An arbitration award may be vacated for “manifest disregard of the agreement” if the award does not draw its essence from the contract and instead reflects the arbitrator’s own notions of economic or industrial justice. (See, e.g., here, here, here, here.) Such an award exceeds the arbitrator’s powers within the meaning of Section 10(a)(4) of the Federal Arbitration Act. 9 U.S.C. § 10(a)(4) and federal common law in Labor Management Relations Act Section 301 cases (which tracks Section 10(a)(4)).
Arbitration awards do not qualify for vacatur under this manifest disregard of the agreement standard unless the arbitrator did not even arguably interpret the agreement. And if you have any doubts about how much extensive leeway arbitrators have to “arguably interpret” contracts, go back and review the U.S. Supreme Court’s decision in Oxford Health Plans LLC v. Sutter, 569 U.S. 564, 566-70 (2013).
The margins for a reasonable argument for manifest disregard of the agreement vacatur are slim, for once the arbitrator offers—or the award is otherwise susceptible to—an even barely plausible interpretation supporting the arbitrator’s award, then it’s game over, even if the barely plausible interpretation is one a court would almost certainly not adopt as its own.
But in StoneMor, Inc. v. The Int’l Bhd. Of Teamsters, Local 469, ___ F.4d ___, No. 23-1489, slip op. (3d Cir. July 10, 2024), the Third Circuit reminds everyone that, while it is “‘a steep climb to vacate an . . . award[,]’” slip op. at 6 (quoting France v. Bernstein, 43 F.4th 210, 219 (3d Cir. 2022)), the Court’s “review is ‘not toothless,’ and [it] will reverse if the arbitrator ‘rewrites the contract[.]’” Slip op. at 6 (quoting Independent Lab’y Employees’ Union, Inc. v. ExxonMobil Research & Engineering Co., 11 F.4th 210, 219 (3d Cir. 2021)). (You can read our France v. Bernstein post here.)
The award before the Court in StoneMor, was the product of an arbitrator who “did just that[,]” and the Court affirmed the district court’s judgment vacating that award—an award which resulted from manifest disregard of the agreement. Slip op. at 6 & 3. Because the Court was able to conclude that the award was not based on—and did not otherwise reflect—an even barely colorable interpretation of the contract, vacatur was warranted.
Manifest Disregard of the Agreement
Background: StoneMor
Stonemor arose out of collective bargaining agreement (“CBA”) governed by Section 301 of the LMRA. StoneMor, Inc. (“StoneMor” or the “Employer”) was a cemetery and funeral home operator. StoneMor’s maintenance workers certified the International Brotherhood of Teamsters, Local 469 (the “Union”) as their exclusive bargaining representative, which prompted Stonemor and the Union to enter CBA negotiations.
The Stonemor and the Union reached a “tentative agreement” (the “Tentative Agreement”). It was signed and provided that the parties “intended to be ‘legally bound.’” Slip op. at 3 (quoting J.A. 59; other citation and quotation omitted). The parties further agreed the Tentative Agreement would “remain ‘tentative until ratified by a majority of the [cemetery maintenance employees[.]’” Slip op. at 3 (quoting J.A. 59; other citation and quotation omitted; bracketed text in original).
The Tentative Agreement contained grievance procedure provisions that gave the Union “ten days to write StoneMor about a disagreement ‘as to the interpretation of or alleged violation of’ the [Tentative] Agreement.” Slip op. at 3 (quoting J.A. 71). It further provided that “‘[t]ime is of the essence’ in the handling of disputes.” Slip op. at 3 (quoting J.A. 71; bracketed text in original). If not settled, disputes were to be submitted to binding arbitration.
On October 5, 2020, a majority of the maintenance employees ratified the Tentative Agreement. Shortly thereafter, StoneMor delivered to the Union a “cleaned-up draft that mostly tracked the [Tentative] Agreement but contained what StoneMor described as a clarification of a wage provision granting employees a salary increase every October 1st.” Slip op. at 3. The clarification apparently resolved an apparent ambiguity in the original Tentative Agreement language over whether the salary increase would occur on: (a) the “just passed October 1st[,]” i.e., October 1, 2020; or (b) “October 1st of the next year[,]” i.e., October 1, 2021. Slip op. at 3.
The Union objected to the proposed clarification language, taking the position that the wage increase was effective October 1, 2020. StoneMor asserted that the wage increase was effective on October 1, 2021, said the Union could file a grievance and arbitrate the disputed issue if it so desired.
Later in the month StoneMor circulated another draft Agreement, which contained the same proposed clarification to the wage provision. And on October 30, 2020, StoneMor distributed the maintenance workers’ paychecks, which did not include the disputed pay raise. At no point in October 2020 did the Union file a grievance.
In November 2020 the Union circulated a draft of the Agreement containing the originally agreed upon (and apparently ambiguous) language of the wage provision. The parties executed this version of the Agreement on December 29, 2020.
