The “Herculean” Challenge of Vacating an Arbitration Award

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Jared R. Martin

July 19, 2022

While the Supreme Court recently handed down a decision (slightly) weakening the ability to vacate an arbitration ruling on the basis of jurisdiction, the United States Court of Appeals for the Fourth Circuit issued an opinion upholding the “sky-high standard of judicial review” that must be overcome to overturn an arbitral verdict on substantive grounds.  Warfield v. ICON Advisers, Inc., No. 20-1690, 26 F.4th 666 (4th Cir. Feb. 24, 2022).

In Warfield v. ICON Advisers, the Court upheld a Financial Industry Regulatory Authority (FINRA) arbitration award of almost $1.2 million in favor of a securities broker on his wrongful termination claim.  Warfield’s home state, North Carolina, presumes at-will employment, meaning that an employment relationship can be terminated at any time for any lawful reason by either the employer or the employee.  However, parties may agree by contract to set a higher standard for terminating the employment relationship.  While no such provision existed by contract between Warfield and ICON, Warfield argued that the FINRA requirement that employment disputes be arbitrated implied a “just cause” standard.

The FINRA arbitration panel sided with Warfield, applied a “just cause” standard to the termination, and awarded damages for wrongful termination without “just cause.”  Warfield moved to enforce the award pursuant to the Federal Arbitration Act, and ICON argued that the underlying claim was precluded by North Carolina’s at-will employment doctrine.  The District Court determined that the FINRA arbitration panel manifestly disregarded the law, and vacated the arbitration award.  The Fourth Circuit reversed the District Court’s decision.

The Fourth Circuit emphasized—in its opening line—that “convincing a federal court to vacate an arbitral award is a herculean task.”  To clear the manifest disregard of the law standard, ICON had to present “indisputably binding precedent” and prove that the arbitration panel (1) was aware of the precedent; (2) understood it correctly; (3) found it applicable to the case at hand; and (4) ignored it anyway.

Warfield presented case law from the Seventh and Eighth Circuit Courts of Appeal in support of his argument.  Painewebber, Inc. v. Agron, 49 F.3d 347 (8th Cir. 1995) (the use of arbitration for settling employment-related disputes converts an at-will employment relationship to a for-cause standard); Shearson Hayden Stone, Inc. v. Liang, 653 F.2d 310 (7th Cir. 1981) (“It has been held repeatedly that an agreement to arbitrate disputes about employee discharge implies a requirement that the discharges be only for ‘just cause.’”).  And ICON presented case law from the Fourth Circuit in support of its argument.  Raymond James Fin. Servs. v. Bishop, 596 F.3d 183 (4th Cir. 2010) (suggesting, arguably in dicta, that the arbitration agreement does not impliedly negate an explicit at-will provision in the parties’ agreement).  The Court declined to assess the persuasiveness of the cited cases, holding that the existence of the legal question was enough to defeat ICON’s attempt to vacate the award.  The Court went so far as to question whether it is even possible for a Federal Court to “establish binding precedent requiring a contrary result on a question of state law.”  Furthermore, in the absence of an explained decision by the arbitration panel (which the parties could have requested), the Court “simply cannot impute manifest disregard” and must analyze all conceivable justifications for the decision.

Employers: Take note.
Warfield highlights a general risk that comes with arbitration: an adverse outcome with limited recourse.  For employers considering whether to include mandatory arbitration provisions in employment agreements, this limited recourse is a factor to consider.  For employers already subject to arbitration, this risk can be somewhat mitigated.  First, employers should enlist competent counsel to present detailed arguments of the facts and applicable law.  Arbitrators cannot be presumed to have any knowledge of either.  Second, employers may want to consider requesting explained decisions by the arbitration panel.  A written justification could significantly narrow the issues and increase the likelihood that a Federal Court would vacate an outlier arbitration award.  Of course, on the specific question of at-will employment, employers should carefully craft employment agreements to contractually protect at-will status where permitted by state law.

Our attorneys are skilled and experienced in preparation and review of employment agreements, as well as arbitration of employment disputes.


*Special thanks to Claire Miller, our intern from the University of Notre Dame, for her contributions to this article.

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