Opinion ID: 1643072
Heading Depth: 2
Heading Rank: 8

Heading: Did the Arbitrators Manifestly Disregard the Law in its Award of Punitive Damages?

Text: As a threshold proposition, the plaintiffs assert that any claim by the News that its federal constitutional due-process protections were violated by the punitive-damages awards is simply not reviewable, citing Davis v. Prudential Securities, Inc., 59 F.3d 1186 (11th Cir.1995). In that case, an individual initiated arbitration under the auspices of the American Arbitration Association against a stock brokerage firm and a stockbroker, pursuant to an underlying account agreement. He asserted tort claims and violations of state and federal securities laws. The arbitration panel awarded him both compensatory damages and punitive damages. He obtained court confirmation of the award, as provided by the account agreement, and the defendants in arbitration appealed to the United States Court of Appeals for the Eleventh Circuit. In refusing to set aside the punitive-damages award, the Eleventh Circuit held, among other things, that because the arbitration was a private proceeding arranged by a voluntary contractual agreement of the parties, it did not constitute state action and, thus, was not subject to scrutiny under the Due Process Clause of the United States Constitution. This holding has been criticized by legal commentators, as discussed in Knepp v. Credit Acceptance Corp. (In re: Knepp), 229 B.R. 821 (Bankr.N.D.Ala.1999), and is readily distinguishable on its facts from the situation at hand. In Davis, there was no court involvement until after the award was made. In these cases, but for the court action, there would have been no arbitration at all. These appeals are appeals from the circuit court judgments of confirmation, not from the underlying awards. Accordingly, we readily perceive the requisite state action underlying these appeals sufficient to justify our review of the awards under governing federal due-process considerations, to the extent the News has properly invoked review of those principles under its assertion that in making the awards the arbitrators acted in manifest disregard of the law. (The plaintiffs reference under a see also introduction three cases other than Davis in connection with their assertion that review for a due-process violation is not available: Todd Shipyards Corp. v. Cunard Line, Ltd., 943 F.2d 1056, 1063-64 (9th Cir.1991), Barnes v. Logan, 122 F.3d 820 (9th Cir.1997), and Glennon v. Dean Witter Reynolds, Inc., 83 F.3d 132 (6th Cir.1996). Without discussing those cases in detail, we find their limited holdings, which in no way approach that of the Eleventh Circuit in Davis, to be clearly distinguishable, both factually and procedurally, from the present appeals.) Because our review under the manifest-disregard-of-the-law standard must be clearly focused, we set out in full the entire of the argument the News devotes to this issue in its two briefs to this Court. In its initial brief, the News presents its challenge to the punitive-damages award as follows: III. The Panel's Decision Is Inconsistent, Both Internally and with the Record. .... C. The Panel's Determination and Calculation of Damages Is Hopelessly and Irrationally Flawed. .... (iii) The Panel's Award of Punitive Damages Is Grossly Excessive. By arbitrarily determining the lost value of each of the appellees' businesses, by arbitrarily determining each of the appellees' lost profits, and then by adding those two components together, the Panel compounded its error. The Panel then multiplied that erroneousindeed, fictitiousamount by 2.5 to award punitive damages. As a result, the Panel compounded its error even further, to a ridiculous extreme. The punitive damage awards in these cases are far out of any rational proportion to the actual compensatory damages even arguably sustained by these appellees. In Hyde's case, for example, the expert estimated the value of his business to be $160,000. Hyde had already recovered $83,000 of that amount, when he sold the single copy portion of the agreement. Thus his actual lost value, according to his own expert, would be $77,000. Hyde's damage[s] award, however, totals $2,142,280.00. The ratio of his total award to his actual damages is a multiple of roughly 26 to 1. See Georgia Power Co. v. International Brotherhood of Electrical Workers, Local 84, 995 F.2d 1030, 1032 (11th Cir.1993) (`An arbitrator's denomination of an award as compensatory will not prevent the court from determining that the award is in fact punitive'). When the duplicative and irrational aspects of each of the other so-called compensatory awards in these cases are considered, it is clear that a similar analysis applies to each of the punitive award. Such a multiple is irrational and in manifest disregard of the law. A grossly excessive award that is arbitrary and irrational under the guideposts set out in BMW of North America v. Gore, 517 U.S. 559, 116 S.Ct. 1589, 134 L.Ed.2d 809 (1996), is equally arbitrary and irrational under the FAA. Sawtelle v. Waddell [& Reed, Inc.], [304 A.D.2d 103, 754 N.Y.S.2d 264 (2003)]. It also exceeds Alabama's statutory cap of three-to-one, which the Panel itself cited in its decision. See Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 628, 105 S.Ct. 3346, 87 