Brabham v. A.G. Edwards & Sons Inc.

• Decision Date: 28 June 2004
• Docket Number: No. 03-60679.,03-60679.
• Citation: 376 F.3d 377
• Parties: Thomas McDowell BRABHAM, Individually and as custodian of the account of Thomas McDowell Brabham III, a minor, and Erika Laine Brabham, a minor, Plaintiff-Appellee, v. A.G. EDWARDS & SONS INCORPORATED, et al., Defendants, A.G. Edwards & Sons Incorporated, Defendant-Appellant.
• Court: U.S. Court of Appeals — Fifth Circuit

376 F.3d 377

Thomas McDowell BRABHAM, Individually and as custodian of the account of Thomas McDowell Brabham III, a minor, and Erika Laine Brabham, a minor, Plaintiff-Appellee, v. A.G. EDWARDS & SONS INCORPORATED, et al., Defendants A.G. Edwards & Sons Incorporated, Defendant-Appellant.

No. 03-60679.

United States Court of Appeals, Fifth Circuit.

June 28, 2004.

COPYRIGHT MATERIAL OMITTED

W. Wayne Drinkwater (argued), Bradley, Arant, Rose & White, Jackson, MS, for Plaintiff-Appellee.

Dorrance L. Aultman (argued), Chadwick Lester Shook, Aultman, Tyner & Ruffin, Hattiesburg, MS, for Defendant-Appellant.

Appeal from the United States District Court for the Southern District of Mississippi.

Before DAVIS, BENAVIDES and PRADO, Circuit Judges.

BENAVIDES, Circuit Judge:

This interlocutory appeal requires us to consider when a district court may vacate an arbitration award. Plaintiff-Appellee Thomas Brabham and Defendant-Appellant A.G. Edwards & Sons submitted a dispute to arbitration. The arbitrators awarded damages to Brabham, but he sought to vacate the award as insufficient. The district court refused to vacate the award on the ground that the arbitrators manifestly disregarded the law but did vacate the award as arbitrary and capricious.

We agree with the district court that the arbitrators did not manifestly disregard the law. However, the district court erred in identifying arbitrariness and capriciousness as an independent ground for vacatur and in vacating the award on that ground. Therefore, we reverse the order of vacatur and remand this case to the district court.

I. Background

In 1996, Thomas Brabham opened several investment accounts, including accounts for his two children, through A.G. Edwards. The broker managing Brabham's account, who was addicted to drugs and alcohol, failed to follow Brabham's instructions, purchased speculative stocks, and made unauthorized trades. Nonetheless, Brabham's accounts were profitable, though not as profitable as Brabham might have hoped given the stock market's meteoric rise during the late 1990s.

After the addiction and mismanagement came to light, Brabham filed a federal suit alleging that A.G. Edwards had negligently hired and failed to supervise the errant broker. A.G. Edwards invoked an arbitration provision in Brabham's investment contract, and the district court compelled arbitration in accordance with the Federal Arbitration Act ("FAA"), 9 U.S.C.A. §§ 1-16 (West 1999 & Supp.2004).

Brabham argued to the three-member arbitration panel that he should receive a damage award commensurate with the gains his accounts would have earned had the broker invested them in index funds that track the Dow Jones Industrial Average and the Standard and Poor's 500. According to Brabham's expert, this method of damage calculation would yield an award between $529,711.34 and $867,009.20. A.G. Edwards countered that the panel should award no damages because Brabham's accounts had been profitable and because A.G. Edwards had apprised Brabham of the broker's actions through monthly statements. After hearing from several witnesses and reviewing numerous documents, the panel found for Brabham and awarded him $124,809.64 in actual damages. The arbitration panel also ordered A.G. Edwards to pay Brabham $14,356.17 for expenses and to bear the costs of arbitration. The panel did not give reasons for its award.

Dissatisfied, Brabham sought to have the district court vacate the award as arbitrary and capricious and in manifest disregard of the law. Brabham v. A.G. Edwards & Sons, 265 F.Supp.2d 720 (S.D.Miss.2003). The district court held that Fifth Circuit precedent allows vacatur on either ground. Id. at 724-25. Addressing each ground in turn, the court concluded that the arbitration panel did not manifestly disregard the law but found no rational basis for the award and therefore vacated it as arbitrary and capricious. The court then remanded the case to the original arbitration panel for reconsideration of damages. Id. at 725-26.

A.G. Edwards then requested permission to seek interlocutory review of the vacatur pursuant to 28 U.S.C. § 1292(b) (West 1993).¹ The district court granted this request, and we granted the petition for interlocutory appeal.²

II. Discussion

We review de novo an order vacating an arbitration award. Brook v. Peak Int'l, Ltd., 294 F.3d 668, 672 (5th Cir.2002). Our review of the award itself, however, is exceedingly deferential. See Glover v. IBP, Inc., 334 F.3d 471, 473 (5th Cir.2003). We can permit vacatur of an arbitration award only on very narrow grounds, see id. at 473-74.

