Turn it up . . .

Applying federal law, the Alabama Supreme Court has joined in the chorus of other courts that have stressed the high burden imposed on parties who seek to vacate arbitration awards, especially when those attempts appear to be a re-litigation of the merits or include bases that are outside of the vacatur statute of Section 10 of the Federal Arbitration Act (“FAA”).  Wade Tucker and Wendell Cook Testamentary Trust, derivatively for HealthSouth Corporation v. Ernst & Young, LLP, Case No. 1121048, Supreme Court of Alabama, June 13, 2014.  A copy of the court’s full Opinion may be viewed here.

The underlying dispute concerned allegations of accounting malfeasance against Ernst & Young (“E&Y”) in connection with the HealthSouth accounting scandal.  During its case-in-chief in the arbitration, HealthSouth presented thousands of exhibits and called no fewer than 75 witnesses who testified at various times over 81 days of hearings.  At the conclusion of HealthSouth’s presentation of evidence, E&Y submitted a dispositive motion to dismiss, which was granted by the arbitrators.  In doing so, the arbitrators issued a 25-page opinion, citing to the facts and the governing case law as they understood those facts and the operative law.  HealthSouth sought vacatur pursuant to 9 U.S.C. § 10(a)(3) and (a)(4), arguing that the arbitrators exceeded their authority and/or engaged in misconduct in dismissing the claims.  The trial court denied the motion to vacate, and HealthSouth appealed directly to the Alabama Supreme Court.

On appeal, the court’s Majority Opinion set the tone early by noting that “Judicial review of an arbitration award, however, is extremely limited, and a court may not vacate an award unless the party attacking the award clearly establishes one of the grounds for vacating an award specified in 9 U.S.C. § 10.”  Yet, HealthSouth argued that vacatur was necessary because the arbitrators ignored Alabama law in denying the claim and “engaged in prejudicial misconduct when they made arbitrary procedural rulings and refused to consider relevant evidence unfavorable to E&Y.”  The court construed HealthSouth’s first argument as one in which the arbitrators had acted in “manifest disregard of the law.”  But the court summarily rejected that argument, concluding that it cannot be a valid basis for vacatur, in part, because it is outside of the enumerated grounds set forth in the vacatur statute.  HealthSouth also argued that the arbitrators exceeded their authority by not expressly following Alabama law.  The court rejected that argument as well, recognizing that the parties bargained for the arbitrators’ interpretation of applicable law and received the benefit of that bargain – no matter whether the arbitrators interpreted the law properly or not.

The Majority evaluated HealthSouth’s “prejudicial misconduct” argument by asking whether HealthSouth had received a “fundamentally fair” hearing.  The court observed that the arbitrators allowed HealthSouth the opportunity to call its witnesses and to present its evidence and arguments.  According to the court, the fact the arbitrators permitted E&Y to seek dismissal did not alone constitute “misconduct” sufficient to vacate.  The court further rejected HealthSouth’s argument that the arbitrators had engaged in “misconduct” by allegedly not considering the testimony of a single witness, in part because it was E&Y who called the witnesses after HealthSouth rested.  The court concluded that the arbitrators were not duty bound to consider as part of a motion to dismiss any evidence presented after the claimant had rested. 

The Tucker court reaffirms the principle that vacatur attempts that even remotely appear to be a re-argument of the merits or the law – even if cast under one of the express provisions of the FAA – often will be resoundly rejected.  That said, the Concurring Opinion appears to leave open the possibility that “manifest disregard of the law” might be a viable basis for vacatur if it could be established that the arbitrators  had  “exceeded their powers” within the contemplation of 9 U.S.C. § 10(a)(4).  Indeed, the Concurring Opinion posits the question of whether arbitrators “who willfully ignore applicable state law are not, in fact, ‘exceeding their power,’ or acting beyond their authority, within the contemplation of 9 U.S.C. § 10(a)(4).” (Citing Hall Street Assocs., L.L.C. v. Mattel, Inc., 552 U.S. 576 (2008)).  In doing so, the Concurring Opinion perhaps answers its own question by noting that 18 jurisdictions appear to permit a state court to review an arbitration award for the arbitrators’ “manifest disregard of the law.”  But for now, the Majority Opinion seems to be the final word on manifest disregard of the law in Alabama that “a Southern man don't need [it] around anyhow.”