Opposition Brief — Bosack v. Soward

a.

JAN 19 29

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No. 09-682 |

IN THE

Supreme Court of the United States

LEONARD BOSACK, et al.,

Petitioners,

v.

DAVID C. SOWARD, e¢ al.,

Respondents.

On PETITION FOR A Writ OF CERTIORARI TO THE

UNITED StaTES Court OF APPEALS

FOR THE NINTH CIRCUIT

BRIEF IN OPPOSITION

ETHAN P SCHULMAN

Counsel of Record

MICHAEL A. KAHN

J. DANIEL SHARP

JOEL SMITH

CROWELL & Morinc LLP

275 Battery Street, 23rd Floor

San Francisco, California 94111

(415) 986-2800

Attorneys for Respondents

COUNSEL PRESS

(800) 274-332) » (800) 359-6859

i

QUESTION PRESENTED

Whether this Court should grant certiorari to decide

whether punitive damage awards in private, voluntary

arbitration should be subject to heightened judicial

review for excessiveness, where the Federal Arbitration

Act as authoritatively interpreted by this Court in Hall

Street Assocs., L.L.C. v. Mattel, Inc., 552 U.S. 576, 128

S. Ct. 1396 (2008) precludes such review, Petitioners did

not seek such review below, and there is no conflict

among the lower courts on the issue.

i

DISCLOSURE STATEMENT

Respondent David C. Soward is an individual.

Respondent & Management Company has no parent

corporation, and no publicly held company owns 10% or

more of its stock.

iii

TABLE OF CONTENTS

QUESTION PRESENTED ..................

DISCLOSURE STATEMENT ...............

STATUTORY PROVISIONS INVOLVED .....

STATEMENT OF THE CASE ...............

A. Soward’s Business Relationship With

BOO GG EHII 6 a onc ein vnc ccccseess

B. The Arbitration Proceedings ...........

C. The District Court Proceedings ........

D. The Ninth Circuit’s Decision ...........

“ewe eeeemeeeeeeneeeeeneeneeeeneeeeeteeeneeweeeeeeee

I. The Question Petitioners Present For

Review Was Neither Raised Nor Resolved

Below, and Is Foreclosed By This Court’s

Decision In Hall Street Associates .....

Page

iv

Contents

Page

A. Petitioners Successfully Urged The

Lower Courts To Apply The Manifest

Disregard Standard ............... 10

B. Petitioners’ Position Is Foreclosed By

Controlling Authority ............. 11

II. There Is No Conflict Among The Lower

Courts Or Other Ground Warranting

REE Cds accscuseenensdxeaaaaeas 13

A. The Overwhelming Weight Of

Authority Holds That Voluntary

Private Arbitration Does Not

Constitute State Action And Cannot

Give Rise To A Due. *ocess Claim ... 13

B. The Few Decisions Petitioners Rely

Upon Do Not Give Rise To Any

EE Gass oak ak dae ee Nae panes 17

C. Petitioners’ Dire Predictions About

the Wider Implications Of The Lower

Court’s Ruling Are Misplaced ...... 20

III. The Court Uf Appeals, In Dicta, Correctly

Concluded That It Could Not Vacate The

Arbitral Award as Excessive ........... 22

Vv

Contents

A. Voluntary Private Arbitration Does

Not Constitute State Action ....... 22

B. Expanded Judicial Review Of Private

Arbitration Awards Would Undermine

The Efficiency And Expediency Of

Arbitration As An Alternative To The

EN ob vsaeeesseudewedas 25

ee ee re 27

vi

TABLE OF CITED AUTHORITIES

Page

Cases

American Mfrs. Mut. Ins. Co. v. Sullivan,

ED ns 6 vp nb 06-0600 0 54006-0860 23

Austern v. Chicago Bd. Options Exch., Inc.,

716 F. Supp. 121 (S.D.N.Y. 1989), aff’d,

898 F.2d 882 (2d Cir. 1990), cert. denied,

i ee 14

B.L. Harbert Int'l, LLC v. Hercules Steel Co.,

441 F.3d 905 (11th Cir. 2006) ............... 26

Barnes v. Logan,

122 F.3d 820 (9th Cir. 1997), cert. denied,

— oe lo 16

Birmingham News Co. v. Horn,

901 So.2d 27 (Ala. 2004) ........... cee eeee 19, 20

Bivens v. Six Unknown Named Agents

of Federal Bureau of Narcotics,

PEE co cn ccuccesvecvecesescece 10

Black v. Cutter Laboratories,

GR fe rrr 11

BMW v. Gore,

DE MR IP EEUD cece ccccrccateccccces passim

vii

Cited Authorities

Page

Bowen v. Amoco Pipeline Co.,

254 F.3d 925 (10th Cir. 2001) ................ 16

Brentwood Acad. v. Tenn. Secondary Sch.

Athletic Ass’n,

Se IES voccenccdacecsnsveccee 24, 25

Browning-Ferris Indus. of Vermont, Inc.

v. Kelco Disposal, Inc.,

Se EE Sa voccneccncccsecsceees 11

Burton v. Wilmington Parking Auth.,

Ee Ws CUED weccericucneneveveceses 23

California v. Rooney,

Ge ls ED vc vecbccdeccccsesessess 11

Davis v. Prudentie! Secs., Inc.,

59 F.3d 1186 (llth Cir. 1995) ............. passim

Edmonson v. Leesville Concrete Co.,

ee OED kcncicoetsceccnccvceves 24

Elmore v. Chicago & Illinois Midlands Ry. Co.,

782 F.2d 94 (7th Cir. 1986) .............0.. 14, 15

Federal Deposit Ins. Corp.

