Petition for Writ of Certiorari — Chica v. Lee
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92-1925 RILED
No. DFECE OE THE CLERK
In the ont
Supreme Court of the United Htate 1 193
at:
October Term, 1992 f
iat ‘BFEICE OF THE CLERK
Qe _ .... =
JAMES JOHN CHICA,
Petitioner,
V.
JUDY LEE,
Respondent.
PETITION FOR WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
FOR THE EIGHTH CIRCUIT
PETITION FOR WRIT OF CERTIORARI
Of Counsel: Briol & Wilmes
Gregory L. Wilmes
Popham, Haik, Schnobrich Counsel of Record
& Kaufman, Ltd. 5080 Norwest Center
Scott E. Richter 90 South Seventh Street
3300 Piper Jaffray Tower Minneapolis, Minnesota 55402
222 South Ninth Street (612) 337-8410
Minneapolis, Minnesota 55402
(612) 333-4800 Attorneys for Petitioner
May 28, 1993
1993 — Bachman Legal Printing, 835 Second Ave. So., Mpis., MN 55402 — (612) 339-9518
@ FAX 612-337-8053
QUESTIONS PRESENTED
: Whether the enforcement of a punitive
damages arbitration award against petitioner
Chica, who was not a party to the arbitration
agreement, violated Chica's due process rights
where he was not afforded the procedural
safeguards available in judicial proceeding and
approved by this Court in Pacific Mut. Life Ins.
Co. v. Haslip, 111 S.Ct. 1032 (1991).
2. Whether, in enacting the Federal
Arbitration Act, Congress intended the federal
courts to develop a federal common law of
contracts preempting state law which reserves to
the state the power to punish by punitive
damages, thereby subjecting petitioner Chica to
a punitive arbitration award prohibited by
Minnesota law.
3. Whether, in enacting the Federal
Arbitration Act, Congress intended a federal
common law of contracts to preempt general
state contract law governing who is a party to an
arbitration agreement, thereby subjecting
petitioner Chica to an arbitration award when he
was not a party to the arbitration contract under
state law.
LIST OF PARTIES
All Parties to this Petition are listed in the caption.
il
TABLE OF CONTENTS
PAGE
Questions Presented................... i
PTA Tee eee eee li
eT ee eee eee iii
ree Vv
ng 60 sb N aw an 0 uw xn b's 1
te 6 6 ke Wha a as aw eos 2
Statutes and Rules Involved............ 2
Statement of the Case................. 4
SES ee 5
The District Court's Order........ .. 6
The Eighth Circuit's Decision ..... .. 8
Reasons For Granting The Writ......... 11
The Eighth Circuit's Ruling In This Case
Conflicts with Perry v. Thomas and the
Decisions of Numerous Other Courts .... . 13
The Eighth Circuit's Ruling that the
Federal Arbitration Act Preempts a State
Law Reserving to the State the Power
Punish by Punitive Damages Conflicts
ill
With the Decisions the Second Circuit and
Numerous Others Courts.............. 17
C. The Eighth Circuit's Ruling Violates Due
Process By Allowing Arbitrators to Impose
Punitive Damages in Informal Proceedings
While Providing No Meaningful Judicial
rr ree ee ree ee 24
re a a er .28
iv
TABLE OF AUTHORITIES
CASES PAGE
Barbier v. Shearson Lehman Hutton, Inc.,
fe Bib g: Ft Ae | Re eres 20
Baselski v. Paine, Webber, Jackson & Curtis, Inc.,
514 F.Supp. 535, (N.D. Ill. 1981)............... 21
Bonar v. Dean Witter Reynolds, Inc., 835 F.2d 1378
A ee TS cs wah ache w eae kaw eee 24
Browing-Ferris Industries of Vermont, Inc. v.
Kelco Disposal, Inc., 492 U.S. 257 (1989)...... 24,25
Cook Chocolate Co. V. Salomon, Inc.,
684 F.Supp. 1177 (S.D.N.Y. 1988) ............. 16
Duplan Corp. v. W.B. Davis Hosiery Mills, Inc.,
463 F Supp. O66 C.D.N.Y. 19T7) 2.0 i eines 16
Flink v. Carlson, 856 F.2d 44 (8th Cir. 1988)......... 9
Garrity v. Lyle Stuart, Inc., 40 N.Y.2d 354,
353 N.E.2d 793 (N.Y. Ct. App. 1976)............ 18
Kelly v. Robinson, 479 U.S. 36 (1986)............. .24
Kociemba v. G.D. Searle & Co., 707 F.Supp. 1517
OO rr ree 20
Kost v. Peterson, 292 Minn. 46, 193 N.W.2d 291
MEE re ae ee seeks eee Wake aes 7,15
Lucas v. American Family Mut. Ins. Co.,
403 N.W.2d 646 (Minn. 1987)................. 19
Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth,
amr Ses REE 6h ck chao dak tvecon eee 23
Pacific Mut. Life Ins. Co. v. Haslip,
eee ts Bo Lt. eres 10,13,24,25,26,27
Perry v. Thomas, 482 U.S. 483 (1987) .. . 7,9,14,15,16,24
Pierson v. Dean, Witter, Reynolds, Inc.,
po Re fF Ty. te Re | ere 21
Prima Paint Corp. v. Flood & Conklin Mfg. Co.,
ae et, fs eee ere eer ee ee ee 15
Raytheon Co. v. Automated Business Systems, Inc.,
G2 F.2a 6 (lat Cir. HOBB) ow cee eee enass 24
Recold, S.A. de C.V. v. Monfort of Colorado, Inc.,
603 F.2d 196, (th Cie. IGBG). 6. ccc ce cc cess 16
Rodriguez de Quijas v. Shearson/American
Express, Inc., 490 U.S. 477 (1989) .... ............ 12
Scherk v. Alterto-Culver Co., 417 U.S. 506 (1974)..... 27
Shahmirzadi v. Smith Barney, Harris ,Upham & Co.;
636 F.Supp. 49 (D. D.C. 1985)................ 21
Shaw v. Kuhnel & Associates, Inc., 698 P.2d 880
i. 8 SR, || Pere rer ore AS a 19
Shearson/American Express v. McMahon, 482 U.S. 220
CRED 5c one ec ein We cc ue ee eee ee 12
vi
Supak & Sons Mfg. Co., Inc. v. Pervel Industries,
Inc., 593 F.2d 135 (4th Cir. 1979) .............. 16
Surman v. Merrill Lynch, Pierce, Fenners & Smith,
733 F.2d 59 (8th Cir. 1984)................... 21
Todd Shipyards Corp. v. Cunard Line, Ltd.,
943 F.2d 1056 (9th Cir. 1991)................. 24
United States Fidelity & Guar. v. DeFluiter,
456 N.E.2d 429 (Ind. App. 1983)............... 19
Volt Information Sciences v. Board of Trustees,
489 US. 468 (1989)................... .15,22,23
Waltman v. Fahnestock & Co., Inc., 792 F.Supp. 31
RN SE ose ao aa oa aie eb hea oe oe be 21
Zelle v. Chicago & Northwestern Ry Co.,
242 Minn. 439, 65 N.W.2d 583 (Minn. 1954)... .. 26
Ziegler v. Whale Securities Co.,
L.P., 786 F.Supp 739 (N.D. Ind. 1992).......... 16
CONSTITUTION
U.S. Const. amend. V ......................... 2,24
Vii
STATUTES
MED 6 ean svi ed eee ekudee eer eae chee 4
I REE ls CaN eae ode Cee oe 3,14
ee a ee ek oe ona Tee ss eee 3,6,16
tes I Ck A Nala ks eae 3,6,7,20,21
ee es RE ois kes oe oo been ea eeusuanee’ 4,6,7,8
DS Us. F ion ko i ee i ee 8
Seer ees ENG oi ok eae dea neee bene cared 5
Se WIE oho ov ax evens dae eka 5,6
Se ee es is eer te cas Cesc 6
ee I ke ca de ek ee eel ae 2
ge ee Dp: ee er ere 8
Colo. Stat. Ann. § 13-21-102(5).................... 19
Minn. Stat. Ch. GOA (IGGG) . «ci ccceccckdawawees 5
Minn. Stat. § 336.2-718(1) (1990) .................. 23
Minn. Stat. § 549.191 (1990) .................. 19,25
Minn. Stat. § 549.20 subd. 1 (1990)................ 19
Minn. Stat. § 549.20 subd. 5 (1990).............. 19,25
Vill
OTHER AUTHORITIES
ET Sade ee gos ovine ke Nye end eae wee dan 5
Brunet, Arbitration And Constitutional Rights,
TE Detaskes GE WR COMED vaso wee sk ccccecucdacen 25
Kupperman & Freedman, Selected Topics In Securities
Arbitration: Rule 15c2-2, Fraud, Duress,
Unconscionability, Waiver, Class Arbitration,
Punitive Damages, and Attorneys Fees and Costs,
— e), & os kt | eee eee 11
Note, Overextension of Arbitral Authority:
Punitive Damages and the Issue of Arbitrability,
65 Wash. L. Rev. 678 (1990) ...................... 24
Pierce, The Federal Arbitration Act: Conflicting
Interpretation of its Scope, 61 Cin. L. Rev.
MN ane gels ee tires ea oes 4 0g 12
Punitive Award Survey, Vol. 4, No. 7 Securities
Arbitration Commentator p. 4 (May 1993) .......... 12
Restatement (Second) of Agency § 320 (1958)........ 15
Sabino, Awarding Punitive Damages in Securities
Arbitration: Working for a Just Result,
27 U. Rich. L. Rev. 33 (Fall 1992) ................. 12
Securities Arbitration--How Investors Fare,
GAO Report to Congressional Requesters, May 11, 1992
| | ee 12
Stipanowich, Punitive Damages in Arbitration -
Garrity v. Lyle Stuart, Inc. Reconsidered,
Ars I, CO ee Wika ee ecb ka ctdedes
IN THE
SUPREME COURT OF THE UNITED STATES
OCTOBER TERM, 1992
JAMES JOHN CHICA,
Petitioner,
Vv.
JUDY LEE,
Respondent.
———————ess—eeeoeE=a—=oeE=SDa=aSES=SSEeSETPDDDPW@W@VBPSSE™
PETITION FOR WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
FOR THE EIGHTH CIRCUIT
James John Chica petitions for a writ of certiorari
to review the judgment of the United States Court of
Appeals for the Eighth Circuit in this case.
OPINIONS BELOW
The Eighth Circuit's opinion is reported at 983
F.2d 883 and is set forth in Appendix A. (App. 1-13.) The
Eighth Circuit's order granting the Securities Industry
Association, Inc. leave to file a petition for rehearing en
banc as amicus curiae is not reported and is set forth in
Appendix B. (App. 14.) The Eighth Circuit's denial of
rehearing and rehearing en banc by a five to six vote is
not reported and is set forth in Appendix C. (App. 15.)
