# In the Matter of the New York Stock Exchange Arbitration Between, Fahnestock & Co., Inc., Cross-Appellee v. Joseph J. Waltman, Cross-Appellant

> Court of Appeals for the Second Circuit · June 10, 1991 · 935 F.2d 512

URL: https://www.frixlaw.com/law-library/cases/9481686

## Case

- **Full name:** In the Matter of the New York Stock Exchange Arbitration Between, FAHNESTOCK & CO., INC., Petitioner-Appellant, Cross-Appellee, v. Joseph J. WALTMAN, Respondent-Appellee, Cross-Appellant
- **Court:** Court of Appeals for the Second Circuit
- **Decided:** June 10, 1991
- **Citations:** 935 F.2d 512; 1991 U.S. App. LEXIS 12303
- **Precedential status:** Published
- **Opinion:** Concurring in part by Mahoney
- **Judges:** Van Graafeiland, Miner, Mahoney
- **Cited by:** 104 later opinions in the Frix Law Library

## Citator (automated)

- No negative treatment found by the automated citator. That is not the same as a confirmation that the case is good law; read the citing cases.
- Full citator and citing cases: https://www.frixlaw.com/law-library/cases/9481686

## How later opinions describe it (automated extraction)

- holding that the punitive damages portion of an arbitrators’ award must be vacated where federal court jurisdiction in New York was based on diversity and New York law prohibited a punitive damages award
- stating that "in the absence of an agreement on the subject " [i.e. a punitive damage award by arbitrators] state law is not pre-empted