v. Air Florida Sys., Inc.,

822 F.2d 833 (9th Cir. 1987), cert. denied,

Ge ie PE RE Seve eescarcecveevesecse 14

villi

Cited Authorities

Page

Flagg Bros., Inc. v. Brooks,

SE EE sob onc vcd copeauescapvas 23

Gilmer v. Interstate/Johnson Lane Corp.,

ee ee ED 6 N00 005 bn ks é¥edeeescaunen 25

Glennon v. Dean Witter Reynolds, Inc.,

83 F.3d 132 (6th Cir. 1996) ................. 16

Hall Street Assocs., L.L.C. v. Mattel, Inc.,

552 U.S. 576, 128 S. Ct. 1396 (2008) ....... passim

Hereford v. D.R. Horton, Inc.,

Se es Or Oe I ED 6.6 800 cdccnseuswsens 20

Honda Motor Co. v. Oberg,

DA Chole NO CHEE: Sa eccdccccvccescacdesee 25

Int'l Ass'n of Heat & Frost Insulators

and Asbestos Workers Local Union 42

v. Absolute Envtl. Svcs., Inc.,

814 F. Supp. 392 (D. Del. 1993) ............. 14

In re Knepp v. Credit Acceptance Corp.,

229 B.R. 821 (Bankr. N.D. Ala. 1999) ....... 17, 18

Kyocera Corp. v. Prudential-Bache

Trade Servs., Inc.,

$41 F.3d 987 (9th Cir. 2008) ............... 22, 26

ix

Cited Authorities

Page

Mastrobuono vu Shearson Lehman Hutton, Inc.,

TE cc cceccccucceecees 21-22, 24

MedValUSA Health Programs, Inc.

v. Memberworks, Inc.,

872 A.2d 428 (Conn. 2005) ...........-000- 15, 21

Nat'l Collegiate Athletic Ass’n v. Tarkanian,

TIN EEUED ccc cc cocccceseceeescoes 22-23

Porush v. Lemire,

6 F. Supp. 2d 178 (E.D.N.Y. 1998) ........... 15

Rifkind & Sterling, Inc. v. Rifkind,

28 Cal. App. 4th 1282,

33 Cal.Rptr.2d 828 (1994) ............65. 5, 15, 26

Sanders v. Gardner,

7 F. Supp. 2d 151 (E.D.N.Y. 1998) ........... 18

Sawtelle v. Waddell & Reed, Inc.,

304 A.D.2d 103 (N.Y. App. Div. 2003) ....... 18, 19

Smith v. American Arbitration Ass'n, Inc.,

233 F.3d 502 (7th Cir. 2000) ............ 15, 17, 24

State Farm v. Campbell,

128 S. Ct. 1518 (2008) ..........cceceees passim

Todd Shipyards Corp. v. Cunard Line, Ltd.,

943 F.2d 1056 (9th Cir. 1991) ..........0005. 16

x

Cited Authorities

Page

Tulsa Prof’l Collection Servs., Inc. v. Pope,

Se ae EE. 6 wocéccensaueceuspecess 23

United Paperworks Int'l Union, AFL-CIO

v. Misco, Inc.,

EE noon n00 e000 esece0seeeeus 12

Volt Info. Scis., Inc. v. Bd. of Trs.,

489 U.S. 468 (1989) ........ cece ee eeeee 21, 23, 25

Statutes

Federal Arbitration Act, 9 U.S.C. § 1 et seg.

ces cel Lionas seseees Cia Ceae eee 1, 2, 12

ae Sener ca ten Cal nana ee sees 6, 10, 19

Other Authorities

Stephen J. Ware, Punitive Damages in

Arbitration: Contracting Out of Government's

Role in Punishment and Preemption of State

Law, 68 Forpuan |... Rev. 529 (1994) .......... 21

1

STATUTORY PROVISIONS INVOLVED

The Federal Arbitration Act, 9 U.S.C. § 1

et seq. (“FAA”), supplies the mechanisms for enforcing

arbitration awards. Under the terms of Section 9 of the

FAA, a court “must” confirm an arbitration award

“unless” it is vacated, modified or corrected “as

prescribed in §§ 10 and 11.” 9 U.S.C. § 9. Section 10(a)

lists the grounds for vacating an award as follows:

(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 the arbitration

(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;

(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

2

(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).

STATEMENT OF THE CASE

A. Soward’s Business Relationship With Bosack and

Lerner

In the 1990s, Petitioners Leonard Bosack and Sandy

Lerner, the founders of Cisco Systems, Inc., hired

Respondent David Soward to manage their considerable

personal wealth. Pet. App. at 5a, 48a. Several years into

Soward’s tenure, Soward and Bosack formed Cartesian

Partners L.P (“Cartesian”). Jd. at 5a. Soward was the

general partner and invested his own money; Bosack

was a limited partner. /d. at 5a, 101a-102a. As of 2003,

Soward’s capital interest in Cartesian was $1,001,101.

Id. at 102a.

In 2002, Soward asked Bosack and Lerner to extend

his contract and increase his compensation for his

services as their investment manager. /d. at 104a. Bosack

and Lerner responded by firing Soward. Jd. Bosack

purported to terminate Soward as general partner of

Cartesian, despite having no signed agreement

permitting him to do so. /d. at 5a, 107a. Contending that

Soward had no “lawful interest” in Cartesian, Bosack

and Lerner jointly formed a new entity called SLLB,

LLC (“SLLB”) to replace Soward as the general partner.

3

Id. at i03a, 108a. Without telling Soward, they filed a

false tax return reducing Soward’s capital account from

$1,001,101 to $135,889, “or in the alternative to zero.”

Id. at 106a, 121a. SLLB took over the assets of Cartesian,

and Bosack and Lerner refused to provide Soward with

an accounting of his interest until they were ordered to

do so by the arbitrators in 2006. Jd. at 106a, 120a-25a.