The oral ruling of the United States District Court for the
District of Minnesota vacating the punitive damage
portion of the arbitration award and confirming the
compensatory portion of the award is not reported and is
set forth in Appendix D. (App. 16-18.) The written order
of the United States District Court for the District of
Minnesota is not reported and is set forth in Appendix E.
(App. 19-20.) The award of the arbitrators is not reported
and is set forth in Appendix F. (App. 21-23.)
JURISDICTION
On January 12, 1993, the Eighth Circuit entered
judgment by a divided vote. On March 4, 1993, Chica's
petition for rehearing and rehearing en banc was denied
by a five to six vote. This petition was filed within 90
days of the Eighth Circuit's denial of Chica's petition for
rehearing. The jurisdiction of this Court is invoked under
28 U.S.C. § 1254.
STATUTES AND RULES INVOLVED
Amendment V to the United States Constitution
provides, in relevant part:
No person shall . . . be deprived
of life, liberty, or property, without due process of
gee
9 U.S.C. § 2 provides, in relevant part:
A written provision in . . . a contract
evidencing a transaction involving commerce to
settle by arbitration a controversy thereafter
arising out of such contract or transaction, .. .
shall be valid, irrevocable, and enforceable, save
upon such grounds as exist at law or in equity for
the revocation of any contract.
9 U.S.C. § 9 provides, in relevant part:
If the parties in their agreement have
agreed that a judgment of the court shall be
entered upon the award made pursuant to the
arbitration, and shall specify the court, then at
any time within one year after the award is
made any party to the arbitration may apply to
the court so specified for an order confirming the
award, and thereupon the court must grant such
an order unless the award is vacated, modified,
or corrected as prescribed in sections 10 and 11
of this title. ...
9 U.S.C. § 10(a)(4) provides, in relevant part:
(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--
a** *
(4) Where the _ arbitrators
exceeded their powers,...
9 U.S.C. § 11(b) provides in relevant part:
In either of the following cases the
United States court in and for the district
wherein the award was made may make an
order modifying or correcting the award upon the
application of any party to the arbitration--
** *
(b) Where the arbitrators have
awarded upon a matter not submitted to them, .
STATEMENT OF THE CASE
This case involves the spread of the much
criticized, quasi-criminal sanction of punitive damages to
the arbitration process. The Eighth Circuit, reversing the
trial court, held that petitioner, James Chica, was bound
by a punitive damage arbitration award, even though he
was not a party to the arbitration agreement and did not
participate in the arbitration. The Eighth Circuit also
ruled that the Federal Arbitration Act ("FAA"), 9 U.S.C.
§§ 1 et seq., allows private arbitrators to impose punitive
damages contrary to state law which reserves to the state
the power to punish by punitive damages. This
preemption of state law completely federalizes the
arbitration process, and results in an unprecedented
expansion of the power of private court systems which
now decide thousands of disputes formerly resolved by
the public courts.
Background
Respondent Judy Lee ("Lee") had a securities
account with the now defunct Engler-Budd & Company,
Inc. ("Engler-Budd"), a broker dealer and a member of
the National Association of Securities Dealers. (App. 2.)
Petitioner Chica was Lee's account representative while
Lee had her account at Engler-Budd. Id.
Lee signed a Customer Agreement with
Engler-Budd. The agreement between Lee and
Engler-Budd contained an arbitration clause providing
that, "If any controversy arises out of this agreement, it
shall be determined by arbitration, except where
prohibited by law." (App. 3.) The agreement and its
enforcement were to "be governed by the laws of the
State of Minnesota", and any arbitration thereunder was
to be conducted under the rules of the American
Arbitration Association ("AAA"). (App. 3.)
Chica, acting as an agent for a disclosed principal,
his employer Engler-Budd, presented the agreement to
Lee, who signed it. Chica is not a party to the customer
agreement and did not sign it. (App. 3.)
Lee filed a demand for arbitration with the AAA
against Chica individually and also against Engler-Budd.
Lee alleged that Chica and Engler-Budd had violated the
Securities Exchange Act of 1934, § 10(b), 15 U.S.C. §
78j(b); the Securities and Exchange Commission Rule
10b-5, 17 C.F.R. § 240.10b-5; the Securities Act of 1933,
15 U.S.C. §§ 77a-77bbb; and the Minnesota Securities
Act, Minn. Stat. Ch. 80A. Lee also alleged state common
law claims of negligence, fraud, and breach of fiduciary
duty. (App. 3.) Lee's arbitration demand also sought
punitive damages.
Chica did not sign the AAA arbitration submission
agreement, did not answer the arbitration complaint, and
made no appearance at the arbitration. (App. 4.)
In December 1990, an AAA arbitration panel held
a hearing. Id. The AAA did not keep a record or
transcript of proceedings before it. Accordingly, there is
no record as to what evidence, if any, was presented at
the arbitration hearing.
The arbitrators awarded Lee $31,800 in punitive
damages, $10,600 in compensatory damages, and $5,000
in attorneys fees against both Chica and Engler-Budd.
(App. 4).'
The District Court's Order
Lee filed a motion to confirm the award in the
Minnesota federal district court under Section 9 of the
FAA. 9 U.S.C. $9. The district court had subject matter
jurisdiction under Section 27 of the Securities and
Exchange Act of 1934. 15 U.S.C. § 78aa. This statute
gives federal district courts exclusive jurisdiction over all
proceedings to enforce any liability created by the 1934
Act. Id. As Lee's arbitration complaint alleged violations
of Section 10(b) of the 1934 Act, 15 U.S.C. § 78j(b), the
motion to confirm the award issued thereon was a
proceeding to enforce a liability under the 1934 Act
within the district court's jurisdiction under Section 27.
15 U.S.C. § 78aa.
Chica opposed Lee's petition and moved to vacate
the award under 9 U.S.C. §§ 10(a)(4) and (11)(b). Chica
argued the entire arbitration award should be vacated
because he was not a party to the arbitration agreement
and did not submit to the AAA's jurisdiction. As a matter
of general Minnesota contract law, Chica, acting as agent
for a disclosed principal, his employer Engler-Budd, was
not a party to the arbitration agreement. Kost v.
1
Engler-Budd, now defunct, did not participate in the
arbitration or district court proceedings and was not a party to the
appeal! to the Eighth Circuit. Engler-Budd's liability is not at issue in
this petition. (App. 4, n.2).
aren tnneceeniciaceeiiaeiiiiNN iis
Peterson, 292 Minn. 46, 49, 193 N.W.2d 291, 294 (Minn.
1971). Chica argued he was not bound by the award
because the arbitration "contract is that of the principal
[Engler-Budd] and does not give rise to any contractual
obligation running to the agent [Chica]." Id.
Chica asked the court to apply this general state
contract law, and rule that as a non-party he was not
subject to the arbitrators' jurisdiction and not bound by
the award. Chica relied on Perry v. Thomas, 482 U.S.
483, 492-93 n.9 (1987). In Perry, this Court said that in
determining the enforceability of arbitration contracts,
"state law, whether of legislative or judicial origin, is
applicable if that law arose to govern issues concerning
the validity, revocability, and enforceability of contracts
generally." Id. 482 U.S. at 492-93 n.9 (emphasis in
original). Chica argued the award should be vacated
because, by issuing an award against a person who was
not a party to the arbitration agreement, the arbitrators
"exceeded their powers," 9 U.S.C. § 10(a)(4), and
"awarded upon a matter not submitted to them," 9 U.S.C.
§ 11(b).
Alternately, Chica asked the district court to at
least vacate the punitive damage portion of the
arbitration award on the ground the arbitrators lacked
the power to impose punitive damages under Minnesota
law. Many states, including Minnesota, do not permit
private persons to inflict the punishment of punitive
damages, even by agreement. These states reserve to the
government, through the courts, the power to punish.
Chica argued that, by violating the Minnesota law
prohibition on punitive arbitral awards, the arbitrators
"exceeded their powers," 9 U.S.C. § 10(a)(4), and
"awarded upon a matter not submitted to them," 9 U.S.C.
§ 11(b).
The district court accepted Chica's argument that
Minnesota law prohibited an award of punitive damages
by an arbitration panel (App. 4). The district court noted
that the arbitration clause in the customer agreement
incorporated Minnesota state law to govern the contract.
(App. 4.) Therefore, the district court reasoned that the
parties had intended to limit the scope of recovery to that
which would be allowed by Minnesota law, which did not
include punitive damages. (App. 4.)
The district court rejected Chica's argument that
it should apply general state contract law to determine
whether Chica was bound by the compensatory award. It
applied a perceived federal common law of contracts and
ruled that under federal law Chica was bound by the
compensatory portion of the award. (App. 4, 17.)
Accordingly, the district court vacated the $31,800
punitive damage portion of the arbitration award, and
confirmed the compensatory portion of the award. (App.
19-20.)
The Eighth Circuit's Decision
Lee appealed to the Eighth Circuit seeking
reversal of the district court's order vacating the punitive
arbitral award, pursuant to 9 U.S.C. § 16(a)(1)(D) and (E)
and 28 U.S.C. § 1291. Chica cross-appealed seeking
reversal of the district court's order to the extent it
confirmed the compensatory portion of the award,
pursuant to 9 U.S.C. § 16(a)(1)(D) and (E).
The Eighth Circuit affirmed the trial court order
confirming the compensatory award. It ruled that federal
law, and not state law, governed the question of whether
Chica, who did not sign the arbitration agreement and
refused to participate in the arbitration, was subject to
the jurisdiction of the arbitrators. The Eighth Circuit
ruled that Perry's direction to apply general state
contract law, 482 U.S. at 492-93 n.9, did not apply when
the court was considering a motion to confirm or vacate
an award. (App. 6). The court also ruled the arbitrators
had the power to determine their own jurisdiction under
the agreement. (App. 7 at n.4).
The Eighth Circuit acknowledged the apparent
inconsistency in its own opinions, noting "there is dicta in
Flink v. Carlson, 856 F.2d 44, 46 (8th Cir. 1988), which
supports Chica's argument that, as an agent for a
disclosed principal, he cannot be bound personally by the
customer agreement." (App. 7 at n.5.) In Flink the court
had ruled that "federal courts look to state law" to resolve
the issue of whether a broker is bound to arbitrate, and
held that "[sligning an arbitration agreement as agent for
a disclosed principal is not sufficient to bind the agent to
arbitrate claims against him personally." 856 F.2d at 46
and n.2.
A divided panel reversed the district court order
vacating the punitive damages portion of the arbitration
award. The majority ruled that as a matter of federal
law, AAA arbitrators had the power to impose punitive
damages, regardless of whether Minnesota law was to
the contrary. (App. 9.) It also employed a "very limited"
standard of review, ruling that an arbitration award
could not be set aside "unless it is completely irrational or
evidences a 'manifest disregard for law.'" (App. 5, 10).
