Due process right to judicial review of arbitral punitive damages awards.
INTRODUCTION
The due process clause of the Fourteenth Amendment requires that jury awards of punitive damages be subject to judicial review. The Supreme Court recently announced this principle in Honda Motor Co. v. Oberg(1). Rooted in the common law tradition of judicial review of such
This holding has sparked speculation on whether arbitral awards of punitive damages fall under the same constitutional constraints as jury awards, and, if so, whether review procedures governing commercial arbitral awards satisfy due process.(5) Since some state courts, as a matter of public policy, prohibit arbitrators from awarding punitive damages,(6) any constitutional requirement of judicial review, within their jurisdictions, may be academic.(7) However, such state law prohibitions are far from universal.(8) Most federal courts, applying the liberal policies of the Federal Arbitration Act ("FAA"),(9) interpret arbitration agreements to grant arbitrators the power to award punitive damages.(10) The applicability of Oberg to arbitration is therefore an issue of national interest.
Two powerful trends heighten this concern. The first is the proliferation of soaring punitive damages awards.(11) For example, an Alaskan federal court jury recently assessed $5 billion in punitive damages against Exxon Corp. for the Exxon Valdez oil spill, dwarfing even the $3 billion in punitive damages awarded to Pennzoil Co. against Texaco, Inc. in 1985.(12) Justice O'Connor has observed that "[j]uries are permitted to target unpopular defendants, penalize unorthodox or controversial views, and redistribute wealth. Multimillion dollar losses are inflicted on a whim."(13) Although some commentators disagree with Justice O'Connor's harsh appraisal of punitive damages,(14) others warn that the frequency, magnitude and unpredictability of punitive awards threaten sectors of the American economy.(15)
The second trend is the burgeoning popularity of commercial arbitration.(16) Over the past three decades the American Arbitration Association ("AAA") has handled an ever-increasing number of disputes.(17) Similarly, arbitration organizations servicing particular trades, such as the securities industry, function in thousands of cases as a substitute for the courts.(18) Many arbitration organizations have adopted rules,(19) both formal and informal,(20) that permit awards of punitive damages,(21) and arbitrators do not seem reluctant to exercise this power.(22)
Under the FAA(23) and state arbitration statutes,(24) the scope of judicial review is limited. The courts have not yet decided whether, under this narrow scope of review, they may set aside punitive awards for unconstitutional excessiveness. If reviewing courts lack this power, and if Oberg applies to arbitration, all arbitral punitive awards constitute a denial of procedural due process. Such a conclusion would have widespread consequences. It would invalidate existing awards and require the amendment of both arbitration organization rules and the FAA. Such amendments would impose procedural complexities in arbitration which run counter to its very purpose.
This article will attempt to resolve the issue of whether the requirements of Oberg apply to commercial arbitrations, and, if so, whether procedures under the FAA meet those requirements. It will begin by discussing the nature of the arbitral process, focusing on the scope of judicial review. It will then trace the development of the Supreme Court's due process analysis beginning with Pacific Mutual Life Insurance Co. v. Haslip, continuing with TXO, and culminating with the Oberg decision. In examining whether due process and the Oberg requirement of judicial review of punitive awards applies to arbitration, this article will analyze whether arbitration involves state action. It will determine that arbitration is not state action and, therefore, that Oberg does not apply to arbitration. Nevertheless, assuming the contrary for the sake of argument, this article will consider and reject the argument that arbitrating parties waive due process. Finally, it will examine whether the judicial review provided in the FAA meets the standard announced in Oberg, and will conclude that such review satisfies this standard.
THE NATURE OF ARBITRATION
Before discussing whether Haslip, TXO and Oberg apply to arbitration, it would be beneficial to compare arbitration with litigation and to examine the FAA, which prescribes rules of arbitral practice, including the rules governing the standard of appellate review.
Arbitration and Litigation Compared
Awash in procedures devised to protect the rights of the parties, litigation often results in years of delay and prohibitive legal expenses(25) which sometimes foreclose parties from pressing claims or defenses, no matter how meritorious.(26) Commercial arbitration affords an efficient and economical alternative to the courtroom.(27)
Nearly every step in the arbitral process is simpler than its counterpart in the court system.(28) Service of a summons and complaint in a court action must satisfy complex statutory requirements(29) as well as the demands of due process,(30) and the content of the complaint must meet pleading standards of particularity.(31) By contrast, an arbitration may begin with an ordinary letter which sets forth a simple statement of the facts.(32) Litigants in lawsuit have at their disposal an arsenal of time-consuming motions.(33) Parties make copious use of disclosure devices,(34) even when the information sought is irrelevant and the scope of the requested discovery is unduly burdensome on the adversary, a tactic which spawns more motion practice(35) wasting additional time and money.(36) Arbitrators, on the other hand, frequently deny the parties permission to make motions,(37) take depositions,(38) and serve interrogatories.(39) Unlike trial judges who must apply the formal rules of ordinance, arbitrators customarily dispense with evidentiary rules.(40) Arbitrating parties wavie the right to a jury,(41) and the proceedings are transcribed only if the parties so request.(42)
The Federal Arbitration Act: Limited Review of Arbitral Awards
Beginning in the late Seventeenth Century, English and American courts denounced arbitration, because it "ousted them of jurisdiction,"(43) and they consequently refused to enforce arbitration agreements.(44) Congress passed the Federal Arbitration Act(45) (FAA) in 1925 to combat this judicial hostility.(46) The FAA encourages arbitration(47) and supports the broad interpretation of arbitration clauses.(48)
Largely a procedural statute, the FAA provides a mechanism for narrow judicial review of arbitration awards.(49) The review process is initiated by filing in district court a motion to vacate the award.(50) In reviewing the award, the court has limited powers.(51) For example, it may vacate an award "procured by corruption, fraud, or undue means,"(52) influenced by "evident partiality,"(53) or tainted by an arbitrator's "misconduct."(54) It also may vacate an award "[w]here the arbitrators exceeded their powers."(55) Many federal courts have recognized a non-statutory ground for vacatur: "manifest disregard for the law."(56) This rule allows reversal when the arbitrators ignore dispositive law intentionally.(57)
The court may not vacate an award because the arbitrators failed to give reasons for their decision.(58) Nor may the court, absent manifest disregard, vacate an award because the arbitrators made an error of law, even if the error was outcome determinative.(59)
CONSTITUTIONAL REQUIREMENT OF JUDICIAL REVIEW OF JURY AWARDED PUNITIVE
DAMAGES
The Oberg(60) decision was the third in a trilogy of recent Supreme Court decisions which have interpreted the due process clause of the Fourteenth Amendment to impose procedural and substantive constraints on punitive damages awards.
Procedural Due Process: Pacific Mutual Life Insurance Co. v. Haslip
The first case in the trilogy, Pacific Mutual Insurance Co. v. Haslip,(61) dealt primarily with the procedural requirements of due process.(62) In Haslip, Ruffin, an insurance agent, sold a health insurance policy to Roosevelt City, Alabama, covering its employees. To pay the premiums, the city clerk issued monthly checks, most of which Ruffin misappropriated. Upon detection of the fraud, aggrieved employees, including Haslip, sued Ruffin individually and Pacific Mutual under the theory of respondeat superior. The court instructed the jury that, if it found in favor of plaintiffs' fraud claim, it could award punitive damages against both defendants. The jury so found and awarded each of the four plaintiffs punitive damages amounting approximately to 4 times the compensatory award.(63)
The issue was whether the award of punitive damages violated the due process clause of the Fourteenth Amendment.(64) Justice Blackmun, writing for a five-judge majority,(65) vindicated the practice of jury-imposed punitive damages awards.(66) Citing the virtually universal acceptance of this two hundred year old practice,(67) the Court rejected the argument that "the common-law method for assessing punitive damages is so inherently unfair as to deny due process and be per se unconstitutional."(68) Nevertheless, the Court granted that under the facts of a particular case such an award might offend the due process clause.(69) The Court, however, declined to specify what requirements due process imposes. Rather, it suggested that "general concerns of reasonableness and adequate guidance from the court when the case is tried to a jury properly enter into the constitutional calculus."(70)
To determine whether the defendants in Haslip received due process, the Court analyzed the procedures followed in the case under Alabama law. It found that the jury instructions "enlightened the jury as to the punitive damages' nature and purpose, identified the damages as punishment for civil wrongdoing of the kind involved, and explained that their imposition was not compulsory."(71) These instructions properly informed the jury of the dual role of punitive damages -- deterrence and retribution,(72) thereby diminishing the risk of arbitrariness.(73) Although the jury was afforded wide discretion,(74) the Court observed that the law entrusts juries to exercise broad discretion on other issues.(75)
The Court also approved of the applicable post-trial review of punitive awards.(76) This procedure requires the Alabama trial court to consider the "culpability of the defendant's conduct,"(77) the "desirability of discouraging others from similar conduct," the "impact upon the parties," and "other factors, such as the impact on innocent third parties."(78)
Appellate review served as Alabama's final procedural safeguard. The High Court found that application of "detailed substantive standards" assured the adequacy of review.(79) For example, in evaluating the appropriateness of such an award, the Alabama Supreme Court could consider (a) the relationship between the award and the actual and likely future harm resulting from the defendant's wrongful conduct, (b) the nature, frequency, and duration of the conduct, and (c) the profitability of the conduct to the defendant.(80)
After engaging in the above analysis, which focused entirely on procedural due process, the Court shifted abruptly to consider the substantive due process implications of the award, that is, whether the magnitude of the award, rather than the procedures followed, violated the Constitution. Finding that the punitive award(81) came "close to the line" of constitutional infirmity,(82) the Court upheld the jury's determination(83) because Alabama procedures were based on "objective criteria."(84)
Justice Scalia concurred in the judgment.(85) Because of the long tradition of entrusting juries with the power to award punitive damages, he would have affirmed without regard to the "reasonableness" of the award.(86) Also concurring in the judgment, Justice Kennedy, though not as confident as Justice Scalia that historical practice always forecloses a due process inquiry, believed "that the judgment of history should govern the outcome of the case before us."(87) Justice O'Connor dissented, because, in her view, the jury instructions were void for vagueness, giving unlimited discretion to the jury and because, in any event, Alabama procedures failed to satisfy the due process test of Mathews v. Eldridge.(88) This case requires that procedures be measured against three factors: (1) the private interest at stake, (2) the risk that the challenged procedures will interfere with the interest, and the likelihood that alternative procedures will effect a cure, and (3) the governmental interest in avoiding the alternative.(89) Applying this test, she found the "private property interest at stake enormous,"(90) the jury instructions and judicial review inadequate,(91) and the state interest in avoiding the modest, necessary reforms insubstantial.(92)
By stressing appellate review,(93) the Court presaged its decision in Oberg, which elevated such review to a constitutional command. However, before Oberg, the Court in TXO Production Corp. v. Alliance Resources Corp.(94) made explicit what was implicit in Haslip: substantive due process restricts the magnitude of punitive damages awards.
