MASTROBUONO v. SHEARSON LEHMAN HUTTON, INC.
Legal provision: 9 U.S.C. 1
Argument of William J. Harte
Chief Justice Rehnquist: We'll hear argument next in Number 94-18, Antonio Mastrobuono v. Shearson Lehman Hutton.
Mr. Harte: Mr. Chief Justice, may it please the Court:
The issue presented in this case is a straightforward one identified by paragraph 13 of the client's agreement which was presented to the Mastrobuonos... Antonio Mastrobuono, a teacher of medieval history, and his wife, an artist, and the client's agreement provision provides, in relevant part, this agreement shall be governed by the State of New York.
This is a choice-of-law clause.
It then moves forward into a comprehensive arbitration agreement.
Now, the point I guess which we diverge on, myself and Shearson's counsel, is just essentially what was agreed by the Mastrobuonos.
Parenthetically, to suggest that they agreed to give up any substantive rights knowingly is preposterous, but what they are said to have agreed.
They are said to have agreed to the Garrity rule by the first sentence of paragraph 13.
The Garrity rule, a rule in New York of approximately 20 years, states essentially that arbitrators are not empowered to grant punitive damages, and therefore, essentially, resort must have to be taken to the judicial forum.
You move to the next aspect of the agreement, the comprehensive agreement which relates to arbitration, and it is straightforward.
They agree to arbitrate any controversy arising out of or relating to my accounts, the transactions with you, your officers, directors, agents, or employees, the grants that say they shall be settled by arbitration in accordance with the rules in effect of the National Association of Securities Dealers.
Now, the point that we have sought to stress in our papers is that either the FAA is going to be employed or it isn't, so if the assertion is that the only judicial forum... the only forum in New York available for punitive damages to the Mastrobuonos is a judicial forum, because of the comprehensive nature of the arbitration, and the statements of this Court time and again that if punitive damages are to be obtained only in the judicial forum, then there is a preemption because Federal law applies--
Unknown Speaker: Mr. Harte, does the ultimate resolution of this case depend upon what it is the parties contracted to do with regard to this matter?
Mr. Harte: --It can be, yes, but--
Unknown Speaker: And in that regard, help me out a little bit.
It isn't clear to me that the arbitrator ever interpreted the parties' agreement.
There was language that indicated that as a matter of equity, or justice, or something, the arbitrator thought that punitives should be awarded, but it was not expressly stated that the arbitrator was interpreting the parties' agreement as permitting the award of punitive damages.
Mr. Harte: --Well, there was a reference made in the arbitrator's award that reliance was placed upon some papers filed by the Mastrobuonos.
We assert in our supplemental brief that, indeed, within those papers was a statement that, look, there is preemption, and I frankly don't know and can't help you, because all I have is what the arbitrator said, but it would seem to me that they had to interpret it in order to get to a resolution.
They had in front of them--
Unknown Speaker: Well, I wasn't asking you about preemption.
I was asking about what the parties--
Mr. Harte: --Agreed--
Unknown Speaker: --provided in their agreement as a matter of contract interpretation.
Mr. Harte: --They would--
Unknown Speaker: Did they or did they not contemplate the award of punitive damages as a possibility?
Mr. Harte: --It would be my view that necessarily they would have had to do that, and did, because the issues were all presented to them.
If we are to look into that determination, necessarily you would have to assume that they had interpreted what the parties had agreed to and what they had not agreed to.
Unknown Speaker: But they also said they agreed to be bound by the laws of the State of New York.
Mr. Harte: Yes, Mr. Chief Justice.
Unknown Speaker: And the laws of the State of New York do not allow arbitrators to award punitive damages.
Mr. Harte: --But what... the Garrity rule states that you do have punitive damages.
You have them in a judicial forum.
Unknown Speaker: Well, but--
Mr. Harte: However, you cannot get them--
Unknown Speaker: --just a minute.
Mr. Harte: --from an arbitrator.
Unknown Speaker: Are you questioning my statement that the law of the State of New York says that arbitrators cannot award punitive damages?
Mr. Harte: No.
Unknown Speaker: Well, then, what difference does it make to rephrase it to say you can get punitive damages in a nonarbitrable forum, i.e., a judicial forum?
Mr. Harte: Because--
Unknown Speaker: They've agreed to be bound by the laws of the State of New York.
The laws of the State of New York says arbitrators can't give punitive damages.
Mr. Harte: --Yes.
However, you move to the next sentence.
The next sentence in the comprehensive arbitration agreement is that the parties are going to arbitrate any controversy.
Now, at that point, one of the controversies would be that the Mastrobuonos were entitled to punitive damages in a judicial forum.
Now, if you--
Unknown Speaker: Well, now, did the contract also provide that the NASD rules apply--
Mr. Harte: --Yes.
Unknown Speaker: --to any arbitration?
Mr. Harte: Yes.
Unknown Speaker: Now, under the NASD rules, is it clear that punitives can be awarded, or not?
Mr. Harte: Yes.
Unknown Speaker: So there may be a conflict in the terms of the contract.
Mr. Harte: Yes.
One of our points is that the ambiguity--
Unknown Speaker: So it may become important to know what the parties intended.
Mr. Harte: --Yes.
Unknown Speaker: Is it correct, Mr. Harte, that the NASD rules do not require punitives to be awarded, nor do they preclude it?
The NASD rules are simply agnostic on the question, is that correct?
Mr. Harte: That's correct.
