In a recent precedential decision, Whitehead v. The Pullman Grp., LLC, the Third Circuit reminded litigants that it’s as tough as ever to vacate an arbitration award – and cast further doubt on the viability of the “manifest disregard of the law” standard here.
Appellant Pullman entered into a contract with two singer-songwriters in May 2002, which gave him the exclusive option to purchase their song catalog following a 180-day due diligence period. Pullman’s due diligence uncovered tax liens on the songbook, and when he (apparently) told the songwriters about them, they reneged on the agreement, which Pullman took as a breach. The songwriters subsequently died and their estates – claiming no knowledge of the agreement with Pullman – offered the songs to another buyer for $4.4 million. Soon after, Pullman publicly disclosed his deal with the songwriters, which, not surprisingly, “torpedoed the deal” with the second buyer. The estates sued, Pullman counter-sued, and the case wound up in arbitration.
In September 2014, a panel of three arbitrators threw the whole case out, concluding that Pullman failed to introduce evidence sufficient to prove that he notified the songwriters that he had completed his due diligence. His option to buy the songbook had therefore lapsed and his agreement, however originally valid, was no longer enforceable. The United States District Court for the Eastern District of Pennsylvania rejected Pullman’s request to overturn the arbitrators’ decision, and the Third Circuit affirmed.
On appeal, Pullman argued that the arbitrators made a mistake regarding New York’s “Dead Man’s Statute” (which generally prohibits litigants from testifying about personal communications had with deceased persons). Applying that statute, the arbitrators “discount[ed] any testimony about oral communications between Pullman and his contractual counterparties.” That ruling, according to Pullman, made it nearly impossible for him to prevail because he did not know that the songwriters would die, and thus he never notified them of his due diligence results in writing.
“[E]ven if the arbitral panel erred in its application of the Dead Man’s Statute,” the Third Circuit held, “that error was not sufficient to vacate the results of the parties’ arbitration.” Pullman had not been deprived of a fair hearing, the Court found, and thus none of the limited grounds set forth in the Federal Arbitration Act were applicable to overturn the panel’s decision.
Finally – and perhaps most interestingly – the Third Circuit also dismissed Pullman’s secondary argument that the arbitrators showed “manifest disregard of the law.” Acknowledging the “open question” as to whether this standard provides grounds for vacating an arbitral award, the Court noted that it had yet to weigh in on this Circuit split and declined to do so here. Regardless, if it were to weigh in and did agree that “manifest disregard of the law” can support overturning an arbitration award, Pullman would have no recourse: “Having made [the] commitment to arbitrate,” and having been fairly treated by the panel, “he is now bound by the terms of his bargain.”
For more on arbitrations and the “manifest disregard of the law” standard – and the long-standing debate around its viability – see What’s Left of the ‘Manifest Disregard’ Standard of Review of Arbitration Awards: All of It If You’re in the Second Circuit; Who Knows if You’re in the Third Circuit.