Substantive Due Process: TXO Production Corp. v. Alliance Resource Corp.
Although the TXO Court held that due process imposes substantive bounds on punitive damages awards, it failed to articulate a clear standard by which such awards should be judged. In TXO, Alliance controlled valuable oil and gas rights and accepted TXO's proposal to develop these rights at enormous potential profit to Alliance. Thereafter, TXO learned that another party owned coal (but not oil and gas) rights in the property, and fraudulently used this fact in an effort to reduce its obligation to Alliance. TXO brought a frivolous declaratory judgment action asserting that Alliance's claim to the oil and gas rights was invalid. Alliance counterclaimed for slander of title.(95) The jury awarded Alliance $19,000 in compensatory damages and $10 million in punitive damages.(96)
TXO argued that the punitive award, which was 526 times the compensatory award, was "so excessive that it must be deemed an arbitrary deprivation of property without due process of law."(97) Agreeing that the due process clause imposes substantive limits on the magnitude of punitive damages awards, Justice Stevens, speaking for a three-judge plurality, did not elaborate on how one might ascertain whether such an award exceeded permissible bounds. Instead he reiterated the amorphous "reasonableness" test,(98) first articulated in Haslip, and held the award consistent with due process(99) "in light of the amount of money potentially at stake, the bad faith of petitioner, the fact that the scheme employed in this case was part of a larger pattern of fraud, trickery and deceit, and petitioner's wealth."(100)
The TXO Court faced a dilemma. While feeling compelled to limit arbitrary and potentially devastating punitive jury awards, the Court recognized that it could not quantify the limits of constitutionality. The propriety of an award depends on the facts of the case in which it was rendered. Delineating the bounds of acceptable awards so daunted the Court that it could not even offer guidance, propounding instead the vague "reasonableness" test.(101) By establishing this test, the Court pretended to have fashioned an objective standard. Reasonableness, however, is measured in subjective rather than objective terms. In essence, the Court adopted a "shocks the conscience" test,(102) an undefined, unquantifiable standard, allowing the reviewing court to intervene when an award offends its sense of fairness. Yet, the magnitude of the punitive award sustained in TXO leads one to ponder how enormous an award must be to shock the Court's conscience and breach the limits of due process.(103)
Such uncertainty could be avoided by concluding that the due process clause creates procedural but not substantive rights. Excessive awards warn of possible jury abuse and a consequent denial of procedural due process which warrant judicial scrutiny for jury impropriety. Where an improper factor such as bias leads to an excessive award, procedural due process supports reversal. Such a test accommodates concerns of excessive awards into a workable structure of procedural due process without manufacturing unenumerated substantive rights.
Justice Scalia, concurring in the TXO judgment, denied the existence of substantive due process and went even further, arguing that traditional procedures are per se constitutional,(104) a position which defers too much to the caprices of history and possible abuses or anomalies embedded in our jurisprudence. Justice Kennedy also questioned the plurality's "reasonableness" standard, urging that an award may violate due process if bias, passion or prejudice swayed the jury.(105) As he recognized, partiality undermines the judicial process and may result in the denial of a fair hearing, thus depriving the plaintiff of procedural due process.
In Oberg the Court leaned in the direction of protecting the substantive due process right articulated in TXO, not with artificial monetary limits, but with procedural safeguards.(106) However, in its haste to formalize an objective test, the Court abdicated its responsibility to analyze complex procedural frameworks for fundamental fairness and established instead a rigid test unconditionally requiring judicial review of punitive damages awards.(107)
Judicial Review: Honda Motor Co. v. Oberg
In Oberg v. Honda Motor Co.(108) the Court considered whether Oregon state law not providing for judicial review of the size of a punitive award is inconsistent with Haslip. The petitioner manufactured a three-wheeled, all-terrain vehicle, which overturned while respondent was driving it, causing him injury. Claiming that Honda knew or should have known that the vehicle was dangerously defective, Oberg sued not only for compensatory damages but also for a punitive award. The jury awarded Oberg approximately $900,000 compensatory damages, reduced by the trial judge to $735,000, and $5,000,000 punitive damages.
The Court began its analysis as it had in Haslip and TXO, by reviewing legal tradition. It found, alluding to English and American common law, that "[j]udicial review of the size of punitive damage awards has been a safeguard against excessive verdicts for as long as punitive damages have been awarded."(109) Honda contested the validity of this premise, citing early criminal and civil cases in which the jury determined questions of fact and law.(110) The Court disposed of this argument, noting that in civil cases verdicts were subject to review, and in criminal cases the nonreviewability of an acquittal does not raise due process concerns, since an arbitrary acquittal grants freedom rather than depriving a party of liberty or property.(111)
In response to the charge that Oregon law provides no review of the size of jury awards, Honda argued that Oregon judges may set aside jury awards based on passion or prejudice.(112) However, the Court disagreed, finding that "[n]o Oregon court for more than half a century has inferred passion and prejudice from the size of a damages award."(113) Honda also argued that Oregon's procedural safeguards other than review satisfy due process.(114) First, Honda argued that the complaint sets limits on the amount of the award. The complaint, the Court responded, offers no protection at all, since any sum of punitive damages may be sought and since it is questionable whether an Oregon court has the power to reduce an award exceeding the sum sought in the complaint.(115) Second, Honda cited Oregon's burden of proof requiring that clear and convincing evidence be adduced before a jury could impose punitive damages. Although acknowledging that this safeguard is an "important check" on the jury, the Court concluded that it does not protect against arbitrary awards.(116) Third, Honda noted that Oregon courts set pre-verdict limits on punitive damages, but the Court saw no support that this procedure existed let alone that any court had ever followed it.(117) Finally, Honda stressed the detailed instructions provided to juries. The Court was concerned, however, that juries might not follow the instructions.(118)
Condemning as unconstitutional Oregon's denial of judicial review of the size of punitive damages awards,(119) the Court revealed some distrust of juries. It said:
Punitive damages pose an acute danger of arbitrary deprivation of property. Jury instructions typically leave the jury with wide discretion in choosing amounts, and the presentation of evidence of a defendant's net worth creates the potential that juries will use their verdicts to express bias against big business, particularly those without strong local presences. Judicial review of the amount awarded was one of the few procedural safeguards which the common law provided against that danger.(120)
Although Oberg has the virtue of establishing an objective constitutional standard (the requirement of judicial review), the standard is arbitrary. Any due process analysis must focus on whether the procedures followed in a particular case were fundamentally fair.(121) As Justice Ginsburg recognized in her dissent,(122) fairness may obtain without review. Absent issues of procedural fairness, including jury partiality, the Constitution is not concerned with substantive limits on awards. Although in Oberg the Court clung to the TXO substantive due process test of reasonableness, one may hope that, in view of the High Court's apparent discomfort in applying the "reasonableness" standard, the test will fade over time into obscurity.
Despite its conceptual shortcomings, Oberg represents entrenched thinking of the Supreme Court. A possible extension of Oberg would be to impose the due process requirement of judicial review on arbitral awards of punitive damages. The propriety of such an extension depends on whether due process applies to arbitration, and whether arbitral procedures meet due process requirements.
THE APPLICABILITY OF DUE PROCESS TO ARBITRATION
The courts do not agree on whether due process applies to arbitration. Some decisions are muddled and many, without any explanation, blindly engraft due process into arbitral proceedings.(123)
The Right to a Fundamentally Fair Hearing
Although procedural safeguards are substantially relaxed in arbitration, the courts agree without exception that parties to an arbitration are entitled to a fundamentally fair hearing.(124) In Bell Aerospace Co. v. Local 516,(125) the union complained that the arbitrator improperly relied on an affidavit not placed in evidence. However, the arbitrator had given letter notice that he would consider the affidavit. The court explained that, although an arbitrator "need not follow all the niceties observed in federal courts," he or she must provide a "fundamentally fair hearing." Since the procedures followed in Bell were fair, the court rejected the union's challenge,(126) but failed to cite a source of the right to such a hearing.
Similarly, in Totem Marine Tug & Barge v. North American Towing, Inc.,(127) Totem contended that the arbitration panel denied it due process by deciding an issue not presented for determination.(128) Holding that the panel had exceeded its authority, the court observed that, although arbitration "is much less formal than a trial in court," an arbitrator must "grant the parties a fundamentally fair hearing."(129) However, as in Bell, the court did not explain why.
These decisions fail to clarify whether the guaranty to a fundamentally fair hearing arises from constitutional due process,(130) the FAA,(131) or some other source. This issue is not academic. If the right to a fundamentally fair hearing in arbitration emanates from the due process clause,(132) Oberg's due process requirement of judicial review of punitive damages awards applies to arbitration. If, on the other hand, due process does not apply to arbitration, Oberg becomes irrelevant to arbitration. To resolve this question, one must examine whether arbitration involves state action.
