Mastrobuono v. Shearson Lehman Hutton, Inc. (94-18), 514 U.S. 52 (1995).
[ Thomas ]
[ Stevens ]
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No. 94-18


on writ of certiorari to the united states court of appeals for the seventh circuit

[March 6, 1995]

Justice Thomas , dissenting.


In Volt, Stanford University had entered into a construction contract under which Volt Information Sciences, Inc. was to install certain electrical systems on the Stanford campus. The contract contained an agreement to arbitrate all disputes arising out of the contract. A choice of law clause in the contract provided that "[t]he Contract shall be governed by the law of the place where the Project is located," 489 U. S., at 476, which happened to be California. When a dispute arose regarding compensation, Volt invoked arbitration. Stanford filed an action in state court, however, and moved to stay arbitration pursuant to California rules of civil procedure. Cal. Civ. Proc. Code Ann. §1281.2(c) (West 1982). Opposing the stay, Volt argued that the relevant state statute authorizing the stay was preempted by the FAA, 9 U.S.C. § 1 et seq.

We concluded that even if the FAA preempted the state statute as applied to other parties, the choice of law clause in the contract at issue demonstrated that the parties had agreed to be governed by the statute. Rejecting Volt's position that the FAA imposes a pro arbitration policy that precluded enforcement of the statute permitting the California courts to stay the arbitration proceedings, we concluded that the Act "simply requires courts to enforce privately negotiated agreements to arbitrate, like other contracts, in accordance with their terms." 489 U. S., at 478. As a result, we interpreted the choice of law clause "to make applicable state rules governing the conduct of arbitration," id., at 476, even if a specific rule itself hampers or delays arbitration. We rejected the argument that the choice of law clause was to be construed as incorporating only substantive law, and dismissed the claim that the FAA preempted those contract provisions that might hinder arbitration.

We so held in Volt because we concluded that the FAA does not force arbitration on parties who enter into contracts involving interstate commerce. Instead, the FAA requires only that "arbitration proceed in the manner provided for in [the parties'] agreement." 9 U.S.C. § 4. Although we will construe ambiguities concerning the scope of arbitrability in favor of arbitration, see Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1, 24-25 (1983), we remain mindful that "as with any other contract, the parties' intentions control," Mitsubishi Motors Corp. v. Soler Chrysler Plymouth, Inc., 473 U.S. 614, 626 (1985). Thus, if the parties intend that state procedure shall govern, federal courts must enforce that understanding. "There is no federal policy favoring arbitration under a certain set of procedural rules; the federal policy is simply to ensure the enforceability, according to their terms, of private agreements to arbitrate." Volt, 489 U. S., at 476.

In this case, as in Volt, the parties agreed to mandatory arbitration of all disputes. As in Volt, the contract at issue here includes a choice of law clause. Indeed, the language of the two clauses is functionally equivalent: whereas the choice of law clause in Volt provided that "[t]he Contract shall be governed by the law of [the State of California]," the one before us today states, in Paragraph 13 of the Client's Agreement, that "[t]his agreement . . . shall be governed by the laws of the State of New York." New York law forbids arbitrators from awarding punitive damages, Garrity v. Lyle Stuart, Inc., 40 N. Y. 2d 354 (1976), and permits only courts to award such damages. As in Volt, petitioners here argue that the New York rule is "anti arbitration," and hence is pre-empted by the FAA. In concluding that the choice of law clause is ambiguous, the majority essentially accepts petitioners' argument. Volt itself found precisely the same argument irrelevant, however, and the majority identifies no reason to think that the state law governing the interpretation of the parties' choice of law clause supports a different result.

The majority claims that the incorporation of New York law "need not be read so broadly" as to include both substantive and procedural law, and that the choice of New York law "is not, in itself, an unequivocal exclusion of punitive damages claims." Ante, at 8. But we rejected these same arguments in Volt, and the Garrity rule is just the sort of "state rule[] governing the conduct of arbitration" that Volt requires federal courts to enforce. 489 U. S., at 476. "Just as [the parties] may limit by contract the issues which they will arbitrate, so too may they specify by contract the rules under which that arbitration will be conducted." Id., at 479 (citation omitted). To be sure, the majority might be correct that Garrity is a rule concerning the State's allocation of power between "alternative tribunals," ante, at 8, although Garrity appears to describe itself as substantive New York law. [n.2] Nonetheless, Volt makes no distinction between rules that serve only to distribute authority between courts and arbitrators (which the majority finds unenforceable) and other types of rules (which the majority finds enforceable). Indeed, the California rule in Volt could be considered to be one that allocates authority between arbitrators and courts, for it permits California courts to stay arbitration pending resolution of related litigation. See Volt, 489 U. S., at 471.