Judge Beam dissented from the majority's holding
that the arbitration panel could award punitive damages.
(App. 11-13.) He concluded that the rules of the AAA,
which do not refer to punitive damages, do not
contemplate the award of punitive damages. (App.
11-13.) He further concluded that even if the AAA rules
could somehow be construed to allow arbitrators to
impose punishments, "this should not be done in an
arbitration setting.” (App. 12.)
Judge Beam believed the arbitral award of
punitive damages violated Chica's due process rights
under Pacific Mut. Life Ins. Co. v. Haslip, 111 S.Ct. 1032
(1991). "In the arbitration setting we have almost none
of the protections that fundamental fairness and due
process require for the imposition of this form of
punishment." (App. 12, Beam dissenting.) Discovery is
abbreviated if available at all. Id. The rules of evidence
are employed, if at all, in a very relaxed manner. Id.
Arbitrators in private court systems act with almost none
of the safeguards of the public courts. Id.
Judge Beam also questioned whether confirmation
of the award in the absence of any meaningful judicial
review complied with the due process requirements
established in Haslip. In Haslip, the Court upheld a
jury's punitive damage award against a due process
challenge, emphasizing that necessary review by the trial
and appellate courts under Alabama statutes provided a
check on arbitrary decision making. 111 S.Ct. at
1043-46.
In contrast to the Alabama procedure in Haslip,
Judge Beam noted "the scope of review of the arbitrator's
award is narrowly limited if not almost nonexistent."
(App. 12). He noted "This standard of review, of course,
almost completely ignores the review required by Haslip.”
(App. 13).
Chica petitioned the Eighth Circuit for rehearing
and rehearing en banc on January 26, 1993. Chica's
petition specifically sought rehearing so the panel could
consider the due process implications of its punitive
damage ruling.
The Securities Industry Association, Inc. ("SIA"),
which represents over 650 broker-dealers in the United
States and Canada, sought and obtained leave to file a
petition for rehearing en banc as amicus on the issue of
the constitutionality of punitive damages in arbitration.
(App. 14).
Chica's petition for rehearing and rehearing en
banc was denied by a five to six vote on March 4, 1993
(App. 15).
10
REASONS FOR GRANTING THE WRIT
This case presents the issue of whether arbitrators
in a private court system, in this case the AAA, have the
power to impose the punishment of punitive damages, a
function that historically has been the exclusive province
of the state subject to its strict regulation. "The authority
of arbitrators to grant relief in the nature of punitive
damages is a fiercely debated policy issue confronting
both students of the arbitral process and parties to
arbitration." Stipanowich, Punitive Damages in
Arbitration - Garrity v. Lyle Stuart, Inc. Reconsidered, 66
B.U.L. Rev. 953, 955 (1986).
The lower courts take widely divergent approaches
on the question of whether arbitrators have the power to
inflict the punishment of punitive damages. Kupperman
& Freedman, d To ti
R - e ility, Waiv
akin 65 Tul L. a. 1547, 1593 (1991). eas hold
that arbitrators lack the power to impose punitive
damages, even by agreement. Id. Others hold that
punitive damages may be awarded in arbitration only if
the arbitration agreement specifically and explicitly so
provides. Id. Still others hold that arbitrators may
award punitive damages whenever the arbitration
agreement can reasonably be construed to permit the
award. Id.
The issues have a wide ranging impact on the
powers of private court systems and the relationship
between the governmental court systems and the private
courts. In recent years, large segments of the business
community have, by contract, removed from the public
courts the power to adjudicate disputes. In 1987 and
1989, this Court reversed precedent prohibiting the
enforcement of predispute arbitration agreements for
claims arising under the federal securities laws.” Since
11
that time, thousands of securities disputes have been
decided in various arbitral fora. The number of securities
cases submitted to arbitration each year has increased by
more than 250% since 1987, and a similar increase has
occurred in commercial arbitration since 1972. Pierce,
its Scope, 61 Cin. L. Rev. 623, 623 (1992).
Whether arbitrators should have the power to
punish by punitive damages is of intense interest to the
securities industry. In light of "the incredible potential
for harm that awards of punitive damages engender. .. .
the securities industry may suffer a tremendous setback
if arbitrators are given the power to award punitive
damages." Sabino, Awarding Punitive Damages in
Securities Arbitration Working for a Just Result, 27 U.
Rich. L. Rev. 33, 68 (Fall 1992). The SIA's intervention
as an amicus seeking rehearing en banc of the panel
decision confirms the importance of this case to the
securities industry.
At least 174 punitive damage arbitration awards
totaling $29,489,900 were issued in_ securities
arbitrations from May 1989 through June 1992. Punitive
Award Survey, Vol. 4, No. 7 Securities Arbitration
Commentator 1, 4 (May 1993). The General Accounting
Office reports that arbitrators in industry sponsored
arbitral fora awarded punitive damages in 12% of the
cases where such damages were requested, and AAA
arbitrators in 9% of the cases where such damages were
requested. Securities Arbitration--How Investors Fare,
GAO Report to Congressional Requesters, May 11, 1992
(GAO/GGD-92-74).
This petition also presents the question of whether
due process is violated by judicial enforcement of a
. See Rodriguez de Quijas v. Shearson/American Exp., Inc.,
490 U.S. 477 (1989); Shearson/American Express v. McMahon, 482
U.S. 220 (1987).
12
punitive arbitral award issued against a person who is
not a party to the arbitration agreement. The lack of
meaningful safeguards in the informal arbitration
process, coupled with the extremely limited judicial
review afforded by the Eighth Circuit, deprived Chica of
the protections this Court has deemed important in
upholding jury awarded punitive damages. See Pacific
Mut. Life Ins. Co. v. Haslip, 111 S.Ct. 1032, 1043-45
(1991).
The decision below is an unprecedented and
unconstitutional expansion of the power of private courts.
It allows private court systems to assert jurisdiction over,
and then to punish, persons who have not agreed to give
them that power. It not only grants private courts
essentially unreviewable discretion to determine who is
subject to their jurisdiction, but also allows them to
exercise the traditional governmental power of imposing
punishments, while providing no meaningful judicial
review.
This Court should review the Eighth Circuit's
decision enforcing a punitive damage arbitration award
against a person who is not a party to the arbitration
agreement. The decision below contravenes decisions of
this Court and numerous other courts, violates Due
Process, and grants to private arbitrators a power--the
power to punish--which the State of Minnesota, has
reserved to itself. This petition for a writ of certiorari
should be granted.
A.
THE EIGHTH CIRCUIT'S RULING IN
THIS CASE CONFLICTS WITH PERRY
v. THOMAS AND THE DECISIONS OF
NUMEROUS OTHER COURTS.
Section 2 of the FAA provides that written
contracts to arbitrate, "shall be valid, irrevocable, and
13
enforceable, save upon such grounds as exist at law or in
equity for the revocation of any contract. 9 U.S.C. § 2. In
Perry v. Thomas, 482 U.S. 483 (1987), this Court ruled
that under Section 2 general state contract law must be
applied in determining the enforceability of arbitration
agreements:
Thus state law, whether of legislative
or judicial origin, is applicable if that law arose
to govern issues concerning the _ validity,
revocability, and enforceability of contracts
generally. ... A court may not, then, in assessing
the rights of litigants to enforce an arbitration
agreement, construe that agreement in a manner
different from that in which it otherwise
' construes non-arbitration agreements under
state law.
482 US. at 492-93 n.9 (1987). The Eighth Circuit flatly
refused to apply general Minnesota contract law to
determine whether Chica was bound to arbitrate under
the customer agreement to which he was not a party.
Rather than follow Perry's instruction to apply general
state contract law principles, the Eighth Circuit said:
Arbitrability of contracts evidencing
interstate commerce is governed by federal
substantive law rather than state law.
(App. 6.)
The Eighth Circuit, erroneously believing federal
law applied, refused to apply Minnesota law which
provides that, "Where an agent, acting for a disclosed
principal, enters into a contract with third persons for
and on account of his principal and in his name, the
contract is that of the principal and does not give rise to
any contractual obligation running to the agent." Kost v.
14
(eet
Peterson, 292 Minn. 46, 49, 193 N.W.2d 291, 294 (Minn.
1971). It is undisputed that Chica acted as an agent for a
disclosed principal, his employer Engler-Budd, and that
the customer agreement is a contract between
Engler-Budd and Lee. "[TJhe contract is that of the
principal ([Engler-Budd] and does not give rise to any
contractual obligation running to the agent [Chica]." Id.°
By ruling that under federal law Chica was bound
to arbitrate under an agreement to which he was not a
party under general state contract law, the Eighth
Circuit did precisely what this Court said it could not
do--it "construe[d] that agreement in a manner different
from that in which it otherwise construes non-arbitration
agreements under state law." Perry, 482 U.S. at 492-493
n.9. This ruling also directly conflicts with this Court's
longstanding directive that the FAA be construed "to
make arbitration agreements as enforceable as other
contracts, but not more so." Prima Paint Corp. v. Flood &
Conklin Mfg. Co., 388 U.S. 395, 404 n.12 (1967). The
ruling makes arbitration agreements enforceable where
ordinary contracts are not, and unlawfully "elevates
[arbitration agreements] over other forms of contract."
Id. at 404 n.12.
"[T]he FAA does not require parties to arbitrate
when they have not agreed to do so." Volt Information
Sciences v. Board of Trustees, 489 U.S. 468, 478 (1989).
Yet, this is precisely what the Eighth Circuit required
Chica to do here. It held Chica to the arbitration award
even though he had not agreed to arbitrate as a matter of
general state contract law.
The Eighth Circuit's refusal to apply general state
contract law in determining arbitrability conflicts not
; The Minnesota rule that an agent is not bound by the
contracts of the principal is widely, if not universally, accepted. See
Restatement (Second) of Agency § 320 (1958) ("Unless otherwise
agreed, a person making or purporting to make a contract with
another as agent for a disclosed principal does not become a party to
the contract.").
15
only with Perry and Volt, but also with its own decisions
and those of numerous other courts. See, e.g., Recold,
S.A. de C.V. v. Monfort of Colorado, Inc., 893 F.2d 195,
197 n.6 (8th Cir. 1990) ("In addressing the issue of
whether a party has entered into an agreement to
arbitrate under the Arbitration Act, courts are to apply
— state law principles . . ."); Supak & Sons Mfg. Co.,
Inc. v. Pervel Industries, Inc., 593 F.2d 135, 137 (4th Cir.