The State Action Doctrine
The Fourteenth Amendment forbids any "[s]tate" to deprive any person of life, liberty or property without due process of law.(133) Following the language of the Amendment, the Supreme Court has long held that due process applies only to "state action,"(134) that is, conduct attributable to the state.(135) However, a finding of state action does not require that the government act directly.(136) Even the early Civil Rights Cases(137) recognized the subtle interaction between private behavior and governmental acts, instructing that "state action of every kind" falls within the ambit of due process.(138) Fashioning rules to determine when seemingly private conduct implicates the state has troubled the Supreme Court.(139) The shortcomings of the doctrine(140) have elicited thoughtful commentary.(141)
State Action Versus Private Conduct
Ostensibly private conduct may assume the character of state action, if the government is sufficiently entangled in it.(142) Although a neutral regulatory scheme may not be enough to support a finding of state action,(143) where the government compels private parties to engage in conduct, a finding of state action may be justified.(144) Participation of state agents in procuring a statutory remedy for a private party may constitute state action.(145) Mere governmental encouragement, even if implicit, may amount to state action, if the encouraged activity offends public policy, such as the eradication of racial discrimination.(146) Private conduct may assume the status of state action if the state benefits from it.(147)
A line of cases, including Jackson v. Metropolitan Edison Co.,(148) holds that state action may occur when the state confers on private parties the power to perform a function "traditionally the exclusive prerogative of the state."(149) The courts are more inclined to find state action under this and most other principles of state action when an equal protection claim rather than a due process claim underlies the controversy.(150)
In 1948 the Supreme Court held in Shelley v. Kraemer(151) that judicial enforcement of a private restrictive covenant bore "the clear and unmistakable imprimatur of the state"(152) and, therefore, constituted state action.(153) Though aimed at fighting racial discrimination,(154) Shelley suggests that judicial enforcement converts any private agreement into state action.(155) Vast in its potential impact,(156) this decision, which might effectively emasculate the state action requirement,(157) lies dormant.(158) The High court has declined to apply it in other cases.(159)
Decisions Without Rationales
Many courts, without discussing the state action doctrine, assume that due process applies in the arbitral forum.(160) Such courts rely neither on precedent nor on any articulated rationale. The conclusion is simply taken for granted. Two such cases involve due process attacks on arbitral awards of punitive damages.
First, in Raytheon Co. v. Automated Business Systems, Inc.(161), the First Circuit equated due process with the right to receive a "fundamentally fair hearing."(162) Seeking to vacate an arbitral award of punitive damages, Raytheon argued that the panel had not given it notice that punitive damages might be assessed, thereby violating its due process rights.(163) The court engrafted due process into the arbitral proceedings, by concluding that, since Raytheon had notice, the court was "unable to see how the arbitrators' behavior denied Raytheon of its constitutional right to due process."(164)
In the second decision, Todd Shipyards Corp. v. Cunard Lines, Ltd.,(165) the Ninth Circuit implicitly recognized that due process applies in arbitration by rejecting Cunard's objection to the panel's imposition of punitive damages. Because Cunard had voluntarily submitted the dispute to arbitration, the court held that "Cunard cannot now argue that its due process was denied."(166)
Some cases hold due process inapplicable without discussing state action.(167) For example, in Moseley, Hallgarten Estabrook & Weeden v. Ellis,(168) the arbitrators determined that the hearing would be bifurcated into two phases, the first to decide if a partnership existed and the second to decide liability. Their subsequent abandonment of this procedure spurred one of the parties to argue that the arbitrators had denied him the opportunity to present evidence and had thus violated his due process rights.(169) The court disagreed: "[W]e note that the "arbitration system is an inferior system of justice, structured without due process, rules of evidence, accountability of judgment and rules of law."(170) It held that the arbitrators had apprised the parties of the change in procedure. The proceedings had therefore been "fair," satisfying the parties' rights.(171) Although clear in its denial of the applicability of due process, Moseley is conclusory.
A few courts, deciding either that due process does or does not apply to arbitration, have been more precise in justifying their holdings. These decisions are generally predicated on the court's view of whether or not arbitration involves state action.(172)
Arbitration as State Action
A clear rationale for finding state action in arbitration comes in Dewey v. Reynolds Metal Co.,(173) a labor case.
Since the arbitration tribunal and arbitration proceedings are in many instances a substitute for traditional judicial remedies, it follows that the rules of due process and other constitutional protection must extend to the substitute proceedings lest the courts, through the approval of arbitration agreements in arbitration proceedings, support proceedings which result in the deprivation of statutory and constitutional rights.(174)
Dewey may not be applicable to commercial arbitration. Numerous Congressional Acts(175) and the National Labor Relations Board(176) govern labor relations. Although regulatory schemes alone do not generally transform private conduct into state action,(177) the complex and pervasive federal scheme regulating labor relations suggests that labor arbitration has more characteristics of state action than does commercial arbitration.
Moreover, the theoretical basis of Dewey pales under scrutiny. Dewey seems to rest on the proposition that dispute resolution is "traditionally an exclusive public function."(178) To support this position, one could argue that, as an alternative to the courts, arbitration performs a function historically reserved to the judicial branch of government. Over two hundred years of judicial refusal to enforce arbitration agreements, a condition which persisted until the passage of the FAA in 1924,(179) illustrates the historic exclusivity of the state's role as adjudicator.(180)
Despite its superficial appeal, this argument fails because the element of "state delegation," essential to application of the "exclusive public function" test, is missing.(181) A similar argument, characterizing peremptory challenges as state action, was successful in Edmonson v. Leesville Concrete Co.(182) There, however, the state conferred on the parties a role in jury selection, a matter exclusively within the state's control.(183) By contrast, although the FAA permits arbitration, the state does not invest arbitrators with the power to adjudicate. Private parties do so by agreement.(184)
A possible rejoinder is that, since the FAA enforces arbitration agreements and vests in the courts the power to confirm arbitral awards, the state is delegating the power to adjudicate to the arbitrator. However, regulatory frameworks far more imposing than the FAA(185) do not meet the requisite threshold for state action.(186) Nor does judicial enforcement of a private agreement, unless racially discriminatory, signal significant governmental entanglement.(187) Federal law does not affect the private character of commercial arbitration. Free of government interference, the parties set their own course in an arbitration agreement. The FAA merely acknowledges the agreement's enforceability. It does not delegate sovereign power to private parties.
Arbitration also arguably constitutes state action, because the state both encourages(188) and benefits from arbitration, which diverts cases from congested courts. However, the benign, unobtrusive federal policy favoring arbitration is unlike the tacit approval of racial discrimination found in Reitman v. Mulkey,(189) where a statute granted landowners absolute discretion in deciding to whom to rent or sell property.(190) Nor is the incidental benefit that arbitration confers on the courts as substantial as the financial benefit that the state enjoyed in Burton v. Wilmington Parking Authority(191) as the result of having the Eagle restaurant, which engaged in racial discrimination, operating on state-owned premises.(192)
More germane to the absence of state action from arbitration than the uncomfortable fit of these tests is the absence of governmental impact on the parties. A finding of state action is usually premised on the state's reordering of private rights.(193) If, for example, state involvement rather than private agreement occasions a deprivation of the rights of debtors,(194) property owners,(195) or a segment of the electorate,(196) the courts are likely to find state action. The decision to arbitrate is mutual. State involvement, such as it is, places neither party at a disadvantage.
The availability of remedies to the party challenging the government activity bears on the impact that the activity may have and thus on whether it constitutes state action. In Flagg Brothers, Inc. v. Brooks,(197) the Court found no state action in a statutory scheme authorizing the non-judicial foreclosure of a warehouseman's lien. In so deciding, the Court stressed the availability of remedies, such as replevin, to stave off the foreclosure sale, and damages, to recover any resulting loss.(198) The arbitration process similarly provides the losing party with a remedy. Judicial review, although limited, is a statutory mechanism to challenge an award.
It is ironic that judicial review, which may be characterized as governmental entanglement, ostensibly supports the argument that arbitration is state action, while contradicting that argument by providing a remedy to the losing party. This tension may be illusory. Judicial enforcement of private, commercial agreements does not convert those agreements into state action. When a court vacates an award because the arbitrators exceeded their powers, it is effecting the parties' arbitration agreement. Similarly, in refusing to uphold awards tainted by collusion or rendered in manifest disregard of the law, courts certainly give effect to the parties' intent.
In sum, the scale tips decidedly against finding state action in the arbitral forum. One might, nonetheless, raise the less ambitious argument that, even if arbitration does not generally involve state action, an arbitrator's imposition of punitive damages does. If accepted, this argument would require arbitrators to observe the due process rights enunciated in Oberg.
This argument posits that punishment lies traditionally in the exclusive province of the state.(199) The purpose of punitive damages is to foster retribution and deterrence,(200) goals associated with criminal rather than civil law. Punitive damages are, therefore, considered quasi-criminal.(201) Some even argue that "punishment should be left to the criminal justice system."(202) Since enforcement of criminal law is historically an exclusive state function, an arbitrator, in imposing punitive damages, appears to encroach on the state's domain.(203)
Garrity v. Lyle Stuart, Inc.(204), the seminal case prohibiting arbitrators from awarding punitive damages, was based on the premise that punishment is an exclusive state function.(205) The Garrity court admonished that "for centuries the power to punish has been a monopoly of the state, and not that of any private individual,"(206) and, thus, "the state is the engine for imposing social sanction."(207) The public policy against permitting arbitrators from imposing punitive damages was so compelling that the court refused to allow arbitrators to exercise such power, even with the parties' consent.(208)
Like the argument that arbitration, as a general matter, involves state action, this argument fails to meet the element of "state delegation." The parties vest the arbitrator with the power to grant punitive damages. The state is a disinterested bystander. Commercial arbitration is a private matter, involving the state inconsequentially. The choices to arbitrate and to grant the arbitrator authority to award punitive damages reside with the parties. The lack of state impact implies the absence of state action and the inapplicability of due process.
