Employers using agreements that require employees to arbitrate employment law claims should take note of a troubling decision by the U.S. 4th Circuit Court of Appeals (the federal appellate court with jurisdiction over North Carolina).
Facts and Findings
James Warfield, a securities broker, contended before an arbitration panel that his former employer, ICON Advisers, Inc., and a related corporation, ICON Distributors, Inc., (together, ICON) wrongfully terminated him without just cause. The panel awarded him $1,186,975. He asked the U.S. District Court for the Western District of North Carolina to enforce the award. ICON asked the court to vacate it.
The district court refused to enforce the award, holding North Carolina is an at-will employment state that doesn’t recognize a claim for wrongful termination without just cause. The court determined the arbitrators manifestly disregarded the law in finding to the contrary and vacated the award on that basis.
Warfield appealed to the 4th Circuit. The appeals court ruled that because ICON hadn’t made the exceedingly difficult showing necessary to prove the arbitrators acted with manifest disregard of the law, it had to reverse the district court’s order and enforce the arbitration award.
Origins of Claim
In April 2017, ICON hired Warfield as a securities wholesaler. By the end of the year, it had fired him. The parties dispute exactly why the employer let him go. They agreed, however, arbitrators would resolve the dispute because his employment fell within the ambit of the Financial Industry Regulatory Authority (FINRA).
In April 2019, Warfield filed a statement with arbitrators asserting a claim against ICON for “wrongful termination without just cause.” He argued the mere fact that disputes over his employment relationship had to be resolved by arbitration implied he could be fired only for cause. For its part, ICON argued he couldn’t recover for the claim because North Carolina is an employment-at-will state.
Lower Court Won’t Enforce $1 Million-Plus Damages Award
The arbitrators agreed with Warfield. They concluded: “Respondents [ICON] are jointly and severally liable for and shall pay to [Warfield] the amount of $1,186,975 in compensatory damages for wrongful termination without just cause.” The decision contained no other explanation about the basis for the award.
Under the Federal Arbitration Act (FAA), Warfield asked the district court to enforce the award. The court denied his request and granted ICON’s.
The lower court found “the clear, well established law in North Carolina and the [4th] Circuit” precluded his wrongful termination without just cause claim and that “the [arbitration] Panel chose to disregard . . . that law.” The court concluded the “award therefore demonstrates manifest disregard [of the law] and must be vacated.”
4th Circuit Reverses
The 4th Circuit began its ruling by noting that convincing a federal court to vacate an arbitral award is a herculean task. When reviewing such an award, a district or appellate court is limited to determining 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.
In addition to the very narrow statutory grounds for vacating an arbitral award, courts have recognized a district court may overturn an arbitral award if it rests upon a “manifest disregard” of the law. To establish manifest disregard, a party must demonstrate: (1) the disputed legal principle is clearly defined and isn’t subject to reasonable debate, and (2) the arbitrator refused to apply the principle.
ICON asserted that because North Carolina is an at-will employment state, a state court would necessarily reject Warfield’s asserted wrongful termination without just cause claim. The problem for the employer was that the former employee cited cases from other parts of the country holding that the presence of an arbitration clause governing an employment dispute implies for-cause termination protections, notwithstanding a state law at-will doctrine to the contrary.
ICON wasn’t able to cite (for either the arbitrators or the 4th Circuit) any North Carolina case rejecting the specific proposition that the arbitration of an employment relationship implies for-cause protections. Because of the competing authorities, the 4th Circuit noted that even if it agreed with ICON that it had the better of the argument before the arbitrators, the points remained (1) there was still an argument, and (2) because the issue was “subject to reasonable debate,” the arbitrators could not have manifestly disregarded the law by determining that Warfield could pursue a wrongful termination claim.
If you use (or are considering) arbitration agreements, you should take heed of the decision in Warfield’s case. One possible approach to address the ruling is to state specifically in your arbitration agreement that it doesn’t create a “for cause” standard for the termination of an otherwise at-will employment relationship.