343 F.

3d 57

Richard HOEFT, III, individually and as trustee under the

Hoeft Charitable Remainder Unitrust, Carol J. Hoeft, as
trustee under the Hoeft Charitable Remainder Unitrust,
Petitioners-Appellants,
v.
MVL GROUP, INC., Discovery Research Group of Utah, Inc.,
formerly known as Discovery Acquisition Corp., RespondentsAppellees.
Docket No. 02-9155.

United States Court of Appeals, Second Circuit.

Argued: March 27, 2003.
Decided: September 3, 2003.

COPYRIGHT MATERIAL OMITTED Louis B. Kimmelman (Marissa

Mol, on the brief), O'Melveny & Myers LLP, New York, NY, for
Petitioners-Appellants.
James T. Shearin, Pullman & Comley, LLC, Bridgeport, CT, for
Respondents-Appellees.
Before: B.D. PARKER, Jr. and RAGGI, Circuit Judges, and
GOLDBERG, Judge.*
B.D. PARKER, JR., Circuit Judge.

This is one of those rare cases in which a district court vacated an arbitration
award because of the arbitrator's manifest disregard of the law. The arbitrator,
Steven Sherrill, issued a $1,402,565 award in favor of petitioners Richard
Hoeft, III and Carol J. Hoeft. The Hoefts filed a petition to confirm the award in
the United States District Court for the Southern District of New York, and
respondents MVL Group, Inc. and Discovery Research Group of Utah, Inc.
(collectively, "MVL") moved to vacate the award. After limited discovery,
including a court-supervised deposition of the arbitrator, the District Court
(Kimba M. Wood, Judge) denied the Hoefts' petition to confirm the award and

granted MVL's motion to vacate it, concluding that Sherrill had manifestly
disregarded the law. Because we conclude that the District Court should not
have permitted MVL to depose the arbitrator regarding his reasoning and
decision-making processes, and because we believe that the arbitrator neither
manifestly disregarded the law nor exceeded his powers, we reverse the
judgment of the District Court.
BACKGROUND
2

In the 1980s Richard Hoeft, III founded two companies that specialize in the
field service area of the market research industry, Discovery Research Group,
Inc. and Discovery Research Group of Utah, Inc. By February 2000, Hoeft
individually and the Hoeft Charitable Remainder Unitrust, of which Hoeft and
his wife Carol J. Hoeft were co-trustees, were the sole shareholders of both
companies. In a February 2000 Stock Purchase Agreement and Amendment to
Stock Purchase Agreement, the Hoefts sold their shares for $6.5 million to
MVL Group, Inc. and Discovery Acquisition Corporation. 1

The sale closed on February 29, 2000, but the parties agreed that MVL could
defer paying a portion of the purchase price until the following year and that
the Hoefts would receive a purchase price adjustment if the value of the
companies increased. The adjustment would be based on a calculation of
EBITDA, which was defined in the Amendment as follows:

For purposes of this Amendment, the term EBITDA shall mean income from
operations before interest expense, provisions for income taxes, interest and
other investment income, other income, depreciation and amortization, which
shall be determined in accordance with generally accepted accounting
principles consistently applied....

(Amendment to Stock Purchase Agreement 1(b).) The Hoefts would receive

the adjustment if, and only if, EBITDA for the year following the closing (the
"Secondary Year") was equal to or greater than EBITDA for the year preceding
the closing (the "Primary Year"). If Secondary Year EBITDA was equal to or
greater than Primary Year EBITDA, the purchase price would be increased by
the difference between 5.5 times Primary Year EBITDA, on the one hand, and
$6,500,000, on the other.

The Amendment provided that, in the event of a dispute as to the calculation of

either Primary or Secondary Year EBITDA, the parties were to
use their reasonable best efforts to resolve such dispute, and in the event that

use their reasonable best efforts to resolve such dispute, and in the event that
they are unable to do so such dispute shall be resolved by Steven Sherrill,
whose decision in such matters shall be binding and conclusive upon each of
the parties hereto and shall not be subject to any type of review or appeal
whatsoever.

(Amendment to Stock Purchase Agreement 1(d).) Sherrill is a certified public

accountant who represented the Hoefts in this transaction and had also worked
as a consultant to MVL. The parties ultimately disagreed over the calculation of
Primary Year EBITDA. The disagreement involved the proper treatment of
certain one-time payments to employees sale-related bonuses and stock
option extinguishment costs made in connection with the February stock
sale. MVL believed that these one-time payments should reduce "income from
operations," a component of EBITDA under 1(b) of the Amendment, while
the Hoefts believed that they should not. The parties were unable to resolve the
dispute themselves, and the Hoefts' attorney wrote to Sherrill requesting that he
resolve it.

A general arbitration clause in the Stock Purchase Agreement (from which the
more specific 1(d) of the Amendment represented a carve-out) referred most
disputes arising under the Agreement to the American Arbitration Association
(the "AAA"). Invoking this clause, MVL initiated a proceeding with the AAA
seeking to disqualify Sherrill and to have the AAA appoint a new arbitrator.
MVL argued, on the basis of a draft calculation of Primary Year EBITDA that
Sherrill had circulated in November 2000, that he had prejudged the matter and
could not act impartially.2 The AAA denied MVL's motions as premature,
noting that, if MVL felt that Sherrill conducted the arbitration proceeding with
"evident partiality," it could seek to have the award vacated on that ground after
the proceeding was concluded and Sherrill rendered his award. See 9 U.S.C.
10(a)(2).