B. The Arbitration Proceedings

The parties voluntarily submitted to arbitration all

of the claims and counterclaims between them. Jd. at

51a. Each side sought, among other relief, punitive

damages from the other. Jd. at 68a-69a. The arbitration

proceedings lasted two years, during which time the

panel of arbitrators held more than sixty days of

hearings, heard the testimony o: four experts and

approximately twenty-six witnesses, and received over

five hundred exhibits into evidence. Jd. at 52a. The

arbitrators were among the most experienced and

respected panelists in California, and gave careful

consideration to all of the parties’ evidence and

contentions, issuing 52 written hearing orders, five

Interim Awards, and one Final Award. See id. at 51a-

52a.

Soward prevailed on all claims that he brought. As

to Cartesian, the arbitrators found that Bosack and

Lerner intentionally sought to hurt Soward by engaging

in “a planned, malicious, [and] purposeful attempt to

take Soward’s interest in Cartesian away from him and

convert[ing] it for Besack’s use.” /d. at 58a-59a. In

Interim Award No. 3, the arbitrators found that Soward

was entitled to an accounting of his interest in Cartesian

4

as of September 30, 2006, valued at $1,464,391.

Id. at 6a, 54a. In Interim Award No. 4, the arbitrators

found Bosack liable in tort for breach of fiduciary duty,

and both Bosack and Lerner liabie for unjustifiable

conversion of Soward’s interest in Cartesian. Jd. at 6a-

7a. They awarded $1,001,101 plus prejudgment interest

on both tort claims, with this amount “deemed satisfied”

by payment of the accounting award. /d. at 122a-23a.

Based on “clear and convincing” evidence of

Petitioners’ malice, the arbitrators made two separate

punitive damage awards against Bosack and Lerner in

Interim Award No. 5. Id. at 9la-92a. The arbitrators

awarded punitive damages of $19,999,494 against

Bosack, using a 9:1 multiplier measured against

compensatory damages of $1,222,166 (principal and

interest) on the tort claims. Jd. at 92a, 96a. They awarded

$8,555,162 in punitive damages against Lerner using a

multiplier of 7:1. 7d. at 92a, 96a.

To set the amount of punitive damages, the

arbitrators engaged in a two-part analysis. First, they

applied California law to “determine an amount that will

have the proper deterrent effect and ensure that

malicious and oppressive conduct is not repeated,” in

light of each defendant’s high net worth. Jd. at 92a.

Second, after applying state law standards, the

arbitrators emphasized that,

[O]ne must determine whether or not the

amount proposed is consistent with the Due

Process standard of the 14th Amendment,

as established by the U.S. Supreme Court

in BMW v. Gore (1996) 517 U.S. 559 and

5

State Farm v. Campbell (2003) 123 S.Ct. 1513.

Significantly, in Rifkind & Sterling, Inc. v.

Rifkind (1994) 28 Cal. App. 4th 1282, 1290-

1293, 33 Cal.Rptr.2d 828, the court held that

because of the lack of state action, a private

contractual! arbitration is not subject to the

strictures of the due process clause.

Notwithstanding Rifkind, the Panel has

endeavored to follow the due process

guidelines set forth in BMW v. Gore and

successor cases.

Id. at 92a-98a.

The arbitrators devoted an entire section of Interim

Award No. 5 to the application of BMW and State Farm

to the facts of the case, examining the reprehensibility

of Petitioners’ conduct, the appropriate ratio between

the compensatory and punitive damage awards, and the

civil penalties authorized for similar misconduct. /d. at

94a-97a. With respect to the first issue, the arbitrators

concluded, “[m]Jeasuring the actions of Respondents

against the five-point scale of State Farm, we find the

actions of Bosack and Lerner [h]ighly reprehensible.”

Id. at 95a. The arbitrators concluded that, on the facts

of the case, a relatively high punitive damages ratio was

necessary to provide a meaningful deterrent. Jd. at 96a-

97a. Finally, the «rbitrators relied on California authority

to ensure that, consistent with State Farm, the punitive

damages awards were in line with civil penalties

authorized or imposed for comparable misconduct.

Id. at 97a.

6

C. The District Court Proceedings

Bosack and Lerner filed separate petitions in the

district court in Seattle seeking to vacate the punitive

damage awards pursuant to Section 10(a)(4) of the

Federal Arbitration Act. Jd. at 47a, 6la. Both argued

that in setting the punitive damages, the arbitrators

“manifestly disregarded” this Court’s rulings in State

Farm and BMW by awarding punitive damage awards

that (when added together) were sixteen times the

compensatory damages award. /d. at 60a.' Neither

Bosack nor Lerner contended that due process required

the district court to perform a general review of the

arbitration panel’s award of punitive damages.

The district court held that due to the limited scope

of review permitted under the FAA, it could not vacate

the award for purported errors of law or fact. Pet. App.

at 61a-62a. The court also stated that it “cannot vacate

the awards based on their excessiveness.” Jd. at 69a.

However, the district court did not hold that it was

barred from engaging in any review of the punitive

damage awards whatever. Instead, the court explained

that under the “manifest disregard” theory, vacatur

would be warranted if Petitioners could show that “the

arbitrators recognized the applicable law and then

ignored it.” Jd. at 62a. Because the record showed that

the arbitration panel had expressly applied BMW to the

1. Bosack and Lerner have since revised their math, and

now contend that the ratio of punitive damages to

compensatory damages was twenty to one. Pet. at 2, 7.

7

facts of the case, the court upheld the awards in full.

Id. at 59a, 69a.

D. The Ninth Circuit’s Decision

On appeal, Petitioners again argued that the awards

should be vacated because the arbitrators had

manifestly disregarded the law. Petitioners conceded

that “while a punitive damages award in arbitration may

not be subject to heightened review for excessiveness, it

must be subject to the judicial review ordinarily applied

to arbitration awards.” Lerner’s Opening Br. On Appeal,

Appeal Nos. 08-35248 and 08-35458 (Oct. 28, 2008)

(“Appellate Brief”), at 60-61 (emphasis added).