Some courts have held, based on the consensual nature of arbitration, that it does not involve state action.(209) For example, in FDIC v. Air Florida Systems, Inc,(210) an arbitrator refused to conduct an oral hearing, rendering a decision based on documentary submissions. The FDIC argued that the denial of an oral hearing deprived it of due process.(211) Rejecting this contention, the court held that arbitration, a private means of dispute resolution, does not involving state action:
The arbitration involved here was private, not state, action; it was conducted pursuant to contract by a private arbitrator. Although Congress, in the exercise of its commerce power, has provided for some governmental regulation of private arbitration agreements, we do not find in private arbitration proceedings that state action requisite for a constitutional due process claim.(212)
Although the court recognized that the government, through the FAA, exercises some control over arbitration, the level of state entanglement in an essentially private forum did not justify the conclusion that arbitration involves state action.
A like result was reached in Austern v. Chicago Board Options Exchange, Inc.(213) where the court dismissed a collateral due process attack on arbitrators who allegedly failed to give notice of arbitration to the complaining party. The court held that the arbitrators' conduct did not constitute state action.(214)
These decisions correctly analyze the state action issue. Yet, as noted, numerous courts, though sometimes perfunctorily, have applied due process to the arbitral forum. However, even assuming due process applicable to arbitration, one may argue that it applies in a diluted form. Rather than conforming to a rigid formulation, due process is a flexible standard.(215) In the arbitral setting, due process must relax to meet the parties' expectations of simplicity, informality and circumscribed rights.
The Haslip "Reasonableness" Test as a Flexible Due Process Standard
A line of Supreme Court cases holds that "[d]ue process, unlike some legal rules, is not a technical conception with a fixed content unrelated to time, place and circumstances."(216) It "is flexible and calls for such procedural protection as the particular situation demands."(217) The due process test of "reasonableness" articulated in Haslip(218) should likewise be interpreted as flexible. The very word "reasonableness" contradicts the slavish adherence to unremitting rules. A procedure reasonable in one situation may be unreasonable in another.
The rigors of Oberg, so strenuously applied to jury awards of punitive damages,(219) should be subject to flexible application in other settings. The nature of the review which due process demands may be relaxed in arbitration. Parties arbitrate voluntarily to avoid the complexities of litigation. They understand that their rights are attenuated, even due process rights that may not be altogether waived. They also understand that the terms of their arbitration agreement govern the proceedings. The forum is administered privately rather than publicly, although the state, through the FAA, exerts some control over it. The private and voluntary nature of arbitration, coupled with the parties' expectation of informality and circumscribed rights, allows for a diluted brand of procedural due process, and the consequent relaxation of Oberg requirements.(220)
The holding of Oberg was based, in large part, on the tradition of judicial review of jury awards of punitive damages.(221) If the tradition in arbitration is to afford parties less plenary judicial review, the basic rationale of Oberg -- to respect tradition -- is not offended by leaving arbitration procedures intact.
WAIVER OF DUE PROCESS
Even if courts hold that arbitration is state action, the waiver doctrine may deprive arbitrating parties of due process protection. The waiver argument is based in part on the informality of arbitration, which may indicate the parties' voluntary relinquishment of due process. It is also grounded on the premise that sophisticated parties, represented by counsel, abandon Oberg rights by voluntarily submitting their dispute to arbitration under the FAA. However, it is doubtful, unless the facts indicate otherwise, that arbitrating parties intend to relinquish Oberg rights.
The Waiver Doctrine
A waiver is "an intentional relinquishment or abandonment of a known right or privilege."(222) While "'courts indulge every reasonable presumption against waiver' of fundamental constitutional rights,"(223) parties may nevertheless waive their rights to civil due process.(224) Despite the presumption against waiver, it may, when unequivocal, be inferred from circumstance(225) or even inaction.(226)
Due process may be waived contractually.(227) When assessing the validity of a contractual waiver of due process, the Supreme Court has focused on the relative bargaining power of the parties and the waiving party's understanding of the legal consequences of the waiver. In D. H. Overmyer v. Frick Co.,(228) Overmyer, while represented by counsel, renegotiated more favorable terms on a note with Frick. The second note contained a cognovit provision under which Overmyer consented, in the event of default, to the entry of judgment without notice or hearing. After Frick exercised its rights under the cognovit provision, Overmyer sought to vacate the judgment, arguing a deprivation of its due process rights to notice and an opportunity to be heard.(229) The Court noted that Overmyer, a large corporation, was not the victim of overreaching or unequal bargaining power.(230) Represented by counsel, Overmyer understood the legal effect of the cognovit provision and agreed to it in exchange for concessions in the renegotiated note.(231) Under these circumstances the Court discerned no deprivation of rights,(232) finding that Overmyer "voluntarily, intelligently, and knowingly waived" due process.(233)
The Supreme Court refused to enforce a purported waiver in Fuentes v. Shevin.(234) There, consumers, alleging a violation of due process, challenged a putative waiver provision in a conditional sales contract. The provision stated that the seller could repossess purchased merchandise upon a default. Sustaining the due process claim,(235) the Court wrote: "There was no bargaining over contractual terms between the parties who, in any event, were far from equal in bargaining power. The purported waiver provision was a printed part of a form sales contract and a necessary condition of the sale."(236) The court went on to hold the language of the purported waiver, which merely granted the seller the right to repossession on the buyer's default, insufficiently clear to be effective.(237)
These cases instruct that the court will scrutinize waivers of due process and will uphold such waivers only if unequivocal.
Analysis of the Waiver Argument
Arbitrating parties, seeking a simplified alternative to litigation,(238) waive many of the rights afforded in court.(239) Most of the waived rights, such as the use of the formal rules of evidence,(240) the right to make motions,(241) and the right to conduct discovery,(242) are not fundamental or constitutional. The presumption against waiver of basic rights such as due process(243) is therefore inapplicable to them. The waiver of nonfundamental rights in arbitration does not imply the waiver of due process.
Some of the rights waived in arbitration are fundamental, constitutional rights, such as the Seventh Amendment right to a trial by jury.(244) Other waived constitutional rights are particular procedural due process safeguards, including the right to certain formalities in the notice of the institution of proceedings,(245) and the right to be subject to suit only if the adjudicating tribunal has a basis of jurisdiction.(246)
The waiver of these rights, like the waiver of less significant ones, does not imply the waiver of Oberg protection. Waiver of all these rights, constitutional and nonconstitutional alike, arises contractually. The rules of the relevant arbitration organization, incorporated by reference into the arbitration agreement, provide the express source of these waivers. Absent overreaching, such waivers negotiated at arm's length are valid.(247) However, no arbitration organization has a rule providing that arbitrating parties waive all due process rights. Nor do any rules expressly eliminate the protection enunciated in Oberg.
Waiver of Oberg rights might arguably arise impliedly. The parties seek in arbitration to be free of the strictures of the courtroom. In forsaking formality, they arguably abandon the procedural and substantive rights recognized in Haslip, TXO and Oberg.
The implied waiver argument is unpersuasive. If the presumption against waiver operates when the waiver is express, that presumption is even stronger when the waiver argument rests on mere implication. The desire for efficiency, economy and informality does not imply the relinquishment of Oberg rights. Enforcing them causes little if any delay or additional expense. To insure constitutionally adequate review, the parties merely need arrange for a stenographer to transcribe the proceedings verbatim and provide the record to the reviewing court.(248)
It is unreasonable to assume that arbitrating parties intend to waive these rights. Newspaper and television reports of astronomical punitive awards have stirred fear in sophisticated business people and others most likely to enter into arbitration agreements. Many such agreements implicitly authorize arbitrators to award punitive damages, and the danger of a devastating award, even if exaggerated by the media, would chasten the parties to preserve constitutional safeguards against abusive exercises of the power.
Assuming for the sake of argument that the judicial review provided under the FAA does not meet the Oberg standard, one might contend that at least some arbitrating parties waive Oberg rights. Fuentes and D. H. Overmyer teach that the existence of a waiver must be judged on the facts of each case.(249) Sophisticated parties to an arbitration, particularly when represented by counsel, presumably understand the provisions of governing federal law. By agreeing to arbitrate, they are subjecting themselves to the FAA, including its standard of review, which, we are assuming, does not satisfy Oberg. If the arbitration agreement is voluntary, D. H. Overmyer suggests that such parties have knowingly and intelligently waived the constitutional right to judicial scrutiny of punitive awards.
This argument is flawed because the assumption on which it rests is unfounded. The scope of review under the FAA accommodates the concerns voiced in Oberg. As noted, arbitrating parties do not likely intend to abandon Oberg rights, but rather intend to preserve them. When the parties operate under this expectation, FAA judicial review assures that their expectation will be met.(250)
Nevertheless, the Ninth Circuit, in Todd Shipyards Corp. v. Cunard Lines, Ltd.,(251) hinted that agreeing to arbitrate might carry the implication of waiver. The court stated:
Because of the lack of formality, parties enter into arbitration by contract, rather than through a statutory scheme imposed involuntarily. Cunard cannot agree to arbitrate "all disputes" and then assert that an award made pursuant to that agreement ... denies due process because it is not sufficiently reliable.... Having taken advantage of this process [procedures available in arbitration] into which it entered voluntarily, Cunard cannot now argue that its due process was denied.(252)
This cryptic language suggests that Cunard waived due process. However, the court may have meant that arbitrating parties do not waive due process but rather that, as discussed above, a relaxed level of due process applies to arbitration.
THE CONSTITUTIONALITY OF THE JUDICIAL REVIEW OF ARBITRAL PUNITIVE
DAMAGE AWARDS
The issue remains whether the scope of judicial review afforded under the FAA satisfies due process. Only the Todd case has addressed this issue directly.(253)
The Adequacy of Judicial Review under the FAA: Todd Shipyards Corp. v.
Cunard Line, Ltd.