10

Sherrill proceeded to arbitrate the dispute over Primary Year EBITDA. The
parties submitted documentary evidence and expert reports supporting their
conflicting calculations. In July 2001, Sherrill issued a draft award and
circulated it to the parties. After receiving comments and additional evidence
from the parties, Sherrill issued his final award in August 2001. Relying on his
perception of the parties' intent, Sherrill adopted the Hoefts' contention that the
one-time payments did not reduce Primary Year income from operations (nor,
therefore, Primary Year EBITDA). Sherrill rejected MVL's argument that
income from operations could be determined solely according to Generally
Accepted Accounting Principles ("GAAP"), as GAAP defined neither "income
from operations" nor "EBITDA." Pursuant to the formula prescribed in 1(e)

of the Amendment, Sherrill determined that, if Secondary Year EBITDA was

equal to or greater than his calculation of Primary Year EBITDA, MVL owed
the Hoefts $1,402,565. MVL conceded that Secondary Year EBITDA was
equal to or greater than Primary Year EBITDA.
11

In September 2001, the Hoefts filed a petition in the District Court to confirm
the award pursuant to the Federal Arbitration Act, 9 U.S.C. 1-16 (1999) (the
"FAA"). MVL, in turn, filed a demand with the AAA to vacate the award, as
well as a slew of motions in the District Court. These motions sought to: vacate
the arbitration award; stay the District Court action pending the outcome of the
AAA proceeding; stay the District Court's consideration of the Hoefts' petition
pending discovery; and compel arbitration. The Hoefts cross-moved to stay the
AAA proceeding. In a November 2001 order the District Court denied MVL's
motion for a stay pending the outcome of the AAA proceeding, denied MVL's
motion to compel arbitration, granted the Hoefts' motion to stay the AAA
proceeding, and denied MVL's motion to stay consideration of the Hoefts'
petition pending discovery.

12

Following the District Court's resolution of these motions, MVL sought a broad
range of discovery: interrogatories, document production, and depositions,
including the deposition of the arbitrator. At the time, MVL had asserted four
grounds for vacating the arbitration award: (1) that Sherrill had exceeded his
powers, (2) that the arbitrator had manifestly disregarded the law by failing to
apply GAAP, (3) that the dispute resolution mechanism of 1(d) of the
Amendment had not been properly triggered, and (4) that the arbitrator had
prejudged the dispute. The Hoefts argued that the District Court should not
permit any discovery but that, to the extent any discovery would be permitted,
the only useful testimony would be the arbitrator's. The District Court ordered
that MVL could depose the arbitrator for one-half hour, under the court's
supervision.

13

On the day of the arbitrator's deposition, the parties disputed its proper scope.
MVL's counsel indicated that he intended to question the arbitrator regarding
whether he had manifestly disregarded the law, while the Hoefts' counsel
argued that the deposition should be limited to whether the arbitrator had
prejudged the dispute (i.e., to events that occurred before the Amendment's
dispute resolution mechanism had been triggered). The court declined to limit
the scope of the deposition, expressly permitting MVL's counsel to examine the
arbitrator regarding his alleged manifest disregard of the law.

14

The in-court deposition of the arbitrator proceeded, with the court supervising.
MVL's counsel did not question the arbitrator regarding the allegations of bias

or prejudgment. Instead, MVL's counsel questioned the arbitrator regarding his

understanding of the calculation of EBITDA under the Amendment and the
substance of his decision-making process in calculating Primary Year
EBITDA, including the role of GAAP in his calculation. Sherrill testified that
he had "disregard[ed] the phrase `generally accepted accounting principles'" in
calculating Primary Year EBITDA and that "the preponderance of evidence
suggested that had GAAP been applied, in my determination those two expense
items [i.e., the sale-related bonuses and stock option extinguishment costs]
would have reduced EBITDA under this calculation." In response to
questioning by the Hoefts' counsel, Sherrill testified that in his opinion GAAP
provided more than one way to present categories of expenses and was
therefore not determinative of EBITDA.
15

At the close of the deposition, MVL's counsel indicated that he would no

longer seek additional discovery. Several days later, MVL's counsel confirmed
that "MVL will not be pursuing its arguments of arbitral bias due to
prejudgment and that the `dispute' prerequisite was unmet." (Letter from
Shearin to Kimmelman of 1/28/0[2], at 1.)

16

After receiving additional briefing regarding the substantive accounting issues

underlying the arbitration award, the District Court denied the Hoefts' petition
to confirm the award and granted MVL's motion to vacate it. The District Court
concluded that the arbitrator had not exceeded his powers under 9 U.S.C.
10(a)(4), but that he had manifestly disregarded the law in failing to calculate
Primary Year EBITDA in accordance with GAAP. Following the entry of
judgment, the Hoefts appealed.

DISCUSSION
17

On appeal, the Hoefts have launched a three-pronged attack on the decision of

the District Court. First, they argue that because the Amendment insulated the
arbitration award from judicial review, the District Court erred in even
considering whether the arbitrator had manifestly disregarded the law. Second,
and in the alternative, they argue that the District Court abused its discretion in
permitting the arbitrator to be deposed concerning his decision-making process.
Third, they argue that the arbitrator neither manifestly disregarded the law nor
exceeded his powers.

