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Fourth Circuit Court of Appeals Takes Rare Step of Vacating Arbitrator’s Award, Saving Employer $400,000

A divided panel of the United States Court of Appeals for the Fourth Circuit took the unusual step of reversing an arbitrator’s award in favor of an ex-employee, finding that the arbitrator’s award was in “manifest disregard” of the law. It’s an interesting case that serves as a reminder both of the perils of arbitration and the importance of every word an employer includes in a seemingly-standard general release of claims.   

Arun Walia had worked for Kiran Dewan’s CPA firm. In 2009, Walia’s employment was terminated and he executed a release in exchange for a $7,000 payment. A few months later, Dewan filed a demand for arbitration against Walia, claiming that Dewan had breached various non-competition and non-solicitation provisions of his Employment Agreement. Walia then asserted various counterclaims.

In defense of the counterclaims, Dewan asserted that the broad release Walia had given in exchange for the $7,000 prevented him from pursuing his claims. The arbitrator found that the release, which was very broad, was valid and enforceable, but apparently concluded that it released only claims pursued in court and not claims pursued in arbitration. She therefore allowed Walia’s claims to proceed and awarded him nearly $400,000 in damages! On appeal of the award to the federal district court, the court upheld the award.

The Fourth Circuit Court of Appeals reversed finding that the broad release unambiguously waived all of Walia’s claims, whether pursued in court or via arbitration, and since the arbitrator had found that the release was valid and enforceable, the arbitrator should have dismissed the counterclaims. The Court therefore ordered that the $400,000 arbitration award in favor of Walia be vacated.  Significantly, a vigorous dissent argued that the Court should not have second-guessed the arbitrator. The dissenting judge said that it was not unreasonable to conclude that the release, which specifically referred to “lawsuits” and “action” and not to arbitrations, applied only to claims brought in court and not to claims in arbitration. The dissenting judge said that the Court was not at liberty to second-guess the arbitrator’s reading of the release.

The decision is interesting for several reasons. First, although the decision in this case reversed the arbitrator’s award, it actually serves as a reminder that such reversals are extremely rare. Indeed, one could easily imagine that if the parties had drawn a different panel of judges, the dissenting judge’s view would have prevailed, leaving the $400,000 award to the ex-employee undisturbed.  Certainly, the result in this case should not be taken as an indication that arbitration awards are subject to review comparable to that which a trial court’s judgment will receive. Far from it; for better or for worse, an arbitrator’s award is generally final and only very rarely will it be set aside.

Second, the decision is also a reminder of the importance of meticulous drafting of releases. Here, the release, seemingly clearly purported to release “all claims . . . of every kind and nature.” But, the draftsman then added a sentence that read “the Employee promises never to file a lawsuit or assist in or commence an action asserting any claims . . . released hereunder.” In my view, this didn’t affect the broad release language at all. It was merely in the nature of a “covenant not to sue,” which didn’t detract from the release at all. But, the arbitrator, the district court judge and the dissenting appellate judge all thought that one sentence was enough to enable the arbitrator to conclude that Walia was free to pursue his counterclaims in arbitration, justifying the $400,000 award. Fortunately, for Dewan, two of the three appellate court judges disagreed and were willing to take the rare step of reversing an arbitration award, saving Dewan a cool $400,000.

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David Barmak

Member / Chair Emeritus, Employment, Labor & Benefits Practice

David Barmak is an experienced trial lawyer at Mintz who focuses his practice on employment law and HR issues. He litigates cases in federal and state courts and arbitrations across the country. David counsels clients on compliance and employee relations issues and risk reduction options.