Unknown Speaker: So what we have is a juxtaposition of NASD rules which do not answer the question, they leave the question open, and a New York common law rule which does answer the question to the effect that an arbitrator may not, in fact, award punitive damages.
Is there any conflict there that needs to be resolved?
Mr. Harte: --I would respectfully submit, Justice Souter, that if the NASD rules are interpreted themselves, they're interpreted by the manual and the manual addresses the arbitrators that they are permitted to grant punitive damages.
Unknown Speaker: But not required.
In other words, it's left open.
Mr. Harte: Well, I assume that they are required if they're going to arbitrate any controversy, and one of the controversies was punitive damages.
Unknown Speaker: So you're--
Mr. Harte: If it's given to them, they must--
Unknown Speaker: --So you're saying on the point in question the NASD rules really are not agnostic.
They say you can award them, New York law says you can't.
Clear conflict, that's your position.
Mr. Harte: --Well, my position is that... no.
My position is that when you put in a comprehensive arbitration agreement to arbitrate any controversy, then the NASD rules are required to move forward with that issue, and the arbitrators must address it because obviously it is a controversy then that would be left not resolved.
Unknown Speaker: Let me ask you a different kind of question.
Under the FAA, there may be a judicial appeal on the question of whether an arbitrator has exceeded his authority as an arbitrator.
Mr. Harte: Yes.
Unknown Speaker: Isn't the question here, whether an arbitrator may or may not award punitive damages, an issue properly considered as one of the arbitrator's authority?
Mr. Harte: Under the FAA?
Unknown Speaker: Yes.
Mr. Harte: Under the FAA, it is my view that the arbitrators can, should, and must award punitive damages--
Unknown Speaker: No, but that's--
Mr. Harte: --if it is a controversy.
Unknown Speaker: --Excuse me.
No, that's not my question.
The question is, is the issue of whether they may award punitive damages an issue of their authority, which is subject to judicial appeal?
Mr. Harte: I do not believe that is an issue.
I believe that is resolved, has been resolved continuously in--
Unknown Speaker: Why isn't it an issue of the arbitrator's authority?
One side says, you may award punitive damages under our contract.
The other side says, you may not.
Isn't that an issue of the arbitrator's authority?
All I want to know is whether that is subject to a judicial appeal, and it seems to me that it is an issue of the arbitrator's authority.
Mr. Harte: --Respectfully, I believe the issue is resolved with the arbitrator's determination, and--
Unknown Speaker: So that there can never be an appeal to the courts on that issue, under the FAA.
Mr. Harte: --As to the authority?
I believe that the FAA, as it has been construed by this Court, states essentially that where the parties agree to arbitrate any controversy, which is the issue here... any controversy... and it is given to the arbitrators, then they have the authority--
Unknown Speaker: Well, that... I think what you're telling me is the answer to the question if there is an appeal on that subject.
I simply want to know, at this stage of the game, is the question of the arbitrator's authority to award punitive damages an issue which is properly subject to a--
Mr. Harte: --The power--
Unknown Speaker: --judicial appeal under the FAA?
Mr. Harte: --The power of the arbitrators, I would say yes, we have stated that that is an issue.
The United States says that it is not an issue.
It is not an issue to be resolved by the courts.
Once the arbitrators have determined the scope of the agreement and their authority, it is not subject to appeal to the court system.
Unknown Speaker: May I ask you this question, then?
It's along the same line of the questions the chief justice was asking about, the status of the laws of New York.
Suppose you have two people in New York... it's a hypothetical case, two people in New York.
They sign an agreement where they say, we simply agree to arbitrate.
Mr. Harte: Yes.
Unknown Speaker: It happens that their transaction occurs in New York, and the arbitrator applies New York law.
Do you take the position that in that case the FAA displaces the Garrity rule?
Mr. Harte: Yes.
That would be--
Unknown Speaker: All right, so your position, then, is that the FAA preempts the Garrity rule.
Mr. Harte: --Yes.
It is stated in our papers, assuming there is no choice of law agreement, assuming the most significant context rule is applied in conflict, assuming that the choice of law is necessarily under the New York law... New York law, and the Garrity rule applies to New York law... it is clear that when, in our view, anyway, where you agree to a comprehensive resolution to resolve any controversy, that the Federal law would preempt the New York law.
Unknown Speaker: And so I take it it's your further position, or am I correct about this, that when the parties incorporate New York law in an agreement where they expressly refer to New York law--
Mr. Harte: Yes.
Unknown Speaker: --they incorporate New York law subject to Federal rules of preemption?
Mr. Harte: Correct, that it is the Federal law which applies to the comprehensive arbitration agreement--
Unknown Speaker: How do you--
Mr. Harte: --and we state that... excuse me.
Unknown Speaker: --How do you reconcile your position with our decision in the Volt case several years ago?
Mr. Harte: Well, the... if I can just continue a response... well, I will respond to Volt.
It is, I guess, to some surprise that we look at Volt differently from the other side.
It would seem that everybody would simply accept Volt as written, you know, what was said, but our position is that Volt is entirely consistent to your decision in Volt, because what you said there is, look, we're going to take a look at what's happening here, and if the California statute is such that it says we're going to wait with respect to arbitration, there are other litigants involved, the issue may be resolved, there is no magic in the procedure, it does not appear to us to be inconsistent with what the FAA is seeking to do.
There is no removal of our right under arbitration, and you state, quote, if I may, the FAA
"preempts State laws which require a judicial forum for the resolution of claims which the contracting parties agree to resolve by arbitration. "
So what I say is that also in Volt you said sections 3 and 4 have never been applied to State fori, only to district court, but we're dealing with section 2, and we're dealing with entirely different issue here.
