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Punitive Damages in Arbitration

by: Joyce J. George

This article discusses the treatment of punitive damages in arbitration. The material here is but a spattering of the legal literature that is available. Other sources should be examined before making a claim for punitive damages or responding in defense of such a claim.

Punitive Damages – Generally

In a civil case, a person who has been harmed will traditionally seek relief in the form of money damages. This is known as compensatory damages and such damages are awarded to compensate the harmed person for the economic loss resulting from the harm caused. When the harm is egregiously, willfully or wantonly committed, the harmed person may seek additional relief, known as punitive damages. Such damages are not directed to the harm caused but rather at the conspicuously bad or offensive manner in which the harm was committed. Sometimes, punitive damages are referred to as “exemplary damages” because they are awarded to make an example of the person who caused the harm and hopefully deter others from the same kind of conduct.

An award of punitive damages is the exception, rather than the rule. A principle well established in arbitration law is that, unless the parties expressly and unambiguously preclude an award of punitive damages in their arbitration clause, the arbitration tribunal will be able to award punitive damages. Applying this principle, federal courts have recently expanded this doctrine to grant arbitration panels more freedom to award punitive damages than state courts have. A Claimant’s demand cannot merely seek punitive damages as such relief is incidental to some wrong upon which compensatory damages must first be awarded. Thus, compensatory damages are a necessary predicate for a punitive damages award.

Additionally, in arbitration as in litigation, prejudgment interest may not be assessed against an award of punitive damages. This is mainly because it is classified as a civil punishment. Even so, post-judgment interest may be assessed based on the fact that the punitive damages award is merged into the judgment. Finally, the doctrine of punitive damages is a matter of substantive law, not procedural law. This means that when there is a conflict of laws, the substantive law of the Respondent’s home state is to be applied.

Punitive damages are available in arbitration as they are in litigation. To be available the harmed party must shown that there is authority for granting punitive damages, i.e. an arbitration provision, a rule, a statute, or some egregious conduct on the part of the Respondent that warrants a claim for punitive damages. The American Arbitration Association Rules, R-43, entitled Scope of Award, provides in subsection (a): The arbitrator may grant any remedy or relief that the arbitrator deems just and equitable and within the scope of the agreement of the parties, including, but not limited to, specific performance of a contract. (Emphasis added.) Where the arbitration provision is silent on punitive damages, this rule may be broadly read to justify an award of punitive damages.

There are three different approaches by the states as to whether or not arbitrators may award punitive damages.1 In some states arbitrators may award punitive damages unless the arbitration provision expressly excludes punitive damages. In other states independent arbitrators may never award punitive damages because only the state may do so. Finally, in some states arbitrators may award punitive damages if the arbitration provision expressly provides that punitive damages may be awarded. As a result, there may or may not be authority for the arbitrator to award punitive damages. This will have to be determined on a case by case basis.

State Law and Punitive Damages

The law on punitive damages in each state must be consulted as the law differs from state to state. Some states may prohibit punitive damages by excluding certain cases from a recovery of punitive damages or even entirely excluding the recovery of punitive damages in any case. Thus, punitive damages are not available in all cases. And while the recovery of punitive damages may be authorized, to be awarded punitive damages the injured party must first be entitled to compensatory damages.

A good review of U. S. Supreme Court decisions discussing punitive damages can be found in a Congressional Research Service Report No. RL33773, entitled Constitution Limits on Punitive Damages Awards: An Analysis of the Supreme Court Case ,u>Phillip Morris USA v. Williams, Updated July 17, 2007.2 And a good state review of West Virginia law is Punitive Damages Law in West Virginia, Robin Jean Davis, Justice West Virginia Supreme Court of Appeals and Louis J. Palmer, Law Clerk to Justice Davis, West Virginia Court of Appeals (October 2009).3 For a discussion of how to determine whether a punitive damage award is excessive, failing to be in proportion to the punishable conduct and therefore excessive see Punitive Damages, Criminal Punishment, and Proportionality: The Importance of Legislative Limits.4