L.Ed.2d 444 (1985) (`By agreeing to arbitrate a statutory claim, a party does not forgo the substantive rights afforded by the statute; it only submits to their resolution in an arbitral, rather than a judicial, forum.') Cole v. Burns Int. Sec. Servs., 105 F.3d 1465, 1487 (D.C.Cir.1997). In its reply brief, the News argues that the multiplier used by the Panel to award punitive damages is being applied to an arbitrary calculation of compensatory damages. As such, it runs afoul of Alabama's statutory cap on punitive damages. Ala.Code § 6-11-21. The News then again argues in support of the applicability of the cap statute, the applicability of which, for the reasons hereinafter explained, we will assume without deciding. We must note, however, that § 6-11-21 applies only to actions commenced more than 60 days after its effective date of June 7, 1999; all of the complaints in these cases were filed before that time. Lastly, the News simply notes in its reply brief: The News has argued that a grossly excessive award of punitive damages that is arbitrary and irrational under the due process guideposts set out in cases such as BMW of North America v. Gore, 517 U.S. 559, 116 S.Ct. 1589, 134 L.Ed.2d 809 (1996), and most recently State Farm Mutual Automobile Insurance Co. v. Campbell, 538 U.S. 408, 123 S.Ct. 1513, 155 L.Ed.2d 585, No. 01-1289 (Supreme Court of the United States, April 7, 2003), is equally arbitrary and irrational under the standards of review of an arbitration decision. As already explained, we decline to undertake any review based on the amorphous arbitrary and irrational standard. To the extent that the News argues that  such a multiple is irrational and in manifest disregard of the law,  referencing the Hyde ratio it deems represents a multiple of roughly 26 to 1, we would have reservations concerning the propriety of such a ratio. To the extent that we have eliminated the duplicative loss of franchise value award from the total damages allotted each plaintiff, application of the ratio between compensatory damages and punitive damages adopted by the panel requires a corresponding reduction in punitive damages. That will be easy enough to calculate, however, because the panel made this explicit finding concerning the ratio it used in determining punitive damages: The Panel concludes that punitive damages are due to be awarded in these cases. We also conclude that a reasonable ratio in relationship to the compensatory damages is less than the 3:1 ratio maximum generally recognized by Alabama law. We find and hold that a fair, equitable and reasonable punitive damages ratio is 2.5 to compensatory damages. As quoted above, the News acknowledges that the expert estimated the value of [Hyde's] business to be $160,000, and that is the value the panel awarded him for loss of franchise value, but asserts that the panel should have reduced the award by $83,000 because it reasoned Hyde had sold the single-copy portion of his branch for that amount. This argument is not presented as an instance of the arbitrators' exceeding their powers or a manifest disregard of the law by the arbitrators, and no other discussion or explanation about it is provided. We are not told what, if anything the expert, Williams, might have had to say on that subject, or whether, or how, he might have taken it into account in his computations. In short, we have no basis under the narrow review we are conducting to look behind the panel's finding of $160,000 as the loss of franchise value for Hyde. The News does not challenge the panel's method of deriving the amount of punitive damages purely as a ratio of compensatory damages; neither does it question the propriety of a 2.5 ratio. Its only discussion of Alabama's statutory cap on punitive damages, as prescribed by § 6-11-21, is in relation to its argument that the 26-to-1 ratio it asserts results in Hyde's case exceeds Alabama's statutory cap of three-to-one, and its argument that the panel's application of its 2.5 ratio to an arbitrary calculation of compensatory damages ... runs afoul of the statutory cap. Apart from its discussion of the proportionality of the ratio perceived by the News to have been used in Hyde's case (and its general reference to the duplicative and irrational aspects of each of the other so-called compensatory awards in these cases), the News presents no argument to the effect that the panel manifestly disregarded controlling legal principles relating to its assessment of punitive damages. We note that the panel presented an extensive explanation of the numerous factors and criteria it considered in arriving at its assessment of punitive damages, over the course of paragraphs 250-273 of its decision, and it certainly cannot be said that it completely ignored or disregarded the legal principles laid down in BMW of North America v. Gore, 517 U.S. 559, 116 S.Ct. 1589, 134 L.Ed.2d 809 (1996), and State Farm Mutual Automobile Insurance Co. v. Campbell, 538 U.S. 408, 123 S.Ct. 1513, 155 L.Ed.2d 585 (2003), as opposed to any argument, which would be unavailing under a manifest-disregard-of-the-law review, that the panel misunderstood or misapplied those legal principles. All in all, we find no instance where the News has successfully identified a manifest disregard by the panel of the law of punitive damages.