The Todd(254) court found the limited scope of arbitral review compatible with due process standards.(255) In Todd, Cunard, after engaging Todd to repair a cruise ship, refused to cooperate with Todd, making performance impossible and causing Todd to incur substantial expenses. The parties went to arbitration, where the panel, finding that Cunard acted in bad faith, awarded Todd $1 million in punitive damages.(256)
Cunard argued that the panel denied it due process by granting the award.(257) Its argument was based on the absence of "procedural strictures," such as the rules of evidence, and, more significantly, on the "narrow" scope of review.(258) Rejecting Cunard's argument that "because the standard of appeal is narrow, an erroneous award is likely to prevail,"(259) the court stressed that "Cunard had every opportunity to present evidence, to argue the merits of its position, and to challenge the arbitrator's award in court."(260)
The Ninth Circuit might have reached a different conclusion if Todd had been decided before Oberg. However, the two decisions are mutually consistent. The review procedures of the FAA satisfy Oberg's requirements of due process.(261)
The Adequacy of Judicial Review under the FAA: The Arbitrators Exceeding
Their Powers
Under the FAA, an arbitrating party may, upon motion, move in federal district court(262) to vacate an award on several grounds.(263) One of the grounds justifying vacatur of an arbitral award is that "the arbitrators exceeded their powers."(264) The courts use this provision to vacate awards when arbitrators grant relief not authorized in the arbitration agreement(265) or resolve issues not presented for their consideration.(266)
Arbitrators derive their authority from the consent of the parties. The agreement of the parties sets the limits of that authority. Any exercise of power beyond that granted in the agreement is improper. Arbitrators making such awards have exceeded their powers.
If arbitrating parties do not intend to waive their due process rights, it follows that they have reserved those rights and expect the arbitrators to honor them. One such due process right, articulated in TXO, is that arbitrators will be reasonable in assessing punitive damages -- that they will not impose unconstitutionally excessive punitive damages awards. The fundamentality of this due process right demands that, if not waived, arbitrators protect it scrupulously. When arbitrators violate this substantive due process right, they have exercised power the parties have not granted them. They have, in short, exceeded their powers. Thus, a district court reviewing a punitive damages award of an arbitrator must measure the award against the standard espoused in TXO. Should the court find that standard violated, it must, under section 10(a)(4) of the FAA, vacate the award on the ground that the arbitrators "exceeded their powers." Such judicial review roots out unconstitutionally excessive awards and, therefore, meets the requirements of Oberg.
Despite the facial adequacy of the review provided in the FAA, one might argue that such review in practice might in some instances be a sham not satisfying the "reasonableness" test articulated in Haslip. The FAA does not require arbitrators to explain their determinations in written decisions. The rationale of many decisions is left a mystery.(267) Faced with an unexplained arbitral award, the reviewing court may be unable to gauge whether the punitive award is excessive.(268)
The answer to this concern is that any arbitrating party has the right to have the proceedings transcribed.(269) With the benefit of a verbatim transcript the reviewing court can evaluate in meticulous detail whether the facts justify the award. If the parties choose to forego arranging for a court reporter, they have manifested their intent to forego an in depth review of the award; they have, in effect, waived Oberg protection. Furthermore, the attorneys, on a motion to vacate, have the opportunity to brief the issue thoroughly, summarize the evidence, present copies of hearing exhibits, and advocate their client's position at oral argument. These review procedures adequately protect other basic rights of arbitrating parties, including the due process right to notice(270) and the right to a fundamentally fair hearing.(271) By assuring meaningful review, they satisfy the most rigid application of Oberg. They easily meet the less stringent due process requirements which arguably attach in arbitration(272) and afford more than the "reasonable" procedural safeguards which Haslip requires.
CONCLUSION
The prominence of commercial arbitration can hardly be overstated. Every year tens of thousands of individuals and businesses in virtually every field, all wary of the legendary inefficiencies of the courts, entrust their disputes to the arbitral forum. These parties choose arbitration because it is speedy and economical. Although they may not be aware of the subtleties of arbitral appellate practice, most would surely be disgruntled to learn that the inappropriate imposition of due process principles threatens to complicate the procedural simplicity which is at the very heart of commercial arbitration. The possible extension of three decisions of the United States Supreme Court arouses concern.
The three potential culprits are Haslip, TXO, and Oberg, which set forth constitutional restrictions on awards of punitive damages. Haslip applies procedural due process to jury awards of punitive damages. TXO establishes that, as a matter of substantive due process, such an award may be unconstitutionally excessive. To insure against the imposition of unconstitutionally excessive awards, Oberg holds that such awards must undergo judicial review.
One must travel a maze to determine whether current arbitration practice offends the Oberg due process right to judicial review of punitive awards. First, one must consider whether arbitration involves state action. If it does not, as the better view suggests, it need not satisfy due process, and the inquiry is ended. However, the predominant view, at least by implication, is that arbitration does involve state action. Under this view, arbitral awards of punitive damages must meet the requirements of due process.
Only two mutually exclusive possibilities need to be considered to determine whether arbitral procedures violate the due process requirements expressed in Oberg. First, due process is waived in arbitration; second, it is not waived. If due process is waived, neither the substantive nor procedural due process rights attaching to punitive damages apply. If it is not waived, the arbitrator must satisfy the parties' due process rights, including the right, announced in TXO, to be free from unreasonably excessive punitive damages awards. Should the arbitrator fail to comply with TXO, he is "exceeding his powers," since the parties have not authorized him to violate their due process rights. The reviewing court, under section 10(a)(4) of the FAA, must vacate such an award, thereby providing the judicial review contemplated in Oberg.
The right to arrange for a verbatim transcript, coupled with the advocacy of counsel on a motion to vacate, insures that review will be meaningful. These rights and procedures satisfy the most strict interpretation of Oberg; they easily satisfy the relaxed standard of due process which applies in the arbitral forum. Due process is flexible, adjusting to circumstance. Even if commercial arbitration meets the threshold for state action, it is nevertheless an informal, voluntary and essentially private method of dispute resolution. Parties to an arbitration do not expect rigid adherence to courtroom procedures. The protection against excessive punitive damages awards available to arbitrating parties therefore exceeds constitutional requirements.
The Supreme Court has shown in TXO and Oberg its penchant to create substantive due process rights and to mold them into unyielding procedural requirements. These cases foreshadow ill-advised incursions into other areas of law. The Court will inevitably confront the issue of whether Oberg applies to arbitration, and, if so, whether current arbitration practice satisfies Oberg requirements. One must hope that the Court will have the wisdom to preserve the simplicity of arbitration, the very quality which attracts those wishing to avoid the procedural convolutions of the courtroom.
(1)114 S. Ct. 2331 (1994).
(2)Id. at 2335-38.
(3)113 S. Ct. 2711 (1993).
(4)Honda Motor Co., 114 S. Ct. at 2341.
(5)See Stephen J. Ware, Punitive Damages in Arbitration: Contracting Out of Government's Role in Punishment and Federal Preemption of State Law, 63 FORDHAM L. REV. 529, 559 (1994) (arguing that Oberg does not apply to arbitration because arbitration does not involve state action); Telephone Interview with Deborah Masucci, Director of Arbitration, NASD (Oct. 11, 1994) (advising that since Oberg the NASD is considering proposals to change its practices regarding punitive damages).
(6)E.g., Garrity v. Lyle Stuart, Inc., 353 N.E.2d 793, 795 (N.Y. 1976) (announcing that under New York public policy "an arbitrator has no power to award punitive damages, even if agreed upon by the parties."); see also COLO. REV. STAT. [sections] 13-21-102(5) (1987); McElroy v. Waller, 731 S.W.2d 789, 792 (Ark. Ct. App. 1987); United States Fidelity & Guar. v. DeFluiter, 456 N.E.2d 429, 432 (Ind. Ct. App. 1983); Shaw v. Kuhnel Assoc., Inc., 698 P.2d 880, 882 (N.M. 1985). See generally Kenneth R. Davis, A Proposed Framework for Reviewing Punitive Damages Awards of Commercial Arbitrators, 58 ALB. L. REV. 55, 62-64 (1994) (discussing the Garrity rule).
(7)Some federal courts have suggested that the liberal policy of the Federal Arbitration Act, see 9 U.S.C. [sections] 2 (1988), may preempt state law which restricts the powers of arbitrators. E.g., Lee v. Chica, 983 F.2d 883 (8th Cir. 1993), cert. denied, 114 S. Ct. 287 (1994); Todd Shipyards Corp. v. Cunard Line, Ltd., 943 F.2d 1056 (9th Cir. 1991); Raytheon v. Automated Business Sys., 882 F.2d 6 (1st Cir. 1989); Bonar v. Dean Witter Reynolds, Inc., 835 F.2d 1378 (11th Cir. 1988); Willoughby Roofing & Supply Co. v. Kajima Int'l, Inc., 598 F. Supp. 353 (N.D. Ala. 1984), aff'd per curiam, 776 F.2d 269 (11th Cir. 1985). See generally Davis, supra note 6, at 92-95 (arguing that these case misconstrue federal arbitration policy and ignore the intent of arbitrating parties, expressed in choice of-law clauses, to be bound by state law).
(8)Some state courts permit arbitrators to award punitive damages only if the arbitration agreement so provides. See, e.g., Belko v. AVX Corp., 251 Cal. Rptr. 557, 563 (Cal. Ct. App. 1988), review den., op. withdrawn by order of ct., 1988 Cal. Ct. App. LEXIS 862 (Dec. 8, 1988); Complete Interiors, Inc. v. Behan, 558 So.2d 48 (Fla. Dist. Ct. App. 1990). Others allow such awards unless the agreement prohibits them. Baker v. Sadick, 208 Cal. Rptr. 676, 681 (Cal. Ct. App. 1981); Rodgers Builders v. McQueen, 331 S.E.2d 726, 731 (N.C. Ct. App. 1985); Grissom v. Greener & Sumner Constr., 676 S.W.2d 709, 711 (Tex. Ct. App. 1984).
(9)Ch. 213, 43 Stat. 883 (1925) (codified as amended at 9 U.S.C. [sections][sections] 1-16 (1988 & Supp. V 1993).
