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This week, the Seventh Circuit confirmed that an error of law, no matter how egregious, is not grounds for a court to vacate an arbitration award under the Federal Arbitration Act (“FAA”). In Affymax, Inc. v. Ortho-McNeil-Janssen Pharmaceuticals, Inc., et al., Case No. 11-2070, the Seventh Circuit reversed the District Court’s decision to vacate a portion of an arbitration award.
The District Court found that the arbitrators “manifestly disregarded the law” because they did not discuss or provide analysis for the basis of a portion of their award. In noting that the FAA provides an exclusive list of reasons for which an arbitration award can be vacated, the Seventh Circuit clarified that a legal error, even one rising to the level of manifest disregard, made by an arbitrator is not a basis for vacating an arbitration award.
Under the FAA, a court may only vacate an award if (1) it was procured by corruption, fraud or undue means, (2) the arbitrators were partial or corrupt, (3) the arbitrators were guilty of misconduct or misbehavior that prejudiced that rights of a party, or (4) the arbitrators exceeded their authority. See 9 U.S.C. §10(a)(1)-(4), respectively. In noting that some of its previous decisions implied that “manifest disregard of the law” would be grounds to vacate an arbitration award under Section 10(a)(4) as exceeding an arbitrator’s authority, the Seventh Circuit held that “manifest disregard of the law” is not a ground on which a court may reject an arbitrator’s award under any provision of the FAA.
Under the Seventh Circuit’s holding in Affymax, it is clear that there is no broader, extra statutory principle authorizing courts to review an arbitrator’s legal rulings. As noted by the Court in its decision, arbitrators are not required to render written opinions and are free to act summarily. Arbitrations are less formal than litigation and as long the arbitrators do not disregard the contract upon which their authority is based an award will not be vacated for being in excess of their authority.
© MICHAEL BEST & FRIEDRICH LLP