1979) ("Section 2 [of the FAA). . does not displace state
law on the general principles governing formation of the
contract itself."); Ziegler v. Whale Securities Co., L.P.,
786 F.Supp 739, 741-2 (N.D. Ind. 1992) ("In order to
determine whether a valid arbitration agreement exists,
this Court must turn to state contract law."); Cook
Chocolate Co. Salomon, Inc., 684 F.Supp. 1177, 1182
(S.D.N.Y. 1988) ("At the same time, however, § 2 of the
Act preserves general principles of state contract law as
rules of decision on whether the parties have entered into
an agreement to arbitrate."); Duplan Corp. v. W.B. Davis
Hosiery Mills, Inc., 442 F.Supp. 86, 87-88 (S.D.N.Y. 1977)
("Congress intended only to place arbitration agreements
affecting commerce or maritime affairs on the same
footing as other contracts, but not to create a federal law
of contract formation.").
The Eighth Circuit attempted to distinguish Perry
by saying:
In Perry the specific issue was whether
the parties could be compelled to arbitrate
according to the contract provisions. In contrast,
the present case is an action seeking to confirm
an award already made by an arbitration panel
in accordance with a provision in a contract.
(App. 6.) This was plainly wrong. Section 9 of the FAA,
which governs judicial confirmation of arbitration
awards, permits confirmation of an award only "[i]f the
parties in their agreement" provide that a judgment may
16
’
be entered on the award. 9 U.S.C. § 9 (emphasis added).
Chica was not a party to the arbitration contract. The
distinction made by the Eighth Circuit is also illogical.
The power of an arbitration panel does not change
depending on when the issue is raised. The power of an
arbitration panel arises from the agreement of the
parties. That agreement remains the same whether the
issue is raised by a motion to compel arbitration or a
motion to vacate an arbitration award.
The Eighth Circuit is developing a general federal
common law of contracts to govern arbitration
agreements, rather than applying general state contract
law as required by Perry. This is not the proper role for
the federal courts. It unlawfully preempts long settled
contract law developed by the states. The Eighth
Circuit's complete federalization of arbitration law is
directly contrary to Perry, and should be reversed.
B.
THE EIGHTH CIRCUIT'S RULING
THAT THE FEDERAL ARBITRATION
ACT PREEMPTS A STATE LAW
RESERVING TO THE STATE THE
POWER TO PUNISH BY PUNITIVE
DAMAGES CONFLICTS WITH THE
DECISIONS OF THE SECOND
CIRCUIT AND NUMEROUS OTHER
COURTS.
Even if Chica was somehow bound by the
agreement to arbitrate, the punitive award should have
been vacated because it was excluded from the scope of
the agreement. The customer agreement provides that,
"If any controversy arises out of this agreement, it shall
be determined by arbitration, except where prohibited by
law." (App. 3). The agreement chose the law to
determine whether a claim is arbitrable--"This agreement
17
and its enforcement shall be governed by the laws of the
State of Minnesota." Id. Minnesota law prohibits the
arbitral award of punitive damages. Punitive damages
were, therefore, outside the scope of the arbitration
agreement.
A. Minnesota Law Prohibits Punitive
Arbitral Awards.
Many states, including Minnesota, do not permit
private arbitrators to inflict the punishment of punitive
damages, even by agreement. These states reserve to the
government, through the courts, the power to punish.
The public policy prohibiting anyone other than the state
from awarding punitive damages is explained in the
leading case of Garrity v. Lyle Stuart, Inc., 40 N.Y.2d
354, 353 N.E.2d 793 (N.Y. Ct. App. 1976). In Garrity, the
court vacated a punitive arbitration award on the
grounds that only the state, and not arbitrators, can
award punitive damages. 353 N.E.2d at 795. The court
ruled that "[pJunitive sanctions are reserved to the
State," 353 N.E.2d at 796, and this power cannot be
delegated to arbitrators, even by agreement:
The law does not and should not permit
private persons to submit themselves to punitive
sanctions of the order reserved to the State. The
freedom of contract does not embrace the
freedom to punish, even by contract.
353 N.E.2d at 797.
18
The district court here concluded that Minnesota
law prohibited the arbitral award of punitive damages.
(App. 4.)* Minnesota statutes permit the award of
punitive damages only in court proceedings where this
punishment can be monitored and controlled. In
Minnesota punitive damages are available only in "civil
actions." Minn. Stat. § 549.20 subd. 1 (1990). Civil
“actions” in Minnesota are judicial proceedings before a
court of law, and do not include arbitration. In a similar
case, the Minnesota Supreme Court ruled that a statute
allowing prejudgment interest in an "action" could not be
used to support a prejudgment interest award in an
arbitration proceeding. Lucas v. rican '
Ins. Co., 403 N.W.2d 646, 649-51 (Minn. 1987). In Lucas,
the Court ruled that the word "action" in the
prejudgment interest statute does not include arbitration
proceedings. 403 N.W.2d at 650. An arbitration
proceeding is not a "civil action" in which punitive
damages may be awarded.
Minnesota law also provides that punitive
damages may not be sought in a complaint until a "court"
determines that a plaintiff has made a prima facie case of
entitlement to punitive damages by showing a factual
basis for the claim. Minn. Stat. § 549.191 (1990). In
addition, Minn. Stat. § 549.20 subd. 5 (1990), specifically
refers to "the court" and "judicial review," and requires
the trial "court" to review punitive damage awards and
make specific findings with respect to them.® Subdivision
. In addition to New York and Minnesota, courts in New
Mexico and Indiana have also expressly ruled that arbitrators may
not award punitive damages. See Shaw v. Kuhnel & Associates, Inc.,
698 P.2d 880, 882 (N.M. 1985); United States Fidelity & Guar. v.
DeFluiter, 456 N.E.2d 429, 432 (Ind. App. 1983). Colorado prohibits
punitive arbitral awards by statute. Colo. Stat. Ann. § 13-21-102(5).
Although this subdivision applies only to causes of action
arising on or after May 4, 1990, it confirms the legislative
determination that punitive damages bel available only in "court"
proceedings, and not in arbitrations.
19
5 also requires the "appellate court" to review the award
in light of the statutory standards for punitive damage
awards. Minnesota restricts punitive awards to court
proceedings because, "Punitive damages are imposed for
the public purposes of punishment and deterrence."
Kociemba v. G.D. Searle & Co., 707 F.Supp. 1517, 1539
n.22 (D. Minn. 1989) (emphasis in original).
B. The Eighth Circuit's Ruling Conflicts
with the Decisions of the Second
Circuit and Other Courts.
Where an arbitration agreement provides it is to
be governed by the law of a particular state, that state
law governs and punitive arbitral awards prohibited by
state law will not be enforced. This is the rule adopted by
the Second Circuit. Barbier v. Shearson Lehman Hutton,
Inc., 948 F.2d 117, 122 (2d Cir. 1991). In Barbier, the
Court vacated a punitive damage arbitration award
where the arbitration agreement contained a New York
choice-of-law provision. Barbier held that by selecting
New York law, which prohibits the arbitral award of
punitive damages, the parties intended to be bound by
the state law limitation on punitive awards. 948. F.2d at
122. The Second Circuit could conceive of "no clearer
example of a case" where arbitrators exceeded their
powers under 9 U.S.C. $10(a)(4), stating:
"[T]here is no clearer example of a case falling
neatly within that provision than the case at bar.
Since the arbitrators were not entitled to award
punitive damages due to the choice-of-law
provision in the parties’ Agreement, it is
manifest that the Panel exceeded its authority in
awarding punitive damages. That portion of the
award should have been vacated by the district
court pursuant to 9 U.S.C. § 10(a)(4)."
20
948 F.2d at 122. The Eighth Circuit's decision here
directly conflicts with Barbier. The Eighth Circuit
refused to vacate the punitive arbitral award, and
refused to enforce the choice-of-law provision which
limited the arbitrators' powers.
Indeed, prior to the ruling in this case, the
Seventh and Eighth Circuits, as well as several federal
district courts, had also ruled that state law prohibiting
punitive arbitral awards applied by virtue of choice-of-law
clauses in arbitration agreements. See Surman v. Merrill
Pierc enners & Smith, 733 F.2d 59, 63 (8th
Cir. 1984) ("Appellees argue that if their fraud claims are
referred to arbitration, they will not be able to recover
punitive arbitral damages. This, however, is what the
parties contracted for."); Pierson _v. Dean, Witter,
Reynolds, Inc., 742 F.2d 334, 336 n.2, 337-339 (7th Cir.
1984) (By agreeing to AAA arbitration under New York
law, plaintiffs waived right to obtain punitive damages
which are not available in arbitration under New York
law); Waltman v. Fahnestock & Co., Inc., 792 F.Supp. 31,
32 (E.D. PA 1992) ("Essentially, Judge Leisure and the
Second Circuit held that New York law governed the
arbitration and that New York law prohibited arbitrators
from awarding punitive damages."); Shahmirzadi_v.
Smith Barney, Harris Upham & Co.; 636 F.Supp. 49, 56
(D. D.C. 1985) ("When the plaintiffs executed the
Customer's Agreement, they contractually waived their
right to punitive damages by agreeing to be governed by
arbitration and New York law"); Baselski_v. Paine,
Webber, Jackson & Curtis, Inc., 514 F.Supp. 535, 543
(N.D. Ill. 1981) ("The parties have agreed in their
‘Customer's Agreement’ that their contractual
relationship will be governed by the law of the State of
New York. Thus, the plaintiffs have contractually
‘waived’ their right to punitive damages").
The majority panel ruled that, regardless of
Minnesota law, federal law gave effect to AAA rules it
21
Se
believed permitted arbitrators to award punitive
damages. The panel ruled that "This case is governed by
federal law. .. . [and] the FAA gives force to the rules of
the AAA." (App. 9-10.) This ruling was wrong. Federal
law gives effect to the parties’ choice of Minnesota law.
And, the AAA rules themselves required the arbitrators
to abide by Minnesota law prohibiting arbitrators from
awarding punitive damages. AAA Rule 43 allows
arbitrators to "grant any remedy or relief the arbitrator
deems just and equitable," as long as the relief is "within
the scope of the agreement of the parties." (App. 11).
The parties' agreement here excluded certain claims from
arbitration--i.e. controversies where arbitration was
"prohibited by [Minnesota] law." Arbitration of punitive
claims is prohibited by Minnesota law. This agreement
should have been enforced. "Arbitration under the Act is
a matter of consent, not coercion, and parties are
generally free to structure their arbitration agreements
as they see fit." Volt Information Sciences v. Board of
Trustees, 489 U.S. 468, 479 (1989).
In Volt, this Court held the FAA required
enforcement of the parties’ choice of California law, even
though that law resulted in a stay of arbitration pending
resolution of related litigation. The Eighth Circuit's
refusal to enforce the choice-of-law provision here directly
conflicts with Volt's ruling that, "[t]he FAA does not...
prevent parties who do agree to arbitrate from excluding
certain claims from the scope of their arbitration
agreement.” Id. at 478.
