United States District Court, N.D. Illinois
January 27, 2004.
AOT USA, a California corporation, Plaintiff
MERRILL LYNCH PROFESSIONAL CLEARING CORPORATION, a Delaware corporation, Defendant
The opinion of the court was delivered by: WAYNE ANDERSEN, District Judge
MEMORANDUM, OPINION AND ORDER
This case is before the Court on the motion of the defendant, Merrill
Lynch Professional Clearing Corporation ("Merrill Lynch") to dismiss
plaintiff's complaint pursuant to Fed.R.Civ.P. 12(b)(6). For the
following reasons, we grant the motion to dismiss plaintiff's complaint
and thereby confirm the arbitration award.
Plaintiff AOT USA's ("AOT") complaint seeks the vacation of an
arbitration award rendered by the Chicago Board Options Exchange, Inc.
("CBOE") on or about January 30, 2003 (the "Award"). In January 2001,
Plaintiff AOT commenced an arbitration before the CBOE against Defendant
Merrill Lynch. The arbitration challenged Merrill Lynch's October 2000
actions in "buying-in" a position in Terra Networks, S.A. ('Terra").
During the course of the arbitration proceeding, AOT argued that
Merrill Lynch executed the buy-ins, which eventually were allocated to
AOT's account by AOT's clearing firm, at a
commercially unreasonable price. Merrill Lynch countered that it
had abided by Rule 11810 of the Uniform Practice Code of the National
Association of Securities Dealers, Inc. ("NASD"), which governs the
buying-in of undelivered securities. On or about January 30, 2003, the
CBOE arbitration panel issued its Award denying AOT any relief.
AOT now seeks to vacate the arbitration Award in this Court.
The Federal Arbitration Act, 9 U.S.C. § 1, et seq, "establishes `a
federal policy favoring arbitration.'" Shearson/American Express,
Inc. v. McMahon, 482 U.S. 220 (1987) (quoting Moses H. Cone
Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1 (1983)).
The corollary to this federal bias in favor of arbitration is that
"judicial review of an arbitration award is extremely limited." E.I.
DuPont de Nemours v. Grasselli Employees Independent Ass'n,
790 F.2d 611, 614 (7th Cir.), cert. denied, 479 U.S. 853 (1986).
Section 10 of the Federal Arbitration Act ("FAA"), 9 U.S.C. § 10,
sets forth the bases by which a District Court may vacate an arbitration
award. These are:
a. In any of the following cases, the United
States court in and for the district wherein
the award was made may make an order vacating
the award upon the application of any party to
(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
(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.
(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.
9 U.S.C. § 10(a). See also IDS Life Insurance Co. v. Royal
Alliance Associates, Inc., 266 F.3d 645
, 649-50 (7th Cir. 2001).
In this case, the Complaint does not allege any of the above-listed
rationale as a basis for vacating the Award. Rather, Paragraph 15 of the
Complaint identifies the following grounds for vacating the Award:
(a) To enforce said award would be contrary to the
public policy of the United States; and
(b) The award rendered by the arbitrators was in
manifest disregard of NASD rules.
The following discussion will show that neither of these grounds
warrants vacation of the Award in this case. See 9 U.S.C. § 10(a);
IDS Life Insurance Co., Inc., 266 F.3d at 649-50.
I. Manifest Disregard
As set forth above, the FAA limits the bases for overturning and
vacating an arbitration award. See 9 U.S.C, § 10. In addition to the
rationale set forth in the Act however, the Supreme Court, in dictum, has
implied that an additional, limited rationale may occasionally warrant
the vacation of the an arbitration award. Wilko v. Swan,
346 U.S. 427, at 436-437 (1953) (dictum); First Options v. Kaplan,
514 U.S. 938, 942 (1995) (dictum). The Seventh Circuit has narrowly
circumscribed the instances in which a party may invoke this
non-statutory ground to situations in which the arbitration award directs
the parties to violate the law or when the arbitral order does
not adhere to the legal principles specified by contract. See
IDS Life Insurance Co. v. Royal Alliance Associates, Inc.,
266 F.3d 645 (7th Cir. 2001); George Watts & Son, Inc. v. Tiffany &
Co., 248 F.3d 577, 580 (7th Cir. 2001). As the Seventh Circuit
observed in George Watts:
After Eastern Associated Coal the
`manifest disregard' principle is limited to two
possibilities: an arbitral order requiring the
parties to violate the law (as by employing
unlicensed truck drivers), and an arbitral order
that does not adhere to the legal principles
specified by contract, and hence unenforceable
under § 10(a)(4).
248 F.3d at 581.;
In this case, AOT is unable to plead that the arbitration Award directs
the parties to violate the law. At the arbitration hearing, AOT
challenged the procedure by which Merrill Lynch executed a buy-in and the
CBOE found that Merrill Lynch had acted properly. AOT does not explain
how the panel, by its ruling, either violated the law or directed Merrill
Lynch to violate the law.
Nor can AOT argue that the CBOE panel ignored the arbitration agreement
or CBOE arbitration rules the contract governing the proceedings
in this case. In fact, the Award establishes that the CBOE panel
considered, and rejected, AOT's arguments with respect to the buy-in and
with respect to the provisions of NASD Code 11810(C)(1). See Complaint,
Exhibit 1. The Seventh Circuit has limited the consideration of
arbitrators' rulings with respect to contract interpretation:
Courts often say, with respect to arbitrators'
role in interpreting contracts, that error is not
a ground of judicial review. `[T]he question for
decision by a federal court asked to set aside an
arbitration award . . . is not whether the
arbitrator or arbitrators erred in interpreting
the contract; it is not whether they clearly erred
in interpreting the contract; it is not whether
they grossly erred in interpreting the contract;
it is whether they interpreted the contract.'
