MASTROBUONO et al. v. SHEARSON LEHMAN HUTTON, INC., et al.
514 U.S. 52 (1995)
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Rule of Law:
Where an arbitration agreement contains a choice-of-law clause selecting a state's law but also incorporates arbitration rules that permit remedies barred by that state's law, the Federal Arbitration Act's policy favoring arbitration requires that ambiguities be resolved in favor of arbitration. A generic choice-of-law clause will not be read to incorporate state rules that limit arbitral authority unless the agreement contains clear evidence of intent to do so.
Facts:
- In 1985, Antonio Mastrobuono and Diana Mastrobuono opened a securities trading account with Shearson Lehman Hutton, Inc. (Shearson).
- To open the account, the Mastrobuonos executed Shearson's standard-form Client's Agreement.
- Paragraph 13 of the agreement stipulated that it 'shall be governed by the laws of the State of New York.'
- The same paragraph also provided that 'any controversy' arising from the account 'shall be settled by arbitration in accordance with the rules' of the National Association of Securities Dealers (NASD).
- The account was managed by Nick DiMinico, a Shearson vice president, until the Mastrobuonos closed it in 1987.
- The Mastrobuonos alleged that Shearson and DiMinico had mishandled their account.
- At the time, New York case law (the 'Garrity' rule) held that only courts, not arbitrators, had the power to award punitive damages.
Procedural Posture:
- Antonio and Diana Mastrobuono (plaintiffs) filed a lawsuit against Shearson Lehman Hutton, Inc., and Nick DiMinico (defendants) in the U.S. District Court for the Northern District of Illinois.
- The defendants filed a motion to stay court proceedings and compel arbitration, which the District Court (trial court) granted.
- An arbitral panel ruled for the Mastrobuonos, awarding both compensatory and punitive damages.
- The defendants paid the compensatory award but filed a motion in the District Court to vacate the punitive damages award.
- The District Court granted the defendants' motion and vacated the punitive damages award.
- The Mastrobuonos (appellants) appealed to the U.S. Court of Appeals for the Seventh Circuit.
- The Seventh Circuit (intermediate appellate court) affirmed the District Court's decision.
- The Mastrobuonos (petitioners) petitioned the U.S. Supreme Court for a writ of certiorari, which was granted.
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Issue:
Does a contractual choice-of-law provision selecting New York law, which prohibits arbitrators from awarding punitive damages, prevent an arbitral panel from awarding punitive damages when the same contract contains a broad arbitration clause requiring arbitration under rules that appear to permit such awards?
Opinions:
Majority - Justice Stevens
No, a contractual choice-of-law provision selecting New York law does not prevent an arbitral panel from awarding punitive damages under these circumstances. The court must interpret what the contract says about the arbitrability of punitive damages. The choice-of-law clause, when read in isolation, is ambiguous; it can be read to incorporate New York's substantive principles without including its special rules allocating power between courts and arbitrators. In contrast, the arbitration clause, by incorporating NASD rules which allow for 'damages and other relief' and are supplemented by a manual stating arbitrators can consider punitive damages, suggests such awards are permitted. Faced with this ambiguity, the Court applies two canons of construction: 1) the federal policy under the FAA that ambiguities as to the scope of arbitration should be resolved in favor of arbitration, and 2) the common-law rule that ambiguous contract language is construed against the drafter (Shearson). The best way to harmonize the two clauses is to read the choice-of-law provision to govern the parties' substantive rights and duties, and the arbitration clause to govern the rules of the arbitration itself, including available remedies.
Dissenting - Justice Thomas
Yes, the contractual choice-of-law provision selecting New York law prevents the arbitrators from awarding punitive damages. This case is controlled by 'Volt Information Sciences, Inc.', which requires courts to enforce arbitration agreements according to their terms, including choice-of-law provisions that incorporate state procedural rules. The language 'governed by the laws of the State of New York' is unambiguous and clearly incorporates New York's 'Garrity' rule prohibiting arbitrators from awarding punitive damages. There is no conflict with the NASD rules, as they are silent on the issue of punitive damages, and the arbitrator's manual cited by the majority is not an official NASD rule and was not incorporated into the contract. By choosing New York law, the parties intended to be bound by its restriction on arbitral remedies, and the court should enforce that clear intent.
Analysis:
This decision significantly bolsters the pro-arbitration policy of the Federal Arbitration Act by establishing a strong default rule in favor of arbitral authority. It clarifies that a general, boilerplate choice-of-law clause will not be interpreted to strip arbitrators of powers, such as awarding punitive damages, unless the contract does so with explicit language. This ruling places the burden on the drafters of arbitration agreements to be unequivocally clear if they wish to limit the scope of remedies available in arbitration. Consequently, the case protects claimants' ability to seek full remedies in arbitration and prevents parties from using ambiguous choice-of-law provisions as a back-door method to curtail arbitral power.
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