Mastrobuono v. Shearson Lehman Hutton Inc.

• Decision Date: 06 March 1995
• Docket Number: 9418
• Citation: 115 S.Ct. 1212,514 U.S. 52,131 L.Ed.2d 76
• 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

Argued Jan. 10, 1994.

Decided March 6, 1995.

Syllabus ^*

Petitioners filed this action in the Federal District Court, alleging that their securities trading account had been mishandled by respondent brokers. An arbitration panel, convened under the arbitration provision in the parties' standard-form contract and under the Federal Arbitration Act (FAA), awarded petitioners punitive damages and other relief. The District Court and the Court of Appeals disallowed the punitive damages award because the contract's choice-of-law provision specifies that "the laws of the State of New York" should govern, but New York law allows only courts, not arbitrators, to award punitive damages.

Held: The arbitral award should have been enforced as within the scope of the contract between the parties. Pp. __.

(a) This case is governed by what the contract has to say about the arbitrability of petitioners' punitive damages claim. The FAA's central purpose is 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, 109 S.Ct. 1248, 1256, 103 L.Ed.2d 488. This Court's decisions make clear that if contracting parties agree to include punitive damages claims within the issues to be arbitrated, the FAA ensures that their agreement will be enforced according to its terms even if a rule of state law would otherwise exclude such claims from arbitration. See, e.g., Allied-Bruce Terminix Cos. v. Dobson, 513 U.S. ----, 115 S.Ct. 834, 130 L.Ed.2d 753. Pp. __.

(b) The Court of Appeals misinterpreted the parties' contract by reading the choice-of-law provision and the arbitration provision as conflicting. Although the agreement contains no express reference to punitive damages claims, the fact that it is intended to include such claims is demonstrated by considering separately the impact of each of the two provisions, and then inquiring into their meaning taken together. This process reveals that the choice-of-law provision is not, in itself, an unequivocal exclusion of punitive damages claims, that the arbitration provision strongly implies that an arbitral award of punitive damages is appropriate, and that the best way to harmonize the two is to read "the laws of the State of New York" to encompass substantive principles that New York courts would apply, but not to include special rules limiting the authority of arbitrators. Thus, the choice-of-law provision covers the rights and duties of the parties, while the arbitration clause covers arbitration; neither provision intrudes upon the other. Pp. __.

20 F.3d 713 (CA7 1994), reversed.

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.

William J. Harte, Chicago, IL, for petitioners.

Malcolm L. Stewart, Washington, DC, for U.S., as amicus curiae by special leave of the Court.

Joseph Polizzotto, New York City, for respondents.

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, 109 S.Ct. 1248, 1256, 103 L.Ed.2d 488 (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, 386 N.Y.S.2d 831, 353 N.E.2d 793 (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. ----, 115 S.Ct. 305, 130 L.Ed.2d 218 (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. ----, 115 S.Ct. 834, 130 L.Ed.2d 753 (1995). Writing for the Court, Justice Breyer observed that Congress passed the FAA "to overcome courts' refusals to enforce agreements to arbitrate." Id., at ----, 115 S.Ct. at 838. See also Volt Information Sciences, Inc. v. Board of Trustees of Leland Stanford Junior Univ., 489 U.S. at 474, 109 S.Ct. at 1253; Dean Witter Reynolds Inc. v. Byrd, 470 U.S. 213, 220, 105 S.Ct. 1238, 1242, 84 L.Ed.2d 158 (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 ----, ----, 115 S.Ct. at 839, 843.

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 ----, 115 S.Ct. at 838, quoting Bernhardt v. Polygraphic Co. of America, Inc., 350 U.S. 198, 211, n. 5, 76 S.Ct. 273, 281, n. 5, 100 L.Ed. 199 (1956) (Frankfurter, J., concurring). Petitioners rely on Southland Corp. v. Keating, 465 U.S. 1, 104 S.Ct. 852, 79 L.Ed.2d 1 (1984), and Perry v. Thomas, 482 U.S. 483, 107 S.Ct. 2520, 96 L.Ed.2d 426 (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, 104 S.Ct. at 858.

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...