(10)See supra note 7 (citing federal circuit court cases holding that arbitrators have authority to award punitive damages). But see Mastrobouno v. Shearson Lehman Hutton, Inc., 20 F.3d 713 (7th Cir. 1994), cert. granted, 63 U.S.L.W. 3281 (U.S. Oct. 11, 1994) (No. 94-18); Barbier v. Shearson Lehman Hutton, Inc., 948 F.2d 117 (2d Cir. 1991); Fahnestock v. Waltman, 935 F.2d 512 (2d Cir. 1991), cert. denied, 112 S. Ct. 380 (1991) and 112 S. Ct. 1241 (1992).
(11)The Rand Corporation's Institute for Civil Justice conducted an empirical investigation of punitive damages awarded in San Francisco, California and Cook County, Illinois from 1960 through 1984 and in all jurisdictions of California and Cook County Illinois from 1980 through 1984. The results suggest that, although jury awards of punitive damages have risen substantially over the past three decades, the magnitude and frequency of such awards have stabilized. In addition, juries generally award punitive damages in appropriate cases (involving bad faith or intentional misconduct), and trial and appellate court review often remits what might otherwise appear to be unreasonably high awards. Nevertheless, the study indicates that inappropriate and excessive awards sometimes occur and survive judicial scrutiny. MARK PETERSON, SYAM SARMA, MICHAEL SHANLEY RAND, THE INSTITUTE FOR CIVIL JUSTICE, PUNITIVE DAMAGES: EMPIRICAL FINDINGS (1987). See also Dorsey D. Ellis, Jr., Punitive Damages, Due Process, and the Jury, 40 ALA. L. REV. 975, 987 (1989) (hereinafter "Ellis I") (concluding that empirical studies do not support fears that punitive damages awards have risen out of control, but nevertheless criticizing the vagueness of standards for awarding punitive damages); Michael Rustad, In Defense of Punitive Damages in Products Liability: Testing Tort Anecdotes With Empirical Data, 78 IOWA L. REV. 1 (1992) (contending that empirical data reveals no evidence of runaway punitive damages awards and pointing out, for example, that the dollar amount of punitive damages awarded in tort actions litigated in New York State courts has stabilized for the period between 1981 and 1991, the median year during that period totalling only $2 million).
(12)Caleb Solomon, Exxon Is Ordered To Pay $5 Billion for Valdez Spill, WALL ST. J., Sept. 19, 1994, at A3.
(13)Pacific Life Ins. v. Haslip, 499 U.S. 1, 43 (1991) (O'Connor, J. dissenting).
(14)Michael Rustad, supra note 11 (favoring use of punitive damages awards in appropriate cases and contending that punitive damages awards have stabilized, id. at 23, 30, 85-87); Alan Howard Scheiner, Judicial Assessment of Punitive Damages, The Seventh Amendment, and the Politics of Jury Power, 91 COLUM. L. REV. 142 (1991) (arguing that empowering juries to award punitive damages serves the policies of retribution and deterrence).
(15)See, e.g., Lester Brickman, The Asbestos Litigation Crisis: Is There a Need for an Administrative Alternative, 13 CARDOZO L. REV. 1819, 1867-68 (1992) (asbestos manufacturers); Anthony M. Sabino, Awarding Punitive Damages in Securities Industry Arbitration: Working for a Just Result, 27 U. RICH. L. REV. 33, 50-51 (1991) (the securities industry).
(16)Arbitration is the most widely used method of alternate dispute resolution. See COMMERCIAL ARBITRATION FOR THE 1990s at XV (Richard J. Medalie, ed. 1991). Particularly over the past two decades, contract disputes involving real estate construction, manufacturing, insurance, employment, medical malpractice, securities, and international trade increasingly have found their way to the arbitral forum. See generally ROBERT COULSON, BUSINESS ARBITRATION -- WHAT YOU NEED TO KNOW 8-9 (3d ed. 1986); 1 GABRIEL M. WILNER, DOMKE ON COMMERCIAL ARBITRATION [sections] 1:01 (rev. ed. 1984).
(17)In 1991 the number of arbitration filings at the AAA was 62,327. The number declined in 1992 to 59,156 and rose in 1993 to 63,171. Telephone Interview with Barbara Brady, Director of Case Administration, AAA (Oct. 11, 1994). These data suggest that the number of annual filings at the AAA is leveling off.
(18)Deborah Masucci and Robert S. Clemente, Securities Arbitration at Self-Regulatory Organizations: New York Stock Exchange, Inc. and National Association of Securities Dealers, Inc. -- Administration and Procedure, in SECURITIES ARBITRATION PRODUCTS, PROCEDURES AND CAUSES OF ACTION, 115, 121 (P.L.I. 1993). Filings at the National Association of Securities Dealers, the most popular securities arbitral forum, jumped to 5,419 in 1993, a 24% increase over 1992. Sabra Chartrand, N.A.S.D. Experiencing Delays in Arbitration, N.Y. TIMES, August 13, 1994, at 36.
(19)See generally PHILIP J. HOBLIN, JR., SECURITIES ARBITRATION: PROCEDURES STRATEGIES CASES 2-4 to 2-5 (2d ed. 1992); 1 WILNER, supra note 16, [sections][sections] 2:01-02 (1984).
(20)Whenever New York Stock Exchange arbitrators inquire whether they have authority to award punitive damages, the exchange informs them that they have such power. Telephone Interview with Harry Albirt, Manager of Arbitration Department, New York Stock Exchange (Dec. 9, 1993). The Security Industry Council on Arbitration, a securities industry trade organization, has published an Arbitrator's Manual which instructs arbitrators in the securities industry that they may award punitive damages, and if they do, they should indicate what portion of the award is punitive and the authority on which they relied in making the award. SECURITIES INDUS. COUNCIL ON ARBITRATION, THE ARBITRATOR'S MANUAL, 27-28 (1993).
(21)See, e.g., NEW YORK STOCK EXCHANGE ARBITRATION RULES Rule 636(d) reprinted in 2 N.Y.S.E. Guide (CCH) [paragraph] 2636 (Nov. 1992) and RULES OF FAIR PRACTICE ART III [sections] 21(f)(4), reprinted in NASD Manual (CCH) [paragraph] 2171 (Jan. 1993), which state: "No agreement shall include any condition which limits ... the ability of the arbitrators to make an award."
(22)See generally Holly S. Stein and Lynn Bolinske, Punitive Damages in Securities Arbitration, 20 COLO. L. REV. 2041, 2041 (1991) (advising that, in the securities arena, arbitrators are awarding punitive damages with more frequency than ever before); Sabino, supra note 15, at 51 (warning that some arbitrators' willingness to impose devastating punitive damages awards may threaten the viability of the securities industry); but see Punitive Award Survey, SEC. ARB. COMMENTATOR, May 1993, at 7 tbl. D (noting that, in securities arbitration, only 2.1% of all awards made by Self-Regulatory Organizations, known as "SROs," (e.g., the New York Stock Exchange and the National Association of Securities Dealers) between May 1989 and June 1992 included punitive damages, and, when awarded, punitive damages exceeded compensatory damages by only 10%).
(23)Section 10(a) of the FAA which governs judicial review of arbitral awards, provides:
(a) In any of the following cases, the United States court in and for the district wherein the award was made may make an order vacating the award upon the application of any party to the arbitration --
(1) Where the award was procured by corruption, fraud, or undue means.
(2) Where there was evident partiality or corruption in the arbitrator or either of them.
(3) Where the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or refusing to hear evidence pertinent and material to the controversy; or in any other misbehavior by which the right of any party have been prejudiced.
(4) Where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made.
(5) Where an award is vacated and the time within which the agreement required the award to be made has not expired the court may, in its discretion, direct a rehearing by the arbitrators.
9 U.S.C. [sections] 10(a)(Supp. V 1993).
(24)Section 12 of the Uniform Arbitration Act ("UAA") provides for judicial review nearly identical to that provided in the FAA. See infra note 46 (discussing the adoption of the UAA).
(25)See Arthur R. Miller, The Adversary System: Dinosaur or Phoenix, 69 MINN. L. REV. 1, 1 (1984) ("The inability of the American judicial system to adjudicate civil disputes economically and efficiently is one of the most pressing issues facing the courts today .... From the perspective of most people ensnared in the litigation process, a half-decade wait for the resolution of a serious dispute is intolerable."); Jon O. Newman, Rethinking Fairness: Perspectives on the Litigation Process, 94 YALE L.J. 1643, 1644 (1985) ("The common perception that the litigation process is marred by undue delay and cost is correct.")
(26)See Miller, supra note 25, at 2.
(27)See COULSON, supra note 16, at 10; HOBLIN, supra note 19, at 2-4; SECURITIES INDUS. CONFERENCE ON ARBITRATION, THE ARBITRATOR'S MANUAL 1 (1993); Medalie, supra note 16, at 42; Jill A. Wile, Vacatur of Awards in Arbitration, SEC. ARB. COMMENTATOR, June 1993, at 18.
(28)See infra notes 29-42 and accompanying text.
(29)See, e.g., FED. R. CIV. P. 4.
(30)See, e.g., Mullane v. Central Hanover Bank & Trust Co., 339 U.S. 306 (1950).
(31)See, e.g., FED. R. VIV. P. 8 (prescribing general pleading standard); FED. R. CIV. P. 9 (prescribing heightened pleading standard for special matters such as fraud).
(32)See COMMERCIAL ARBITRATION RULES Rule 6 (Am. Arb. Ass'n 1993) ("The initiating party [hereinafter claimant] shall, within the time period, if any, specified in the contract[s], give written notice to the other party [hereinafter respondent] of its intention to arbitrate [demand], which notice shall contain a statement setting forth the nature of the dispute, the amount involved, if any, the remedy sought, and the hearing locale requested ..."). See also NEW YORK STOCK EXCHANGE RULES Rule 601(a), (d), reprinted in 2 N.Y.S.E. Guide (CCH) [paragraph] 2601 (Nov. 1992) and NATIONAL ASSOCIATION OF SECURITIES DEALERS CODE OF ARBITRATION PROCEDURE [sections][sections] 13(b), (d), 25(a), reprinted in N.A.S.D. Manual (CCH) [paragraph][paragraph] 3713, 3725 (Oct. 1993) (providing that the claimant shall file with the NYSE or NASD statement of claim, which the "Director of Arbitration shall endeavor to serve promptly by mail or otherwise on the Respondent[s]")
(33)See, e.g., FED. R. CIV. P. 12(b) (motion to dismiss complaint); FED R. CIV. P. 12(c) (motion for judgment on the pleadings); FED. R. CIV. P. 12(e) (motion for a more definite statement); FED. R. CIV. P. 12(f) (motion to strike); FED. R. CIV. P. 56 (motion for summary judgment).