Hill v. Norfolk & Western Ry.,
814 F.2d 1192, 1194-95 (7th Cir. 1987);
see, e.g., United Steelworkers v. Enterprise
Wheel & Car Corp., 363 U.S. 593, 599
George Watts, 248 F.3d at 579. Here, the evidence shows that
the CBOE panel fully followed the parties' arbitration agreement and
considered and rejected AOT's arguments.
By the same token, AOT's assertion in Paragraph 18 of the Complaint
that the "arbitrators ignored the NASD rule" is belied by AOT's own
exhibits. In the Complaint, AOT claims: "In allowing AOT USA to be bought
in at $25.50, the arbitrators ignored the NASD rule regarding buy-ins at
the current market price evincing a manifest disregard of the law."
In fact, the Award makes clear that the arbitration panel both
considered and applied NASD Rule 11810:
On January 16, 2001, AOT USA ('Claimant') filed a
Statement of Claim against Merrill Lynch
Professional Clearing Corporation claiming that,
on October 25, 2000, Respondent improperly
effected a buy-in' (the `buy in') in Terra
Networks S.A. Claimant asserts that the `buy-in'
was executed at a price without economic
justification and did not conform to the
procedural rules contained in NASD Regulation
11810 of the NASD's Uniform Practice Code.
Claimant alleges that, as a direct result of
Respondent's failure to conform to NASD
regulations in executing the buy-in, Claimant
suffered a loss of One Million Two Hundred Eleven
Thousand Four Hundred Ninety Four and 00/100
Dollars ($1,211,494.00). In its answer, and at the
hearing, Respondent refutes Claimant's
allegations. . . .
After due deliberation and in consideration of the
hearing testimony, documentary evidence, and other
submissions made by the parties, the undersigned
arbitrators, in full and final resolution of all
issues in controversy, award as follows:
1. The panel denies Claimant's request[s] . . .
January 30, 2003 Arbitration Award, attached to AOT's Complaint as
Thus, it is clear that the arbitrators framed and addressed the
appropriate issue, considered all of the evidence, and rejected AOT's
position. Accordingly, AOT fails to sufficiently plead
facts alleging a valid manifest disregard of the law, and the
Complaint must be dismissed on this basis.
II. Public Policy
The Supreme Court has ruled that courts may not enforce collective
bargaining agreements that are contrary to public policy. See W.R.
Grace & Co. v. Local Union 759, 461 U.S. 757, 766 (1983). These
prohibitions extend to arbitration proceedings mandated by such union
contracts. Id. In this circuit, however, it is questionable
whether this "public policy" justification for vacating an arbitration
award would be extended beyond the limited exception of collective
bargaining contracts. See Moseley, Hallgarten, Estabrook &
Weeden, Inc. v. Ellis, 849 F.2d 264, 267, n. 7, (7th Cir. 1988).
Even assuming that "violation of public policy" could form a basis for
vacation of the Award in the Seventh Circuit, AOT fails to plead an
"explicit public policy that has been violated by the Award. In the
limited cases in the collective bargaining context in which courts have
vacated arbitration awards for "violation of public policy," the courts
have emphasized that the violation must be of "some explicit policy" that
is "well defined and dominant and is to be ascertained `by reference to
the laws and legal precedents and not from general considerations of
supposed public interests."' Id. See also United Paperworkers
International v. Misco, 441 U.S. at 43; Muschany v. United
States, 324 U.S. 49, 66 (1945).
By contrast, in this case, AOT cites no evidence of violation of public
policy. First, the Complaint does not clearly state what public policy
the CBOE panel allegedly undercut in rendering its arbitration Award. The
Complaint asserts, without factual justification or support,
that enforcement of the Award, would be contrary to the "explicit
and well defined public policy of the role that short sellers play" in
Indeed, there is no assertion that anyone, other than AOT, has been
affected by the Award. The public policy purportedly at issue
the ability of market makers to engage in short selling of securities
was not directly or indirectly at issue in the arbitration
proceedings. See Complaint ¶ 16(B) and Exhibit 1 thereto. Likewise,
the Award, which denies relief to AOT, has no direct or indirect effect
on the right or ability of a market maker to conduct short sales, and
AOT does not allege facts suggesting that it does. In essence, AOT
attempts to magnify its own disappointment in the arbitrators' decision
into a matter affecting the public as a whole. Yet, the Complaint and
exhibits attached thereto make clear that this is merely a private
grievance having no real public policy implication. Accordingly,
"violation of public policy" does not form a basis for vacating the
In sum, AOT has failed to plead a valid basis for vacating the
arbitration Award under the rationale enumerated in 9 U.S.C. § 10(a).
Moreover, the reasons for vacating the Award which AOT has plead in the
Complaint-that it is contrary to public policy and in manifest disregard
of the law-do not, in this case, warrant relief.
For the foregoing reasons, we grant the motion of Defendant Merrill
Lynch Professional Clearing Corporation to dismiss Plaintiffs Complaint
and, thus, we confirm the arbitration
Award rendered on or about January 30, 2003 in this case. This is a
final and appealable order. All other pending motions are deemed moot by
this order. It is so ordered.
© 1992-2004 VersusLaw Inc.