Mastrobuono v. Shearson Lehman Hutton

• Decision Date: 10 January 1995
• Docket Number: No. 94-18,94-18
• Citation: 514 U.S. 52,131 L. Ed. 2d 76,115 S. Ct. 1212
• Parties: ANTONIO MASTROBUONO AND DIANA G. MASTROBUONO, PETITIONERS v. SHEARSON LEHMAN HUTTON, INC., ET AL
• Court: U.S. Supreme Court

514 U.S. 52,

115 S. Ct. 1212,

131 L. Ed. 2d 76, ANTONIO MASTROBUONO AND DIANA G. MASTROBUONO, PETITIONERS v. SHEARSON LEHMAN

HUTTON, INC., ET AL.

No. 94-18

SUPREME COURT OF

THE UNITED STATES

January 10, 1995, Argued

March 6, 1995, Decided

COUNSEL: William J. Harte argued the cause for petitioners. With him on the briefs were Robert L. Tucker and Joan M. Mannix.

Malcolm L. Stewart argued the cause for the United States et al. as amici curiae urging reversal. With him on the brief were Solicitor General Days, Deputy Solicitor General Wallace, Simon M. Lorne, Paul Gonson, Jacob H. Stillman, Lucinda O. McConathy, and Mark Pennington.

Joseph Polizzotto argued the cause for respondents. With him on the brief were Phil C. Neal, H. Nicholas Berberian, and Robert J. Mandel. *

* Briefs of amici curiae urging reversal were filed for the American Association of Limited Partners by Michael B. Dashjian; for the Public Investors Arbitration Bar Association by Stuart C. Goldberg and Seth E. Lipner.

Andrew L. Frey, Andrew J. Pincus, and Stuart J. Kaswell filed a brief for the Securities Industry Association as amicus curiae urging affirmance.

JUDGES: STEVENS, J., delivered the opinion of the Court, in which REHNQUIST, C. J., and O'CONNOR, SCALIA, KENNEDY, SOUTER, GINSBURG, and BREYER, JJ., joined. THOMAS, J., filed a dissenting opinion, post, p. 64.

OPINION BY: STEVENS

OPINION

JUSTICE STEVENS delivered the opinion of the Court.

New York law allows courts, but not arbitrators, to award punitive damages. In a dispute arising out of a standard-form contract that expressly provides that it "shall be governed by the laws of the State of New York," a panel of arbitrators awarded punitive damages. The District Court and Court of Appeals disallowed that award. The question presented is whether the arbitrators' award is consistent with the central purpose of the Federal Arbitration Act to ensure "that private agreements to arbitrate are enforced according to their terms." Volt Information Sciences, Inc. v. Board of Trustees of Leland Stanford Junior Univ., 489 U.S. 468, 479, 103 L. Ed. 2d 488, 109 S. Ct. 1248 (1989).

I

In 1985, petitioners, Antonio Mastrobuono, then an assistant professor of medieval literature, and his wife Diana Mastrobuono, an artist, opened a securities trading account with respondent Shearson Lehman Hutton, Inc. (Shearson), by executing Shearson's standard-form Client's Agreement. Respondent Nick DiMinico, a vice president of Shearson, managed the Mastrobuonos' account until they closed it in 1987. In 1989, petitioners filed this action in the United States District Court for the Northern District of Illinois, alleging that respondents had mishandled their account and claiming damages on a variety of state and federal law theories.

Paragraph 13 of the parties' agreement contains an arbitration provision and a choice-of-law provision. Relying on the arbitration provision and on §§ 3 and 4 of the Federal Arbitration Act (FAA), 9 U.S.C. §§ 3, 4, respondents filed a motion to stay the court proceedings and to compel arbitration pursuant to the rules of the National Association of Securities Dealers. The District Court granted that motion, and a panel of three arbitrators was convened. After conducting hearings in Illinois, the panel ruled in favor of petitioners.

In the arbitration proceedings, respondents argued that the arbitrators had no authority to award punitive damages. Nevertheless, the panel's award included punitive damages of $400,000, in addition to compensatory damages of $159,327. Respondents paid the compensatory portion of the award but filed a motion in the District Court to vacate the award of punitive damages. The District Court granted the motion, 812 F. Supp. 845 (ND Ill. 1993), and the Court of Appeals for the Seventh Circuit affirmed, 20 F.3d 713 (1994). Both courts relied on the choice-of-law provision in paragraph 13 of the parties' agreement, which specifies that the contract shall be governed by New York law. Because the New York Court of Appeals has decided that in New York the power to award punitive damages is limited to judicial tribunals and may not be exercised by arbitrators, Garrity v. Lyle Stuart, Inc., 40 N.Y.2d 354, 353 N.E.2d 793, 386 N.Y.S.2d 831 (1976), the District Court and the Seventh Circuit held that the panel of arbitrators had no power to award punitive damages in this case.