The Ninth Circuit affirmed the district court’s

decision. In applying the “manifest disregard” standard

urged by Petitioners, the Ninth Circuit explained that

an arbitrator does not “exceed its powers” under the

FAA by making an error of law or fact, but instead does

so only where it is “clear from the record that the

arbitrator [] recognized the applicable law and then

ignored it.” Pet. App. at lla (citations omitted). The

Ninth Circuit found no basis in the record to conclude

that standard met here, emphasizing that “the panel

extensively discussed and then applied both State Farm

and BMW” and that “Bosack and Lerner have failed to

show that the panel demonstrated a manifest disregard

of the law in issuing the award.” Jd. at 14a.

8

The Ninth Circuit stated in dicta that it agreed with

the district court’s holding that it could not vacate the

arbitration awards at issue for excessiveness. Jd. at 14a.

However, it did not analyze whether a right of due

process under the federal constitution as found in State

Farm and BMW requires a court to engage in de novo

or heightened review of private arbitration awards. Nor

did it address whether judicial confirmation of arbitral

awards constitutes state action. Moreover, while

Petitioners argued for the first time on appeal that

judicial confirmation of arbitral awards furnishes the

necessary state action to trigger due process concerns,

those arguments were offered in support of limited

review for manifest disregard of the law, not enhanced

State Farm review, which Petitioners conceded did not

apply. Appellate Br. at 59-61. Rather, Petitioners argued

that due process concerns compel district courts to

subject punitive arbitral awards “to the same review as

other aspects of arbitration awards, and therefore,

where arbitrators award punitive damages in manifest

disregard of the law, those damages must be vacated.”

Id. at 57 (emphasis added).

9

REASONS FOR DENYING THE PETITION

I.

THE QUESTION PETITIONERS PRESENT FOR

REVIEW WAS NEITHER RAISED NOR RESOLVED

BELOW, AND IS FORECLOSED BY THIS COURT’S

DECISION IN HALL STREET ASSOCIATES.

Petitioners ask this Court to decide “[w]Jhether an

arbitral award of punitive damages is subject to

constitutional constraints on excessiveness,” contending

that certiorari is warranted because the Ninth Circuit

“refused to review the award to determine whether it

was excessive under this Court’s due process

precedents.” Pet. at 1. Even more broadly, Petitioners

argue for the first time in this Court that the manifest

disregard standard they urged the lower courts to apply

“does not satisfy the constitutional standard of

“meaningful” and “adequate” review of an award of

punitive damages.” Jd. at 16. The Court should deny

certiorari because Petitioners never raised those issues

in the lower courts, which therefore did not reach them.

Even more fundamentally, Petitioners’ attack on the

manifest disregard standard is squarely foreclosed by

this Court’s recent holding in Hall Street Associates,

which narrowly limits judicial review of arbitration

awards under the Federal Arbitration Act.

10

A. Petitioners Successfully Urged The Lower Courts

To Apply The Manifest Disregard Standard.

In the lower courts, Petitioners consistently

challenged the award on the ground that in awarding

punitive damages, the arbitrators had “manifestly

disregarded” the law. Petitioners now reverse course,

asserting that due process requires a broader, State Farm-

like review of arbitral awards of punitive damages. Indeed,

they argue for the first time in this Court that the manifest

disregard standard they urged the Ninth Circuit to apply

below itself violates due process. However, having failed

to raise these contentions below, Petitioners are barred

from raising them in this Court for the first time. F£.g.,

Bivens v. Six Unknown Named Agents of Federal Bureau

of Narcotics, 403 U.S. 388, 396 (1971)(a question is not

properly before the Court where it was not raised or

resolved in the court of appeals).

Petitioners urged the lower courts to vacate the

arbitration award on the ground that the arbitrators

“manifestly disregarded” the law. Indeed, they admitted

below that a punitive damages award in arbitration “may

not be subject to heightened review for excessiveness,”

and that they were only seeking the judicial review

“ordinarily applied to arbitration awards.” Appellate Br.

at 60-61. That “ordinary” standard referred to the narrowly

limited review available under Section 10(a)(4) of the FAA,

under which a court may vacate an arbitration award only

if the arbitrators “exceeded their powers” by “manifestly

disregarding the law.” While Petitioners raised due process

arguments below, those arguments were insufficient to

preserve the constitutional issue now framed by

Petitioners because they were offered only in support of

11

limited review under the FAA, not—as Petitioners now

suggest—enhanced, State Farm review under the Due

Process Clause of the Fifth Amendment. See Browning-

Ferris Indus. of Vermont, Inc. v. Kelco Disposal, Inc., 429

U.S. 257, 277 (1989)(holding that due process challenge to

punitive damage award must be directly raised below for

purposes of preserving for certiorari).

Understandably in light of Petitioners’ position below,

the Ninth Circuit did not reach or resolve the issue they

now seek to raise. That court reviewed the awards for

manifest disregard of the law without analyzing any

constitutional due process issues, including the threshold

question of whether voluntary private arbitration involves

state action. Pet. App. at 33a. Thus, its passing agreement

with the district court that it could not vacate the award

for excessiveness was, at best, dicta, which is not a proper

subject of review. California v. Rooney, 483 U.S. 307, 311

(1987)(“This Court reviews judgments, not statements in

opinions”) (quoting Black v. Cutter Laboratories, 351 U.S.

292, 297 (1956)).

B. Petitioners’ Position Is Foreclosed By Controlling

Authority.

Petitioners do not make any effort to reconcile their

contention that arbitration awards should be subject to a

heightened, State Farm judicial review for excessiveness

with this Court’s ruling in Hall Street Associates. Instead,

the petition simply makes no reference at all either to the

FAA or to Hall Street Associates.