This issue is that the Garrity rule forecloses punitive damages in an arbitrable forum, and that is why I return again and again to what was agreed.
There was agreed a choice of law forum which, if you accept their view, stated to the Mastrobuonos you must go to a judicial forum in order to obtain punitive damages under the choice of law.
But then you go to the arbitration agreement, the next sentence, and it fits entirely into what you've said in Volt, quoting from Perry v. Thomas, that State law must give way if the only way a person can get a remedy is to go to a judicial forum, and they have been... they have entered into this arbitration agreement.
And for example, in Perry v. Thomas, the California... State of California said in order to get a wage situation resolved they had to go to a judicial forum, and what you said is that the State law must give way if... if the State law says judicial forum alone, and it leads from the decision.
You see it in McMahon, the concern about arbitration, the jealousy of the courts, and it is very paradoxical and ironic that this sophisticated group... the SIC, the industry and what... would fight for arbitration, would fight for this panel of three sophisticated people, would state that judges and juries were not to be trusted, and then weep and whine and hand-ring about the decision made in the forum that they wanted by this mumbo-jumbo now-you-see-it, now-you-don't--
Unknown Speaker: Mr. Harte, may I... maybe I misunderstood your interpretation of this contract clause, but I thought you were presenting the simple case that when we have a choice of law clause, New York law... New York law permits punitive damages.
Mr. Harte: --Yes.
Unknown Speaker: And then we move on to the choice of forum clause, which is we're choosing arbitration under the NSAD rules, which are neutral, so you choose New York substantive law which permits punitive damages, you've chosen arbitration, the arbitration forum, which is governed by in this case NASD rules, not California rules, as in the other case, and that's... it's as simple as that, is your contract interpretation, I thought, but what I'm hearing is a little more complicated.
Mr. Harte: Well, if you move into a requirement, and I simply state that the choice of law of New York adopts the law, that's not preempted by Federal law.
Federal law applies to that second sentence.
Unknown Speaker: Because if all you had--
Mr. Harte: That's what I'm saying, and that's preemption.
Unknown Speaker: --If all you had in this contract was a choice of law clause, then New York law permits punitive damages.
Mr. Harte: Yes.
Unknown Speaker: And... but that would say nothing about the forum.
Then, going over to the forum, your position is, on the forum the NSAD rules control.
There's no inconsistency.
Mr. Harte: Correct, but if... if it is said that you cannot get punitive damages in an arbitra... see, the Mastrobuonos get hit twice.
First, they are said to have waived their right to punitive damages in any place but a judicial forum.
Then they move to the next sentence and say they're going to arbitrate any controversy, and then it is claimed that they can't get punitive damages at arbitration because again they're hit with a choice of law forum.
Unknown Speaker: Thank you, Mr. Harte.
Mr. Stewart, we'll hear from you.
Argument of Malcolm L. Stewart
Mr. Stewart: Mr. Chief Justice and may it please the Court:
In our briefs, and I think in the cases, we've spent a lot of time stressing the similarities between labor arbitration and Federal Arbitration Act arbitration, but I think there's one respect in which the two are different that's fairly central to this case.
That is, in labor arbitration, the arbitrator's power is typically restricted to the interpretation and the enforcement of the collective bargaining agreement itself, and if a dispute arises between an individual employee and the employer based upon some other source of law... for instance, a title VII claim... typically that would not be resolved by the arbitrator, it would be resolved in a judicial forum just as though there were no collective bargaining agreement.
Under... in commercial arbitration under the FAA, the thing is really fundamentally different.
That is, you do have a contract here.
It's certainly possible that the Mastrobuonos could have filed an action for breach of contract contending that Shearson Lehman had breached its contractual duties, but the arbitrator's authority is not limited to suits arising under the agreement itself.
Typically, the presumption is that the arbitrator will resolve disputes arising under all sorts of different other provisions of law that happened to involve the same transactions, and the arbitration agreement here stated that it would apply to all disputes arising out of or involving the petitioner's accounts, and consequently it was always within the natural contemplation of the parties that the arbitrator might ultimately be called upon to apply a variety of different bodies of law.
And therefore when the contract said that the contract, the agreement would be governed by the laws of the State of New York, it certainly implied that a breach of contract action would be governed by that law, but it certainly didn't imply that every aspect of every dispute between the parties would be so governed.
And, in fact, here the petitioner has filed claims based on Federal securities laws, based on Illinois and Texas law.
Obviously nobody contended that New York law should have applied to--
Unknown Speaker: So in your view this is just strictly a question of contract interpretation.
You disagree with the court of appeals.
Mr. Stewart: --It's a question of contract interpretation subject to two caveats.
First, that the policies underlying the FAA are influential in the interpretation of the contract, although they don't preclude the parties from agreeing to waive punitive damages if they wish, and second, it's our view that because this comes down to a matter of contract interpretation, ultimately great deference is owed to the views of the arbitrator, and therefore--
Unknown Speaker: But we don't know what those views are, because the arbitrator never said, this is what the parties agreed, and that's what I'm applying.
Mr. Stewart: --It's typically the case, Your Honor, that arbitrators will not give the reasons for their awards.
This Court recognized that in the steelworkers' trilogy, particularly in Enterprise Wheel, and the fact that the arbitrator doesn't make clear what the basis for his opinion is doesn't mean that we don't defer, so long as there is... in a sense it's like review of an act of Congress, and the question is whether we can hypothesize a valid basis for the award, rather than whether there is a statement.
