The Arbitration Proceedings
James Warfield was employed in North Carolina as a mutual funds wholesaler for ICON Advisors, a FINRA-regulated brokerage firm. Mr. Warfield’s offer letter and employment agreement with ICON provided that his employment was terminable by either party at any time with or without cause. After six months’ employment, ICON terminated Mr. Warfield’s employment. Mr. Warfield contested the termination.
Neither Mr. Warfield’s employment agreement nor his offer letter made reference to arbitration. But by virtue of FINRA Rule 13200(a) and his signed FINRA Form U4 (Uniform Application for Securities Industry Registration or Transfer), the dispute concerning Mr. Warfield’s termination was subject to FINRA arbitration.
Before the arbitrators, Mr. Warfield asserted a claim for “wrongful termination without just cause.” Citing decisions from the Seventh and Eighth Circuits in Shearson Hayden Stone, Inc. v. Liang, 653 F.2d 310 (7th Cir. 1981), and Paine Webber, Inc. v. Agron, 49 F.3d 347 (8th Cir. 1995)—but none from the Fourth Circuit or North Carolina—Mr. Warfield urged that the FINRA rules’ subjection of the dispute concerning his employment relationship to arbitration implied that he could only be fired for cause. He also sought expungement of the termination explanation in the Form U5 (Uniform Termination Notice) ICON filed with FINRA following the termination, alleging that it was false and defamatory.
ICON maintained before the arbitration panel that because North Carolina is an employment-at-will state, Mr. Warfield could not recover for “wrongful termination without just cause.”
The arbitration panel sustained Mr. Warfield’s wrongful discharge claim and granted his request for expungement. On the former, the panel stated simply that “Respondents are jointly and severally liable for and shall pay to Claimant the amount of $1,186,975.00 in compensatory damages for wrongful termination without just cause.” Without sustaining his claim for defamation, the panel granted Mr. Warfield’s request for expungement, essentially requiring substitution in the Form U5 of language he proposed. The arbitrators’ decision contained no other explanation as to the basis for the award.
District Court Proceedings: Vacatur of Award
Mr. Warfield sought enforcement of the award in the Western District of North Carolina, and ICON sought vacatur, pursuant to the Federal Arbitration Act (FAA), 9 U.S.C. §§ 9, 10.
The district court sided with ICON, concluding that the award for “‘wrongful termination without just cause’ . . . has no basis in North Carolina law because no such cause of action exists for ‘at-will’ employees.” Warfield v. ICON Advisors, Inc., No. 3:20CV195-GCM (W.D.N.C. June 16, 2020). The district court held that “clear, well-established law in North Carolina and the Fourth Circuit” precluded Mr. Warfield’s claim for “wrongful termination without just cause” and that “the [arbitrators] chose to disregard . . . that law.” The district court thus concluded that the award demonstrated manifest disregard of the law and vacated it.
The Fourth Circuit: Vacatur Reversed and Award Reinstated
On Mr. Warfield’s appeal, the Fourth Circuit panel reversed, effectively reinstating the award. At the outset of its unanimous opinion, the Fourth Circuit panel characterized the task of seeking vacatur as “herculean,” with a scope of review “among the narrowest known at law.” Warfield, No. 20-1690, slip op. at 4. And at the end, the court reiterated that “[i]n this case, as in almost all manifest disregard cases, the sky-high standard of judicial review is the beginning and the end of our analysis.” Id. at 13.
For any litigator seeking confirmation of an arbitration award within (or beyond) the Fourth Circuit, the opinion in Warfield likewise should serve as the “beginning and the end” of the analysis—a passim citation, for sure.
The Fourth Circuit in its Warfield opinion integrated its past decisions on manifest disregard into a fresh application of a two-pronged test. Most simply, the test is as follows: “To establish manifest disregard, a party must demonstrate: ‘(1) the disputed legal principle is clearly defined and is not subject to reasonable debate; and (2) the arbitrator refused to apply that legal principle.’” Id. at 5 (citation omitted). The court reiterated the low bar often stated for the arbitral task, from the perspective of a reviewing court: The court “‘is limited to determin[ing] whether the arbitrators did the job they were told to do—not whether they did it well, or correctly, or reasonably, but simply whether they did it.’” Id. at 4 (quotation omitted).