Petitioners’ position is flatly foreclosed by this

Court’s recent, authoritative decision in Hall Street

Associates. There, the Court squarely held that Section

12

10(a) of the FAA sets forth the “exclusive” grounds for

vacatur of an arbitration award. 128 S. Ct. at 1403;

accord id. at 1400 (“We hold that the statutory grounds

are exclusive”). Those exclusive grounds do not include

an inquiry into whether an award is “excessive.” The

Court reaffirmed the continued vitality of the “manifest

disregard of the law” standard, strongly suggesting that

standard is coextensive with the statutory grounds for

vacatur found in Section 10. 7d. at 1404. And it reaffirmed

the long-standing prohibition against courts conducting

a “general review for an arbitrator’s legal errors.” /d.

at 1404; see also, e.g., United Paperworks Intl Union,

AFL-CIO wv Misco, Inc., 484 U.S. 29, 38 (1987)(“[T]hat

a court is convinced [the arbitrator] committed serious

error does not suffice to overturn his decision”).

Petitioners’ argument in favor of full-blown State

Farm review of arbitral awards amounts to an unspoken

constitutional challenge to the constitutionality of the

FAA as applied to arbitrators’ awards of punitive

damages. Petitioners’ position cannot be reconciled with

this Court’s recent holding in Hall Street Associates.

The petition should be denied on that ground alone.

2. The Court rejected the argument that review of

arbitration awards for “manifest disregard of the law” confers

expanded authority on courts to review arbitration awards.

128 S. Ct. at 1404.

13

Il.

THERE IS NO CONFLICT AMONG THE

LOWER COURTS OR OTHER GROUND

WARRANTING CERTIORARI.

Petitioners assert that certiorari is appropriate

because the lower courts are in “disarray” over “the

important question” of whether “arbitral awards of

punitive damages are subject to the constitutional

constraints of due process.” Pet. at 8, 11. In fact, there

is no such conflict among lower courts on this issue. The

great weight of authority, including every federal circuit

to have addressed the issue, holds that voluntary

private arbitration proceedings do not involve state

action and cannot give rise to due process claims.

Petitioners do not cite a single case that endorsed a

heightened, State Farm-like review of arbitral awards

for excessiveness. Likewise, Petitioners do not cite a

single case—and, to our knowledge, there is none—in

which a court overturned an arbitral award of punitive

damages on the ground that it was unconstitutionally

excessive.

A. The Overwhelming Weight Of Authority Holds

That Voluntary Private Arbitration Does Not

Constitute State Action And Cannot Give Rise To

A Due Process Claim.

The great weight of authority rejects the notion that

a litigant disappointed with the outcome of a private,

voluntary arbitration proceeding can challenge the

arbitration award on due process grounds. Thus,

virtually every court to have squarely addressed the

14

issue, including every federal circuit to have done so,

has concluded that voluntary private arbitration does

not constitute state action sufficient to trigger due

process review. E.g., Davis v. Prudential Secs., Inc., 59

F.8d 1186,°1191-92 (11th Cir. 1995)(“We agree with the

numerous courts that have held that the state action

element of a due process claim is absent in private

arbitration cases”); Federal Deposit Ins. Corp. v. Air

Florida Sys., Inc., 822 F.2d 833, 843 n.9 (9th Cir. 1987),

cert. denied, 485 U.S. 987 (1988) (“Although Congress

... has provided for some governmental regulation of

private arbitration agreements, we do not find in private

arbitration proceedings the state action requisite for a

constitutional due process claim”); Elmore v. Chicago

& Illinois Midlands Ry. Co., 782 F.2d 94, 96 (7th Cir.

1986)(“(T]he fact that a private arbitrator denies the

procedural safeguards . . . cannot give rise to a

constitutional complaint”); Austern v. Chicago Bd.

Options Exch., Inc., 716 F. Supp. 121, 125 (S.D.N-Y.

1989), affd, 898 F.2d 882 (2d Cir. 1990), cert. denied, 498

U.S. 850 (1990) (holding that arbitration panel’s conduct

“did not in any way constitute state action”); /ntl Ass'n

of Heat & Frost Insulators and Asbestos Workers Local

Union 42 v. Absolute Envtl. Svcs., Inc., 814 F. Supp.

392, 402-03 (D. Del.1993)(no state action in arbitration

proceedings pursuant to collective bargaining

agreement between private parties).

The rationale for this broad consensus that

contractual arbitration does not constitute state action

is straightforward:

Private arbitration, however, really is

private; and since constitutional rights are in

15

general rights against government officials

and agencies rather than against private

individuals and organizations, the fact that a

private arbitrator denies the procedural

safeguards that are encompassed by the term

“due process of law” cannot give rise to a

constitutional complaint.

Elmore, 782 F:2d at 96; accord, Davis, 59 F-3d at 1191

(arbitration is “a private proceeding arranged by a

voluntary contractual agreement of the parties.”)

Porush v. Lemire, 6 F. Supp. 2d 178, 186 (E.D.N.Y.

1998)(“Simply put, private arbitrators are not state

actors and, absent state action, there can be no violation

of either amendment”); Rifkind & Sterling, Inc. v.

Rifkind, 28 Cal.App. 4th 1282, 1292, 33 Cal.Rptr.2d 828,

834 (1994)(“the legal and practical reality” is that “an

arbitration award is not a product of public law or state

proceedings, but rather is a private arrangement,

governed by rules of the parties’ own making or

selection”).

There is also widespread agreement that “mere

confirmation of a private arbitration award by a district

court is insufficient state action to trigger the

application of the Due Process Clause.” Davis, 59 F.3d

at 1192; see also, e.g., Smith v. American Arbitration

Ass'n, Inc., 233 F.3d 502, 507 (7th Cir. 2000)(judicial

enforcement of arbitration contracts “does not convert

the contracts into state or federal action and so bring

the equal protection clause into play”) (citations

omitted); MedValUSA Health Programs, Inc. v.

