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

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Opposition Brief
- **Published:** January 1, 2009

## Text

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(3) ; AUG 2 5 2008

Nd af
No. 08-1396 a

| “Ue A

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

---

Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386017_0511%3A2. Public record. Not legal advice.