28 F.3d 704 (7th Cir. 1994), 93-3647, Baravati v. Josephthal, Lyon & Ross, Inc.

Docket Nº:93-3647.
Citation:28 F.3d 704
Party Name:Ahmad BARAVATI, Plaintiff-Appellee, v. JOSEPHTHAL, LYON & ROSS, INCORPORATED, and Peter Sheib, Defendants-Appellants.
Case Date:July 01, 1994
Court:United States Courts of Appeals, Court of Appeals for the Seventh Circuit

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28 F.3d 704 (7th Cir. 1994)

Ahmad BARAVATI, Plaintiff-Appellee,




No. 93-3647.

United States Court of Appeals, Seventh Circuit

July 1, 1994

Argued April 7, 1994.

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Judson H. Miner, Barack H. Obama (argued), Davis, Miner, Barnhill & Galland, Chicago, IL, for plaintiff-appellee.

M. Jayne Rizzo, Kelley, Drye & Warren, Chicago, IL, Michael L. Hirschfeld (argued), Kelley, Drye & Warren, New York City, for defendant-appellant.

Before POSNER, Chief Judge, BAUER, Circuit Judge, and TINDER, District Judge. [*]

POSNER, Chief Judge.

Ahmad Baravati was employed as a broker in the Chicago office of Josephthal, Lyon & Ross, Inc. (JLR), a New York securities firm that is a member of the National Association of Securities Dealers. JLR fired Baravati. The NASD requires that whenever a broker is terminated, the member firm that employed him must fill out and submit to the association a termination notice form (form U-5), which the NASD retains and makes available to any member who wants information about the broker, perhaps because he has applied for a job with the member. The form asks the reason for the termination. The reason JLR listed was that Baravati was "under investigation by [JLR] for the fraudulent and wrongful taking of firm property in the amount of $7,650.25." The parties agree that Baravati's contract with JLR required disputes, tortious as well as contractual, arising under the contract to be arbitrated in accordance with the NASD's Code of Arbitration Procedure. (Submission of disputes to arbitration is now a required term in employment contracts with members of NASD. Kresock v. Bankers Trust Co., 21 F.3d 176, 178-79 (7th Cir.1994).) Contending that the reason stated in the U-5 for firing him was false and defamatory--that in

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fact he had been fired in retaliation for blowing the whistle to the SEC about fraud committed by JLR on its customers--Baravati, like a number of similarly situated brokers lately (see Edward Felsenthal, "Filings about Brokers' Departures Made by Firms Spark Libel Suits," Wall St. J., April 14, 1994, p. B2), invoked the arbitral process. The arbitrators found that he had been defamed and awarded him $60,000 in compensatory damages and $120,000 in punitive damages. Baravati went to district court to enforce the award, 9 U.S.C. Sec. 9, and won. 834 F.Supp. 1023 (N.D.Ill.1993). JLR appeals.

Judicial review of arbitration awards is tightly limited; perhaps it ought not be called "review" at all. By including an arbitration clause in their contract the parties agree to submit disputes arising out of the contract to a nonjudicial forum, and we do not allow the disappointed party to bring his dispute into court by the back door, arguing that he is entitled to appellate review of the arbitrators' decision. United Paperworkers International Union v. Misco, Inc., 484 U.S. 29, 36, 108 S.Ct. 364, 369, 98 L.Ed.2d 286 (1987); Chicago Typographical Union v. Chicago Sun-Times, Inc., 935 F.2d 1501, 1504-06 (7th Cir.1991); Brotherhood of Locomotive Engineers v. Atchison, Topeka & Santa Fe Ry., 768 F.2d 914, 921 (7th Cir.1985). There are, nevertheless, limited grounds on which an arbitral award can be set aside, such as that the arbitrators "exceeded their powers." 9 U.S.C. Sec. 10(a)(4).

A number of courts, including our own, have said that they can set aside arbitral awards if the arbitrators exhibited a "manifest disregard of the law." Health Services Management Corp. v. Hughes, 975 F.2d 1253, 1267 (7th Cir.1992); Todd Shipyards Corp. v. Cunard Line, Ltd., 943 F.2d 1056, 1060 (9th Cir.1991); Note, "Vacatur of Commercial Arbitration Awards in Federal Court: Contemplating the Use and Utility of the 'Manifest Disregard' of the Law Standard," 27 Ind.L.Rev. 241, 251-54 (1993). Two courts, however, have declined to adopt this formula, Ainsworth v. Skurnick, 960 F.2d 939, 940-41 (11th Cir.1992) (per curiam); Stroh Container Co. v. Delphi Industries, Inc., 783 F.2d 743, 750 (8th Cir.1986), though without rejecting it. Two have criticized it. Raiford v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 903 F.2d 1410, 1412-13 (11th Cir.1990); I/S Stavborg v. National Metal Converters, Inc., 500 F.2d 424, 430-31 (2d Cir.1974). The criticisms are marshaled and endorsed in the excellent student note in the Indiana Law Review. The formula is dictum, as no one has found a case where, had it not been intoned, the result would have been different. It originated in Wilko v. Swan, 346 U.S. 427, 436-37, 74 S.Ct. 182, 187-88, 98 L.Ed. 168 (1953) (see Drayer v. Krasner, 572 F.2d 348, 352 (2d Cir.1978) (Friendly, J.))--a case the Supreme Court first criticized for its mistrust of arbitration and confined to its narrowest possible holding, Shearson/American Express Inc. v. McMahon, 482 U.S. 220, 231-34, 107 S.Ct. 2332, 2340-41, 96 L.Ed.2d 185 (1987), and then overruled. Rodriguez de Quijas v. Shearson/American Express, Inc., 490 U.S. 477, 485, 109 S.Ct. 1917, 1922, 104 L.Ed.2d 526 (1989). Created ex nihilo to be a nonstatutory ground for setting aside arbitral awards, the Wilko formula reflects precisely that mistrust of arbitration for which the Court in its two Shearson/American opinions criticized Wilko. We can understand neither the need for the formula nor the role that it plays in judicial review of arbitration (we suspect none--that it is just words). If it is meant to smuggle review for clear error in by the back door, it is inconsistent with the entire modern law of arbitration. If it is intended to be synonymous with the statutory formula that it most nearly resembles--whether the arbitrators "exceeded their powers"--it is superfluous and confusing. There is enough confusion in the law. The grounds for setting aside arbitration awards are exhaustively stated in the statute. Now that Wilko is history, there is no reason to continue to echo its gratuitous attempt at nonstatutory supplementation. So it will be enough in this case to consider whether the arbitrators exceeded their powers.

JLR makes two points (the third, that Baravati waived his right to complain about being defamed, is frivolous and need not be discussed). The first is that under the law of Illinois the contents of the U-5 form

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that JLR filled out and submitted to the NASD are, like a pleading, testimony, exhibit, or opinion, absolutely privileged as a communication made in a judicial or...

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