We granted certiorari, 513 U.S. 921 (1994), because the Courts of Appeals have expressed differing views on whether a contractual choice-of-law provision may preclude an arbitral award of punitive damages that otherwise would be proper. Compare Barbier v. Shearson Lehman Hutton Inc., 948 F.2d 117 (CA2 1991), and Pierson v. Dean, Witter, Reynolds, Inc., 742 F.2d 334 (CA7 1984), with Bonar v. Dean Witter Reynolds, Inc., 835 F.2d 1378, 1386-1388 (CA11 1988), Raytheon Co. v. Automated Business Systems, Inc., 882 F.2d 6 (CA1 1989), and Lee v. Chica, 983 F.2d 883 (CA8 1993). We now reverse. 1

II

Earlier this Term, we upheld the enforceability of a predispute arbitration agreement governed by Alabama law, even though an Alabama statute provides that arbitration agreements are unenforceable. Allied-Bruce Terminix Cos. v. Dobson, 513 U.S. 265, 130 L. Ed. 2d 753, 115 S. Ct. 834 (1995). Writing for the Court, JUSTICE BREYER observed that Congress passed the FAA "to overcome courts' refusals to enforce agreements to arbitrate." Id., at 270. See also Volt Information Sciences, Inc. v. Board of Trustees of Leland Stanford Junior Univ., 489 U.S. at 474; Dean Witter Reynolds Inc. v. Byrd, 470 U.S. 213, 220, 84 L. Ed. 2d 158, 105 S. Ct. 1238 (1985). After determining that the FAA applied to the parties' arbitration agreement, we readily concluded that the federal statute pre-empted Alabama's statutory prohibition. Allied-Bruce, 513 U.S. at 272-273, 281-282.

Petitioners seek a similar disposition of the case before us today. Here, the Seventh Circuit interpreted the contract to incorporate New York law, including the Garrity rule that arbitrators may not award punitive damages. Petitioners ask us to hold that the FAA pre-empts New York's prohibition against arbitral awards of punitive damages because this state law is a vestige of the "'"ancient"'" judicial hostility to arbitration. See Allied-Bruce, 513 U.S. at 270, quoting Bernhardt v. Polygraphic Co. of America, Inc., 350 U.S. 198, 211, n. 5, 100 L. Ed. 199, 76 S. Ct. 273 (1956) (Frankfurter, J., concurring). Petitioners rely on Southland Corp. v. Keating, 465 U.S. 1, 79 L. Ed. 2d 1, 104 S. Ct. 852 (1984), and Perry v. Thomas, 482 U.S. 483, 96 L. Ed. 2d 426, 107 S. Ct. 2520 (1987), in which we held that the FAA pre-empted two California statutes that purported to require judicial resolution of certain disputes. In Southland, we explained that the FAA not only "declared a national policy favoring arbitration," but actually "withdrew the power of the states to require a judicial forum for the resolution of claims which the contracting parties agreed to resolve by arbitration." 465 U.S. at 10.

Respondents answer that the choice-of-law provision in their contract evidences the parties' express agreement that punitive damages should not be awarded in the arbitration of any dispute arising under their contract. Thus, they claim, this case is distinguishable from Southland and Perry, in which the parties presumably desired unlimited arbitration but state law stood in their way. Regardless of whether the FAA pre-empts the Garrity decision in contracts not expressly incorporating New York law, respondents argue that the parties may themselves agree to be bound by Garrity, just as they may agree to forgo arbitration altogether. In other words, if the contract says "no punitive damages," that is the end of the matter, for courts are bound to interpret contracts in accordance with the expressed intentions of the parties -- even if the effect of those intentions is to limit arbitration.

We have previously held that the FAA's proarbitration policy does not operate without regard to the wishes of the contracting parties. In Volt Information Sciences, Inc. v. Board of Trustees of Leland Stanford Junior Univ., 489 U.S. 468, 103 L. Ed. 2d 488, 109 S. Ct. 1248 (1989), the California Court of Appeal had construed a contractual provision to mean that the parties intended the California rules of arbitration, rather than the FAA's rules, to govern the resolution of their dispute. Id., at 472. Noting that the California rules were "manifestly designed to encourage resort to the arbitral process," id., at 476, and that they "generally fostered the federal policy favoring arbitration," id., at 476, n. 5, we concluded that such an interpretation was entirely consistent with the federal policy "to ensure the enforceability, according to their terms, of private agreements to arbitrate," id., at 476. After referring to the holdings in Southland and Perry, which struck down state laws limiting agreed-upon arbitrability, we added "But it does not follow that the FAA prevents the enforcement of agreements to arbitrate under different rules than those set forth in the Act itself. Indeed, such a result would be quite inimical to the FAA's primary purpose of ensuring that private agreements to arbitrate are enforced according to their terms. 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. Just as they may limit by contract the issues which they will arbitrate, see Mitsubishi [Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 628, 87 L. Ed. 2d 444, 105 S. Ct. 3346 (1985)], so too may they specify by contract the rules under which that arbitration will be conducted." Volt, 489 U.S. at 479.

Relying on our reasoning in Volt, respondents thus argue that the parties to a contract may lawfully agree to limit the issues to be arbitrated by waiving any claim for punitive...