Unknown Speaker: But in those cases, Mr. Stewart, there was a great deal of talk about the law of the shop and that sort of thing, which is really peculiar to labor arbitration, and I don't think you have any factors like that here.
Mr. Stewart: It's certainly true that some of the factors that this Court has relied on in the labor cases in stressing the difference owed to the arbitrator are unique to labor.
However, this Court also recognized in Wilko v. Swan that the arbitrator's decision under the FAA is not subject to review for legal error.
The Court has continued to recognize in McMahon, for instance, that the bases for overturning the arbitrator's decision remain limited, and the courts of appeals have uniformly been of the view that an arbitrator cannot be said to exceed his powers simply because the reviewing court believes that the arbitrator got wrong the question of contract interpretation.
Unknown Speaker: Well, don't you have--
Mr. Stewart: There has to be some sort of gross or clear error.
Unknown Speaker: --Don't you have something more here, though?
The arbitrator in effect said in so many words, I'm not really following the contract as written, I'm following its spirit.
I'm doing justice here.
Mr. Stewart: Well, I don't think--
Unknown Speaker: Doesn't the arbitrator in effect say, I'm remaking it my way?
Mr. Stewart: --We would certainly agree that if the arbitrator said, I'm ignoring the contract and acting on the basis of my own views of justice, that award should not be sustained even if we could imagine a valid basis.
Unknown Speaker: Well, he isn't going to be quite that dumb, but he came close to that, didn't he?
Mr. Stewart: I don't think, with respect, Your Honor, that that's what he said.
What he said was that he was awarding punitive damages based on the authority as cited in the petitioner's brief to the arbitrator, and the petitioners made a number of arguments, some of which are quite similar to the ones that we're making today, namely that if punitive damages are awardable in a judicial forum they should ordinarily be awarded in arbitration as well.
One of the other things they said, and it was really just a passing comment, was to the effect that the arbitrator could look to the spirit rather than the letter of the agreement, but--
Unknown Speaker: Well, if a reviewing court isn't sure, and thinks maybe the arbitrator was just relying on some spirit or sense of justice, and not relying on the contract terms at all, what is the reviewing court to do--
Mr. Stewart: --Well, I--
Unknown Speaker: --to send it back to the arbitrator?
I mean, what's the role of the reviewing court, and is your office taking a position in this First Options case that's going to be argued that seems to sort of raise this question?
Mr. Stewart: --Well, I guess there are about three different answers I should give.
First, the reviewing court will typically be unsure, because typically arbitrators give no explanation at all, so that really can't be--
Unknown Speaker: But this one did give an explanation.
Mr. Stewart: --And the explanation was, I'm doing it for the reasons stated in the petitioner's brief, and I think probably the best indication... it's about a four-page brief.
It contains a number of arguments.
One of them was, you can look to the spirit rather than the letter of the agreement, but even that was taken as a direct quotation from a New York court of appeals case which said, arbitrators can look to the spirit rather than the letter of the parties' agreement, so even that isolated sentence was not an appeal to ignore the law, it was simply a statement of what the law was.
As to the First Options case, one of the questions presented is, if a district court denies a motion to vacate an award, what should the standard of review be on appeal, and the flip side is the question presented here, namely, when a district court grants a motion to vacate an award, what is the standard of review?
The conflict in the First Options case is between the Third Circuit, which says de novo review of denial of a motion to vacate, the Eleventh Circuit which says an abuse of discretion review.
But even the Eleventh Circuit in Robbins v. Day, which is discussed in the petition in First Options, said that when you have granted a motion to vacate, that should be reviewed but de novo, so I think under the standard of any circuit, the Seventh Circuit was correct in reviewing de novo the determination of the district court that the arbitrable award should be vacated.
I want to address just briefly a comment that Justice Souter--
Unknown Speaker: Mr. Stewart, may I just ask, going back before the First Options question, wasn't that spirit of the law sentence followed up in that same brief by what I thought was the plaintiff's interpretation... the petitioner's interpretation of the contract, that is, the choice of law clause governed only New York substantive law--
Mr. Stewart: --That's correct.
Unknown Speaker: --i.e., punitive damages are available, and arbitration was governed by the NSAD rules?
Mr. Stewart: That's correct.
As I say, there were a number of arguments made in that brief, many of which are similar to the ones that we're making today, so it was not at all a brief which in its essence asked the arbitrator to avoid applying the contract, it was essentially a brief about how the contract should be interpreted.
I want to return to a question Justice Souter asked as to whether this is a case about the arbitrator's authority, and I think that there are two kinds of issues that may arise about authority.
One is arbitrability jurisdiction, whether a particular claim or grievance or cause of action was properly presented to the arbitrator rather than to the court, and certainly there are a number of this Court's decisions saying that the determination on that issue is for the court, albeit with a presumption of arbitrability.
This is not a case about arbitrability.
This is a case in which it is clear that the determination as to whether punitive damages should be awarded is to be made by the arbitrator.
The only question is, what standard of law should the arbitrator apply, and the Court has held in Enterprise Wheel, in Misco, in W. H. Grace, that when a claim is clearly properly before the arbitrator, the arbitrator's determination as to what remedies are appropriate is typically entrusted to his sound discretion, and that's particularly true here when the propriety of the remedy turns on interpretation of the contract.
That is, the respondents don't contend that the Garrity rule applies of its own force.
They don't contend that there is some other provision of law which bars an award of punitive damages.
