Federal courts appear to be changing their position as to who should decide whether the preclusion of punitive damages in an arbitration clause is for the court or the arbitrator to decide. The changing law on the subject poses serious questions for businesses as to the utility of arbitration clauses. Prior case authority generally shows that federal courts were not shy about deciding whether an arbitration clause that precluded punitive damages was enforceable. See, e.g., Benoay v. E.F. Hutton & Co., 699 F. Supp. 1523, 1528 (S.D. Fla. 1988) ("Signing the contract with the arbitration clause in it constitutes a waiver of the right to punitive damages.") (citing Baselski v. Paine Webber, Jackson & Curtis, Inc., 514 F. Supp. 535, 543 (N.D. Ill. 1981)); see also Baravati v. Josephthal, Lyon & Ross, Inc., 28 F. 3d 704, 709 (7th Cir. 1994) (parties to an arbitration clause "surely can stipulate that punitive damages will not be awarded."). In the past several years, however, a number of Circuit Courts have held that the question of whether punitive damages have been waived pursuant to an arbitration agreement is for the arbitrator, not a court, to decide. See, e.g., MCI Telecomm. Corp. v. Matrix Communications Corp., 13 F.3d 27, 33 n.12 (1st Cir. 1998) (the validity of a provision in an arbitration agreement foreclosing multiple damage remedies is an issue for the arbitrators); Great W. Mortgage Corp. v. Peacock, 110 F.3d 222, 232 (3d Cir. 1997) (whether the right to punitive damages has been waived "is for the arbitrator to decide"); Hawkins v. Aid Ass’n for Lutherans, 338 F.3d 801, 807 (7th Cir. 2003) (complaints regarding the unavailability of punitive damages under an arbitration agreement "must be presented to the arbitrator"); Larry’s United Super, Inc. v. Werries, 253 F.3d 1083, 1086 (8th Cir. 2002) (whether a "waiver of punitive damages violates the public policy underlying RICO’s treble damages provision is a matter for the arbitrator"); Anders v. Hometown Mortgage Servs. Inc., 346 F.3d 1024, 1032 (11th Cir. 2003) ("an arbitrator not a court should decide the validity of the remedial restriction provisions" in an arbitration agreement).
The danger of having an arbitrator decide whether the preclusion of punitive damages in an arbitration clause will be enforced is illustrated by Stark v. Sandberg, Phoenix & Von Gontard, P.C., 381 F.3d 793, 797 (8th Cir. 2004). In Stark, an arbitrator found that the clause in the parties’ arbitration agreement precluding punitive damages was ambiguous and construed the provision against the defendant. The arbitrator then awarded plaintiffs $1,000 in actual damages, $1,000 in statutory damages, and $6,000,000 in punitive damages. Id. at 798. The Eight Circuit ordered confirmation of the arbitrator’s award, citing the limited appellate review permitted of an arbitrator’s decisions. Stark, 381 F.3d at 803. The defendant in Stark filed petition for certiorari in early February, and the Supreme Court has yet to decide if it will take the case. Nevertheless, Stark serves as an indicator of what can occur under recent Circuit Court authority which holds that arbitrators decide the validity of arbitration provisions excluding punitive damages. Businesses that seek protection from runaway juries by precluding punitive damages in an arbitration agreement should know that they may subject themselves to an arbitrator’s decision on the validity of such limitation, while simultaneously restricting the scope of appellate review on the issue.
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