The Eighth Circuit's wholesale preemption of state
law, in derogation of the arbitration agreement, was not
justified. "[T]he FAA contains no express preemptive
provision, nor does it reflect a congressional intent to
occupy the entire field of arbitration." Volt, 489 U.S. at
477. State law applies in arbitration matters, subject to
preemption only "to the extent that it actually conflicts
with federal law." Volt, 489 U.S. at 477. There is no
22
actual conflict between the FAA and the state law rule
reserving to the state the power to punish by punitive
damages. The state's decision to reserve to itself the
power to punish can peacefully co-exist with federal law
favoring arbitration.®
Congress did not intend that the FAA invalidate
Minnesota state law reserving to the state the power to
punish by punitive damages. The federal policy favoring
arbitration is strong. But, "That is not to say that all
controversies implicating statutory rights are suitable for
arbitration." Mitsubishi Motors Corp. v. Soler
Chrysler-Plymouth, 473 U.S. 614, 627 (1985). Statutory
claims resting on the state's power to punish, such as the
punitive claim here, are not suitable for arbitration. This
is especially true because the power to punish is an
important aspect of a state's sovereignty. "The right to
formulate and enforce penal sanctions is an important
aspect of the sovereignty retained by the States" Kelly v.
Robinson, 479 U.S. 36, 47 (1986). Congress did not
intend to force the states to relinquish to private
arbitrators the sovereign power to punish.
There is a split in the circuits, and some courts
would rule as the Eighth Circuit did. See Todd Shipyards
Corp. v. Cunard Line, Ltd., 943 F.2d 1056 (9th Cir.
1991); Raytheon Co. v. to d Business Syst
s
Inc., 882 F.2d 6, 7 (1st Cir. 1989); Bonar v. Dean Witter
Reynolds, Inc., 835 F.2d 1378, 1386 (1lth:Cir. 1988).
6
The state's decision to limit punitive awards to court
proceedings is not a law directed against arbitration in particular.
Any agreement by a person to submit to punishment by a private
person or group would be invalid in Minnesota. For example, under
general Minnesota contract law, and the UCC adopted in most
states, parties may not legally agree to liquidated damages clauses
that act to penalize the breaching party. Minn. Stat. § 336.2-718(1)
(1990) (".. . A [contract] term fixing unreasonably large liquidated
damages is void as a penalty."). Punishment by private persons is
not permitted in Minnesota, whether it flows from an arbitration
award or some other contractual arrangement.
23
The decisions relied upon by the Eighth Circuit here,
such as Raytheon, supra, have been soundly criticized for
overextending arbitral authority. Note, Overextension of
Arbitral Authority: Punitive Da e e
Arbitrability, 65 Wash. L. Rev. 678 (1990). All these
decisions proceed on the mistaken notion that
arbitrability is exclusively a matter of federal law. None
of the cases consider the direction in Perry v. Thomas,
482 U.S. 483, 492-93 n.9 (1987), that the courts must
apply general state contract law in_ interpreting
arbitration agreements.
C.
THE EIGHTH CIRCUIT'S RULING
VIOLATES DUE PROCESS BY
ALLOWING ARBITRATORS TO
IMPOSE PUNITIVE DAMAGES IN
INFORMAL PROCEEDINGS WHILE
PROVIDING NO MEANINGFUL
JUDICIAL REVIEW.
The court's enforcement of the punishment of
punitive damages against Chica violates due process.
U.S. Const. amend. V. Punitive damages are not to be
"reached in proceedings lacking the basic elements of
fundamental fairness." Pacific Mut. Life Ins. Co. v.
Haslip, 111 S.Ct. 1032, 1038 (1991), quoting
rowing-Ferris Industries of Vermont, Inc. v. Kelco
Disposal, Inc., 492 U.S. 257, 276 (1989). "In the
arbitration setting we have almost none of the
protections that fundamental fairness and due process
require for the imposition of this form of punishment."
(App. 12, Beam dissenting.) Indeed, the very nature of
the arbitral process exposes participants to the potential
loss of valuable constitutional rights. "At present,
arbitration operates in a culture where, as a matter of
doctrine, no definite legal norms safeguard constitutional
24
rights." Brunet, Arbitration And Constitutional Rights,
71 N.C.L. Rev. 81, 117 (1992).
Chica had none of the due process protections this
Court found adequate in Haslip, 111 S.Ct. at 1043-46. In
Haslip, this Court upheld a due process challenge to an
Alabama jury's award of punitive damages. This Court
emphasized that the three layers of safeguards provided
by Alabama's scheme for imposing punitive damages
were essential to its decision upholding the punitive
award. Under Alabama's system, these safeguards were
provided through 1) jury instructions to guide the jury's
discretion, 2) post-trial review conducted by the trial
court, applying specific criteria, and 3) appellate review,
also applying specific criteria. Id. at 1044-46.’ The
procedures approved in Haslip "ensure[d] meaningful and
adequate review by the trial court whenever a jury has
fixed the punitive damages," 111 S.Ct. at 1044, and
appellate application of "detailed substantive standards"
for punitive damages "provide[d] an additional check on
the jury's or trial court's discretion." Id. at 1045.
None of the three layers of protection available in
Haslip, and guaranteed by Minnesota statutes in judicial
proceedings, were provided to Chica here. There were no
instructions on the law to guide to the arbitrators.
Instead, in Minnesota "arbitrators may do what no other
person acting in the capacity of one who judges can or has
a right to do, namely they may intentionally decide
5
These protections, and more, are provided in court
proceedings where punitive damages are imposed in Minnesota. In
judicial proceedings, a punitive claim cannot be asserted in a
pleading until a prima facie showing of entitlement to them has been
made to, and determined sufficient by, a court. Minn. Stat. § 549.191
(1990). The trial court must review any punitive award in light of
statutorily defined standards, and must make specific findings with
respect to them. Minn. Stat. § 549.20 subd. 5 (1990). Appellate
courts are likewise required to evaluate the award in light of
statutory factors. Id.
25
contrary to the law and still have their judgment stand."
Zelle v. Chicago & Northwestern Ry Co., 242 Minn. 439,
447, 65 N.W.2d 583, 589 (Minn. 1954). Enforcement of a
punitive arbitration award against a person who never
agreed to give the arbitrators jurisdiction itself violates
due process.
No meaningful judicial review was provided here.
Instead, the Eighth Circuit ruled the award "is subject
only to very limited scrutiny," and could not be set aside
"unless it is completely irrational or evidences a 'manifest
disregard for law." (App. 5, 10.) As the dissent noted,
"This standard of review, of course, almost completely
ignores the review required by Haslip." (Beam
dissenting, App. 13). The narrow, if not almost
non-existent, review provided by the Eighth Circuit is
incompatible with the due process required review
approved in Haslip.
The constitutionally required meaningful judicial
review of the punitive arbitration award was virtually
impossible. The AAA maintained no record of the
testimony presented at the arbitration proceeding. "An
arbitral award can be made without explication of the
reasons and without development of a record, so that the
arbitrator's conception of our statutory requirement may
be absolutely incorrect yet functionally unreviewable,
even when the arbitrator seeks to apply our law." Scherk
v. Alterto-Culver Co., 417 U.S. 506, 532 (1974)(Douglas,
J., dissenting).
In upholding the constitutionality of punitive
damage awards by juries, this Court also relied upon the
long history of the practice of allowing juries to assess
such punishment. Haslip, 111 S.Ct. at 1042-43, and at
1051-54 (Scalia, J. concurring). In contrast to jury
awarded punitive damages, no great historical tradition
supports the arbitral award of punitive damages.
Chica never "had the benefit of the full panoply of
[Minnesota's] procedural protection." Haslip, 111 S.Ct. at
26
1046. The judicial enforcement of the punitive
arbitration award violates Chica's due process rights.
27
ae
CONCLUSION
This petition for a writ of certiorari should be granted.
Respectfully submitted,
Of Counsel: - Gregory L. Wilmes*
Scott E. Richter Briol & Wilmes
Popham, Haik, Schnobrich 5080 Norwest Center
3300 Piper Jaffray Tower 90 South Seventh Street
222 South Ninth Street Minneapolis, MN55402
Minneapolis, MN 55402 (612) 337-8410
(612) 333-48009
Attorneys for Petitioner
*Counsel of Record
Dated: May 28, 1993
8556
28
cinerea eaten
APPENDIX
Appendix A - Opinion of the United States Court of
Appeals for the Eighth Circuit, January 12, 1993... . A-1
Appendix B - Order of the United States Court of Appeals
for the Eighth Circuit, February 4, 1993, Granting the
Securities Industry Association, Inc.'s Motion for Leave to
File Petition for Rehearing En Banc as Amicus
er rs A-14
Appendix C - Order of the United States Court of Appeals
for the Eighth Circuit, March 4, 1993, Denying Petition
for Rehearing and Rehearing En Banc.......... .A-15
Appendix D - Oral Ruling of the United States District
t Court for the District of Minnesota,
ec cs eee es ane se eee eae A-18
Appendix E - Order of the United States District Court
for the District of Minnesota, August 22,1991... .. A-19
Appendix F - Award of Arbitrators, March 20,
MN Sra ksa BG Ka WW A ok Te ae A-21
Appendix G - Minnesota Punitive Damage Statutes -
Minn. Stat. $§ 549.191 (1990) and 549.20 (1990). . . .A-24
ae
APPENDIX A
United States Court of Appeals
FOR THE EIGHTH CIRCUIT
Nos. 91-3043/3146
\
t
In the Matter of Arbitration 3
Between: °
Judy Lee, .
Appellant / Cross-appellee, * Appeals from the
* United States District
v. * Court for the
* District of Minnesota
James John Chica; Engler-Budd °
& Co., Inc., ,
Appellees / Cross-appellants, ”
Submitted: May 15, 1992
Filed: January 12, 1993
Before McMILLIAN, JOHN R. GIBSON and BEAM,
Circuit Judges.
Al
McMILLIAN, Circuit Judge.
Judy Lee appeals from a final order entered in
theDistrict Court’ for the District of Minnesota to the
extent that it vacates the punitive damages awarded by
an arbitration panel. Lee v. Chica, No. 3-91-304 (D.
Minn. Aug. 22,1991) (order). For reversal, Lee argues the
district court erred in refusing to confirm the arbitration
panel's award of punitive damages because (1) federal
law governs the arbitrability of the dispute and (2) the
arbitration clause in the Customer Agreement
incorporated the rules of the American Arbitration
Association (AAA) which allow arbitration panels to
award punitive damages.
James John Chica cross-appeals from the district
court's final order to the extent that it confirms the
arbitration panel's award of compensatory damages and
attorney's fees to Lee. For reversal, Chica argues the
district court erred in holding that Lee's claims against
him individually were subject to arbitration because he
did not sign, and therefore was not a party to the
customer agreement. Chica agrees that the district court
was correct in denying Lee punitive damages.
For the reasons discussed below, we affirm that
part of the district court's order confirming compensatory
damages and attorney's fees and reverse that part of the
district court's order denying Lee punitive damages.
