Baravati v. Josephthal, Lyon & Ross, Inc.

• Citation: 28 F.3d 704
• Decision Date: 01 July 1994
• Docket Number: No. 93-3647,93-3647
• Parties: 128 Lab.Cas. P 11,127, 9 IER Cases 1127 Ahmad BARAVATI, Plaintiff-Appellee, v. JOSEPHTHAL, LYON & ROSS, INCORPORATED, and Peter Sheib, Defendants-Appellants.
• Court: United States Courts of Appeals. United States Court of Appeals (7th Circuit)

Page 704

28 F.3d 704

128 Lab.Cas. P 11,127, 9 IER Cases 1127

Ahmad BARAVATI, Plaintiff-Appellee, v. JOSEPHTHAL, LYON & ROSS, INCORPORATED, and Peter Sheib Defendants-Appellants.

No. 93-3647.

United States Court of Appeals Seventh Circuit.

Argued April 7, 1994.

Decided July 1, 1994.

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 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 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 quasi-judicial proceeding. The law of Illinois? Confirmation of the arbitrators' award was sought under Title 9 of the U.S.Code, the Federal Arbitration Act. Yet one might think that in a case such as this, where the basis of federal jurisdiction is diversity of citizenship rather than the existence of a federal question (as it would be if, for example, an arbitration award based on a collective bargaining contract subject to section 301 of the Taft-Hartley Act, 29 U.S.C. Sec. 185, were sought to be enforced), substantial constitutional questions would arise if the federal courts tried to create a body of substantive law to be applied by the arbitrators. Erie R.R. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938), holds that the conferral by Article III of the Constitution of diversity jurisdiction on the federal courts does not authorize them to create substantive law to govern the disputes arising under that jurisdiction. The Federal Arbitration Act, however, is limited to diversity cases that affect interstate commerce, 9 U.S.C. Secs. 1, 2, a basis of federal lawmaking jurisdiction. Bernhardt v. Polygraphic Co., 350 U.S. 198, 201-02, 76 S.Ct. 273, 275, 100 L.Ed. 199 (1956); Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 405, 87 S.Ct. 1801, 1806, 18 L.Ed.2d 1270 (1967). The Act therefore can, and the Supreme Court has held that it does, authorize the federal courts to create a federal substantive law of arbitration to apply in cases under the Act. Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1, 24-25 and n. 32, 103 S.Ct. 927, 941-42 and n. 32, 74 L.Ed.2d 765 (1983); Southland Corp. v. Keating, 465 U.S. 1, 11-16, 104 S.Ct. 852, 858-61, 79 L.Ed.2d 1 (1984).

A standard way in which federal courts make federal common law is by adopting the law of the state whose law would govern in the absence of federal law, subject to the implicit proviso that the adopted state law be consistent with federal policy. The states have richer bodies of common law than the federal courts do and it is desirable to minimize the number of different legal rules to which people are subject. Powers v. United States Postal Service, 671 F.2d 1041 (7th Cir.1982). So if we started with federal common law we might end up with Illinois law after all. But there is a more direct route. This case is unusual because the arbitrators, rather than being called upon to interpret a contract, their usual function, were called upon to determine whether one party had defamed the other. (There is, as we said, no contention that they were not empowered by the parties' contract to do so.) Defamation is an area of state law, and the various defamation privileges are an integral part of the law of defamation. It would be surprising if in authorizing the arbitration of their disputes the parties had intended the arbitrators to make up a law of defamation to apply to those disputes. More likely they were expected to apply the defamation law of some state, and Illinois is as plausible a candidate as any, since Baravati worked in JLR's Chicago office. So let us apply the Illinois law of privilege.

That is easier said than done. Fahnestock & Co. v. Waltman, 935 F.2d 512, 516-17 (2d Cir.1991), rejected a claim of privilege on facts similar to ours, but it was not an Illinois case--there is no Illinois case on the question--and the court's brief discussion suggests that the arbitrators were correctly applying New York law. It might seem obvious...