## Opinion text

MAHONEY, Circuit Judge,
concurring in part and dissenting in part:
I join the majority opinion insofar as it affirms that portion of the judgment below which confirmed the arbitral award of compensatory damages. I respectfully dissent, however, from the majority’s affirmance of the district court’s vacatur of the arbitral award of punitive damages.
The majority recognizes the fundamental requirement of the FAA “that parties comply with their agreements to arbitrate.” They further concede that “the parties have not specified remedies and ... the arbitrators therefore should be free to fashion appropriate relief.” They deem these considerations outweighed, however, by the fact that diversity of citizenship *520 provides the basis for federal jurisdiction in this case. This leads them to apply normally applicable diversity rules, and thus to conclude that the availability of punitive damages is a question of substantive law for which state law provides the rule of decision. Deeming New York law applicable, they then invoke Garrity v. Lyle Stuart, Inc., 40 N.Y.2d 354 , 353 N.E.2d 793 , 386 N.Y.S.2d 831 (1976), to affirm the district court’s vacatur of the arbitral award of punitive damages.
In my view, this analysis misreads the applicable law and creates an unnecessary conflict with two of our sister circuits. As the Supreme Court stated in Moses M. Cone Memorial Hosp. v. Mercury Constr. Corp., 460 U.S. 1 , 103 S.Ct. 927 , 74 L.Ed.2d 765 (1982):
The Arbitration Act is something of an anomaly in the field of federal-court jurisdiction. It creates a body of federal substantive law establishing and regulating the duty to honor an agreement to arbitrate, yet it does not create any independent federal-question jurisdiction under 28 U.S.C. § 1331 (1976 ed., Supp. V) or otherwise. Section 4 provides for an order compelling arbitration only when the federal district court would have jurisdiction over a suit on the underlying dispute; hence, there must be diversity of citizenship or some other independent basis for federal jurisdiction before the order can issue.
Id. at 25 n. 32, 103 S.Ct. at 942 n. 32 (emphasis added).
The majority’s approach effectively disregards the existence of a “body of federal substantive law establishing and regulating the duty to honor an agreement to arbitrate,” id., and imposes the diversity regime of Erie R.R. v. Tompkins, 304 U.S. 64 , 58 S.Ct. 817 , 82 L.Ed. 1188 (1938). The Erie standard is intended, however, for “all matters except those in which some federal law is controlling.” Id. at 72 , 58 S.Ct. at 819 . It therefore seems to me clearly inappropriate to apply Erie-generated rules to an area for which, the Supreme Court has instructed, federal law supplies the rule of decision. That, however, is precisely what the majority has done in this case.
The Supreme Court has continually reiterated that the FAA “simply requires courts to enforce privately negotiated agreements to arbitrate, like other contracts, in accordance with their terms.” Volt Information Sciences, Inc. v. Board of Trustees, 489 U.S. 468, 478 , 109 S.Ct. 1248, 1255 , 103 L.Ed.2d 488 (1989). As the Court stated in Volt:
The FAA was designed “to overrule the judiciary’s long-standing refusal to enforce agreements to arbitrate,” Dean Witter Reynolds Inc. v. Byrd, 470 U.S. [213, 219-20, 105 S.Ct. 1238, 1241-42 , 84 L.Ed.2d 158 (1985)], and to place such agreements “ ‘upon the same footing as other contracts,’ ” Scherk v. Alberto-Culver Co., 417 U.S. [506, 511, 94 S.Ct. 2449, 2453 , 41 L.Ed.2d 270 (1974) ] (quoting H.R.Rep. No. 96, 68th Cong., 1st Sess., 1, 2 (1924)). While Congress was no doubt aware that the Act would encourage the expeditious resolution of disputes, its passage “was motivated, first and foremost, by a congressional desire to enforce agreements into which parties had entered.” Byrd, 470 U.S., at 220 [ 105 S.Ct. at 1242 ],
Id. Accordingly, the FAA mandates district courts, upon application, to “direct[] that ... arbitration proceed in the manner provided for in [the parties’] agreement.” 9 U.S.C. § 4 (1988) (emphasis added).
It follows that a state law which limits freedom of contract with respect to arbitration agreements covered by the FAA conflicts with the FAA and is preempted by it. See Saturn Distribution Corp. v. Williams, 905 F.2d 719, 722 (4th Cir.) (“with few limitations, if a state law singles out arbitration agreements and limits their enforceability it is preempted.”), cert. denied, — U.S. -, 111 S.Ct. 516 , 112 L.Ed.2d 527 (1990); cf. Volt, 489 U.S. at 479 , 109 S.Ct. at 1256 (“Arbitration under the [FAA] is a matter of consent, not coercion, and parties are generally free to structure their arbitration agreements as they see fit.”).
*521 As a result, the cases that have addressed the question whether punitive damages may be awarded in arbitration have looked to the agreement between the parties to resolve the issue. See, e.g., Raytheon Co. v. Automated Business Sys., 882 F.2d 6, 9-12 (1st Cir.1989); Bonar v. Dean Witter Reynolds, Inc., 835 F.2d 1378, 1386-88 (11th Cir.1988); Pyle v. Securities U.S.A., Inc., 758 F.Supp. 638, 639 (D.Colo.1991); Barbier v. Shearson Lehman Hutton, Inc., 752 F.Supp. 151, 159-60 (S.D.N.Y.1990); Peabody v. Rotan Mosle, Inc., 677 F.Supp. 1135, 1139 (M.D.Fla.1987); Ehrich v. A.G. Edwards & Sons, Inc., 675 F.Supp. 559, 563 (D.S.D.1987); Duggal Int’l, Inc. v. Sallmetall, B.V., No. 84 Civ. 7170 (JMC) (S.D.N.Y. May 8, 1986); Willoughby Roofing & Supply Co. v. Kajima Int’l, Inc., 598 F.Supp. 353, 357-59 (N.D. Ala.1984), aff'd, 776 F.2d 269 (11th Cir.1985) (per curiam); Willis v. Shearson/American Express, Inc., 569 F.Supp. 821, 823 (M.D.N.C.1983).