18

I. Enforceability of Private Agreements to Preclude Judicial Review of

Arbitration Awards

19

Under 1(d) of the Amendment, disputes over the calculation of EBITDA were

19

Under 1(d) of the Amendment, disputes over the calculation of EBITDA were
to be "resolved by Steven Sherrill, whose decision in such matters shall be
binding and conclusive upon each of the parties hereto and shall not be subject
to any type of review or appeal whatsoever." According to the Hoefts, this
provision deprived the District Court of the authority to examine the substance
of the arbitrator's decision and, thus, to review it for manifest disregard of the
law. While the Hoefts did invoke the District Court's jurisdiction in order to
obtain a judgment confirming the arbitration award, they contend that there is
no contradiction between their petition and their claim that the substance of the
arbitrator's decision is unreviewable. The Hoefts rely on the Stock Purchase
Agreement and its Amendment as the source of their right to seek confirmation
of the award in federal court.

20

The District Court did not determine whether a private agreement could both
authorize a federal court to enter a judgment confirming an arbitral award and
divest that court of the authority to review the substance of the award for
manifest disregard of the law. Instead, the District Court assumed arguendo
that parties could agree to eliminate judicial review of an arbitration award, but
concluded that 1(d) of the Amendment was not sufficiently clear to indicate
the parties' intention to do so.

21

In urging us to enforce the parties' apparent agreement to insulate the substance

of the arbitration award from judicial review, the Hoefts rely on the general
principle of freedom of contract and the more specific canon of deference to
private agreements to arbitrate. But the freedom to contract, like any freedom,
has its limits, and the Hoefts' reliance on the federal policy favoring arbitration
overlooks several key assumptions that undergird that policy. It is in part
because arbitration awards are subject to minimal judicial review that federal
courts voice such strong support for the arbitral process. See Gilmer v.
Interstate/Johnson Lane Corp., 500 U.S. 20, 32 n. 4, 111 S.Ct. 1647, 114
L.Ed.2d 26 (1991) ("We have stated ... that `although judicial scrutiny of
arbitration awards necessarily is limited, such review is sufficient to ensure that
arbitrators comply with the requirements of the statute' at issue." (quoting
Shearson/Am. Express Inc. v. McMahon, 482 U.S. 220, 232, 107 S.Ct. 2332, 96
L.Ed.2d 185 (1987))). Arbitration awards are not self-enforcing, a fact that the
Hoefts, who petitioned the District Court to confirm the award, cannot deny.
Thus, while we have spoken in broad terms of deference to private agreements
to arbitrate, we have always done so with an awareness of the confirmationand-vacatur safety net that hangs below. The FAA prescribes several grounds
for vacating arbitration awards that although narrow are nevertheless important.
Specifically, 10(a) of the FAA authorizes a district court to vacate an
arbitration award:

22

(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
them;

23

(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; or

24

(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.

25

9 U.S.C. 10(a). The Supreme Court has supplemented the FAA with an
additional ground not prescribed in the statute: manifest disregard of the law.
See Wilko v. Swan, 346 U.S. 427, 436-37, 74 S.Ct. 182, 98 L.Ed. 168 (1953),
overruled on other grounds, Rodriguez de Quijas v. Shearson/Am. Express,
Inc., 490 U.S. 477, 485, 109 S.Ct. 1917, 104 L.Ed.2d 526 (1989); see also, e.g.,
Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Bobker, 808 F.2d 930, 933 (2d
Cir.1986). The manifest disregard standard together with 10(a) represent a
floor for judicial review of arbitration awards below which parties cannot
require courts to go, no matter how clear the parties' intentions.

26

While various courts have enforced private agreements to alter the judicial
review to be applied to arbitral awards, as the Hoefts acknowledge, "[m]ost of
these cases have involved attempts to raise the level of judicial review
otherwise available under the FAA." (Br. of Petitioners-Appellants at 26 n. 16
(emphasis added).) See, e.g., Roadway Package Sys., Inc. v. Kayser, 257 F.3d
287, 293 (3d Cir.2001); LaPine Tech. Corp. v. Kyocera Corp., 130 F.3d 884,
888-89 (9th Cir.1997); Gateway Techs., Inc. v. MCI Telecomm. Corp., 64 F.3d
993, 996-97 (5th Cir.1995). Decisions enforcing agreements to decrease the
otherwise applicable level of judicial review are far more scarce. See Bowen v.
Amoco Pipeline Co., 254 F.3d 925, 931 (10th Cir.2001) (noting in dicta that
"parties to an arbitration agreement may eliminate judicial review by
contract"); Aerojet-Gen. Corp. v. Am. Arbitration Ass'n, 478 F.2d 248, 251 (9th
Cir.1973) (same). While taking no position on the enforceability of agreements
to raise the level of judicial review, we note that there is a fundamental
difference between an agreement to increase the scrutiny that courts apply
when considering whether to confirm or vacate an arbitration award and an
agreement to prevent courts from reviewing the substance of an arbitration
award at all.