‘ Facts
In 1987 Lee opened a securities account with the
now defunct Engler-Budd & Company, Inc.
(Engler-Budd), a broker-dealer and member of the
National Association of Securities Dealers (NASD).
Chica, a NASD registered securities representative, was
Lee's original and sole account representative for the
entire time Lee had an acccunt at Engler-Budd.
‘The Honorable Robert G. Renner, United States District Judge for the District
of Minnesota.
A2
Lee signed a Customer Agreement at the request
of Chica when she opened the account. Paragraph 15 of
the Customer Agreement contained the following
arbitration clause:
This agreement and its enforcement shall
be governed by the laws of the State of
Minnesota. If any controversy arises out of this
agreement, it shall be determined by
arbitration, except where prohibited by law.
Such arbitration shall be in accordance with the
rules, then obtaining, of the American
Arbitration Association. I authorize you, if I do
not make such election . . ., to make such
election in my behalf. Any arbitration
hereunder shall be before at least three
arbitrators and judgment upon the award
rendered by the arbitrators or a majority of
them may be entered in any court, state or
federal, having jurisdiction.
Lee is the only signatory of the Customer Agreement.
A dispute arose concerning the management of the
account. In July of 1990, Lee filed a demand for
arbitration with the AAA against Engler-Budd and
Chica. Lee alleged that Engler-Budd and Chica had
violated the Securities Exchange Act of 1934, § 10(b), 15
U.S.C. § 78j(b); the Securities Exchange Commission
Rule 10b-5, 17 C.F.R. § 240.10b-5; the Securities Act of
1993, 15 U.S.C. § 77a-78; and the Minnesota Securities
Act, Minn. Stat. § 80A; and also alleged state common
law claims of negligence, fraud and breach of fiduciary
duty. Lee claimed that Engler-Budd and Chica opened a
margin account in her name without informing her of the
risks and that Engler-Budd and Chica bought and sold
securities in this account without her authorization and
failed to follow specific sell orders given by her.
A3
Neither Engler-Budd* nor Chica answered the
demand for AAA arbitration. Chica made no appearance
at the arbitration hearings, did not answer the AAA
complaint, nor did he sign the AAA arbitration
submission agreement. In December of 1990, the
arbitration panel held a hearing on the dispute and
awarded Lee $10,600 in compensatory damages, $5,000
in attorney's fees and $31,800 in punitive damages
against both Engler-Budd and Chica.
On June 7, 1991, Lee filed an application and
motion in federal district court to confirm the arbitration
award. Chica filed a cross-motion to vacate or modify the
award. The district court confirmed the arbitration
award of compensatory damages and attorney's fees, but
vacated the award of punitive damages. The district
court accepted the argument by Chica that Minnesota
law prohibited an award of punitive damages by an
arbitration panel. The district court noted that the
arbitration clause in the customer agreement had
incorporated Minnesota state law as the law to govern
the contract. Therefore, the district court reasoned that
the parties had intended to limit the scope of recovery in
the event of a breach of contract to that which would be
allowed by Minnesota law, which, in the view of the
district court did not include punitive damages. This
appeal and cross-appeal followed.
II. Arbitration
The issues in this appeal involve whether federal
or state law applies in interpreting the arbitration clause
in the customer agreement and in determining if
arbitrators can award punitive damages. Lee argues
that the Federal Arbitration Act (FAA), 9 U.S.C. §§ 1-14,
applies in this case because there is federal subject
*Engler-Budd is not a party in this appeal and did not participate in the district
court proceedings concerning this matter. Because Engler-Budd is not
involved in this dispute, it is not necessary to determine Engler-Budd's
liability.
A4
matter jurisdiction and that the FAA specifically applies
in cases involving interstate commerce. Chica contends
that State law applies because courts are to use state law
to interpret the arbitration clause in the contract and to
determine the ability of arbitrators to award punitive
damages. Each party contends that if the district court
applied the law he or she contends is the proper law to
apply, it will result in a decision that is favorable to him
or her.
A. Scope of Review of Arbitrators' Awards
It is well-settled that judicial review of arbitration
awards is narrowly limited and that an arbitration award
will not be set aside unless it is completely irrational or
evidences a "manifest disregard for law." E.g., Barbier v.
Shearson Lehman Hutton, Inc., 948 F.2d 117, 120 (2d
Cir. 1991) (Barbier); Todd Shi ds Corp. v. Cunard
Line, Ltd., 943 F.2d 1056, 1060 (9th Cir. 1991) (Todd
Shipyards); General Tel. Co. v. Communications Workers
of America, 648 F.2d 452, 457 (6th Cir. 1981)
(Communications Workers) ("Reviewing courts should be
extremely reluctant to substitute their interpretation of
the agreement for that of the arbitrator.").
B. Arbitration of Claims Against Chica
The initial question raised is whether the law of
Minnesota, governs the arbitrability of this case. Chica
argues that he should not be a party to this action
because he did not sign the customer agreement and
Minnesota law would not enforce the terms of a contract
between Lee and Engler-Budd against Chica. Kost _v.
Peterson, 292 Minn. 46, 193 N.W.2d 291 (1971). Chica
relies on Perry v. Thomas, 482 U.S. 483 (1987) (Perry), to
argue that the contract is not enforceable against him.
The Supreme Court in Perry stated in a footnote that
when this type of "standing" issue presents itself, courts,
in determining whether to apply state or federal law, are
A5
to apply state law "if that law arose to govern issues
concerning validity, revocability, and enforceability of
contracts generally." Id. at 492 n.9 (emphasis in
original). Furthermore, the Supreme Court stated that
courts are to examine arbitration agreements in the same
light they would examine any other contractual
agreement. Id.
Perry involved a dispute over the amount of
commissions due on the sale of securities between a
former employee and his former employer and two of its
employees. The former employee argued that his dispute
could be heard by the California courts under the
California Labor Code, while the two employees argued
that according to the employment contract the dispute
had to be heard by an arbitration panel. The former
employee argued that the two employees were not parties
to the agreement, and therefore lacked "standing" to force
him to arbitrate the dispute. Id. at 488.
While Chica relies on Perry for support, his
argument is misplaced. In Perry, the specific issue was
whether the parties could be compelled to arbitrate
according to the contract provisions. In contrast, the
present case is an action seeking to confirm an award
already made by an arbitration panel in accordance with
a provision in a contract. It is not an issue of validity, ~
revocability or enforceability of the arbitration agreement
within the contract.
Arbitrability of contracts evidencing interstate
commerce is governed by federal substantive law rather
than state law. Southland Corp. v. Keating, 465 U.S. 1,
15-16 (1984) (Keating); Moses H. Cone Memorial Hosp. v.
Mercury Constr. Corp., 460 U.S. 1, 24-25 (1983) (Cone);
Prima Paint v. Flood & Conklin Mfg. Co., 388 U.S. 395,
402-05 (1967) (Prima Paint); Letizia v. Prudential Bache
Secur., Inc., 802 F.2d 1185, 1187 (9th Cir. 1986) (Letizia);
5Cal. La. Code § 229 (West 1971) (actions for wages can be maintained in
courts without regard to private arbitration agreements).
A6
Bayma v. Smith Barney, Harris Upham & Co., 784 F.2d
1023, 1025 (9th Cir. 1986); see also LS. Joseph Co. v.
Michigan Sugar Co., 803 F.2d 396, 399 n.2 (8th Cir.
1986).‘
Federal courts have found that an arbitration
agreement between a customer and a brokerage firm can
also be binding on the agent who represented or traded in
the customer's account even if the agent had not signed
the customer agreement. Letizia, 802 F.2d at 1188
(nonsignatory employees of brokerage firm are bound by
the customer agreement between brokerage firm and
customer); Scher v. Bear Sterns & Co., 723 F.Supp. 211,
216 (S.D.N.Y. 1989) ("Acts by employees of one of the
parties to a customer agreement are equally arbitrable as
acts of the principals as long as the challenged acts fall
within the scope of the customer agreement."); Brener v.
Becker Paribas, Inc., 628 F.Supp. 442, 451 (S.D.N.Y.
1985) (arbitration clause that called for arbitration of any
disputes arising out of the customers’ accounts was broad
enough to include the agent who actually did the
transactions); see also Nesslage v. York Secur., Inc., 823
F.2d 231, 233 (8th Cir. 1987) (disclosed agents of the
broker could enforce an arbitration agreement between
the broker and the customer).°
‘in LS. Joseph Co. v. Michigan Sugar Co., 803 F.2d 396, 399 n.2 (8th Cir.
1986), the court noted that an arbitration agreement could be drafted broadly
enough so as to give the arbitrator the right to determine arbitrability. The
contract provision in this case is an example of such a broad contract provision.
Paragraph 15 of the Customer Agreement provides that arbitration is to be used
to resolve "any controversy aris[ing] out of th{e] agreement.” It also authorizes
the signing party to elect arbitration even if the principal or in this case even if
the agent refuses to. Contrast this with the arbitration clause that was
considered too narrow to vest arbitrators with the ability to determine
arbitrability in the first instance in Necchi S.P.A. v Necchi Sewing Mach. Sales
Corp., 348 F.2d 693, 695-96 (2d Cir. 1965), cert. denied, 383 U.S. 909 (1966).
“We note that there is dicta in Flink v. Carlson, 856 F.2d 44, 46 (8th Cir.
1988), which supports Chica's argument that, as an agent for a disclosed
principal, he cannot be bound personally by the customer agreement.
However, we think the holdings in that case and the present case are
distinguishable. In Flink v. Carlson, the customer had Signed two customer
A7
In addition, the plain language of the arbitration
clause reveals that Lee's claims against Chica are subject
to arbitration even though Chica did not sign the
customer agreement. The arbitration clause provides
that "any controversy aris[ing] out of [the customer]
agreement" will be settled by arbitration. It is not
disputed that Chica was employed by Engler-Budd, that
Lee knew of the employment relationship between Chica
and Engler-Budd, and that Chica was responsible for the
transactions in Lee's account. All of Lee's allegations
against Chica arise out of his actions as Engler-Budd's
employee in connection with the management of her
account. Thus, we hold that Chica can be compelled to
arbitrate Lee's claims against him as the disclosed agent
of Engler-Budd, arising out of the customer agreement,
even though he did not sign the customer agreement and
we affirm the district court's order confirming the
compensatory damages and attorney's fees.