They simply contend that the contract properly construed reflects the parties' agreement that punitive damages will not be awarded.
The question of whether they're right is a question of contract interpretation.
The arbitrator evidently reached a different determination, and that judgment is entitled to substantial deference from the reviewing court.
As to Volt, we think really that's the fundamental difference between this case and Volt.
In Volt, the State court determined that the choice of law clause was properly construed to incorporate California procedural rules.
This Court said, we won't review that determination.
Assuming it's correct, the FAA does not prohibit enforcing the agreement according to its terms.
Here, by contrast, the decisionmakers whose judgment is entitled to deference, namely the arbitrators, concluded that the choice of law clause did not have that effect... I'm sorry.
Thank you, Your Honor.
Unknown Speaker: Thank you, Mr. Stewart.
Argument of Joseph Polizzotto
Mr. Polizzotto: Mr. Chief Justice, may it please the Court:
I'm somewhat confused by the preemption argument advanced by the petitioner.
He's gone back and forth on that issue in the past.
In our reading of this Court's cases, particularly the Volt case, the overriding, if not the sole concern of the Federal Arbitration Act, is the enforcement of the parties' agreement according to their terms.
This Court has said that repeatedly in virtually every case decided in the mid to late eighties on the arbitration subject, and perhaps most explicitly as it pertains to this case in the Volt decision.
The preemptive force, if any, that the FAA has, is with respect to attempting to determine what the agreement of the party was... what the agreement of the parties were, so I am somewhat at a loss to understand the argument of preemption under the Federal Arbitration Act.
Unknown Speaker: Well, can I put my understanding of the argument before you and ask you to comment on it?
I suppose one could interpret the language, governed by the laws of the State of New York, in one of two ways, the way the court of appeals did so that it picks up the Garrity rule, or one can read it to say, apply the laws that a New York court would apply in the same controversy, and they obviously took the latter view.
Now, supposing under your view of the contract New York law, instead of providing punitive damages shall not be awarded, provided that no damages shall be awarded, and the arbitrator shall only have authority to enter the equivalent of a declaratory judgment construing the terms of the contract.
Would that foreclose the award of damages?
Mr. Polizzotto: That arguably might foreclose the award of damages, because the claims sought to be brought under the FAA included claims for compensatory damages.
However, the preemptive force of the FAA with respect to what the parties' agreement is, in my view, paramount and dispositive here.
The contract argument now being advanced here was not advanced below.
In our view, the only fair reading of the contract, and the clear constraint on arbitral authority here, was that New York law applies, New York law includes the Garrity rule, which is clear and unmistakable, and the arbitrators exceeded their power under section 1084 of the FAA in not permitting an award of punitive... and permitting--
Unknown Speaker: Why isn't it a reasonable construction of this contract to say it's got a choice of law clause... ordinarily that means substantive law, punitive damages okay under New York law... it's got a choice of forum clause, that forum is arbitration governed by the NSAD rules, you read them compatibly to say, New York law says substantive damages, punitive damages are okay, NSAD procedural law says it's neutral, and so that's a reasonable construction of the contract?
If the contract is ambiguous, you drew it.
It should be construed against you.
Mr. Polizzotto: --I've several responses to that.
First of all, under New York law, it's fairly clear that the Garrity rule itself is a substantive rule.
It is more than simply a procedural rule.
There's an extremely strong and powerful policy under New York law, and a fair reading of Chief Judge Bertel's opinion I think reveals that.
In addition, on their face--
Unknown Speaker: So the parties could not have said, we want New York substantive law, and not New York arbitration law.
We want New York substantive law to govern, and then we want the NSAD rules to govern arbitration.
Suppose they had... they certainly could have done that.
There's nothing obligatory about New York law.
This is for the parties to dispose of, right?
Mr. Polizzotto: --I think that would have been a terribly confusing way of going about the issue, had they done so.
Unknown Speaker: It's a question of what the parties mean, right?
Mr. Polizzotto: Correct.
Unknown Speaker: They can write their own law into the contract.
So they say, as a shorthand, instead of writing out all the terms and conditions, we pick New York.
It's got good substantive law, good contract law.
So we pick New York law to govern the terms and conditions, and we pick the NSAD arbitration rules.
Mr. Polizzotto: But the NASD rules themselves are totally silent on the issue of punitive damages.
Unknown Speaker: Which means they're allowed.
Which means... which means that so far as the NASD rules are concerned, the arbitrator can award them.
Mr. Polizzotto: --To the extent... to the extent that the parties' agreement otherwise would prohibit them, and in this case the adoption of the New York choice of law provision, sweeping in the Garrity rule, makes that prohibition--
Unknown Speaker: No, but--
--The question is whether it does sweep in... I mean, you have admitted, and I think as you must, that the parties could draw their own bargain here, and the question is, what bargain did they draw, and why isn't it a logical reading to say that they picked up only New York substantive law?
Mr. Polizzotto: --Well--
Unknown Speaker: If you had nothing but that first sentence, you'd go into a court, because you have no arbitration, the agreement shall be governed by the laws of the State of New York.
Bring that case in New York, you get punitive damages.
Mr. Polizzotto: --The submission itself, the submission of the dispute itself before the NASD contemplated in the submission... this is section 12 of the NASD Code of Arbitration.
Unknown Speaker: Are you reading from somewhere in your brief?
Mr. Polizzotto: Yes.
Page 29 in my brief.
I'm reading from the NASD Code of Arbitration Procedure, section 12(a).