27

An agreement that contemplates confirmation but bars all judicial review

presents serious concerns. Arbitration agreements are private contracts, but at
the end of the process the successful party may obtain a judgment affording
resort to the potent public legal remedies available to judgment creditors. In
enacting 10(a), Congress impressed limited, but critical, safeguards onto this
process, ones that respected the importance and flexibility of private dispute
resolution mechanisms, but at the same time barred federal courts from
confirming awards tainted by partiality, a lack of elementary procedural
fairness, corruption, or similar misconduct. This balance would be eviscerated,
and the integrity of the arbitration process could be compromised, if parties
could require that awards, flawed for any of these reasons, must nevertheless be
blessed by federal courts. Since federal courts are not rubber stamps, parties
may not, by private agreement, relieve them of their obligation to review
arbitration awards for compliance with 10(a). Cf. I/S Stavborg v. Nat'l Metal
Converters, Inc., 500 F.2d 424, 427 (2d Cir.1974) (holding that parties'
invocation of district court's power to appoint arbitrator demonstrated their
intent to permit court to review arbitral award).

28

The Hoefts contend there is a middle ground. They would draw a distinction
between the bases for vacatur enumerated in 10(a), on the one hand, and the
judicially created manifest disregard of the law standard, on the other. Thus, the
argument goes, we may preclude parties from contracting around 10(a), yet
permit them to contract around the manifest disregard standard. Accordingly,
the Hoefts urge us to interpret 1(d) of the Amendment as divesting the
District Court of the authority to review the arbitration award for manifest
disregard of the law, even if it does not divest the court of the authority to
review it for corruption, partiality, or the other 10(a) grounds.

29

But we see no reason to treat manifest disregard of the law differently from the
grounds enumerated in 10(a). Through the combination of legislation and
common law, narrow standards of reviewing arbitration awards have developed
in the courts of this and other Circuits. See, e.g., Greenberg v. Bear, Stearns &
Co., 220 F.3d 22, 26-27 (2d Cir.2000), cert. denied, 531 U.S. 1075, 121 S.Ct.
770, 148 L.Ed.2d 669 (2001); see also, e.g., G.C. & K.B. Invs., Inc. v. Wilson,
326 F.3d 1096, 1106 (9th Cir.2003); Prestige Ford v. Ford Dealer Computer
Servs., Inc., 324 F.3d 391, 394-96 (5th Cir.2003); Sheldon v. Vermonty, 269
F.3d 1202, 1206 (10th Cir.2001); O.R. Sec., Inc. v. Prof'l Planning Assocs.,
Inc., 857 F.2d 742, 746-47 (11th Cir.1988). As the Tenth Circuit held in
refusing to enforce a private agreement to expand judicial review of arbitration
awards, "in the absence of clear authority to the contrary, parties may not
interfere with the judicial process by dictating how the federal courts operate."
Bowen, 254 F.3d at 936 n. 8. Similarly, in a different context the Supreme

Court has held that "the mere fact that [a] settlement agreement provides for
vacatur" of a judgment does not justify vacatur, U.S. Bancorp Mortgage Co. v.
Bonner Mall P'ship, 513 U.S. 18, 29, 115 S.Ct. 386, 130 L.Ed.2d 233 (1994),
stating that judicial precedents "are not merely the property of private litigants,"
id. at 26, 115 S.Ct. 386 (citation and quotation marks omitted). The fact that the
manifest disregard standard is a product of common law, rather than statute,
makes it no less essential to the judicial review of arbitration awards. Just as the
Supreme Court held in Bonner Mall that private parties may not dictate to a
federal court when to vacate another court's judgment, we hold today that
private parties may not dictate to a federal court when to enter a judgment
enforcing an arbitration award. Judicial standards of review, like judicial
precedents, are not the property of private litigants.
30

Lastly, we note that Katz v. Feinberg, 290 F.3d 95 (2d Cir.2002), upon which
the Hoefts place considerable reliance, does not alter this analysis. In that case,
we enforced the parties' agreement to preclude arbitral review of an arbitration
award, holding that a panel had exceeded its authority in modifying the award
that another arbitrator had rendered. Id. at 98. Katz obviously did not hold that
parties may preclude judicial review of arbitration awards, as that decision
itself affirmed a district court judgment vacating a portion of an arbitration
award. There is no contradiction in our differing treatment of private
agreements to preclude arbitral and judicial review of arbitration awards. As the
district court noted in Katz, "Because arbitration is a creature of contract, the
arbitrability of an issue derives fundamentally from the parties' agreement to
arbitrate." Katz v. Feinberg, 167 F.Supp.2d 556, 565-66 (S.D.N.Y.2001), aff'd,
290 F.3d 95 (2d Cir.2002). Thus, just as a private agreement may vest decisionmaking authority in an arbitrator, so may it deprive an arbitrator of that
authority. Unlike arbitration, however, judicial review is not a creature of
contract, and the authority of a federal court to review an arbitration award
or any other matter does not derive from a private agreement. See, e.g., Ins.
Corp. of Ireland, Ltd. v. Compagnie des Bauxites de Guinee, 456 U.S. 694, 702,
102 S.Ct. 2099, 72 L.Ed.2d 492 (1982) (holding that "no action of the parties
can confer subject-matter jurisdiction upon a federal court").

31

Parties seeking to enforce arbitration awards through federal-court

confirmation judgments may not divest the courts of their statutory and
common-law authority to review both the substance of the awards and the
arbitral process for compliance with 10(a) and the manifest disregard
standard. Therefore, we must examine the merits of the District Court's
conclusion that the arbitrator manifestly disregarded the law in rendering his
award.