The majority relies upon two assertions to defend its departure from Volt. First, it contends that "[a]t most, the choice of law clause introduces an ambiguity into an arbitration agreement." Ante, at 10. We are told that the agreement "would otherwise allow punitive damages awards," because of Paragraph 13's statement that arbitration would be conducted "in accordance with the rules then in effect, of the National Association of Securities Dealers, Inc." It is unclear which NASD "rules" the parties mean, although I am willing to agree with the majority that the phrase refers to the NASD Code of Arbitration Procedure. But the provision of the NASD Code offered by the majority simply does not speak to the availability of punitive damages. It only states:

"The award shall contain the names of the parties, the name of counsel, if any, a summary of the issues, including the type(s) of any security or product, in controversy, the damages and other relief requested, the damages and other relief awarded, a statement of any other issues resolved, the names of the arbitrators, the dates the claim was filed and the award rendered, the number and dates of hearing sessions, the location of the hearings, and the signatures of the arbitrators concurring in the award." NASD Code of Arbitration Procedure §41(e) (1985).

It is clear that §41(e) does not define or limit the powers of the arbitrators; it merely describes the form in which the arbitrators must announce their decision. The other provisions of §41 confirm this point. See, e.g., §41(a) ("All awards shall be in writing and signed by a majority of the arbitrators . . ."); §41(c) ("Director of Arbitration shall endeavor to serve a copy of the award" to the parties); §41(d) (arbitrators should render an award within 30 days); §41(f) (awards shall be "publicly available"). The majority cannot find a provision of the NASD Code that specifically addresses punitive damages, or that speaks more generally to the types of damages arbitrators may or may not allow. Such a rule simply does not exist. The Code certainly does not require that arbitrators be empowered to award punitive damages; it leaves to the parties to define the arbitrators' remedial powers.

The majority also purports to find a clear expression of the parties' agreement on the availability of punitive damages in "a manual provided to NASD arbitrators." Ante, at 9. But Paragraph 13 of the Client Agreement nowhere mentions this manual; it mentions only "the rules then in effect of the [NASD]." The manual does not fit either part of this description: it is neither "of the [NASD]," nor a set of "rules."

First, the manual apparently is not an official NASD document. The manual was not promulgated or adopted by the NASD. Instead, it apparently was compiled by members of the Securities Industry Conference on Arbitration (SICA) as a supplement to the Uniform Code of Arbitration, which the parties clearly did not adopt in Paragraph 13. Petitioners present no evidence that the NASD has a policy of giving this specific manual to its arbitrators. Nor do petitioners assert that this manual was even used in the arbitration that gave rise to this case. More importantly, there is no indication in the text of the Client's Agreement that the parties intended this manual to be used by the arbitrators.

Second, the manual does not provide any "rules" in the sense contemplated by Paragraph 13; instead, it provides general information and advice to the arbitrator, such as "Hints for the Chair." SICA, Arbitrator's Manual 21 (1992). The manual is nothing more than a sort of "how to" guide for the arbitrator. One bit of advice, for example, states: "Care should be exercised, particularly when questioning a witness, so that the arbitrator does not indicate disbelief. Grimaces, frowns, or hand signals should all be avoided. A `poker' face is the goal." Id., at 19. [n.3]

Even if the parties had intended to adopt the manual, it cannot be read to resolve the issue of punitive damages. When read in context, the portion of the SICA manual upon which the majority relies seems only to explain what punitive damages are, not to establish whether arbitrators have the authority to award them:

"The issue of punitive damages may arise with great frequency in arbitrations. Parties to arbitration are informed that arbitrators can consider punitive damages as a remedy. Generally, in court proceedings, punitive damages consist of compensation in excess of actual damages and are awarded as a form of punishment against the wrongdoer. If punitive damages are awarded, the decision of the arbitrators should clearly specify what portion of the award is intended as punitive damages, and the arbitrators should consider referring to the authority on which they relied." Id., at 26.