Punitive damages are among the most difficult type of financial redress to acquire in court or in arbitration, as they generally require proof of substantial and intentional injuries on the part of the defending party. Punitive damages are extraordinary civil damages as they are not awarded to compensate for harm. Compensatory damages give the harmed person redress by providing for economic losses, such as lost wages and medical expenses, as well as, noneconomic losses, such as pain and suffering and emotional distress. Punitive damages are awarded on conduct that is malicious, accompanies by ill will or spirit, or for the purpose of injuring another.5 This type of damages is treated as a civil punishment and may have devastating consequences on a defending party’s character, reputation, business, and good will. A punitive damages award is to be in an amount sufficient to punish the bad actor, while not being grossly excessive. If it is grossly excessive it may be in violation of the due process clause of the 14th Amendment to the U.S. Constitution. This reads, in pertinent part: “nor shall any State deprive any person of life, liberty, or property, without due process of law…” If found to be excessive, the award of punitive damages may be open to challenges for reduction or negation.

An award of punitive damages is the exception, not the rule as they are rarely given.

In 1996 the National Conference of Commissioners on Uniform State Laws adopted a Model Punitive Damages Act (1996) and recommended the Model Act for enactment in all the states.6 . The Model Act does not define the types of cases in which an award may be made. Other authority, within each state, needs to be consulted to make that determination. A few of the provisions of the Model Act include:

  • Allowing the trier of fact to award punitive damages only if there is clear and convincing evidence that the defendant maliciously intended to cause the injury or exhibited a conscious and flagrant disregard of others in causing the injury;
  • Identifying nine factors to be considered in determining a punitive award, such as the defendant’s financial condition and any adverse effect of the award on innocent persons;
  • Determining whether the punitive damage award is disproportional to the punishable conduct and therefore excessive.

The American Tort Reform Association (ATRA) argued 7 that punitive damages reforms were needed. One ATRA suggestion was that a claimant should be required to establish proof of punitive damages liability by “clear and convincing evidence.” Employing this standard requires the fact-finder to be satisfied that there is a high degree of probability that defending party engaged in exceptional misconduct. “Clear and convincing” evidence is a standard suggestive of the quasi-criminal nature of punitive damages. It takes a middle ground between the burden of proof standard ordinarily used in civil cases (i.e., proof by a “preponderance”) and the criminal law standard (i.e., proof “beyond a reasonable doubt”).8 In 2001, the clear and convincing evidence standard was applicable in 31 jurisdictions.

Alabama; Alaska; Arizona; California; District of Columbia; Florida; Georgia; Hawaii; Indiana; Iowa; Kansas; Kentucky; Maine; Maryland; Minnesota; Mississippi; Missouri; Montana; Nevada; New Jersey; North Carolina; North Dakota; Ohio; Oklahoma; Oregon; South Carolina; South Dakota; Tennessee; Texas; Utah; and Wisconsin.

However, the statutes differ from state to state so that the statute of a particular state must be examined to determine:

  1. Does a particular state allow for the granting of punitive damages? If it permits awards of punitive damages, other questions must be asked.
  2. Are there any restrictions on such a grant?
  3. Is there a cap on the recovery of such damages?
  4. Is there a limit as to the pool of damages from which punitive damages may be awarded?
  5. Are there limited cases upon which such an award may be granted?

Arbitrators, like courts, may be authorized to award punitive damages in appropriate cases when the compensation for egregious or oppressive conduct warrants it. It is with great deliberation that an arbitrator will award punitive damages, as such an award is not a matter of right, but discretionary. Punitive damages are generally not available in a breach of contract action or where a statute may include a penalty for wrongful conduct or in an action against a governmental agency.