II. Deposition of Arbitrator

32

Before reaching the ultimate question of the correctness of the District Court's
vacatur of the arbitration award, we must consider whether the court erred in
permitting MVL to depose the arbitrator regarding his decision-making process
and in relying on his testimony in deciding to vacate the award. The District
Court's decisions to permit the deposition of the arbitrator generally, and to
permit questioning regarding his manifest disregard of the law in particular, are
reviewed for abuse of discretion. See, e.g., Goetz v. Crosson, 41 F.3d 800, 805
(2d Cir.1994); Lyeth v. Chrysler Corp., 929 F.2d 891, 898 (2d Cir.1991) ("The
district court has discretion to deny discovery in a proceeding to confirm an
arbitral award."). A district court abuses its discretion when "(1) its decision
rests on an error of law (such as application of the wrong legal principle) or a
clearly erroneous factual finding, or (2) its decision though not necessarily
the product of a legal error or a clearly erroneous factual finding cannot be
located within the range of permissible decisions." Zervos v. Verizon New York,
Inc., 252 F.3d 163, 169 (2d Cir.2001).

33

We begin our analysis with the well-established rule that arbitrators may not be
deposed absent "clear evidence of impropriety." Andros Compania Maritima,
S.A. v. Marc Rich & Co., A.G., 579 F.2d 691, 702 (2d Cir.1978); see also Lyeth,
929 F.2d at 899. The "impropriety" relied on by MVL to support its application
to depose Sherrill was the arbitrator's alleged prejudgment of the parties'
dispute evidenced by his draft EBITDA calculation in November 2000.

34

The Hoefts appear to have conceded the permissibility of deposing the

arbitrator regarding his alleged prejudgment of the dispute. (Tr., Sherrill Dep.,
Jan. 23, 2002, at 9-10.) Regardless, in light of the fact that Sherrill had
performed, at the Hoefts' request and prior to the commencement of his role as
arbitrator, the very calculation that was the substance of the parties' dispute, the
District Court acted within its discretion in permitting MVL's counsel to depose
him regarding the allegation of prejudgment. This does not mean, however, that
MVL's counsel also should have been permitted to question Sherrill about the
substance of his decision-making process. As it turned out, MVL's counsel did
not question Sherrill regarding his alleged prejudgment of the EBITDA
calculation, and MVL soon withdrew its prejudgment argument.

35

Thus, the crux of the parties' dispute regarding the deposition of the arbitrator
involves the District Court's permitting MVL to examine him regarding his
alleged manifest disregard of the law. Relying principally on our decision in
Andros, the Hoefts argue, first, that manifest disregard of the law does not
constitute the sort of "impropriety" about which an arbitrator could ever be

deposed and, second, that even if manifest disregard were an impropriety, MVL
did not present "clear evidence" that the arbitrator had manifestly disregarded
the law. We agree with the Hoefts on both points.
36

While arbitrators may be deposed regarding claims of bias or prejudice, cases

are legion in which courts have refused to permit parties to depose arbitrators
or other judicial or quasi-judicial decision-makers regarding the thought
processes underlying their decisions. For example, the Supreme Court long ago
declared it "wholly improper" to submit the members of a state administrative
board to an "elaborate cross-examination with regard to the operation of their
minds." Chicago, Burlington, & Quincy Ry. Co. v. Babcock, 204 U.S. 585, 593,
27 S.Ct. 326, 51 L.Ed. 636 (1907). The Court explained its decision by
reference to the rules regarding the questioning of other decision-makers:

37

Jurymen cannot be called, even on a motion for a new trial in the same case, to
testify to the motives and influences that led to their verdict. So, as to
arbitrators.... All the often-repeated reasons for the rule as to jurymen apply
with redoubled force to the attempt, by exhibiting on cross-examination the
confusion of the members' minds, to attack in another proceeding the judgment
of a lay tribunal, which is intended, so far as may be, to be final,
notwithstanding mistakes of fact or law.

38

Id. (emphasis added). Courts have consistently applied this rule to parties
attempting to depose arbitrators regarding their decision-making processes. See,
e.g., In re Nat'l Risk Underwriters, Inc., 884 F.2d 1389, 1989 WL 100649, at *1
(4th Cir. Aug. 22, 1989) (unpublished table decision) (granting writ of
mandamus to prevent deposition of arbitrator); Sperry Int'l Trade, Inc. v. Gov't
of Israel, 602 F.Supp. 1440, 1443-44 (S.D.N.Y.1985); Bliznik v. Int'l Harvester
Co., 87 F.R.D. 490, 491 (N.D.Ill.1980) (noting that it would be "improper" to
depose an arbitrator "in order to inquire into the reasoning that led to his
award"); Reichman v. Creative Real Estate Consultants, Inc., 476 F.Supp. 1276,
1286 (S.D.N.Y.1979) ("It is clear that Reichman seeks the deposition for the
forbidden purpose: to probe the arbitrator's decisionmaking process.");
Northwest Airlines, Inc. v. Air Line Pilots Ass'n, Int'l, 385 F.Supp. 634, 640
(D.D.C.1974) (declaring it inappropriate "to attempt to probe [an arbitrator's]
decisional processes"), rev'd on other grounds, 530 F.2d 1048 (D.C.Cir.1976);
Martin Weiner Co. v. Fred Freund Co., 2 A.D.2d 341, 155 N.Y.S.2d 802, 805
(1st Dept. 1956) ("Inquisition of an arbitrator for the purpose of determining the
processes by which he arrives at an award, finds no sanction in law."), aff'd, 3
N.Y.2d 806, 166 N.Y.S.2d 7, 144 N.E.2d 647 (1957).

