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Dewan v. Walia: Arbitration Award Vacated for Manifest Disregard of the Law

Dewan v. Walia, 2013 U.S. App. LEXIS 21970 (4th Cir. 2013) (unpublished).
Read the case.

The Background. In 2003, Dewan, a certified public accountant and proprietor of his own accounting firm, entered into a three-year employment agreement with Walia, a Canadian accountant. The agreement contained non-solicitation and non-competition clauses, as well as an arbitration clause. In 2006, the agreement was renewed for another three-year period. Although the parties differed over whether the employment agreement continued beyond its expiration in early 2009, it is clear that Walia continued to work for the firm through August 2009. In November 2009, Walia signed a release agreement in exchange for consideration in the amount of $7,000. The release agreement expressly discharged Dewan and related parties from liability for claims relating to Walia’s employment.

Several months later, Dewan began arbitration proceedings against Walia. At issue were Dewan’s claims that Walia (i) breached the non-solicitation and non-competition clauses of his employment agreement and (ii) breached the release agreement by bringing claims against Dewan. Walia, in turn, asserted that Dewan had underpaid him, breached the profit-sharing terms of the employment agreement and fraudulently attempted to withdraw his authorization to work in the United States. A four-day arbitration hearing concluded with an award of $457,108.20 in Walia’s favor.

Dewan challenged the arbitration award in a federal court action. Noting the “heavy burden of proof” to be met by a party seeking to overturn an arbitration award under Maryland state law, the United States District Court for the District of Maryland declined to overturn the award. See Kiran M. Dewan, CPA, P.A., v. Walia, 2012 U.S. Dist. LEXIS 108998 (D. Md. 2012).

The Issue.
On appeal to the Fourth Circuit, Dewan argued that the arbitrator’s decision reflected a “manifest disregard of the law.” See Dewan v. Walia, 2013 U.S. App. LEXIS 21970 (4th Cir. 2013). The Fourth Circuit, relying on common law, noted that an arbitration award may be vacated “’where an award fails to draw its essence from the contract, or the award evidences a manifest disregard of the law.’” Id., citing MCI Constructors, LLC v. City of Greensboro, 610 F.3d 849, 857 (4th Cir. 2010). The Fourth Circuit noted that while the arbitrator correctly ruled that the release extinguished Walia’s claims in state or federal court, she erroneously concluded that these claims could be heard in an arbitration. Despite a strongly worded dissent pointing to the “severely circumscribed” limits on judicial review of arbitration decisions, the majority was both clear and harsh in its assessment of the arbitrator’s performance. The majority opinion stated, “[N]either linguistic gymnastics, nor a selective reading of Maryland contract law, could support [the arbitrator’s] conclusion that the Release was enforceable but that Walia’s claims were arbitrable anyway.” Id. The Fourth Circuit therefore vacated the judgment on the grounds that the arbitrator had demonstrated a “manifest disregard of the law.”

The Takeaway. In 2008 the Supreme Court held that the Federal Arbitration Act limits a court’s ability to vacate an arbitration award to specific circumstances enumerated in the statute itself (fraud, partiality or corruption, misconduct or an arbitrator’s exceeding authority). See Hall Street Associates, L.L.C. v. Mattel, Inc., 552 U.S. 576 (2008). While the Hall Street opinion limited its analysis to judicial review under the Federal Arbitration Act (as opposed to common law), some circuit courts have concluded that erroneous legal conclusions can longer be the basis for overturning arbitration decisions. See, e.g., Medicine Shoppe International, Inc. v. Turner Investments, Inc., 614 F.3d 485 (8th Cir. 2010).

In contrast, the Fourth Circuit’s decision in Dewan v. Walia revives the notion that certain decisions may be overturned under common law for “manifest disregard of the law.” Dewan v. Walia is an unpublished opinion and therefore without precedential value. The opinion is nonetheless a valuable reminder that, in some circuits, the limits of judicial patience with arbitration awards can be tried, despite the Supreme Court’s clear preference for the enforcement of arbitration proceedings.