The parties dispute just what those narrow grounds for vacatur include. A.G. Edwards contends that a district court may vacate an arbitration award only on grounds explicitly listed in section 10 of the FAA, 9 U.S.C.A. § 10(a) (West Supp.2004). These "statutory" grounds include situations

(1) where the award was procured by corruption, fraud, or undue means;

(2) where there was evident partiality or corruption in the arbitrators, or either of them;

(3) where the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy; or of any other misbehavior by which the rights of any party have been prejudiced; or

(4) where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made.

Id. Section 10 does not explicitly provide for vacatur when the arbitrators manifestly disregard the statute or act arbitrarily and capriciously. See id. Therefore, A.G. Edwards argues, the district court improperly vacated the award based on a judicially-created "nonstatutory" ground. In the alternative, A.G. Edwards argues that even if a district court could vacate an award on nonstatutory grounds, the arbitrators in this case neither manifestly disregarded the law nor acted arbitrarily and capriciously. Brabham responds that the district court properly recognized manifest disregard and arbitrariness and capriciousness as two nonstatutory grounds for vacating an award and that the award can be vacated on either ground.

A. Manifest Disregard

We agree with the district court that manifest disregard is an accepted nonstatutory ground for vacatur and that the arbitrators in this case did not manifestly disregard the law.

Contrary to A.G. Edwards' contention, an arbitration award may be vacated if the arbitrators manifestly disregard the law. For many years, section 10 of the FAA "describe[d] the only grounds on which a reviewing court [could] vacate an arbitration award." McIlroy v. PaineWebber, Inc., 989 F.2d 817, 820 (5th Cir.1993) (per curiam). A district court could not vacate an award for manifest disregard. See R.M. Perez & Assocs. v. Welch, 960 F.2d 534, 539-40 (5th Cir.1992). Subsequently, however, a panel of this Circuit held that "clear approval of the `manifest disregard' of the law standard in the review of arbitration awards under the FAA was signaled by the Supreme Court's statement in First Options that `parties [are] bound by [an] arbitrator's decision not in "manifest disregard" of the law.'" Williams v. Cigna Fin. Advisors Inc., 197 F.3d 752, 759 (5th Cir.1999) (quoting First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 942, 115 S.Ct. 1920, 131 L.Ed.2d 985 (1995)). Since Williams, we have noted the potential applicability of manifest disregard in a number of contexts. See, e.g., Bridas S.A.P.I.C. v. Government of Turkmenistan, 345 F.3d 347, 363 (5th Cir.2003), cert. denied, ___ U.S. ___, 124 S.Ct. 1660, 158 L.Ed.2d 357 (2004) (international petroleum operations); Glover, 334 F.3d at 474 (workers' compensation); Prestige Ford v. Ford Dealer Computer Servs., 324 F.3d 391, 395 (5th Cir.), cert. denied, ___ U.S. ___, 124 S.Ct. 281, 157 L.Ed.2d 141 (2003) (sales and service contract). Thus, this Circuit has already accepted manifest disregard as a ground for vacating an arbitration award.³

In this case, however, the arbitrators did not manifestly disregard the law. Manifest disregard "means more than error or misunderstanding with respect to the law." Prestige Ford, 324 F.3d at 395 (quoting Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Bobker, 808 F.2d 930, 933 (2d Cir.1986)). The arbitrators must have "appreciate[d] the existence of a clearly governing principle but decided to ignore or pay no attention to it." Id. Furthermore, "the governing law ignored by the arbitrators must be well defined, explicit, and clearly applicable." Id. (quoting Merrill Lynch, 808 F.2d at 934).

Brabham claims that the arbitration panel manifestly disregarded Miley v. Oppenheimer & Co., Inc., which discusses the measure of an investor's damages in cases of broker misconduct. 637 F.2d 318, 326-29 (5th Cir.1981). In Miley, we instructed district courts to measure damages according to "how the investor's portfolio would have fared in the absence of the such [sic] misconduct." Id. at 328. We also stated that "in the absence of either a specialized portfolio or a showing by either party that a different method is more accurate," it would be "preferable" for district courts to use "the average percentage of performance of the Dow Jones Industrials or the Standard & Poor's Index during the relevant period as the indicia of how a given portfolio would have performed in the absence of the broker's misconduct." Id. Brabham points out that his expert used the Dow Jones and S&P to estimate damages and contends that A.G. Edwards offered no evidence in rebuttal. Therefore, Brabham argues, the panel could only have departed from his expert's estimates by disregarding Miley.⁴

The district court properly rejected this argument. As Brabham admits, Miley did not impose a procrustean measure for use in every case of broker misconduct. Because there are "countless legitimate ways" to manage a...