Memberworks, Inc., 872 A.2d 423, 434-35 (Conn.

2005)(“Almost universally, courts have concluded that

16

judicial] confirmation of an arbitration award is not

sufficient to convert the action of an arbitrator into state

action”) (collecting authorities).

Other courts, without reaching the state action

issue, have rejected due process challenges to

arbitration awards (including arbitral awards of punitive

damages) on the ground that parties that voluntarily

enter into arbitration agreements may not later assert

that the limited judicial review of arbitration awards

afforded by the Federal Arbitration Act violates due

process:

Cunard had every opportunity to present

evidence, to argue the merits of its position,

and to challenge the arbitrator’s award in

court. Having taken advantage of this

process, into which it entered voluntarily,

Cunard cannot now argue that its due process

was denied.

Todd Shipyards Corp. v. Cunard Line, Ltd., 943 F.2d

1056, 1063-64 (9th Cir. 1991); see also, e.g., Bowen v.

Amoco Pipeline Co., 254 F.8d 925, 940 (10th Cir.

2001)(“[Appellant] may not now oppose the very process

it advocated and to which it voluntarily submitted”);

Barnes v. Logan, 122 F.3d 820, 824 (9th Cir. 1997), cert.

denied, 523 U.S. 1059 (1998) (rejecting contention that

award of punitive damages by arbitrators should be

subject to “heightened scrutiny”); Glennon v. Dean

Witter Reynolds, Inc., 83 F.3d 132, 138-39 (6th Cir.

1996)(FAA affords “meaningful review” of claims that

no evidence supports an arbitration panel’s award of

punitive damages arbitration awards, and therefore does

17

not violate due process); Smith, 233 F.3d at 506-07(“By

agreeing to arbitrate in a setting in which [the opposing

party] if it prevailed could seek confirmation under the

Federal Arbitration Act, [appellant] bound herself to

accept the limited judicial review which that act allows”).

B. The Few Decisions Petitioners Rely Upon Do Not

Give Rise To Any Conflict.

Petitioners erroneously assert that certiorari is

warranted because there is a conflict on the question

whether arbitral awards of punitive damages are subject

to due process review for excessiveness. Pet. at 8-12. In

fact, Petitioners do not cite a single case holding that

the limited judicial review permitted by the FAA must

give way to the heightened, State Farm review for

excessiveness of arbitral awards that Petitioners now

seek. In particular, there is not “a single case holding

that an award of punitive damages by an arbitrator is

in any way unconstitutional.” Davis, 59 F.3d at 1192.

The handful of lower court decisions on which

Petitioners rely do not give rise to any conflict, much

less a well-developed conflict, warranting review by this

Court. One bankruptcy court expressed the view that

judicial enforcement of arbitration agreements could be

considered state action, but that court ultimately

acknowledged it was bound by the Eleventh Circuit’s

opinion in Davis v. Prudential Secs., Inc., 59 F.3d 1186

(11th Cir. 1995), and that the arbitration clause was not

subject to scrutiny under the Due Process Clause.

In re Knepp v. Credit Acceptance Corp., 229 B.R. 821,

841 (Bankr. N.D. Ala. 1999). Further, that discussion was

pure dicta, as the court had already concluded that there

18

was no enforceable arbitration agreement because

neither party had signed the arbitration clause. Jd. at

834, 836-37. Finally, the case did not involve a challenge

to an award of punitive damages, but instead a party’s

opposition to a motion to compel arbitration on the

ground that the arbitration clause’s limitation on his

ability to conduct discovery would violate due process.

Id. at 840.

Likewise, the district court in Sanders v. Gardner,

7 F. Supp. 2d 151 (E.D.N.Y. 1998), followed Davis in

holding that imposition of punitive damages in

arbitration did not violate due process. /d. at 173-74

(“The assertion that the arbitrators’ imposition of

punitive damages is violative of due process because

there is no protection against arbitrary results, is also

unsupported by precedent”). While the court appeared

to assume, without deciding, that arbitral awards of

punitive damages could be constitutionally excessive

(id. at 176-79), it also acknowledged that the award could

be vacated only if the arbitrators had “manifestly

disregarded the law” in reaching their decision. Jd. at

158-59. And the court upheld an award of $10 million in

punitive damages and $184,583 in compensatory

damages—a ratio of more than 54 to 1—based on a

finding that “the Arbitrator’s punitive damages award

cannot be said te be a manifest disregard of the law.”

Id. at 170, 177-79.

In Sawtelle v. Waddell & Reed, Inc., 304 A.D.2d 103

(N.Y. App. Div. 2003), an intermediate state appellate

court, citing Davis, observed that “there is ample

authority for the proposition that private arbitration

does not implicate due process concerns since, where

19

the parties have voluntarily participated in the

arbitration process, there is no state action involved,

not even in the judicial confirmation of the punitive

damage award.” Jd. at 109-10. The court did not decide

the due process issue, which it characterized as “besides

the point”; instead, it referred to BMW solely as a

guideline to determine whether the award should be

vacated as “arbitrary and irrational.” Jd.; see also id. at

110 (Gore test “has application outside the realm of a

due process claim in a review of a punitive damage

award”). Moreover, that was only an alternative ground,

as the court also found that the manifest disregard

standard was satisfied. See id. at 113-14 (“in awarding

$25 million in punitive damages, the panel completely

ignored applicable law, an error that provides a separate

basis for vacating the award”). In any event, Sawtelle is

of doubtful validity, because that an award is “arbitrary

and irrational” is not among the exclusive statutory

grounds for vacatur. See Hall Street, 128 S. Ct. at 1400.