The claim is submitted before the arbitrators as provided by a duly executed and enforceable written agreement.
The claim itself incorporates--
Unknown Speaker: Now, where are you reading from?
Mr. Polizzotto: --I'm reading from the quote of the rule, actually, which is the block in indented quote on page 29 of the respondent's brief.
Unknown Speaker: Okay, go ahead.
Mr. Polizzotto: It includes other material provisions in the contract of which the--
Unknown Speaker: Well, I don't... are you sure you're on page 29?
Mr. Polizzotto: --Yes, of respondent's brief, page 29.
Unknown Speaker: And then tell us again where you're reading from.
Mr. Polizzotto: I was reading... I was paraphrasing section 12 of the NASD Code of Arbitration Procedure.
Unknown Speaker: Well, maybe that's what I didn't get.
I thought you were reading verbatim.
Mr. Polizzotto: No.
I'm sorry, Mr. Chief Justice.
Unknown Speaker: Mr. Polizzotto, isn't the choice open to you something like this.
If you read the contract the way Justice Ginsburg was suggesting, there's no conflict and there's no ambiguity as between the choice of law provision and the choice of forum provision.
If you read the contract the way you were suggesting, there is an ambiguity, but that ambiguity would normally be resolvable against you as the party who drew the contract, so either way, you lose, and either way the arbitrator's award should be upheld.
Mr. Polizzotto: Well, I would say this.
Virtually every case that has reviewed this question, the question of the applicability of the New York choice of law provision and whether it involves an exceeding of arbitral powers, has taken a fresh de novo review and I think that that would be the appropriate course here.
Unknown Speaker: Well, have each... I'm sorry, go ahead.
No, go on.
Well, have each of the instances that you allude to been instances in which there was a potential conflict situation as between contractual provisions so that the reading in question either avoids the conflict, as in Justice Ginsburg's suggestion, or reads the other way to provide an ambiguity in which, under the rule of construing the contract against the maker, you would lose.
Mr. Polizzotto: I guess I don't see the--
Unknown Speaker: Has that been the case in all of those instances that you allude to?
Mr. Polizzotto: --I guess I don't see the conflict, because the choice of law provision in our agreement is the preceding sentence to the dispute resolution provision, if you will, and I think for... a better and more appropriate construction is that they're one and the same, for this purpose.
Unknown Speaker: Mr. Polizzotto, do you think that th New York law at issue here has any existence except as something to be referred to by private parties?
That is to say, if it were not adopted voluntarily by the parties would this New York rule be enforceable under our current interpretation of the FAA?
Mr. Polizzotto: I think the answer to that question is probably yes, and let me explain why.
The Court has made quite clear that the FAA does not preempt the whole law of arbitration, and in fact there needs to be a clear and unmistakable congressional intent to preempt.
There's nothing in the FAA that says anything about punitive damages, so in the absence of an agreement between the parties on this question, I think it is entirely possible that a State rule such as this would have applicability when New York law applies of its own force.
Unknown Speaker: So in--
Mr. Polizzotto: So we disagree with the Government on that point.
Unknown Speaker: --So instead of declining to honor arbitral awards, which would violate the FAA as we've interpreted it, the States could instead render arbitral awards worthless by piece-by-piece saying you can't give punitive damages, maybe you can't give expectation damages, maybe you can give nothing but a declaratory judgment.
Could they do that, and that would... wouldn't that violate the FAA?
Mr. Polizzotto: Well, the FAA has preemptive force in the context in which people are attempting to derive or get access to the arbitral forum as an initial matter.
Unknown Speaker: Well, then, don't you think it means that the States cannot render the arbitral forum nugatory by simply saying, yes, we have a general law, but this law won't be applicable in an arbitral forum?
That seems to me to violate the--
Mr. Polizzotto: It may mean that, Justice Scalia, but that's not this case.
This case is a far clearer case.
Unknown Speaker: --It may be this case, because if this provision of New York law is totally preempted and is only there so it's a handy referral for a private agreement, which we've said can supersede the FAA, then maybe it's not New York law any more.
I mean, if it has no binding effect in and of itself, maybe it's not New York law.
I mean, I don't consider it law if it's just something that can be referred to by the parties if they want to adopt it, but that could not be imposed upon the parties absent their agreement.
You think this could be imposed on the parties absent their agreement.
Mr. Polizzotto: I think there's an argument to suggest that the FAA does not have the type of preemptive force that would override the natural power of New York law, in an appropriate case.
Unknown Speaker: But isn't this always--
--It seems to me that your case may very well turn on that, because it strikes me as rather odd that if the parties simply agree to arbitrate without a choice of law clause or a mention of New York, and it happens to be that the transaction is in New York, the parties are in New York, they apply New York law, that they would apply the Federal preemptive portion of New York law and ignore the Garrity rule.
It seems to me rather strange that when the parties go one further step and say, we want New York law, that suddenly you interpret the contract as saying we want New York law absent prevailing Federal preemption law.
That seems to me very odd.
Mr. Polizzotto: Well, it's--
Unknown Speaker: And it seems to me that's what you have to say in order to win your case.
Mr. Polizzotto: --Well, I think that's right to some extent, but that's because the animating policy and the animating preemptive force of the FAA is, what did the parties agree to in this case?
So that's why I believe Justice O'Connor was correct in the very first question that she asked the petitioner, that fundamentally here what we are talking about is what did the agreement provide?