Making a Punitive Damages Claim

Once the arbitrator determines that he is empowered to award punitive damages, Claimant must establish evidence sufficient to warrant such an award. Thus, an arbitrator may award punitive damages if permitted to do so under the rules adopted by the parties, so long as the award is not otherwise proscribed by the parties’ agreement.9 Awarding punitive damages in reliance on an arbitration rule, such as AAA’s R-43, authorizing the arbitrator to “grant any remedy or relief that the arbitrator deems just and equitable and within the scope of the agreement of the parties,” and in the absence of any state law prohibiting an award of punitive damages in arbitration proceedings has been upheld.10

Punitive damages are intended to punish the offending party and to discourage the conduct engaged in. For example, in a 1997 civil case against Orenthal James Simpson (OJ), the jury found Simpson, who prior to that had been acquitted of murder, liable for the deaths of his former wife, Nicole Brown Simpson and her friend, Ronald Goldman. In the civil case, the Goldman family sought and was awarded $8.5 million in compensatory damages. The Simpson family did not seek or obtain any compensatory damages. However, both families sought and were awarded punitive damages and the jury awarded each family $12.5 million in punitive damages.

When making a claim, the Claimant must do the following:

  1. Include a claim in the Demand for punitive damages.
  2. Persuade the arbitrator that there is authority for considering punitive damages.
  3. Show there is sufficient evidence that would entitle the Claimant to an award of punitive damages.
  4. Offer clear and convincing evidence of the reprehensibility of Respondent’s conduct or whether Respondent profited from his wrongful conduct.
  5. The Respondent’s financial worth.
  6. A proportional relationship between the compensatory damages sought and the punitive damages being sought.

When there is no language specifically precluding punitive damages in the arbitration provision at issue, the Claimant can argue that because punitive damages are not precluded they may be awarded. Providing Claimant is confident that a claim for punitive damages is justified, Claimant should include its claim for punitive damages in its demand. However, if the offensive conduct only becomes known during the discovery process, Claimant should amend the demand to include such damages, at the earliest opportunity.

Claimant must have evidence of fraud or oppressive conduct or that a wrongful act was done maliciously, wantonly, mischievously or with criminal indifference to civil obligations. Here are some examples of the types of cases that may warrant a claim of punitive damages:

  • Wrongful eviction where the conduct is malicious and wanton.
  • Where there has been actual malice in bringing litigation.
  • Assault that was willful, intentional and unlawful.
  • Intentional infliction of emotional distress where the conduct was wanton, willful or reckless.
  • Retaliatory discharge and emotional distress.
  • Insurance policy bad faith claims.
  • Failure to negotiate in good faith.

Defending Against a Punitive Damages Claim

When there is no language specifically precluding punitive damages in the arbitration provision at issue, the Respondent might argue that because punitive damages are not provided for and they are an exceptional kind of damages, they are precluded.

When defending against a claim for punitive damages, the Respondent can do the following:

  1. Challenge the claim for punitive damages and the authority Claimant relies upon to justify granting them.
  2. Persuade the arbitrator that there is a lack of authority for considering punitive damages, under the facts, and that such consideration would be error.
  3. Show there is a lack of evidence that Respondent acted willfully or maliciously.
  4. Offer evidence of Respondent’s good character and show that his conduct was not malicious nor did he profit from his conduct.
  5. Raise questions as to the reasonableness of Claimant’s portrayal of Respondent’s financial worth.
  6. Under the facts presented contest the amount of compensatory damages being sought.
  7. If punitive damages are to be awarded, argue what the appropriate ratio between the two should be.

Any defenses available against a claim and potential award for punitive damages must be raised at the earliest opportunity. Initially, a challenge can be made to the authority upon which the claim for punitive damages is being requested. If the arbitration provision does not clearly call for punitive damages, an argument can be made that it is not expressly provided for and is therefore not available. If reliance is on a statute, an issue might be raised as to whether or not the facts of the case fall within the ambit of the statutory scheme.