Finally, in Birmingham News Co. v. Horn, 901 So.2d

27 (Ala.2004), the Alabama Supreme Court suggested

that there was sufficient state action inherent in court

orders compelling arbitration to justify review of the

awards under federal due process considerations.

Id. at 66. However, the court grounded its ruling

affirming the punitive damages award in that case

squarely on the “manifest disregard” standard. See id.

at 66-69. It upheld the award of punitive damages under

that standard, explaining that “the panel presented an

extensive explanation of the numerous factors and

criteria it considered in arriving at its assessment of

punitive damages... and it certainly cannot be said

that it completely ignored or disregarded the legal

20

principles laid down in [BMW] and [State Farm].”

Id. at 69.* Thus, at most Birmingham News stands for

the proposition that arbitrators should consider State

Farm’s due process factors, but that courts may not

vacate the resulting award unless the arbitrators

manifestly disregarded the law. That holding is entirely

consistent with the Ninth Circuit’s decision here.

C. Petitioners’ Dire Predictions About the Wider

Implications Of The Lower Courts Ruling Are

Misplaced.

Petitioners predict that the limited judicial review

of arbitral awards afforded by the FAA will create

“a powerful disincentive to arbitration,” leading to

greater burdens on the courts, and will expose parties

“to an arbitrator’s virtually unchecked power to impose

punishment for nothing more than ordinary commercial

conduct.” Pet. at 12, 138. However, Petitioners offer no

evidence that any such adverse effects have occurred

or will occur in the future, much less that full-blown,

State Farm review of arbitral punitive damages awards

is essential to avoid such adverse effects.

This Court rejected an identical argument in Hall

Street Associates, where the petitioner argued that

“parties will flee from arbitration if expanded review is

not open to them.” 128 S. Ct. at 1406. The Court found

no evidence to support that prediction, and observed

that even if accurate, it could provide no justification

3. Following Hall Street Assocs., that court later overruled

Birmingham News Co. in part. Hereford v. D.R. Horton, Inc. ,13

So. 3d 375, 380-81 (Ala. 2009).

21

for rewriting the statute. /d. ; see also MedValUSA

Health Programs, Inc., 872 A.2d at 438 n.14 (dismissing

as “wholly speculative” contention “that parties engaged

in negotiation over contract language will decide not to

include an arbitration clause at all, because of the

possibility that, in the event of a breach, the arbitration

panel will render an excessive punitive damages award

that a court will not be able to overturn... .”).

Contrary to Petitioners’ dire predictions, “[t]he

expertise of arbitrators and the lack of bias in the

arbitral forum have caused some commentators to

predict that runaway punitive damage verdicts are a

problem that is likely to be reduced, rather than

aggravated, by shifting disputes from courts to

arbitration.” Davis, 59 F.3d at 1192 (quoting Stephen

J. Ware, Punitive Damages in Arbitration: Contracting

Out of Government’s Role in Punishment and

Preemption of State Law, 63 FoRDHAM L. REv. 529, 570

(1994)); see also, e.g., MedValUSAHealth Programs,

Inc., 872 A.2d at 438 n.14 (“Simply because we can

conceive of an arbitration award of the magnitude

hypothesized by the dissent, does not mean that such

an award is likely to occur. We ought not to make rules

of law based on unrealistic hypotheses”).

Finally, Petitioners’ argument simply ignores the

practical realities of voluntary arbitration. As this Court

has recognized, “parties are generally free to structure

their arbitration agreements as they see fit.” Volt Info.

Scis., Inc. v. Bd. of Trs., 489 U.S. 468, 479 (1989). Parties

wishing to avoid punitive damages in arbitration may

do so by expressly excluding such damages in the

arbitration agreement. See Mastrobuono v. Shearson

22

Lehman Hutton, Inc., 514 U.S. 52, 58 (1995)(explaining

that the availability of punitive damages in arbitration

turns on the language of the arbitration contract).

Alternatively, “{sJhould parties desire more scrutiny

than the [FAA] authorizes courts to apply, they can

contract for an appellate arbitration panel to review the

arbitrator’s award.” Kyocera Corp. v. Prudential-Bache

Trade Servs., Inc., 341 F.3d 987, 993 (9th Cir. 2003)

(citation and internal quotation omitted). What they

may not do is what Petitioners did here: agree to submit

their dispute to arbitration, empower the arbitrators

to award exemplary damages and seek such an award

of damages from the other party, and then challenge an

adverse award on the ground that it deprives them of

due process.

IIT.

THE COURT OF APPEALS, IN DICTA, CORRECTLY

CONCLUDED THAT IT COULD NOT VACATE THE

ARBITRAL AWARD AS EXCESSIVE.

While the Ninth Circuit’s observation that it could

not vacate the punitive damage awards for excessiveness

was mere dicta, and therefore not a proper subject of

review, this Court also should deny certiorari because

that conclusion was correct.

A. Voluntary Private Arbitration Does Not

Constitute State Action.

Constitutional due process protections “do not

extend to private conduct abridging individual rights,”

but only to state action. Nat'l Collegiate Athletic Assn

23

v. Tarkanian, 488 U.S. 179, 191 (1988) (quoting Burton

v. Wilmington Parking Auth. , 365 U.S. 715, '722 (1961)).

The state action concept is narrow, and applies only

where the state exercises such “coercive power” or

“significant encouragement” that the conduct at issue

may be “fairly treated as that of the State itself.”

American Mfrs. Mut. Ins. Co. v. Sullivan, 526 U.S. 40,

52 (1999). This Court repeatedly has held that “[pJrivate

use of state-sanctioned private remedies or procedures

does not rise to the level of state action.” Jd. at 53 (state-

sanctioned private review of workers compensation

disputes is not state action) (quoting Tulsa Prof’l

Collection Servs., Inc. v. Pope, 485 U.S. 478, 485 (1988));

see also, e.g., Flagg Bros., Inc. v. Brooks, 436 U.S. 149,

164-65 (1978)(post-eviction sale of property permitted

under state law did not constitute state action).