Unknown Speaker: Mr. Polizzotto, on the question of what the parties could dispose of, these... the Mastrobuonos, as I understand it, brought this case in Federal district court, and you removed it, is that correct?
Mr. Polizzotto: --Correct.
Unknown Speaker: So if they had brought this case in New York Federal District Court, or they brought it in Illinois Federal District Court and said, see this choice of law clause, shall be governed by the laws of New York, and so we want compensatory and punitive damages, suppose you had not asked to have the case dismissed because of the arbitration clause.
You were not required to do that.
That was something that no law required, no Illinois law, no New York law, no Federal law.
It was yours to dispose of.
So if they had just gone into Federal court, and you hadn't asked to have the arbitral forum, they would have gotten compensatory and punitive damages, right, assuming they proved their case?
Mr. Polizzotto: And assuming that the judge and jury would have agreed the same way--
Unknown Speaker: Yes.
Mr. Polizzotto: --that the arbitrators did here.
But that is precisely the distinction that is so powerful with respect to the Federal Arbitration Act.
The provision that we relied on to compel the case was, of course, section 4 of the FAA, and it doesn't say, parties who are signatories to arbitration agreements, you can get orders from the Federal court directing that the matter proceed in arbitration.
What it says is that parties are entitled to an order directing that such manner... arbitration proceed in the manner provided for in such agreement.
Again, even in the procedural, largely procedural section of title 9 relating to motions to compel, there is a harkening back to what was the parties' intent under the agreement?
Unknown Speaker: So that's why I keep coming back to Justice Ginsburg's original question.
The question as you see it is, what did they agree to?
Mr. Polizzotto: Correct.
Unknown Speaker: In my agreement, it says they agree to be governed by the laws of New York, and then they also agree that any controversy will be settled by the NASD rules.
The NASD rules specifically say in their arbitrator's manual that punitive damages may be a remedy, so it seems... why isn't there at least an ambiguity as to what they meant, and once you find an ambiguity, then why aren't we simply required to follow what the arbitrator interpreted them to mean?
Mr. Polizzotto: The rules are... the manual are not the rules, first of all.
The manual is the manual.
Unknown Speaker: But beside... that's... all I'm saying is, isn't it at least ambiguous as to what they meant, and once you find it even a little bit ambiguous, then doesn't the court... don't the courts have to follow the arbitrator's interpretation of the contract as to what they meant?
In other words, isn't this case way north of Misco?
You don't have to get, you know, too technical about it.
There's at least a big ambiguity here.
Mr. Polizzotto: I think the issue of arbitral power... I think to some extent you're underestimating the force of section 10 of the Federal Arbitration Act, which specifically gives to the courts... it's a directive to the courts that says, you are obligated to vacate awards to the extent that the arbitrators have exceeded their authority.
Unknown Speaker: Well, I mean, Misco says, yes, that's right, but don't ever do it, and that's in the labor area, so maybe we always used to follow it that way in the court of appeals, anyway, and now this isn't the labor area, so perhaps because it's not the labor area, it isn't true don't every do it, maybe sometimes do it, but at least there... there I'm exaggerating, but you see my point.
Mr. Polizzotto: But there seems to me to be a distinction, and a valid one, between the question of whether an arbitrator has the power to award such relief--
Unknown Speaker: Yes.
Mr. Polizzotto: --and the question of whether, under the facts of a given case, the arbitrators correctly exercised that power.
We're saying that this is the former situation.
Unknown Speaker: Yes, I know, but I'm trying to get your answer to the question specifically, isn't there at least enough ambiguity as to what they meant that we'd have to follow the arbitrator?
Is it because the arbitrator didn't give that as a reason?
Is it because there really isn't that ambiguity?
What, in your view, is the basic reason--
Mr. Polizzotto: Well, one--
Unknown Speaker: --why we don't have to follow the arbitrator?
Mr. Polizzotto: --One clear answer to that is the fact that this is not what the arbitrators were asked to do in this case.
Unknown Speaker: Normally we pay no attention to that, except in extreme circumstances, in a court of appeals.
That is, normally an arbitration award has no reasons, so normally you don't really cross-examine the arbitrator.
Mr. Polizzotto: Part of the record--
Unknown Speaker: Why is this different?
Mr. Polizzotto: --Part of the record in the district court was the submission made by the petitioners in which they urged the arbitration panel to disregard the law, disregard the authority and the constraints on that authority placed in the agreement that you signed.
Unknown Speaker: Yes, but the next sentence contradicted that, and the parties say all kinds of things in their brief.
The first said, spirit of the law, the second one said, this contract means New York substantive law, so I don't think you can hang a party on one sentence in a brief that's contradicted by the next sentence.
Mr. Polizzotto: Except in this case the application, I believe, and I think Garrity's... a fair reading of Garrity indicates this.
The Garrity rule, as it relates exclusively to arbitration, is a substantive pronouncement of law in the State of New York, and the petitioners concede this in their main brief.
They say that flat out in their brief.
I would also say in partial further response to your question, Justice Breyer, there's a happy synergy, if you will, between the statutory language under section 10, which speaks about arbitrators exceeding their powers, and the Garrity case itself.
Garrity, Chief Judge Bertel uses precisely the same word in disposing of the case right at the beginning of the case.
He says, the holding of this court is that the arbitrators do not have the power to award punitive damages.
Unknown Speaker: --that means we don't look at their reason.
We assume that they would have given a right reason.
So if they would have given a right reason here, namely, he'd said specifically, there are two sentences in this contract, one of which seems to contradict the other, I interpret those sentences to mean, just what I said, why would that exceed his power?