In the arbitration, Mr. Warfield had cited Agron and Liang for “their holding[s] that the presence of an arbitrability clause governing an employment dispute implies for-cause termination protections, notwithstanding a state law at-will doctrine to the contrary,” Warfield, slip op. at 6 (emphasis in original), and, the court continued, “[I]f there is a North Carolina case rejecting the Agron-Liang theory, ICON never cited that precedent to the arbitrators (or to us for that matter).” Id. Of course, it is often difficult to prove a negative.
First Prong of the Manifest Disregard Standard
For the first prong of the standard—“[t]o demonstrate that ‘the disputed legal principle is clearly defined and is not subject to reasonable debate’”—ICON had to present to the arbitrators “binding precedent requiring a contrary result” than that reached in Agron or Liang. Warfield, slip op. at 5 (citation and quotation omitted). It was not enough for ICON merely to argue that “North Carolina courts would reject the theory embraced in Agron and Liang that arbitrability implies for-cause protection.” Warfield, slip op. at 7 (emphasis in original). Because North Carolina state courts had never affirmatively rejected that theory, the court concluded, “North Carolina’s at-will doctrine cannot provide the ‘binding precedent requiring a contrary result’ necessary to demonstrate that the arbitrators manifestly disregarded the law.” Id. at 7 (citation and quotation omitted).
Nor was it enough that the Fourth Circuit itself already had expressly disapproved both Agron and Liang. In Warfield, ICON relied on the previous decision of the Fourth Circuit in Raymond James Financial Services, Inc. v. Bishop, 596 F.3d 183 (4th Cir.), cert denied, 562 U.S. 889 (2010). There, the claimants, financial advisors in arbitration under rules of the former National Association of Securities Dealers (NASD), had advanced Liang and Agron in support of their contention that “because Raymond James was required under [former NASD] Rule 10101 to arbitrate claims ‘arising out of’ the termination of [their] affiliation, it simply lacked the authority to terminate their affiliations without cause,” Raymond James, 596 F.3d at 194, the same theory advanced by Mr. Warfield. After a thorough analysis, the Fourth Circuit in Raymond James had expressly stated that “we decline to follow Liang or Agron under the circumstances of this case.” Liang and Agron had both arisen in the context of arbitration in collective bargaining, so, as the court in Raymond James saw it, their application in individual NASD arbitration was “less than clear,” and “[i]n any event, in neither [Liang nor Agron] was the court faced with an express agreement providing for termination at will”—a distinction that, as noted in Raymond James, had been made by the Eighth Circuit itself in Agron, 596 F.3d at 195 n.16 (quoting Agron, 49 F.3d at 352), and indeed was now present in Warfield.
Remarkably, in declining in Warfield to apply its previous analysis from Raymond James, the Fourth Circuit panel in Warfield suggested that federal decisions on the state law issue at hand might not count for assessing manifest disregard of law: “As an initial matter, it is unclear that a federal court could ever establish ‘binding precedent requiring a contrary result’ on a question of state law, at least from an arbitrator’s perspective.” Warfield, slip op at 7 (emphasis in original) (quotation omitted).
Beyond that, in Warfield the Fourth Circuit concluded that its discussion in Raymond James of whether the arbitration claimants there would have a wrongful discharge claim was “(at least arguably) dicta.” Warfield, slip op. at 6 (parentheses in original). For one thing, the claimants there (unlike Mr. Warfield) had voluntarily resigned. Further, although the district court in Raymond James had found manifest disregard, the Fourth Circuit there had affirmed vacatur solely on the alternative ground that the arbitrators had “exceeded their powers” as proscribed by section 10(a)(4) of the FAA, 9 U.S.C. § 10(a)(4), and had found it unnecessary to apply the standard of manifest disregard, in light of its questionable status following the Supreme Court’s decision in Hall Street Associates, LLC v. Mattel, Inc., 552 U.S. 576 (2008). (Two years after Raymond James, in Wachovia Securities, LLC v. Brand, 671 F.3d 472, 483 (4th Cir. 2012), the Fourth Circuit held that the manifest disregard doctrine did indeed survive the decision in Hall Street, and the court in Warfield declined to revisit this issue, commenting that “the existence or nonexistence of the manifest disregard doctrine does not change the outcome here, i.e., upholding the arbitration award.” Warfield, slip op. at 5 n.3).