39

An allegation that an arbitrator manifestly disregarded the law, unlike an

allegation of bias or prejudgment, necessarily involves what the Reichman

court appropriately dubbed the forbidden purpose: inquiring into the arbitrator's
decision-making process. A manifest disregard claim involves both objective
and subjective components. While the objective component looks to whether
the governing law was well defined, the subjective component focuses on the
substance of the arbitrator's decision-making process: whether the arbitrator
was aware of the governing law, and whether he consciously decided to ignore
it. See, e.g., Westerbeke Corp. v. Daihatsu Motor Co., Ltd., 304 F.3d 200, 209
(2d Cir.2002). The subjective component of the manifest disregard standard, in
particular, may not properly be broached in deposing an arbitrator. That is, the
parties to a confirmation or vacatur proceeding may not depose an arbitrator
regarding "the knowledge [that he] actually possessed," or whether he
"appreciate[d] the existence of a clearly governing legal principle but decide[d]
to ignore or pay no attention to it." Id. (quotation marks omitted).
40

A review of the transcript of the arbitrator's deposition makes clear that the
bulk of the questioning probed this forbidden terrain. For example, MVL's
counsel asked the arbitrator whether he understood that he was supposed to
determine EBITDA in accordance with GAAP, whether he actually took
GAAP into consideration in calculating EBITDA, what he understood the
parties' intentions to be, and why he reached the conclusion that he did. These
questions while relevant to the manifest disregard inquiry were
inappropriate, as they were all designed to determine the processes by which
the arbitrator arrived at his award. See Martin Weiner, 155 N.Y.S.2d at 805.
While it may be difficult to prove the subjective prong of the manifest
disregard standard without questioning the arbitrator, this fact does not change
our result. Cf. Woods v. Saturn Distribution Corp., 78 F.3d 424, 430 (9th
Cir.1996) ("Although it may be difficult to prove actual bias without deposing
the arbitrators, deposition of arbitrators are [sic] `repeatedly condemned' by
courts." (citation omitted)). Permitting depositions of arbitrators regarding their
mental processes would make arbitration only the starting point in the dispute
resolution process and deprive arbitration awards of the last word on their
authors' intentions. See Duferco Int'l Steel Trading v. T. Klaveness Shipping
A/S, 333 F.3d 383, 389 (2d Cir.2003).

41

The Fourth Circuit confronted a nearly identical issue in National Risk

Underwriters. In that case, following an arbitration award, the losing party
sought to depose the arbitrator on the grounds that he had disregarded both the
law and the parties' agreement. Nat'l Risk Underwriters, 1989 WL 100649, at
*2. After the district court ruled that it would permit the deposition, the Fourth
Circuit granted a writ of mandamus preventing the deposition, drawing a
distinction between allegations of manifest disregard and the sort of

impropriety that may warrant an arbitrator's deposition. The court held, "It is
clear that only when a non-prevailing party makes a clear showing of the
arbitrator's fraud, misconduct, or bias could the district court properly grant that
party's request to depose an arbitrator." Id. at *3. Deposing an arbitrator
regarding allegations of manifest disregard of the law, in contrast, "would
impermissibly interfere with the arbitral decision-making process." Id. at *1.
42

An arbitrator should be free to decide the dispute before him without fear that
he will have to explain the basis for his decision, and how he arrived at it, at
some later date. If the parties to an arbitration agreement want to know the
arbitrator's reasoning, they may request that he include it in his award, as
Sherrill did. Once an arbitrator issues an award, however, his role is complete
and, like a judge or a jury, he may not be required to answer questions about
why he reached a particular result.

43

Thus, while we do not believe that under the facts presented the District Court
abused its discretion in permitting limited, judicially controlled discovery
regarding the allegation that the arbitrator had prejudged the dispute, the court
should not have permitted MVL's counsel to depose him regarding his decisionmaking process. The court, therefore, should not have relied on the arbitrator's
deposition testimony which focused exclusively on manifest disregard, not
prejudgment in determining whether he had manifestly disregarded the law
in rendering his award.3
III. Manifest Disregard of the Law

