Last month, www.insurereinsure.com reported on the U.S. Supreme Court’s decision in Hall Street Associates, L.L.C. v. Mattel, Inc., No. 06-989 (U.S. Mar. 25, 2008), which held that the grounds set forth in the Federal Arbitration Act (“FAA”) for vacating and modifying arbitration awards were “exclusive,” rejecting the notion that parties whose arbitration is governed by the FAA can contractually expand the scope of judicial review of the award beyond the grounds provided by the FAA. (Click here to see the prior blog post.)  Many commentators predicted the Supreme Court’s decision in Hall Street Associates would be interpreted by courts as effectively eliminating the judicially-created doctrine of “manifest disregard of the law” as a basis for vacating or modifying an arbitration award arising under the FAA, even though the Supreme Court did not overrule that doctrine in its decision.  A recent case arising from a New York State court, however, illustrates that at least one court may believe that manifest disregard of the law is alive and well and remains a basis upon which an arbitrator’s award can be vacated or modified.  See Barclays Capital Inc. v. Shen, No. 07-111720 (N.Y. Sup. Ct., Apr. 22, 2008).

The underlying arbitration involved a dispute between Elizabeth Shen and her former employer, Barclays Capital Inc.  Shen was terminated from her employment at Barclays and filed a claim with the National Association of Securities Dealers (“NASD”) alleging, among other things, that the U-5 termination notice filed by Barclays with the NASD in conjunction with Shen’s dismissal contained malicious, defamatory and egregious statements entitling her to an award of punitive damages.  The arbitration panel ruled in Shen’s favor on this issue, finding that Barclays was liable for punitive damages in the amount of $95,000.

Barclays petitioned the court to vacate the punitive damages portion of the arbitration award, contending that it was rendered in manifest disregard of the law based on the New York Court of Appeals decision last year in Rosenberg v. Metlife, Inc., 8 N.Y.3d 359 (2007).  Barclays asserted that the arbitrators knew about but ignored Rosenberg, in which the Court of Appeals held that monetary damages (including punitive damages) could not be awarded for defamatory statements made about a terminated employee in a U-5 filing, because the contents of that form are absolutely privileged.  Arbitration of disputes regarding employment in the securities industry is governed by the FAA, and thus the FAA applied to Barclay’s petition to vacate.

Under New York law, an arbitration award arising under the FAA may be vacated for manifest disregard of the law if the moving party can establish that (1) the arbitrators knew of a governing legal principle, yet refused to apply it or ignored it altogether and (2) that the law ignored by the arbitrators was well defined, explicit and clearly applicable to the case.  The court vacated the panel’s punitive damages award, finding that it was rendered in manifest disregard of the law because the panel was aware of but ignored Rosenberg, controlling precedent that unequivocally held that an award of monetary damages, of any kind, was improper for a defamation claim arising from a U-5 filing.

Barclays Capital Inc. was decided roughly a month after Hall Street Associates, which was not addressed in the court’s decision.  It is not clear whether the parties brought Hall Street Associates to the court’s attention or whether the court was even aware of it.  Thus, it remains unclear how future courts will interpret Hall Street Associates with regard to the doctrine of manifest disregard of the law.