With no North Carolina state court decision expressly rejecting the Liang-Agron theory, and with the Fourth Circuit’s previous disapproval of those cases viewed as nonbinding dicta on an issue of state law, the theory of those cases remained “subject to reasonable debate”:
The arbitrators had before them on the one hand, Agron and Liang holding that arbitrability implies for-cause termination protections, and on the other hand, North Carolina caselaw establishing a presumption of at-will employment and a Fourth Circuit case that could be read to criticize Agron and Liang. Even if we agree with ICON that it had the better of the argument before the arbitrators, the point remains that there is still an argument. Because the issue is “subject to reasonable debate,” . . . the arbitrators could not have manifestly disregarded the law by determining that Warfield could pursue a wrongful termination claim.
Warfield, slip op. at 9.
Second Prong of the Manifest Disregard Standard
For the second prong—that the arbitrators “refused to heed” the law—the party seeking vacatur must “show that the arbitrators were aware of the law, understood it correctly, found it applicable to the case before them, and yet chose to ignore it in propounding their decision.’” Id. at 10 (quotation omitted).
Rendering this task particularly difficult in Warfield, the award provided no statement of reasons. Absent party agreement, a “reasoned” award is not required in FINRA arbitration. FINRA Rule 12904(g)(1). But, as explained in Warfield, “when arbitrators do not explain how they reached a given result, the party seeking vacatur ‘must show that it would be manifest disregard of the law to’ reach that outcome by each and every conceivable route.” Warfield, slip op. at 13 (quotation omitted). As discussed throughout the Warfield opinion, one indeed could construct, on a post hoc basis, several conceivable routes of explanation for the award, but because the award itself actually provided no explanation, as the court concluded, “we do not know that they did not take them.” Id. at 13 (emphasis in original). This again, of course, places the burden on the vacatur proponent essentially to prove a negative.
In sum, the Fourth Circuit concluded that neither North Carolina law nor its decision in Raymond James established the “binding precedent requiring a contrary result” from the outcome that the arbitrators reached. And even if there were such a binding precedent, ICON had “not met its heavy burden of showing that the arbitrators knew of and ‘refused to heed’ that precedent.” Warfield, slip op. at 13.
What Warfield Means and How to Address It
First, the decision should be viewed in the factual context before the court. Available filings in the underlying arbitration—not reviewed in the Fourth Circuit’s opinion but accessible in the public docket of the district court case—suggest that Mr. Warfield may have made a very sympathetic showing over the four days of the arbitration hearing. And in most cases, unlike the situation in Warfield, any contractual provisions addressing termination of employment will be contained in the same contractual documentation that gives rise to the arbitration obligation—making it much easier to show, should the arbitrator award relief contravening contractual provisions, that the arbitrator “exceeded [his or her] powers” within the meaning of section 10(a)(4) of the FAA, 9 U.S.C. § 10(a)(4). It remains to be seen, but it seems unlikely that the decision in Warfield means that just-cause provisions may now be implied in every employment relationship within the states encompassed by the Fourth Circuit, contrary to an express at-will disclaimer in the contractual documents defining the relationship, merely because those same documents include an arbitration clause.
Second, despite the enhanced finality potentially afforded to arbitral awards that lack a statement of reasons, arbitration parties should consider requiring a reasoned award. This obviously can more readily be done in the pre-dispute arbitration agreement than post-dispute, but parties might still agree, even post-dispute, to keep their arbitrators’ feet to the fire.
Third, arbitration agreements can be crafted to direct the arbitrator to apply the law as previously stated by the courts (and perhaps the legislature) of a particular state specified in the arbitration agreement, and not to apply laws or decisions that would not be binding precedent within the chosen state.
Finally, if an award appears to be rooted in manifest disregard of a rule of state law, and counsel for the losing side in arbitration believes the elements of the test for manifest disregard can be met, counsel might consider seeking vacatur in state court. To be sure, questions of proper forum and jurisdiction may well arise, but a state court might be more readily persuaded than a federal counterpart that its own, state law precedents have been manifestly disregarded.