(34)See Medalie, supra note 16, at 42;
(35)See FED. R. CIV. P. 36(a) (motion to compel discovery).
(36)See Miller, supra note 25, at 9 (characterizing "the quicksand of discovery" as an "often interminable process," which "permits artful attorneys to hide the ball and keep alive hopeless claims as well as defenses"); David M. Trubek et al., The Costs of Ordinary Litigation, 31 U.C.L.A. L. REV. 4, 74-75, n.1 (1983) (summarizing critical commentary on wasteful litigation practice, particularly involving discovery). But see Marc Galanter, Reading the landscape of Disputes: What We Know and Don't Know (and Think We Know) about Our Allegedly Contentious and Litigious Society, 31 U.C.L.A. L. REV. 4, 61 (1983) (asserting that discovery abuses occur in only "a tiny minority of cases"); Trubek, et al., supra, at 89 (remarking that "pretrial activity [is] modest" in most litigation).
(37)See HOBLIN, supra note 19, at 2-4; Medalie, supra note 16, at 50-51.
(38)See HOBLIN, supra note 19, at 2-4.
(39)See HOBLIN, supra note 19, at 2-4; Medalie supra note 16, at 42-45.
(40)See e.g., Bernhardt v. Polygraphic Co., 350 U.S. 198, 203 (1956); Pacific Reinsurance Management Corp. v. Ohio Reinsurance Corp., 935 F.2d 1019, 1026 (9th Cir. 1991); Stroh Container Co. v. Delphi Indus., Inc., 783 F.2d 743, 751, n.12, cert. denied, 476 U.S. 1141 (1986); see generally HOBLIN, supra note 19, at 2-5; Medalie, supra note 16, at 48-49; COMMERCIAL ARBITRATION RULES Rule 31 (Am. Arb. Ass'n 1993) ("The arbitrator shall be the judge of the relevance and materiality of the evidence offered, and conformity to legal rules of evidence shall not be necessary."): NEW YORK STOCK EXCHANGE ARBITRATION RULES Rule 620 reprinted in N.Y.S.E. Guide (CCH) [paragraph] 2620 (Nov. 1992), and NATIONAL ASSOCIATION OF SECURITIES DEALERS CODE OF ARBITRATION PROCEDURE [sections] 34 reprinted in N.A.S.D. Manual (CCH) [paragraph] 3734 (Oct. 1993) ("The arbitrator shall determine the materiality and relevance of any evidence proffered and shall not be bound by the rules governing the admissibility of evidence."); SECURITIES INDUSTRY CONFERENCE ON ARBITRATION, THE ARBITRATOR'S MANUAL 23 (1993).
(41)Bernhardt v. Polygraphic Co., 350 U.S. 198, 203 (1956) (stating that jury trial is waived in arbitration); Marine Transit Corp. v. Dreyfus, 284 U.S. 263, 278-79 (1932) (holding that waiver of jury trial in arbitration is constitutional); RULES OF FAIR PRACTICE ART III [sections] 21 (f)(1)(ii), reprinted in N.A.S.D. Manual (CCH) [paragraph] 2171, at 2095-4 (Jan. 1993) ("The parties are waiving their rights to seek remedies in court, including the right to a jury trial."); Medalie, supra note 16, at 51.
(42)See COMMERCIAL ARBITRATION RULES Rule 23 (Am. Arb. Ass'n 1993) ("Any party desiring a stenographic record shall make arrangements directly with a stenographer and shall notify the other party of these arrangements in advance of the hearing."); see also NEW YORK STOCK EXCHANGE RULES Rule 623, reprinted in 2 N.Y.S.E. Guide (CCH) [paragraph] 2623, at 4321 (Nov. 1992) and NATIONAL ASSOCIATION OF SECURITIES DEALERS CODE OF ARBITRATION PROCEDURE [sections] 37, reprinted in NASD Manual (CCH) [paragraph] 3737, at 3724 (Jan. 1993) ("A verbatim record of all arbitration hearings shall be kept by stenographic reporter or tape recording. If a party or parties to a dispute elect to have the record transcribed, the cost of such transcription shall be born by the party or parties making the request unless the arbitrators direct otherwise."); see generally Medalie, supra note 16, at 52.
(43)See generally IAN R. MACNEIL, AMERICAN ARBITRATION LAW 61 (1992).
(44)See Kulukundis Shipping Co. v. Amtorg Trading Corp., 126 F.2d 978, 982-84 (2d Cir. 1942) (spurning the "ouster of jurisdiction" argument, which it called "bad dogma"); Macneil, supra note 43, at 61 (noting that, in addition to the "ouster of jurisdiction" argument, courts objected to arbitration on the contrived ground that the powerful could extort agreements to arbitrate from the weak and control the arbitration process); see generally 1 WILNER, supra note 16, [sections] 3:01, at 21-23 (1984).
(45)Ch. 213, 43 Stat. 883 (1925) (codified as amended at 9 U.S.C. [sections][sections] 1-16 (1988 & Supp. V 1993).
(46)At approximately the same time, the Conference on Commissioners of Uniform State Laws drafted the UAA. Since then, 26 states have adopted it as drafted or with minor revisions, and five more states have borrowed from it in formulating their own arbitration statutes. Only two states, Alabama and Mississippi, have not enacted modern arbitration legislation. See 1 WILNER, supra note 16, [sections] 4:02.
(47)Volt Info. Sciences, Inc. v. Leland Stanford Junior U., 489 U.S. 468, 478 (1989) (The FAA "simply requires courts to enforce privately negotiated agreements to arbitrate, like other contracts, in accordance with their terms"); Southland Corp. v. Keating, 465 U.S. 1, 12 (1984) ("In enacting sec. 2 of the federal Act, Congress declared a national policy favoring arbitration").
(48)Moses H. Cohen Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24-25 (1963) ("The Arbitration Act establishes that, as a matter of federal law, any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration.").
(49)9 U.S.C. [sections] 10(a) (Supp. V. 1993).
(50)Id.
(51)The scope of review under the UAA mirrors the scope of review under the FAA. See UAA [sections] 12 (1955).
(52)9 U.S.C. [sections] 10(a)(1) (Supp. V 1993).
(53)Id. at [sections] 10(a)(2).
(54)Id. at [sections] 10(a)(3).
(55)Id. at [sections] 10(a)(4).
(56)The Supreme Court, in Wilko v. Swan, 346 U.S. 427, 436 (1953), first suggested the "manifest disregard" standard and most federal courts have adopted it. E.g., Lee v. Chica, 983 F.2d 883, 885 (8th Cir. 1993), cert. denied, 114 S. Ct. 287 (1994) (stating that a court will not set aside an arbitration award "unless it is completely irrational or evidences 'manifest disregard of the law'"); Merrill Lynch, Pierce Fenner & Smith v. Bobker, 808 F.2d 930, 933-34 (2d Cir. 1986) (noting that the manifest disregard standard provides an extremely limited ground for vacatur); Thompson v. Tega-Rand Int'l, 740 F.2d 762 (9th Cir. 1984) (confirming legally erroneous award because arbitrator had not manifestly disregarded the law). Contra Chameleon Dental Prod., Inc. v. Jackson, 925 F.2d 223, 226 (7th Cir. 1991) (rejecting "manifest disregard" standard because the FAA prescribes the exclusive grounds for vacatur of arbitration awards).
(57)E.g., Campania de Navegcion v. Saguenay Terminal, Ltd., 293 F.2d 796, 801 (9th Cir. 1961) (explaining that "when arbitrators understand and correctly state the law, but proceed to disregard the same," they have manifestly disregarded the law, and the court will reverse their decision); see also Upshur Coal Corp. v. United Mine Workers, Dist. 31, 933 F.2d 225, 229 (4th Cir. 1991).
(58)Bernhardt v. Polygraphic Co., 350 U.S. 198, 203 (1956); Wilko v. Swan, 346 U.S. 427, 436 (1953); Koch Oil, S.A. v. Transocean Gulf Oil Co., 751 F.2d 551, 554 (2d Cir. 1985).
(59)French v. Merrill, Lynch, pierce, Fenner & Smith, 784 F.2d 902, 906 (9th Cir. 1986); See Hoblin, supra note 19, at 2-5.
(60)114 S. Ct. 2331 (1994).
(61)499 U.S. 1 (1990).
(62)In Browning-Ferris Indus. of Vt., Inc. v. Kelco Disposal, Inc., 492 U.S. 257 (1989), the Supreme Court rejected the argument that the Eighth Amendment's prohibition against excessive fines applies to awards of punitive damages in civil cases. Concluding that the appellant had not properly presented on appeal its due process objection to the award, the Court suggested in dicta that such awards might well raise due process conerns. Id. at 276-77. Similarly, in Bankers Life & Casualty Co. v. Crenshaw, 486 U.S. 71, 76-80 (1988), Justice O'Connor, though pointing out that the due process issue was not in the case, commented that the Court should address the issue on the appropriate occasion. See also Aetna Life Ins. Co. v. Lavoie, 475 U.S. 813, 828-29 (1986) (emphasizing the importance of the due process argument, but holding that the issue need not be reached in the case).
(63)Although the award was not clearly apportioned between compensatory and punitive damages, the Court concluded that at least $840,000 of the $1,040,000 award represented punitive damages. Haslip, 499 U.S. at 7, n. 2.