Further, as the majority recognizes, courts have rebuffed efforts to invoke Garrity to preclude an arbitral award of punitive damages even where the pertinent contract explicitly stated that it was to be governed by New York law. See, e.g., Bonar, 835 F.2d at 1386-87 ; Barbier, 752 F.Supp. at 153 , 160 & n. 15; Singer v. E.F. Hutton & Co., 699 F.Supp. 276, 278-79 (S.D.Fla.1988); Duggal Int’l, slip op. at —, — n. 4; Willis, 569 F.Supp. at 823 — 24; see also Raytheon, 882 F.2d at 11 (rejecting Garrity), Ehrich, 675 F.Supp. at 565 (same); Willoughby, 598 F.Supp. at 359 (same).
If an express provision that a contract will be governed by New York law does not suffice to render an arbitration under that contract subject to Garrity , it must surely follow a fortiori that the mere invocation of diversity jurisdiction does not do so. Further, the imposition of the Garrity rule, without respect to (or any meaningful inquiry regarding) the contractual intention of the parties, directly contravenes the dominant purpose and policy of the FAA as repeatedly articulated by the Supreme Court.
The district court herein ruled that because Garrity “is not in direct conflict with any express provision of the [FAA],” it should be invoked to preclude any award of punitive damages. Fahnestock & Co. v. Waltman, No. 90 Civ. 1792 (PKL), slip op. at 10, 1990 WL 124354 (S.D.N.Y. Aug. 23, 1990). Although the contract at issue was distinguished from contracts incorporating an American Arbitration Association rule that is often read to authorize an award of punitive damages, id. at 11 , no significant inquiry was conducted regarding the intent of the parties, and no mention was made of the NYSE award form, applicable here, that makes specific provision for punitive damages. Rather, Garrity was deemed controlling as a matter of law.
In affirming, my colleagues dismiss the award form because they "cannot conclude that award forms are part of the arbitration agreement.” Indeed, in the absence of any consideration of the issue by the district court, it is impossible on this record to reach any conclusion pro or con regarding the matter, or more generally regarding the intent of the parties as to the award of punitive damages. The majority makes clear, in any event, that it “might” defer only to an explicit agreement between the parties authorizing an award of punitive damages.
Given the rule that “ambiguities as to the scope of the arbitration clause [are] resolved in favor of arbitration,” Volt, 489 U.S. at 476 , 109 S.Ct. at 1254 ; see also Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, 473 U.S. 614, 626 , 105 S.Ct. 3346, 3353 , 87 L.Ed.2d 444 (1985) (“as with any other contract, the parties’ intentions control, but those intentions are generously construed as to arbitrability.”); Moses M. Cone, 460 U.S. at 24-25 , 103 S.Ct. at 941-942 (“any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration”), a much more hospitable approach to arbitral power to award punitive damages is appropriate. In any event, some significant inquiry as to contractual intent is required. Clearly, none has occurred here.
I would therefore reverse the ruling of the district court vacating the arbitral *522 award of punitive damages and remand for reconsideration of that issue in terms of the contractual intent of the parties. I am not prepared to conclude at this juncture that the outcome of that necessarily particularized inquiry will result in a different disposition of this issue. I am convinced, however, that the inquiry should be undertaken, rather than aborted by the invocation of Garrity .
No precedent of this court calls for a different result. John T. Brady & Co. v. Form-Eze Systems, Inc., 623 F.2d 261, 263-64 (2d Cir.), cert. denied, 449 U.S. 1062 , 101 S.Ct. 786 , 66 L.Ed.2d 605 (1980), discussed Garrity , but concluded that no award of punitive damages had been made requiring any ruling on the issue in that case. Synergy Gas Co. v. Sasso, 853 F.2d 59, 65 (2d Cir.), cert. denied, 488 U.S. 994 , 109 S.Ct. 559 , 102 L.Ed.2d 585 (1988), similarly dismissed an argument premised upon Garrity because the arbitral award was construed not to include punitive damages. Accordingly, neither case had any occasion to address the issue whether Garrity can operate to preclude punitive damages awards in FAA arbitrations. In any event, any ruling giving that effect to Garrity would be inconsistent with Moses M. Cone’s teaching that the FAA “creates a body of federal substantive law establishing and regulating the duty to honor an agreement to arbitrate.” 460 U.S. at 25 n. 32, 103 S.Ct. at 942 n. 32. More recently, in Kerr-McGee Refining Cory. v. M/T Triumph, 924 F.2d 467, 470 (2d Cir.1991), we stated, in the context of an arbitration of a RICO claim, that punitive damages could be awarded “in an appropriate case,” citing Bonar .
Although our precedents are ambiguous, I conclude that governing Supreme Court doctrine, the vast weight of federal court authority on the issue, and basic principles of federal arbitration law counsel against the ruling of the majority in this case on the issue of punitive damages. I therefore respectfully dissent from that ruling.

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Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/9481686. Public record. Not legal advice.