Fourth Circuit Reinforces Sky-High Standard to Vacate Arbitration Awards, But Opens Potential Questions Regarding Arbitration Agreements and At-Will Employment

March 10, 2022

By: Stephen B. Stern

     In Warfield v. ICON Advisors, Inc., No. 20-1690 (4th Cir. Feb. 24, 2022), the United States Court of Appeals for the Fourth Circuit reversed the decision of a trial court that vacated an arbitration award and, in doing so, opened some potential questions about altering the at-will employment relationship when disputes are to be resolved in arbitration.

     In April 2017, ICON Advisors, Inc., and a related company, ICON Distributors, Inc. (collectively, “ICON”), hired James Warfield (“Mr. Warfield”) as a securities broker.  ICON terminated Mr. Warfield’s employment later that year.  Mr. Warfield claimed that he was wrongfully terminated and, because his employment was subject to the Financial Industry Regulatory Authority (“FINRA”), he and ICON agreed that his dispute should be referred to arbitration.

     Mr. Warfield argued in the arbitration that he was “wrongfully terminated without just cause.”  In support of his claim, Mr. Warfield argued that “the mere fact that disputes over his employment relationship had to be resolved by arbitration implied that he could only be fired for cause.”  ICON in turn argued that North Carolina (the state in which Mr. Warfield was employed) was an employment at-will state, which means it did not need “just cause” to terminate his employment and, thus, Mr. Warfield’s claim necessarily failed.

     The arbitrators agreed with Mr. Warfield and awarded him $1,186,975.  Mr. Warfield moved in federal district court to enforce the arbitration award under the Federal Arbitration Act.  ICON cross-moved to vacate the arbitration award.  The federal district court denied Mr. Warfield’s motion to enforce and granted ICON’s motion to vacate.  In reaching this conclusion, the federal district court held that ‘“the clear, well-established law in North Carolina and the Fourth Circuit’ precluded [Mr.] Warfield’s wrongful termination without just cause claim, and that ‘the [arbitration] Panel chose to disregard . . . that law.’”  As a result, the district court concluded that the award “demonstrates manifest disregard [of the law] and must be vacated.”  Mr. Warfield then appealed to the Fourth Circuit.

     The Fourth Circuit started its analysis by noting that “[c]onvincing a federal court to vacate an arbitral award is a herculean task.”  When reviewing an arbitration award, ‘“a district or appellate court is limited to determine[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.’”  The court then noted that the grounds for vacating an arbitration award are “very narrow,” but either ‘“as an independent ground for review or as a judicial gloss on the [narrow] enumerated grounds for vacatur set forth’ in § 10(a) [of the Federal Arbitration Act], that a district court may vacate an arbitral award that rests upon a ‘manifest disregard’ of the law.”  To establish “manifest disregard,” the court explained that 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.”

     To demonstrate that the disputed legal principle is clearly defined and not subject to reasonable debate, ICON pointed to North Carolina law regarding the at-will employment relationship and a decision by the Fourth Circuit.  The court, however, noted that Mr. Warfield cited cases the held “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.”  The cases relied on by Mr. Warfield in this regard were Paine Webber, Inc. v. Agron, 49 F.3d 347 (8th Cir. 1995), and Shearson Hayden Stone, Inc. v. Liang, 653 F.2d 310 (7th Cir. 1981).

     The Fourth Circuit made clear that it “express[ed] no opinion on the persuasiveness of Agron and Liang.”  But those decisions were important to the Fourth Circuit’s analysis because “they exist,” Mr. Warfield “presented them to the arbitrators,” and ICON did not cite either to the arbitrators or the Fourth Circuit “any North Carolina case rejecting the specific proposition that the arbitrability of an employment relationship implies for-cause protections.”  This was significant in the context of reviewing an arbitration award because “in the absence of clearly on-point and controlling precedent, the fact that courts disagree on a particular legal question weighs against second-guessing an arbitrator’s award.”  Further, the court clarified that “[i]n the manifest disregard context, it is not [the court’s] role to predict whether North Carolina courts would reject the theory embraced in Agron and Liang that arbitrability implies for-cause protection.” (emphasis in original).  As a result, North Carolina’s at-will employment doctrine did not establish “binding precedent requiring a contrary result” that required vacating the arbitration award.

     ICON proffered additional arguments trying to establish that clear and binding precedent precluded Mr. Warfield’s claim, each of which overlapped in certain respects with the previous arguments, but the Fourth Circuit rejected each of those as well.  The court ultimately concluded that, “as in almost all manifest disregard case, the sky-high standard of judicial review is the beginning and the end of our analysis.”

     The Fourth Circuit’s decision in Warfield is notable because it reinforces the “sky-high” standard that is required to vacate an arbitration award.  In addition, the Fourth Circuit’s decision in Warfield opens some questions as to whether the at-will employment relationship remains the standard when an arbitration clause governs employment disputes or whether “for-cause protections” apply when an arbitration clause is applied.  The Fourth Circuit made clear that it offered no opinion on this issue.  Rather, it simple acknowledged that the precedent for “for-cause protections” existed in other jurisdictions.  But, by not offering an opinion on the issue, the Fourth Circuit arguably left open the possibility that “for-cause protections” could apply when employment disputes are governed by an arbitration clause.  This issue warrants monitoring, as it is likely to make its way back to the Fourth Circuit at some point.