44

We review de novo a district court's decision to vacate an arbitration award for

manifest disregard of the law, as it turns entirely on questions of law. See
Westerbeke, 304 F.3d at 208 & n. 7; Greenberg v. Bear, Stearns & Co., 220
F.3d 22, 28 (2d Cir.2000), cert. denied, 531 U.S. 1075, 121 S.Ct. 770, 148
L.Ed.2d 669 (2001). Judicial review of an arbitration award for manifest
disregard of the law is "severely limited." GMS Group, LLC v. Benderson, 326
F.3d 75, 81 (2d Cir.2003). The party challenging the award in this case,
MVL bears the "heavy burden" of proving that the arbitrator manifestly
disregarded the law. Id. Manifest disregard "clearly means more than error or
misunderstanding with respect to the law," Merrill Lynch, Pierce, Fenner &
Smith, Inc. v. Bobker, 808 F.2d 930, 933 (2d Cir.1986), and "[w]e are not at
liberty to set aside an arbitrat[or's] ... award because of an arguable difference
regarding the meaning or applicability of laws urged upon [him]," id. at 934. As
noted, a party seeking to vacate an arbitration award on the basis of manifest
disregard of the law must satisfy a two-pronged test. The party must prove that:
"(1) the arbitrator[ ] knew of a governing legal principle yet refused to apply it

or ignored it altogether, and (2) the law ignored by the arbitrator[ ] was well
defined, explicit, and clearly applicable to the case." Halligan v. Piper Jaffray,
Inc., 148 F.3d 197, 202 (2d Cir.1998) (citation omitted).
45

MVL attempts to satisfy the first prong of this standard by arguing that the
arbitrator knew he was required to calculate Primary Year EBITDA in
accordance with GAAP, knew that GAAP mandated a calculation favorable to
MVL, and ignored GAAP in order to calculate Primary Year EBITDA
favorably to the Hoefts. Primarily on the basis of the arbitrator's deposition
testimony, the District Court agreed. See Order, Aug. 30, 2002, at 21
("Sherrill's deposition testimony largely supports MVL's position."), 21-24, 2627. For the reasons discussed in section II, supra, however, the District Court
should not have permitted MVL to depose the arbitrator regarding the grounds
for his decision, and the court should not have relied on his deposition
testimony in determining whether he had disregarded GAAP. Significantly, the
District Court acknowledged that, had it not taken the arbitrator's deposition
testimony into consideration, "it would be possible to find that there is a barely
colorable justification for the outcome reached and hence conclude that Sherrill
did not manifestly disregard the law." (Order, Aug. 30, 2002, at 25-26
(citations, alterations, and quotation marks omitted).)

46

In defending the District Court's decision on appeal, MVL relies primarily on

the arbitrator's deposition testimony and, to a lesser extent, on the text of the
arbitration award itself. Without the benefit of the deposition testimony,
however, MVL cannot show that the arbitrator knew that GAAP dictated a
particular EBITDA calculation yet decided to ignore GAAP in calculating
EBITDA. Contrary to MVL's contention, the arbitration award does not
demonstrate the arbitrator's manifest disregard of the law. Rather, in resolving
the one-time expense issues, the arbitrator explicitly relied on testimony from
MVL's own expert accounting witness "that GAAP does not specifically define
the phrase `income from operations,'" as well as testimony from the Hoefts'
expert "that GAAP can be preserved using more than one presentation of
financial results." (Letter from Sherrill to Morris and Smith of 8/15/01, at 3.)
The arbitrator's earlier draft award, which reached the same result as his final
award, similarly relied on the Hoefts' expert's testimony "that the [one-time
expenses] could have been presented as non-operating and still have been in
conformity with generally accepted accounting principles." (Letter from Sherrill
to Morris and Smith of 7/23/01, at 6.) Thus, the award proves neither that the
arbitrator knew that GAAP required a decision in favor of MVL nor that he
ignored GAAP in calculating EBITDA.

47

In Bobker, which involved analogous facts, we held that a panel of arbitrators

had not acted in manifest disregard of the law in deciding not to enforce strictly
the "net long" provision of SEC Rule 10b-4. The arbitrators' decision was based
on their "serious doubts about the rationality and interpretation of the `net long'
proviso and how it serves the Rule's avowed purpose." Bobker, 808 F.2d at
936-37. Similarly, here, the arbitrator treated the one-time payments and
calculated Primary Year EBITDA in a way that he determined best effected the
parties' intent. The award indicates that the arbitrator received conflicting
evidence from the parties regarding the application of GAAP to the one-time
payments, and that he adopted the Hoefts' proposed application because the
parties "both understood that [the one-time expenses] would not recur in the
future." (Letter from Sherrill to Morris and Smith of 7/23/01, at 6.) That is
precisely what the parties hired Sherrill as arbitrator to do. See Duferco, 333
F.3d at 389 ("It should be remembered that arbitrators are hired by parties to
reach a result that conforms to industry norms and to the arbitrator's notions of
fairness."). Thus, we conclude that MVL cannot satisfy its burden of proving
the first, subjective prong of the manifest disregard of the law standard.
48

MVL fares no better on the second prong of the standard. MVL argues that, for
purposes of the EBITDA calculation, GAAP constitutes well-defined, explicit,
and clearly applicable law. We are not persuaded. As it relates to this case,
GAAP is not sufficiently well-defined or explicit to constitute "law" within the
meaning of the manifest disregard standard. While we do not doubt that GAAP
may, for some purposes, be sufficiently well-defined, explicit, and clearly
applicable to satisfy the manifest disregard standard, see Siegel v. Titan Indus.
Corp., 779 F.2d 891 (2d Cir.1985), the relevant GAAP provisions do not
satisfy that standard here. As the District Court noted, "[t]here is ... some
evidence indicating that there was more than one way to calculate the OneTime Payments under GAAP, and that Sherrill followed a minority
interpretation of GAAP." (Order, Aug. 30, 2002, at 25.) At the arbitration, both
parties submitted evidence from accounting experts supporting their
interpretations of the proper treatment of the one-time payments under GAAP.
That MVL's position may represent a clear majority view is of no consequence.
See Duferco, 333 F.3d at 391 (stating that "even a `barely colorable'
justification for the outcome reached will save an arbitral award" (citation
omitted)). As long as there is more than one reasonable interpretation of the
governing law, the law is not well-defined, explicit, and clearly applicable, and
an arbitrator cannot be said to have manifestly disregarded the law in rejecting
either party's interpretation. GMS Group, 326 F.3d at 82-83 (holding that
arbitrator did not manifestly disregard law in rejecting one party's proffered
interpretation of applicability of NASD rules to facts of case); Goldman v.
Architectural Iron Co., 306 F.3d 1214, 1217 (2d Cir.2002) (holding that
governing law was unclear and that, "even if ... the arbitrator erred in resolving

