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Dewan v. Walia

Issue Discussed: Judicial Review/Manifest Disregard

Submitted by Robert W. DiUbaldo

Date Promulgated: October 28, 2013

 

Dewan v. Walia, 544 Fed. Appx. 240 (4th Cir. 2013)

Court: U.S. Court of Appeals for the Fourth Circuit

Issues Decided:  (1) whether the doctrine of manifest disregard of the law remains a viable basis to challenge arbitral awards implicating the Federal Arbitration Act (“FAA”), even after the U.S. Supreme Court’s decision in Hall Street Assocs., LLC v. Mattel, Inc., 552 U.S. 576 (2008); and (2) whether an award that violates state law meets the standard for vacatur based on manifest disregard of the law.

Arun Walia, a Canadian national, came to work for Kiran M. Dewan, CPA, P.A. (“Dewan”) in the United States as an accountant via an employment visa.  Walia entered into an employment agreement with Dewan, which contained certain nonsolicitation and noncompetition provisions and a broad arbitration clause encompassing disputes between the parties.  In 2009, Walia’s employment was terminated, and he entered into a Release Agreement (the “Release”) with Dewan pursuant to which Walia “released and discharged” any claims against Dewan related to Walia’s employment in consideration for payment of $7,000.00.

Thereafter, Dewan commenced an arbitration against Walia with the American Arbitration Association pursuant to the relevant clause in the employment agreement, alleging that Walia breached the noncompetition/nonsolicitation provisions.  Despite the Release, Walia asserted numerous counterclaims against Dewan in the arbitration, primarily alleging that he was underpaid during his employment; that Dewan breached the profit-sharing terms of the employment agreement; and that Dewan had violated federal immigration law related to the work-visa program.  After a four-day hearing, an arbitrator found in favor of Walia with respect to Dewan’s claims and, though finding the Release executed by Walia was valid and enforceable, awarded him substantial monetary relief on his counterclaims.

Walia moved in the U.S. District Court for the District of Maryland to confirm the aspect of the award addressing his counterclaims, and Dewan cross-moved to vacate the same.  The arguments asserted by both parties were based on the Maryland Uniform Arbitration Act (“MUAA”).  The District Court granted Walia’s motion and denied Dewan’s, both originally and on reconsideration, finding that Dewan failed to demonstrate that any of the applicable grounds set forth in the MUAA warranted vacatur.  Dewan then appealed to the U.S. Court of Appeals for the Fourth Circuit.

Initially, the Fourth Circuit found that the FAA, and not the MUAA, governed the dispute, because the employment agreement and Release “evidence and arose out of” transactions involving foreign commerce, pursuant to Section 2 of the FAA.  The Court further found that the basis upon which Dewan sought vacatur at the appellate level – that the arbitrator’s award manifestly disregarded the law – remained a valid basis for review of arbitral awards even after the U.S. Supreme Court’s decision in Hall Street Assocs., LLC v. Mattel, Inc., 552 U.S. 576 (2008), whether as an independent ground for review or as a “judicial gloss” on the enumerated grounds set forth in Section 10 of the FAA.  The Court characterized the manifest disregard standard as only being applicable where “the arbitrator understands and correctly states the law, but proceeds to disregard the same.”  Here, the Fourth Circuit held the standard warranted vacating the award, because the arbitrator concluded that the Release between Walia and Dewan was enforceable and encompassed Walia’s counterclaims.  While the arbitrator further ruled that the Release only applied to claims asserted in state or federal court, as opposed to those brought in the arbitral forum, the Court found that this distinction was not supportable under either Maryland law or common law generally.

 

 

[1] Rob DiUbaldo is a Partner at Carlton Fields Jorden Burt, whose practice focuses on insurance, reinsurance and commercial litigation and arbitration.