Mr. Polizzotto: Well, I suppose I don't agree with your interpretation of the contract--
Unknown Speaker: In other words, you're saying it's so clear.
Mr. Polizzotto: --And I don't think the contract is... can be interpreted in that fashion.
Unknown Speaker: Okay.
Mr. Polizzotto: I think to some extent the Court needs to focus more on the historic purpose of choice of law clauses generally.
I think under your analysis, Justice Breyer, the clause here would be given short shrift.
In fact, they are very important aspects to American jurisprudence.
They sweep in a whole compendium of issues that might otherwise bear on a dispute that parties may have with each other.
Unknown Speaker: May I just point out this one problem with... it's the first sentence, of course, we're focusing on in the agreement, and it says, the agreement shall be governed by the laws of the State of New York.
Now, as I understand it, thinking... following up on Justice Ginsburg's thought, if the agreement had been construed in the Federal court it would have one meaning.
If it was construed by an arbitrator, it would have a different meaning.
Mr. Polizzotto: No, because this particular Federal court construed the agreement the same way.
Unknown Speaker: No, no, if the trial had been held in a Federal court--
Mr. Polizzotto: Oh--
Unknown Speaker: --if you had not removed it.
Mr. Polizzotto: --There's no question that--
Unknown Speaker: Then, applying the laws of New York, the agreement would have a different meaning than it was given in this case... than the court gave it in this case.
Mr. Polizzotto: --But that's precisely the difference.
We are in arbitration.
The parties have a contract, and the contract defines the agreement, and the difference is, is that the Garrity rule is a substantive rule that only relates to arbitrations.
That's precisely the difference.
We're not contesting that these individuals, had we stayed in Federal court, might have been able to maintain State common law claims that might have had as a component some element of punitive damages.
Of course, from a procedural safeguard perspective--
Unknown Speaker: It would be different if this first sentence had said, any proceedings held pursuant to this clause shall be governed by the laws of the State of New York.
It says, the agreement shall be governed, and then it's odd to say that the same law will give the same agreement two different meanings, depending on what judge is interpreting it.
Mr. Polizzotto: --This is, however, a rather lengthy agreement, and I think the fact that these--
Unknown Speaker: Paragraph 13 isn't very long.
Mr. Polizzotto: --these two thoughts are in tandem in the contract is of some significance.
Unknown Speaker: Well, it would still be governed by the same law, whether brought in Federal court or in arbitration, to wit, the law that you can't give punitive damages in arbitration.
That rule wouldn't be contradicted by the Federal suit.
It just wouldn't be applicable in the Federal suit.
Mr. Polizzotto: Absolutely.
Unknown Speaker: So it's not that two different laws would be applied.
Mr. Polizzotto: No, that's correct.
I would again urge the Court that with respect to the preemption issue, it's really a nonissue here.
Volt controls that most particularly.
I think the Court is correct in focusing on the contract questions.
It's our view that the contract is clear.
It's also, if I may spend a few minutes on the section 10 argument, I think the Government... the Government's advancement of their argument under section 10 which, by the way, is not an argument that the petitioners advanced until the reply brief, is an overly constrained reading of the proper meaning of section 10(a)(4).
Section 10(a)(4) is a clear directive of the courts to act in appropriate cases.
That is something that is entitled to de novo action on the part of the courts, and to read it in any other fashion does violence to the force behind it.
There are only limited bases upon which arbitration awards can be vacated, but to remove that basis, which is I think effectively what the Government is arguing, from a party who believes to be aggrieved from an arbitration award really severely undercuts the force of the vacation statute, section 10.
If the Court doesn't have any further questions, I would rest.
Chief Justice Rehnquist: Thank you, Mr. Polizzotto.
The case is submitted.
Unknown Speaker: The honorable court is now adjourned until tomorrow at ten o'clock.
Argument of Justice Stevens
Mr. Stevens: I have the opinion of the Court to announce the Mastrobuono versus Shearson Lehman Hutton, number 94-18.
In this case the Mastrobuonos entered into a contract with Shearson, whereby Shearson agreed to handle their securities trading account, the terms of the contract were spelled-out in Shearson’s standard form agreement.
Paragraph 13 of that agreement contains a choice of law provision stating that “the agreement shall be governed by the laws of the State of New York”.
It also contains an arbitration clause stating “all disputes arising out of the agreement shall be resolved by arbitration.”
The Mastrobuonos later sued Shearson in Federal District Court claiming that it had mishandled their securities account and Shearson filed a motion to enforce the arbitration clause under the Federal Arbitration Act.
The Court granted the motion and a penal of arbitrators was appointed.
After hearings the arbitrators ruled in favor of the Mastrobuonos and awarded both compensatory and punitive damages.
Shearson challenged the punitive damages component of the award arguing that under the agreement the arbitrator should have applied New York law, and the New York Law allows only courts but not arbitrators to award punitive damages.
The District Court and the Court of Appeals agreed with Shearson.
In an opinion written by Justice Stevens and filed with the clerk today we reverse.
The central purpose of the Federal Arbitration Act is to insure that private agreements to arbitrator are enforced according to their terms.
If the parties to this contract agreed to allow punitive damages to be awarding the arbitration then the arbitrator’s award must be enforced.
We think the contract is best read to allow punitive damages because the arbitration clause indicates that punitive damages maybe awarded at the discretion on the arbitrator.
We rule in favor of the petitioners and uphold the award of punitive damages.
Justice Thomas has filed a dissenting opinion.