the conflicting precedent ..., the arbitral decision cannot be said to have
exhibited a manifest disregard of the law").4
49

While the arbitration award may not have conformed to a majority

interpretation of GAAP, the award is "supportable." See Yusuf Ahmed
Alghanim & Sons, W.L.L. v. Toys "R" Us, Inc., 126 F.3d 15, 25 (2d Cir.1997);
see also GMS Group, 326 F.3d at 82 (stating that "we will not find manifest
disregard of the law where an arbitral award rests on the application of an
unclear rule of law to a complex factual situation" (citation and internal
quotation marks omitted)). Accordingly, the District Court erred in concluding
that the arbitrator had manifestly disregarded the law.

50

IV. Whether the Arbitrator Exceeded His Powers

51

An arbitrator exceeds his powers when he "rule[s] on issues not presented to

[him] by the parties." See Fahnestock & Co. v. Waltman, 935 F.2d 512, 515 (2d
Cir.1991) (citation and quotation marks omitted); 9 U.S.C. 10(a)(4). Section
10(a)(4) of the FAA "focuses on whether the arbitrator[ ] had the power, based
on the parties' submissions or the arbitration agreement, to reach a certain issue,
not whether the arbitrator[ ] correctly decided that issue." DiRussa v. Dean
Witter Reynolds, Inc., 121 F.3d 818, 824 (2d Cir.1997). MVL contends that the
arbitrator exceeded his powers by calculating Primary Year EBITDA in
accordance with his understanding of the parties' intent, rather than in
accordance with GAAP. The District Court concluded that 10(a)(4) does not
provide a basis for vacatur of the arbitration award because "MVL's contention
that Sherrill failed to apply GAAP is best characterized as a challenge to his
application of the law, rather than a challenge under Section 10(a)(4)." (Order,
Aug. 30, 2002, at 30.)

52

We agree with the District Court. MVL does not contend that the arbitrator
resolved an issue that the parties' agreement did not authorize him to resolve.
Indeed, the only issue that he resolved the calculation of Primary Year
EBITDA was the precise issue that the Amendment authorized him to
decide. (Amendment to Stock Purchase Agreement 1(d); Letter from Sherrill
to Morris and Smith of 8/15/01, at 4.) MVL does not argue that the arbitrator
decided any issue other than the calculation of EBITDA; rather, MVL argues
that he calculated EBITDA incorrectly. Even if MVL is correct, however, that
argument provides no basis for vacating the award under 10(a)(4). See
DiRussa, 121 F.3d at 824 ("DiRussa's real objection appears to be that the
arbitrators committed an obvious legal error in denying him attorney's fees.
Section 10(a)(4) was not intended to apply to such a situation."). Accordingly,
the District Court correctly concluded that 10(a)(4) does not provide a basis

for vacating the arbitration award.

CONCLUSION
53

For these reasons, we reverse the judgment of the District Court vacating the
arbitration award and remand with instructions to enter judgment confirming
the award, and for further proceedings consistent with this opinion.

Notes:
*

The Honorable Richard W. Goldberg, of the United States Court of

International Trade, sitting by designation

Following the sale, Discovery Research Group, Inc. and Discovery Research
Group of Utah, Inc. were merged into Discovery Acquisition Corporation,
which changed its name to Discovery Research Group of Utah, Inc

The Amendment required MVL to calculate Primary Year EBITDA by June

30, 2000. After MVL failed to do so, the Hoefts requested that Sherrill perform
the calculation. (The parties dispute whether a representative of MVL also
asked Sherrill to calculate Primary Year EBITDA.) No one objected to this
request, and Sherrill forwarded his draft calculation to the parties in November
2000

Even if manifest disregard of the law were an "impropriety" that could warrant
the deposition of an arbitrator, we would conclude, largely for the reasons
discussed in part III,infra, that MVL did not submit, in advance of the
deposition, clear evidence that the arbitrator had manifestly disregarded the
law.

It is helpful to contrast the facts of this case with those of a case in which we
found manifest disregard of the law. InNew York Telephone Co. v.
Communications Workers of America Local 1100, 256 F.3d 89 (2d Cir.2001)
(per curiam), we held that the arbitrator had manifestly disregarded the law by
"explicitly reject[ing]" binding Second Circuit precedent in favor of more
recent decisions of other circuits. Id. at 93. Sherrill, in contrast, did not
explicitly or even implicitly reject GAAP. Rather, he simply rejected
MVL's interpretation of GAAP, which was one of two permissible
interpretations.