III. Punitive Damages
Lee argues that the district court erred in vacating
the punitive damages award. Lee argues that the
customer agreement incorporated the rules of the AAA
which allow arbitration panels to award punitive
damages and that federal courts have upheld arbitral
awards of punitive damages. Lee also contends that
Minnesota does not have a clear rule or policy against
agreements, One Opening a margin account, the other a cash account; each
contained an arbitration clause. The broker did not sign either customer
agreement. There was a separate agreement between the brokerage firm and
the individual broker in which the broker agreed to arbitrate any claims against
him by a Customer or the brokerage firm arising out of his employment. The
customer initiated arbitration proceedings against both the brokerage firm and
the broker. The brokerage firm asserted a cross-claim against the broker for
indemnity or contribution. The customer then dismissed his claim against the
broker from the arbitration. The court held that the brokerage firm could not
compel the broker to arbitrate its third-party claim against him in the same
arbitration proceeding involving the customer's claims against the brokerage
firm. Id. at 47.
A8
|
arbitrators' awarding punitive damages and that Chica's
arguments are only speculations and conjectures about
the real state of the law.
Chica argues that the district court correctly held
that the arbitrators "exceeded their powers" under the
FAA 9 U.S.C. § 10(a)(4), by awarding Lee punitive
damages. Chica contends Minnesota law and public
policy prohibit arbitrators from awarding punitive
damages and that, by choosing Minnesota law in the
contract, the arbitration panel and any court reviewing
the arbitrators’ decision must apply Minnesota law as it
pertains to the awarding of punitive damages in
arbitration. We disagree. The issue of which law to
apply to the granting of punitive damages comes from the
arbitration clause in the customer agreement which
provides that enforcement "shall be governed by the laws
of the State of Minnesota" and that "any controversy
aris{ing] out of this agreement, . . . shall be determined
by arbitration . . . in accordance with the rules, then
obtaining, of the American Arbitration Association."
When the choice of law provision in an arbitral
clause incorporates the rules of the AAA, some circuits
have held, and we agree, that AAA arbitrators may grant
any remedy or relief including punitive damages. See
Todd Shipyards, 943 F.2d at 1063, Raytheon Co. v.
Automated Business Systems, Inc., 882 F.2d 6, 11-12 (1st
Cir. 1989) (Raytheon); Bonar v. Dean Witter Reynolds,
Inc., 835 F.2d 1378, 1386-87 (11th Cir. 1988) (Bonar);
Willoughby Roofing & Supply Co. v. Kajima Int'l, Inc.,
598 F.Supp. 353,359 (N.D. Ala. 1984) (Willoughby), affd,
776 F.2d 269 (11th Cir. 1985).7 Furthermore, there is
°AAA Rule 43 specifically allows arbitrators to award "any remedy or relief
that the arbitrator deems just and equitable,” including an award of punitive
damages.
Other courts have held that when an arbitration agreement Clearly sets forth
that a particular state law applies - and that state does not allow arbitrators to
award punitive damages - arbitrators are not free to do so. However, the
arbitration clause in those cases did not incorporate the rules of the AAA as in
A9
nothing on the record that indicates that the arbitrators
did not address the substantive law of Minnesota in
awarding punitive damages.
Even if we accepted as valid Chica's argument
that under state law the parties did not agree to arbitrate
punitive damages because Minnesota law does not allow
an awarding of punitive damages, it would not be
dispositive in this case. This case is governed by federal
law. See Raytheon, 882 F.2d at 11-12; Bonar, 835 F.2d
at 1386-87; Willoughby, 776 F.2d at 264. When the
parties, as here, agree to arbitration under the rules of
AAA and the arbitration issues involve interstate
commerce, the FAA gives force to the rules of the AAA.
See Keating, 465 U.S. at 1; Cone, 460 U.S. at 1; Prima
Paint, 388 U.S. at 395.
The Federal Arbitration Act states that an
arbitrators award is to be confirmed unless the award can
be "vacated, modified, or corrected as prescribed in
sections 10 and 11" of the FAA. 9 U.S.C. §9. Section 10
provides that an arbitrators award can be overturned
where the arbitration award was obtained by corruption,
fraud, undue means, where there was evident partiality
on the part of the arbitrators, where there was
misconduct by the arbitrators®, or where the arbitrators
exceeded their power.® Id. Section 11 provides that an
arbitrators award may be modified where there was an
evident miscalculation of figures, or a material mistake in
describing a person, thing or property referred to in the
award, or where the arbitrators issued an award on a
subject matter not submitted to them,’ or where the
the present case. See New York Stock Exchange Arbitration between
Fahnestock & Co. v. Waltman, 935 F.2d 512, 518 (2d Cir. 1991); Garrity v.
Lyle Stuart, Inc., 40 N.Y.2d 354, 353 N.E.2d 793, 386 N.Y.S.3d 831 (1976).
Misconduct includes a refusal to postpone arbitration hearings when there is
sufficient cause shown to do such, or by refusing to hear evidence that is
pertinent and material to the controversy, or any behavior that would result in
rejudice to one of the parties. 9 U.S.C. § 10(a)(3).
iGhice argues that the arbitrators exceeded their power, see arguments supra.
Chica argues that the arbitrator's award should be modified, because he
Al0
modification is to correct an imperfection in the matter or
form which does not affect the merits of the controversy.
Id. We see none of the abuses mentioned in sections 10
or 11 of the FAA to be evident in this case. ''
The award of an arbitration panel is subject only
to very limited scrutiny. Communications Workers, 648
F.2d at 457; Minut _¥, Ci od
Processing, etc., 331 F.2d 280, 281 (5th Cir. 1964); accord
= inists v. W. nc.,
292 F.2d 112, 119 (5th Cir.), cert. denied, 368 U.S. 926
(1961). Thus, we reverse that part of the district court
order vacating the punitive damage award.
Accordingly, the judgment of the district court is
affirmed in part and reversed in part and the case is
remanded to the district court for further proceedings
consistent with this opinion.
BEAM, concurring in part and dissenting in part.
I join the court in Parts I and II of its opinion. |
disagree with the holding that the arbitration panel may
award punitive damages. Accordingly, I dissent as to
Part III.
Lee contends that AAA Rule 43, incorporated into
the arbitration agreement by reference, allows the
arbitrators to impose punitive damages. The majority
agrees and states in footnote six that Rule 43 specifically
allows punitive damages. I find no such authority in the
words of Rule 43 and certainly no specific reference to
punitive damages. The rule in its entirety says:
The arbitrator may grant any remedy
or relief that the arbitrator deems just and
equitable and within the scope of the agreement
Claims that the subject of punitive damages should not have been submitted to
them. See arguments supra.
Minnesota has adopted the Uniform Arbitration Act (UAA). MSA. 8§
572.08 - 572.30 (1951). The UAA contains language similar to FAA Sections
10 and 11. Thus, our conclusions would be the same if we were to apply the
UAA here - which we do not
All
of the parties, including, but not limited to,
specific performance of a_ contract. The
arbitrator shall, in the award, assess arbitration
fees, expenses, and compensation as provided in
Sections 48, 49, and 50 in favor of any party and,
in the event that any administrative fees or
expenses are due the AAA, in favor of AAA.
Thus, the arbitrator may award “any remedy"
deemed "just and equitable." The arbitrator shall grant
"compensation" as provided in section 48, 49 and 50.
Rule 43 and sections 48, 49 and 50 say nothing about
imposing punishment on a party to an arbitration
agreement. Even if punishment could somehow be
wedged into the "just and equitable" language, this
should not be done in an arbitration setting.
Punitive damages are imposed not to compensate
a plaintiff, but to be "exemplary, punitive, or vindictive
damages [imposed] upon a defendant." Pacific Mut. Life
Ins. Co. v. Haslip, 111 S.Ct. 1032, 1042 (1991) (citing
Day v. Woodworth, 13 How. 363, 371 (1852)). They are
not to be "reached in proceedings lacking the basic
elements of fundamental fairness." Id. at 1038. These
elements are discussed at length in Haslip.
As stated, AAA Rule 43 clearly speaks in terms of
"remedy or relief" and "compensation" for the arbitration
claimant and says nothing about punishing the.
arbitration defendant. Arbitration is a creature of
contract and is carried out under agreed upon rules.
Therefore, it is not for the arbitration panel, or for this
court, to extend and expand the scope of the proceedings
beyond the terms actually agreed upon.
Finally, Haslip is about due process and the
protections that must be employed for punitive damages
to be permissible in any event. In the arbitration setting
we have almost none of the protections that fundamental
fairness and due process require for the imposition of this
Al2
a
form of punishment. Discovery is abbreviated if available
at all. The rules of evidence are employed, if at all, in a
very relaxed manner. The factfinders (here the panel)
operate with almost none of the controls and safeguards
assumed in Haslip. The proceeding at issue in Haslip
was conducted in the Alabama state court system with
full appellate review. Here, as noted by the opinion of the
court, the scope of review of the arbitrator's award is
narrowly limited if not almost nonexistent. "[AJn
arbitration award will not be set aside unless it is
completely irrational or evidences a ‘manifest disregard
for law.'" Majority Opinion at 4-5 (citations omitted).
This standard of review, of course, almost
completely ignores the review required by Haslip. Why
should less be required in an arbitration proceeding if,
indeed, punitive damages are within the scope of AAA
Rule 43? The simple answer is that the rule doe not
contemplate an award of punitive damages. The district
court was correct and should be affirmed.
Accordingly, I concur as to Parts I and II of the
court's opinion and dissent as to Part III.
A true copy.
Attest:
CLERK, U.S. COURT OF APPEALS, EIGHTH CIRCUIT
Al3
APPENDIX B
United States Court of Appeals
FOR THE EIGHTH CIRCUIT
No. 91-3043MNST
91-3146MNST
Judy Lee, :
*
Appellant, °
* Appeal from the
* United States
vs. * District Court for the
* District of Minnesota
James John Chica; et al., °
7
Appellees. °
The motion of the Securities Industry Association,
Inc. for leave to file a petition for rehearing en banc as
amicus curiae has been considered by the court and is
granted.
February 4, 1993
Order Entered at the Direction of the Court:
s/ Micha ._ Gans
Clerk, U.S. Court of Appeals, Eighth Circuit
Al4
APPENDIX C
United States Court of Appeals
FOR THE EIGHTH CIRCUIT
No. 91-30483MNST
91-3146MNST
Judy Lee, .
*
Appellant, .
* Order Denying
* Petition for
VS. * Rehearing and
* Suggestion for
* Rehearing En Banc
James John Chica; et al., °
¥
Appellees. .
The suggestion for rehearing en banc is denied.
Judge Bowman, Judge Magill, Judge Beam, Judge
Loken, and Judge Hansen would grant the suggestion for
rehearing en banc.
The petition for rehearing is also denied.
March 4, 1993
Order Entered at the Direction of the Court:
/s/ Michael E. Gans
Clerk, U.S. Court of Appeals, Eighth Circuit
Ald
APPENDIX D
UNITED STATES DISTRICT COURT
DISTRICT OF MINNESOTA
THIRD DIVISION
coterenenene -- x
Judy Lee,
Plaintiff, | 3-91 Civ 304
v. )
: St. Paul, Minnesota
James Chica and Engler-Budd : August 16, 1991
& Company, Inc.,
Defendants.