The necessary element of coercive state action is

not satisfied in private, voluntary arbitration for the

simple reason that “arbitration under the [FAA] is a

matter of consent, not coercion.” Volt Info. Scis., Inc.,

489 U.S. at 479. No state action is necessary to enable

the existence of an arbitration agreement, which is

operative when signed by the parties. Nor is coercive

state action necessary for an arbitrator to issue a

punitive damages award pursuant to that agreement.

That a court may later confirm (or decline to vacate) an

award pursuant to that agreement is no different from

judicial enforcement of any other contract, and falis far

short of the “significant encouragement” required for

state action. See American Mfrs. Mut. Ins. Co., 526 U.S.

at 53 (“We have never held that the mere availability of

a remedy for wrongful conduct, even when the private

use of that remedy serves important public interests,

24

so significantly encourages the private activity as to

make the State responsible for it”); Smith, 233 F.3d at

507 (“t]he fact that the courts enforce [arbitral awards],

just as they enforce other contracts, does not convert

the contracts into state or federal action”); Davis, 59

F.3d at 1191-92 (holding limited judicial involvement in

confirmation of arbitral awards insufficient to bring

conduct within ambit of Due Process Clause).

Petitioners briefly argue that private arbitration

constitutes state action because arbitrators perform a

“public function,” and because judicial enforcement of

an arbitration award constitutes “significant overt

assistance” on the part of the government. Pet. at 14-

15. However, neither argument is supported by this

Court’s precedents. First, arbitrators do not perform a

public function at all. They are appointed by private

disputants, not the state; and they award relief,

including punitive damages, pursuant to the parties’

contract, not in order to further the public policies

applicable in civil court proceedings. See Mastrobuono,

514 U.S. at 58. For that reason, this case is the polar

opposite of Edmonson v. Leesville Concrete Co., 500 U.S.

614 (1991), which found state action in judicial

enforcement of discriminatory peremptory challenges

in jury selection on the ground that the “trial judge

exercises substantial control over voir dire in the federal

system.” Edmonson, 500 U.S. at 623.

Second, the government “assistance” involved in the

mere judicial enforcement of an arbitration award is a

far cry from that involved in Brentwood Acad. v. Tenn.

Secondary Sch. Athletic Assn, 531 U.S. 288 (2001),

which held that an athletic association was a state actor

25

in light of the “pervasive entwinement of public

institutions and public officials in [the association’s]

composition and workings.” Jd. at 298 (emphasis added).

Courts do not exercise similar “substantial” or

“pervasive” control over the arbitral process, which is

dictated by the disputants. See Volt Info. Scis., 489 U.S.

at 479.‘ Indeed, Petitioners’ state action theory sweeps

far too broadly, as it would necessarily mean that all

judicial enforcement of private contracts constitutes

state action, thereby erasing any distinction between

public and private law.

B. Expanded Judicial Review Of Private Arbitration

Awards Would Undermine The Efficiency And

Expediency Of Arbitration As An Alternative To

The Judicial System.

Petitioners’ call for heightened review of arbitral

awards is not only inconsistent with the FAA and this

Court’s precedents, it would also undermine the very

purpose of arbitration. As this Court has explained,

opening the door to expanded judicial review would

thwart arbitration’s “essential virtue of resolving

4. Neither Gilmer v. Interstate/Johnson Lane Corp., 500

U.S. 20 (1991) nor Honda Motor Co. v. Oberg, 512 U.S. 415 (1994)

supports Petitioners’ argument. Gilmer (which involved neither

punitive damages nor a due process claim) held that the limited

judicial review permitted under the FAA was sufficient to

protect the parties’ rights. 500 U.S. at 32 n.4. Honda Motor

involved an award of punitive damages by a jury, not by a panel

of arbitrators in voluntary arbitration. In any event, the “fair

notice” issue it involved is not germane to arbitration, where

the parties are free to limit the penalties in advance in their

arbitral agreement.

26

disputes straightaway” by rendering arbitration “merely

a prelude to a more cumbersome and time-consuming

judicial review process.” Hall Street Assocs., 128 S. Ct. at

1405 (quoting Kyocera, 341 F.3d at 998); see also Rifkind

& Sterling, Inc., 28 Cal.App. 4th at 1292, 33 Cal.Rptr.2d at

834 (“If the limited state involvement of converting the

award into a judgment were to engender the same due

process incidents required with respect to an award

originally assessed and imposed by a court, the contrasting

simplicity, informality, and private nature of arbitration

would be seriously undermined”).

This case is an unfortunate example of what one circuit

has described as arbitration’s perennial “poor loser

problem,” wherein the losing party drags the dispute

through the courts in a vain attempt to obtain a better

result in the courts, with the result that resolution costs

more than it would have had there been no arbitration in

the first place. See B.L. Harbert Inil, LLC v. Hercules Steel

Co., 441 F-3d 905, 913 (11th Cir. 2006). Petitioners’ call for

an exception to the limited review provided for under the

FAA, if heeded, would only exacerbate the “poor loser”

problem and force courts to develop an entirely new body

of law governing punitive damage awards in arbitration.

Petitioners’ attempt to expand judicial review of arbitration

awards is misguided, contrary to the law, unworkable and

should be rejected.

27

CONCLUSION

The petition for a writ of certiorari should be denied.

Respectfully submitted,

ETHAN P SCHULMAN

Counsel of Record

MICHAEL A. KAHN

J. DANIEL SHARP

JOEL SMITH

CROWELL & Morinc LLP

275 Battery Street, 23rd Floor

San Francisco, California 94111

(415) 986-2800

Attorneys for Respondents