here did not resolve a claim

outside the scope of the agreement”—an action that “all

Circuits would agree would exceed the arbitrators pow-

ers under § 10(a)(4) of the FAA.” Pet. 32-33. But, in fact,

22.

respondents’ principal argument below was that “the

Arbitrator overreached her authority when she ruled en

the Franchise Act claims,” despite a contract provision

providing otherwise. App. 32. Respondents also argued

that “the Arbitrator had a conflict of interest that rose to

the level of bias”—namely, that she shared an account-

ant with Coffee Beanery, and issued an award that criti-

cally depended on her assessment of the credibility of

that accountant. /d.; 9 U.S.C. § 10(a)(2) (authorizing vac-

tur for “evident partiality”). The existence of compelling

alternative grounds for vacatur makes it likely that re-

view of the Sixth Circuit’s formulation of the manifest-

disregard standard would not be dispositive.

Finally, to the extent that the petition seeks to take

the Sixth Circuit to task solely for its description of the

proper basis for the manifest-disregard standard (statu-

tory versus non-statutory), that request is a purely aca-

demic exercise unworthy of this Court’s review. This

Court does not sit to police dicta in unpublished deci-

sions. Likely for this reason, the petition also includes a

second question presented, seeking review of the case-

specific application of the manifest-disregard standard to

the facts. Pet. 11. But certiorari is inappropriate where, as

here, the asserted error consists of no more than “the

misapplication of a properly stated rule of law.” S. Ct.

Rule 10.

August 2009

23.

CONCLUSION

The petition for a writ of certiorari should be denied.

Respectfully submitted,

DEEPAK GUPTA

Counsel of Record

SCOTT L. NELSON

PUBLIC CITIZEN LITIGATION GROUP

1600 20th Street NW

Washington, DC 20009

(202) 588-1000

HARRY M. RIFKIN

1447 York Road

Lutherville, MD 21093

(410) 583-0099

Counsel for Respondents