TRANSCRIPT OF PROCEEDINGS
[Preceding argument of counsel omitted. ]
THE COURT:I think not. I think I am ready to
rule.
By the way, both of you have made eloquent and
helpful arguments, leaving me as confused as before. But
nevertheless, I feel now I have received the best advice I
could have to prepare me. We have, as I view it, a
Al6
number of issues, but the essential issue for purposes of
this hearing is whether or not state law does govern, and
the question of who's to be a party of an arbitration
contract, whether federal law is reaching into that area
as a part of its common law, or whether the rules of
construction of a contract should continue to be within
the state province as they apply to arbitration contracts,
that and the issue of whether punitive damages are to be
awarded.
It does seem to me, Mr. Heikes, that you may well
be right as to the distinguishability of the Second Circuit
case. But it does seem to me that it makes sense that
federal law passed the law which applied to arbitration
and arbitration agreements which made it nationwide as
opposed to what had been previously up to the individual
states. It seems to me that if they wanted to preempt the
area to that regard, they certainly would want to
determine who should or shouldn't be covered by the
same.
As to the punitive damages, I am pressed with the
problems involved with the whole question of punitive
damages, not only as to arbitration awards but, as both
of you know, as to the effect on jury awards to the
affected parties, as far as that's concerned, as to attempts
by legislatures and the Congress to some way get control
of them, if that's the word. I think it's probably agreed
that punitive damage by themselves serve a good
purpose. The question is how do you contain them when
they don't. But we don't have that here. I guess I am
wavering.
But it does seem to me that there is a dominant
theme appearing any time related to punitive damages,
and that is that punitive damages must be controlled. I
am not arguing my personal belief. I don't intend to.
What I'm trying to say is what case law I view in the
area. It does seem to be alert to the needs to utilize the
same for the purpose for which it was intended. And one
Al7
of the ways that can be done is to restrict it to the Court
as opposed to disseminating to an agency like a creation
such as an arbitration panel.
I am going to grant the motion to modify the
arbitration award and to eliminate the punitive damages
award, and I'm going to deny the motion to vacate the
award. I'm going to grant the petition for confirmation of ~
the award. In essence, that means the punitive damages
figure of 31,800 will be stricken. The $10,000
compensatory damage will remain, and the $5,000 for
attorneys’ fees will also be allowed to remain. It does
seem to me this certainly is a case that could well go up
and serve to help in the assistance of creating an
expanded body of law that governs these matters of
arbitration awards.
Are there any questions?
Very well, that will be all.
MR. HEIKES: Thank you, Judge.
MR. WILMES: Thank you, Judge.
CERTIFIED: /s/ Robert W. Riley
Als
APPENDIX E
UNITED STATES DISTRICT COURT
DISTRICT OF MINNESOTA
FOURTH DIVISION
In the Matter of Arbitration Court File No.
3-91-304 Between:
Judy Lee,
Claimant,
James John Chica and Engler-Budd
& Company, Inc.,
Respondents.
A hearing was held before the undersigned
District Court Judge on August 16, 1991 on (1) the
motion of respondent James J. Chica to vacate the March
1991 arbitration award or, in the alternative, to vacate or
modify the award to strike the punitive damage award,
and (2) the motion of claimant Judy Lee to confirm the
arbitration award. Graham Heikes, Esq. appeared for
claimant Judy Lee. Gregory L. Wilmes, Esq. appeared
for respondent James J. Chica. Engler-Budd &
Company, Inc. did not appear and has not otherwise
responded to claimant Judy Lee's motion.
Alg
Based upon all the records, files and proceedings,
the briefs and arguments of counsel, and in accord with
the Court's oral ruling of August 16, 1991,
IT IS HEREBY ORDERED that (1) Respondent
James J. Chica's motion to vacate the entire award is
denied;
(2) Respondent James J. Chica's motion to
vacate the punitive damage portion of the award, or to
modify the award to strike the punitive damage award, is
granted, and the arbitrators' award of $31,800 in
punitive damages is hereby vacated;
(3) Claimant Judy Lee's motion to confirm is
granted in part and denied in part. The arbitration
award against James John Chica is confirmed, except
with respect to the punitive damage award. Accordingly,
claimant Judy Lee shall have judgment against
respondent James J. Chica in the amount of $10,600.00
for compensatory damages, $5,000.00 for attorneys’ fees,
and $300.00 for administrative fees, all as awarded by
the arbitrators.
(4) Claimant Judy Lee's motion to confirm is
denied with respect to the punitive damage portion of the
arbitration award directed against James John Chica.
(5) No opposition having been filed by
Engler-Budd & Company, Inc., the entire arbitration
award is confirmed against Engler-Budd & Company,
Inc. Claimant Judy Lee shall have judgment against
respondent Engler-Budd & Company, Inc. in the amount
of $10,600.00 for compensatory damages, $5,000.00 for
attorneys’ fees, $300.00 for administrative fees, and
$31,800 for punitive damages.
Dated: August 22, 1991 /s/ Robert J. Renner
District Court Judge
LET JUDGMENT BE ENTERED
ACCORDINGLY.
A20
APPENDIX F
AMERICAN ARBITRATION ASSOCIATION
SECURITIES ARBITRATION TRIBUNAL
In the Matter of the Arbitration between
JUDY LEE
-AND-
JAMES JOHN CHICA AND ENGLER-BUDD &
COMPANY, INC.
CASE NUMBER: 56 136 00251 90
AWARD OF ARBITRATORS
WE, THE UNDERSIGNED ARBITRATORS, having been
designated in accordance with the arbitration agreement
entered into by the above-named parties and having been
duly sworn and having duly heard the proofs and
allegations of Judy Lee; and James John Chica and
Engler-Budd & Company, Inc. having failed to appear
after due notice by mail in accordance with the Securities
Arbitration Rules of the American Arbitration
Association, hereby FIND that:
1. James John Chica and Engler-Budd &
Company, Inc., hereafter referred to as
RESPONDENTS, opened a margin account for
Judy Lee, hereinafter referred to as CLAIMANT,
without informing her of the inherent risks of
such an account;
A21
2. RESPONDENTS bought and sold
virtually all the securities in the account on a
discretionary basis without receiving from
CLAIMANT authorization for such discretionary
trading;
3. RESPONDENTS, on at least two
occasions, failed and refused to execute sell
orders of securities that had been requested by
CLAIMANT;
4. RESPONDENTS were guilty of fraud
and defalcation of their fiduciary duty to
CLAIMANT, which arose as a result of the
unauthorized discretionary trading.
Therefore, WE AWARD as follows:
RESPONDENTS shall pay to CLAIMANT compensatory
damages in the amount of $10,600, punitive damages in
the amount of $31,800 , and attorneys’ fees in the
amount of $5,000, making a total award due to
CLAIMANT for FORTY-SEVEN THOUSAND FOUR
HUNDRED DOLLARS ($47,400).
The administrative fees and expenses of the American
Arbitration Association totaling $300 shall be borne by
RESPONDENTS. Therefore, RESPONDENTS shall pay
to CLAIMANT the sum of $300 for administrative fees
previously advanced by CLAIMANT to the Association.
This Award is in full settlement of all claims submitted to
this arbitration.
A22
Dated: _ 3-11-93 /s/ Allen D. Barnard
Allen D. Barnard, Arbitrator
Dated: _ 3-16-93 /s/ Joseph William Anthony
Joseph William Anthony, Arbitrator
Dated: _ 3-16-93 /s/ James A. Lundberg
James A. Lundberg, Arbitrator
A23
APPENDIX G
Minn. Stat. 549.191 (1990) provides:
549.191 CLAIM FOR PUNITIVE DAMAGES
Upon commencement of civil action, the
complaint must not seek punitive damages After filing
the suit a party may make a motion to amend the
pleadings to claim punitive damages. The motion must
allege the applicable legal basis under section 549.20 or
other law for awarding punitive damages in the action
and must be accompanied by one or more affidavits
showing the factual basis for the claim. At the hearing
on the motion, if the court finds prima facie evidence in
support of the motion, the court shall grant the moving
party permission to amend the pleadings to claim
punitive damages. For purposes of tolling the statute of
limitations, pleadings amended under this section relate °
back to the time the action was commenced.
Minn. Stat. 549.20 (1990) provides:
549.20 PUNITIVE DAMAGES
Subdivision 1. (a) Punitive damages shall be
allowed in civil actions only upon clear and convincing
evidence that the acts of the defendant show deliberate
disregard for the rights of safety of others.
(b) A defendant has acted with deliberate disregard
for the rights or safety of others if the defendant has
knowledge of facts on intentionally disregards facts that
create a high probability of injury to the rights or safety
of others and:
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(1) deliberately proceeds to act in conscious or
intentional disregard of the high degree of
probability of injury to the rights or safety of
others; or :
(2) deliberately proceeds to act with indifference to
the high probability of injury to the rights or
safety of others.
Subd. 2. Punitive damages can properly be awarded
against a master or principal because of an act done by
an agent only if:
(a) the principal authorized the doing and the manner
of the act, or
(b) the agent was unfit and the principal deliberately
disregarded a high probability that the agent was
unfit, and
(c) the agent was employed in a managerial capacity
with authority to establish policy and make
planning level decisions for the principal and was
acting in the scope of that employment, or
(d) the principal cr a managerial agent of the principal,
described in clause (c), ratified or approved the act
while knowing of its character and probable
consequences.
Subd. 3. Any award of punitive damages shall be
measured by those factors which justly bear upon the
purpose of punitive damages, including the seriousness of
hazard to the public arising from the defendant's
misconduct, the profitability of the misconduct to the
defendant, the duration of the misconduct and any
concealment of it, the degree of the defendant's
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es un
awareness of the hazard and of its excessiveness, the
attitude and conduct of the defendant upon discovery of
the misconduct, the number and level of employees
involved in causing or concealing the misconduct, the
financial condition of the defendant, and the total effect of
other punishment likely to be imposed upon the
defendant as a result of the misconduct, including
compensatory and punitive damage awards to the
plaintiff and other similarly situated persons, and the
severity of any criminal penalty to which the defendant
may be subject.
Subd. 4. Separate proceeding. In a civil action in
which punitive damages are sought, the trier of fact shall,
if requested by any of the parties, first determine
whether compensatory damages are to be awarded.
Evidence of the financial condition of the defendant and
other evidence relevant only to punitive damages is not
admissible in that proceeding. After a determination has
been made, the trier of fact shall, in a separate
proceeding, determine whether and in what amount
punitive damages will be awarded.
Subd. 5. Judicial review. The court shall specifically
review the punitive damages award in light of the factors
set forth in subdivision 3 and shall make specific findings
with respect to them. The appellate court, if any, also
shall review the award in light of the factors set forth in
that subdivision. Nothing in this section may be
construed to restrict either court's authority to limit
punitive damages.
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This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.