A glance at neighboring passages, which explain the purpose of "compensatory/actual damages," "injunctive relief," "interest," "attorneys' fees," and "forum fees," see id., at 26-29, confirms that the SICA manual does not even attempt to provide a standardized set of procedural rules.

Even if one made the stretch of reading the passage on punitive damages to relate to an NASD arbitrator's authority, the SICA manual limits its own applicability in the situation presented by this case. According to the manual's Code of Ethics for Arbitrators, "[w]hen an arbitrator's authority is derived from an agreement of the parties, the arbitrator should neither exceed that authority nor do less than is required to exercise that authority completely." Id., at 38. Regarding procedural rules, the Code states that "[w]here the agreement of the parties sets forth procedures to be followed in conducting the arbitration or refers to rules to be followed, it is the obligation of the arbitrator to comply with such procedures or rules." Id., at 38-39. The manual clearly contemplates that the parties' agreement will define the powers and authorities of the arbitrator. Thus, we are directed back to the rest of Paragraph 13 and the intent of the parties, whose only expression on the issue is their decision to incorporate the laws of New York. [n.4]

My examination of the Client Agreement, the choice of law provision, the NASD Code of Procedure, and the SICA manual demonstrates that the parties made their intent clear, but not in the way divined by the majority. New York law specifically precludes arbitrators from awarding punitive damages, and it should be clear that there is no "conflict," as the majority puts it, between the New York law and the NASD rules. The choice of law provision speaks directly to the issue, while the NASD Code is silent. Giving effect to every provision of the contract requires us to honor the parties' intent, as indicated in the text of the agreement, to preclude the award of punitive damages by arbitrators.

Thankfully, the import of the majority's decision is limited and narrow. This case amounts to nothing more than a federal court applying Illinois and New York contract law to an agreement between parties in Illinois. Much like a federal court applying a state rule of decision to a case when sitting in diversity, the majority's interpretation of the contract represents only the understanding of a single federal court regarding the requirements imposed by state law. As such, the majority's opinion has applicability only to this specific contract and to no other. But because the majority reaches an erroneous result on even this narrow question, I respectfully dissent.


1 The Seventh Circuit adopted a de novo standard of review of the arbitrators' decision. Although we have not yet decided what standard of review to apply in cases of this sort, see First Options of Chicago, Inc. v. Kaplan, No. 94-560 (cert. granted Dec. 5, 1994), petitioners waived the argument that a deferential standard was appropriate. Petitioners did not raise the argument in their petition for certiorari or in their opening brief. While the standard of review may be an antecedent question, see United States Nat'l Bank of Oregon v. Independent Insurance Agents of America, 5__ U. S. ___ [113 SCt 2173] (1993), given the petitioners' waiver of the argument it seems more appropriate to resolve the question in First Options than here.

2 The New York Court of Appeals rested its holding on the principle that punitive damages are exemplary social remedies intended to punish, rather than to compensate. Because the power to punish can rest only in the hands of the State, the Court found that private arbitrators could not wield the authority to impose such damages. Garrity, 353 N. E. 2d, at 796-797.

3 Other "rules" include: "The Chair should maintain decorum at all times. Shouting, profanity, or gratuitous remarks should be stopped." Securities Industry Conference on Arbitration, Arbitrator's Manual 20 (1992). "Some attorneys think that the more often a statement is made, the truer it becomes. The Chair, however, should discourage needless repetition." Ibid. "Immediately after the close of the hearing, the arbitrators usually remain in the hearing room either to begin deliberations or set a date for deliberation. Unlike jurors, the panel members are not restricted from discussing the case among themselves." Id., at 25.

4 It is telling that petitioners did not even claim until their reply brief that Paragraph 13 expressed an intent to reserve to arbitrators the authority to award punitive damages. Instead, petitioners consistently have argued only that the agreement did not constitute a "waiver" of their "right" to obtain punitive damages.