If there is neither a statute nor an arbitration provision specifically dealing with punitive damages, the challenge can be made that the facts do not show willfulness, wantonness or egregiousness and, therefore, do not support the arbitrator’s consideration of punitive damages. Next, once punitive damages are to be considered, assuming that the evidence does not support such an award, the defense must shift attention to the hearing to clearly show those facts that would negate an award for punitive damages. Should the evidence support such an award, the defense should focus on the lack of willfulness, wantonness or egregiousness to minimize the punitive damage award. If the claims sound in assault and battery, Respondent may show provocation to mitigate damages.

If there is an excessive, unreasonable, outrageous and manifest showing of impartiality or prejudice in the award of punitive damages a due process challenge may be made to the award. Under due process protections, both state and federal, punitive damages cannot be excessive. Pacific Mutual Life Insurance Co. v. Haslip, 499 U. S. 1, 111 S. Ct. 1032, ll3 L. Ed.2d 1 (1991), held that due process clause of the 14th Amendment to the U.S. Constitution placed limitations on a state’s ability to impose punitive damages. Certain punitive damages awards could violate the due process clause.11

Conclusion

Although punitive damage awards are rare in arbitration, when the conduct of the Respondent is sufficiently malicious or egregious, the Demand should include a claim for punitive damages. Such damages are designed to punish the defending for particularly bad conduct, and send a message to others of a like mind not to do the same.

Several hurdles make punitive damages hard to recover. The arbitrator typically finds that there is not enough evidence of bad conduct to consider an award of punitive damages. Even when the arbitrator does consider them, the arbitrator may be hesitant to award them. Then, when the arbitrator does award punitive damages, the Respondent will surely seek court review to reduce or eliminate them. Nonetheless, punitive damages awards in arbitration are usually upheld.

Footnotes

1. See Edward Electric Co. v. Automation, Inc., 229 Ill. App.3d 89, 593 N.E.2d 833, 171 Ill. Dec. 13 (Ill. App. 1992) and In re the Arbitration between John W. Winkelman, Petitioner-Appellant-Cross-Respondent, v. Kraft Foods, Inc., Respondent-Respondent-Cross-Appellant. 2005 Wisc. App. LEXIS 76,*;2005 WI App 25; 279 Wis. 2d 335;693 N.W.2d 756, 03-2355. COURT OF APPEALS OF WISCONSIN

2. Written by Vanessa K. Burrows, Legislative Attorney, American Law Division and available at http://www.fas.org/sgp/crs/misc/RL33773.pdf (7/2/10)
3. http://www.state.wv.us/wvsca/PunitiveDamages2010.pdf (7/2/10).
4. http://works.bepress.com/cgi/viewcontent.cgi?article=1000&context=leo_romero (7/2/10).
5. From the “Lectric Law Library’s Lexicon, Punitive Damages, http://www.lectlaw.com/def/d006.htm 6/30/10.
6. http://www.law.upenn.edu/bll/archives/ulc/mpda/MPDAFNAL.htm (7/2/10).
7. ATRA Issues, Punitive Damages Reform, Introduction. http://www.atra.org/show/7343 (7/2/2010).
8. Id.
9. Winkelman, supra, footnote 1.
10. U.S. Supreme Court permitted punitive damages in Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52, 60-63 (1995), when interpreting the Federal Arbitration Act, which provides persuasive authority to the states. 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.
11. BMW of North America, Inc. v. Gore, 517 U.S. 559, 116 S. Ct. 1589, 134 L. Ed.2d 809 (1996); State Farm Mut. Auto. Ins. Co. v. Campbell, 538 U.S. 408, 123 S. Ct. 1513, 155 L.Ed.2d 585 (2003); Phillip Morris USA v. Williams, 549 U.S. 346, 127 S. Ct. 1057, 166 L. Ed.2d 940 (2007); and Exxon Shipping Co. v. Baker, 200 U.S. 321, 128 S. Ct. 2605, 171 L. Ed.2d 570 (2008).

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