On January 5, 2021—a week after executing the Agreement on December 29, 2020, but more than ninety days after the Agreement was ratified on October 5, 2020—the Union filed a grievance advocating its interpretation of the apparently ambiguous wage provision, which was present in both the ratified agreement and the version executed on December 29, 2020. An arbitration took place, with the parties asking the arbitrator to resolve the dispute including the issue whether the grievance was timely. Slip op. at 4.
The arbitrator determined that the grievance was timely and made an award in favor of the Union on the merits. The arbitrator “reasoned that the contested [wage] provision had been unresolved from ratification on October 5, 2020 until execution of the finalized Agreement on December 29, 2020.” Slip op. at 4. She pointed out that StoneMor omitted from the post-ratification drafts the wage provision in its original form, instead substituting for it the “clarified” version. The original version did not appear in a post-ratification draft until the Union distributed its November 2020 draft, which was ultimately executed on December 29, 2020.
According to the arbitrator, “‘Moreover, the Union was not required to file a grievance while the parties were continuing to clarify and negotiate the provisions of the [Agreement] until the [Agreement] was fully executed.’” Slip op. at 4-5 (quoting J.A. 55).
The Agreement was executed on December 29, 2020, and since the grievance was filed on January 5, 2021, the arbitrator concluded it was filed within 10 days as required by the grievance provision.
StoneMor filed a petition to vacate the Award in the United States District Court for the District of New Jersey, citing Section 10(a)(4) of the FAA. The district court granted the petition, finding that “the award had no basis in the underlying Agreement.” Slip op. at 5.
The district court “reasoned that ‘[t]he [Agreement] was enforceable as soon as it was ratified by the Union members’ on October 5, 2020, and that the grievance provision was triggered by at least October 30, 2020, when the paychecks arrived without a salary increase.” Slip op. at 5 (citing J.A. 18, 21). The district court said the arbitrator’s conclusion “that the Union was reasonable and within its rights to wait until January to pursue a grievance” contravened the “plain meaning of the Agreement.” Slip op. at 5. The Union appealed to the Third Circuit, and the Third Circuit affirmed. Slip op. at 2.
Manifest Disregard of the Agreement: The Third Circuit’s Decision
The Third Circuit said this was a case where the arbitrator “rewr[ote] the contract.” Slip op. at 6 (citation and quotations omitted).
The Tentative Agreement expressly provided that it “became final once ‘ratified by a majority of the employees[.]” Slip op. at 6 (quoting J.A. 59). The Union ratified the Tentative Agreement on October 5, 2020.
In district court the Union “acknowledge[d] that” the Tentative Agreement was binding, an admission the Third Circuit thought appropriate because “the pertinent language [of the Agreement] is crystal clear.” Slip op. at 6-7 (citing and quoting J.A. 206).
The arbitrator, nevertheless, “declared, ‘it is reasonable that the Union would ensure that the [originally agreed-upon] language was incorporated in the [final Agreement] before it filed a grievance asserting that the Employer violated the [Agreement].’” Slip op. at 7 (citing and quoting J.A. 55). The Court, however, held that there was “no ‘reasonableness’ exception to the grievance procedure in the Agreement.” Slip op. at 7. “In fact,” said the Court, the parties explicitly agreed that ‘time [was] of the essence.’” Slip op. at 7 (quoting J.A. 71).
The arbitrator’s decision “was not based on anything in the Agreement.” All she did was “assert[] that ‘the Union was not required to file a grievance while the parties were continuing to clarify and negotiate the provisions of the [Agreement] until the [Agreement] was fully executed.’” Slip op. at 7 (quoting J.A. 55). This assertion, however, “directly contradicts the Agreement’s express language setting ratification, and not execution, as the binding date for the Agreement.” Slip op. at 7 (citation and quotation omitted). The award therefore “‘reflects a manifest disregard of the agreement[.]’” Slip op. at 7 (quoting Monongahela Valley Hosp., Inc. v. United Steel Workers Int’l Union, 946 F.3d 195, 199 (3d Cir. 2019).
The Union argued that the arbitrator acted within her powers because the evidence showed that the parties had reached no meeting of the minds concerning an essential term of the contract. But that, said the Court, was “the very circumstance covered by the grievance procedure, which was binding upon the parties at ratification.” Slip op. at 7-8.
“If[,]” said the Court, “the Union did not like StoneMor’s interpretation of the wage provision, and StoneMor did not relent, the Union could and should have filed a grievance within ten days.” Slip op. at 8. It failed to do so, the Court explained, which meant the grievance was not timely. Slip op. at 8. “The arbitrator’s decision to the contrary[,]” said the Court, “cannot stand because it ignores that the grievance procedure was mandatory at ratification.” Slip op. at 8.
Contacting the Author
If you have any questions about this article, arbitration, arbitration-law, or arbitration-related litigation, then please contact Philip J. Loree Jr., at (516) 941-6094 or PJL1@LoreeLawFirm.com.
Philip J. Loree Jr. is principal of the Loree Law Firm, a New York attorney who focuses his practice on arbitration and associated litigation. A former BigLaw partner, he has nearly 35 years of experience representing a wide variety of corporate, other entity, and individual clients in matters arising under the Federal Arbitration Act, as well as in insurance or reinsurance-related, and other, matters.
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