(64)Id. A subsidiary issue was whether punitive damages might be awarded constitutionally under the doctrine of respondeat superior. Id. at 12. The Court held, on the facts before it, that the assessment of such damages against Pacific Mutual, based on respondeat superior liability, did not violate due process. Id. at 15.
(65)Justices Scalia and Kennedy joined in the judgment. Id. at 2.
(66)Id. at 17.
(67)Punitive damages in Anglo-American jurisprudence date back to the Eighteenth Century. See Dorsey D. Ellis, Jr., Fairness and Efficiency in the Law of Punitive Damages, 56 S. CAL. L. REV. 1, 12 (1982) (hereinafter "Ellis II"); Clarence Morris, Punitive Damages in Tort Cases, 44 HARV. L. REV. 1173, 1176 (1931). Perhaps the first reported English case in which a jury awarded punitive damages is Wilkes v. Wood, 98 Eng. Rep. 489 (P.C. 1763), a trespass action challenging an unreasonable search and seizure. By the Nineteenth Century the use of punitive damages was firmly established in both England and the United States. See Rustad, supra note 11, at 2. Nevertheless, punitive damages were assailed in that era as "a monstrous heresy" and "an unsightly and unhealthy excrescence, deforming the symmetry of the body of law." Fay v. Parker, 53 N.H. 342, 382 (1873). Today, punitive damages are no less controversial, having both supporters and detractors. For example, one commentator challenges the imposition of punitive damages awards in asbestos litigation because such awards punish the same offender many times for the same misconduct, and dissuade "greedy" plaintiffs from settling. Brickman, supra note 15, at 1867-68. However, reprehensible misconduct inflicting mass injury calls for large-scale retribution, David G. Owen, Punitive Damages in Products Liability Litigation, 74 MICH. L. REV. 1257, 1322-23 (1976)(hereinafter "Owen I"), and harsh punishment averts future wrongdoing. See Ellis I, supra note 11 (supporting use of punitive damages, but criticizing practice for its vagueness and for investing the jury with too much discretion); David G. Owen Problems of Assessing Punitive Damages against Manufacturers of Defective Products, U. CHI. L. REV. 1, 59 (1982) (hereinafter "Owen II") (favoring the use of punitive damages, but questioning the appropriateness and magnitude of some awards); Rustad, supra note 11, at 85-88 (advocating the appropriate imposition of punitive damages in products liability cases because (1) criminal law does not address serious issues of product safety, (2) indeterminacy of the magnitude of punitive awards encourages high standard of product design, which benefits public and ultimately may increase sales, and (3) punishing egregious conduct sets a moral tone which filters through society).
(68)Haslip, 499 U.S. at 17. See Scheiner, supra note 14, at 224 (urging that transferring the authority to award punitive damages from juries to judges would wrest from the people a significant check on the power of government and business interests). But see Owen I, supra note 67, at 1320-21 (suggesting that after the jury decides that a punitive award is appropriate, a judge, who possesses both detachment and experience, should assess the amount of such damages.)
(69)Haslip, 499 U.S. at 18.
(70)Id.
(71)Id. at 19.
(72)The principle purposes of punitive damages are retribution for reprehensible misconduct and deterrence of the defendant and others from engaging in similar conduct in the future. Clarence Morris, Punitive Damages in Tort Cases, supra note 67, at 1198-1206 (1931); Rustad, supra note 11, at 2; Scheiner, supra note 14, at 163; see also Ellis II, supra note 67, at 1 (observing that, in addition to retribution and deterrence, encouraging victims of wrongdoing to bring suit and discouraging private revenge, are secondary, id. at 8, and unconvincing justifications for punitive damages, id. at 76). But see Owen I, supra note 67, at 1287-90 (arguing that the enticement of punitive awards encourages injured parties to press lawsuits and thus enforce laws); David G. Owen, The Moral Foundations of Punitive Damages, 40 ALA. L. REV. 705, 714 (1989) (arguing that punitive damages fail to deter egregious misconduct).
(73)Haslip, 499 U.S. at 20.
(74)Id., See Michael J. King, PUnitive Damages and Due Process: Pacific Mutual Life Insurance Co. v. Haslip, 25 CREIGHTON L. REV. 323 345-46 (1991) (criticizing the Haslip Court for providing "no guidelines as to how a jury may properly exercise its discretion").
(75)Haslip, 499 U.S. at 20. The Court noted that juries exercise a wide grith of discretion in deciding the "best interests of the child," "reasonable care," "due diligence," and compensation for pain and suffering and mental anguish. Id. See Scheiner, supra note 14, at 161-62 (noting that standards for assessing punitive damages are no more vague than those for assessing damages for pain and suffering and mental anguish).
(76)Haslip, 499 U.S. at 20.
(77)Most jurisdictions require that the jury find "malicious," "wanton," "wilful," or "reckless" conduct before it may award punitive damages. See Ellis II, supra note 67, at 20.
(78)Haslip, 499 U.S. at 20 (citing Hammond v. Gadsden, 493 So.2d 1374, 1379 (Ala. 1986)).
(79)Id. at 21.
(80)Id. at 21-22. Other factors include the financial position the defendant, the cost of litigation, and mitigating circumstances, such as criminal sanctions and other civil awards imposed for the same misconduct. Id.
(81)The punitive award was 4 times the compensatory award. Id. at 23.
(82)Id. at 23-24. See generally J. Mark Hart, The Constitutionality of Punitive Damages, 21 CUMB. L. REV. 585, 601 (1991) (finding little guidance in the Court's pronouncement that the punitive award in Haslip came "close to the line" of constitutional infirmity).
(83)Haslip, 499 U.S. at 23-24. See generally Christopher V. Carlyle, Big Business Beware: Punitive Damages Do Not Violate the Fourteenth Amendment According to Pacific Mutual Life Insurance Co. v. Haslip, 19 PEPP. L. REV. 1397, 1439 (1992) (speculating that if the Court had held the award unconstitutional, a consequence would have been the limitation, if not elimination, of arbitral punitive awards).
(84)Id. at 23-24.
(85)Id. at 24 (Scalia, J concurring).
(86)Id. at 25-28 (Scalia, J. concurring).
(87)Id. at 40 (Kennedy, J. concurring).
(88)424 U.S. 319, 335 (1976).
(89)Haslip, 499 U.S. at 43 (O'Connor, J. dissenting).
(90)Id. at 54 (O'Connor, J. dissenting).
(91)Id. at 55-57 (O'Connor, J. dissenting).
(92)Id. at 58-60 (O'Connor, J. dissenting). Commentators have sided with the majority, Justices Scalia, and Justice O'Connor. Compare Michael W. Kier, Todd Shipyards Corp. v. Cunard Line, Inc.: Procedural Due Process and an Arbitrator's Punitive Damage Award, 42 CASE W. RES. L. REV. 1085 (1992) (agreeing with the majority's use of the "reasonableness" test instead of the Mathews test, because the assumption underlying Mathews -- that within each factual context identifiable procedures guarantee compliance with due process -- is inapposite to assessing punitive damages, which depends on the jury's subjective moral outrage at the defendant's conduct); with Richard McKenna, Jr., Pacific Mutual Life Insurance Co. v. Haslip: Punitive Damages and the Modern Meaning of Procedural Due Process, 70 N.C.L. REV. 1362 (1992) (criticizing the Court for adopting the "hopelessly vague standard of fairness," id. at 1384, and advocating Justice Scalia's position of reliance on historical practice, id. at 1388); and William H. Volz and Michael C. Fayz, Punitive Damages and the Due Process Clause: The Search for Constitutional Standards, 69 U. Det. L. Rev. 459 (1992) (favoring Justice O'Connor's "compelling dissent," id. at 515, and arguing that the second prong of the Mathews analysis -- implementing alternative procedures -- requires instructing the jury on the factors relevant to the appropriateness and amount of punitive damages, id. at 519).
(93)Note, Punitive Damages -- Limits on Jury Discretion, 105 HARV. L. REV. 216, 224-25 (faulting the Court for not specifying the type of post-verdict review constitutionally required to assure reasonable jury verdicts of punitive damages).
(94)113 S. Ct. 2711 (1993).
(95)Slander of title is a common law cause of action. It arises when the defendant falsely and maliciously publishes a statement derogating plaintiff's title to realty, causing the property's value to be diminished in the eyes of third parties. See TXO Production Corp. v. Alliance Resources Corp., 419 S.E.2d 870, 878 (W. Va. 1992); see also REST. (SECOND) OF TORTS [sections][sections] 623A, 624 (1977).
(96)TXO, 113 S. Ct. at 2714.
(97)Id.
(98)Id. at 2716.
(99)TXO raised procedural due process objections, arguing that the trial judge did not articulate reasons for upholding the verdict, the West Virginia Supreme Court opinion contained flippant characterizations of TXO, and TXO received no notice that the punitive damages award might be so disproportionate to actual damages. The Court rejected these arguments. Id. at 2711.
(100)Id. at 113. After relying in part on the defendant's wealth as supporting the propriety of the award, Justice Stevens confusingly sympathized with TXO's objection that the jury instructions authorized the jury to consider the "wealth of the perpetrator." Id. Justice Stevens conceded "that the emphasis on the wealth of the wrongdoer increased the risk that the award may have been influenced by prejudice against large corporations, a risk that is of special concern when the defendant is a nonresident." Id. Noting that Haslip recognized that the defendant's financial position is a permissible consideration in the assessment of punitive damages, id., Justice Stevens avoided ruling on the propriety of the jury instructions in TXO, concluding that TXO had not preserved the issue on appeal. Id. at 4772. See Owen I, supra note 67, at 44 (explaining that along with the reprehensibility of defendant's misconduct and the nature and extent of plaintiff's injury, defendant's wealth is one of the three factors generally governing the size of a punitive damages award); Michael J. Pepek, TXO v. Alliance: Due Process Limits and Introducing a Defendant's Wealth When Determining Punitive Damage Awards, 25 PAC. L.J. 1191, 1224-28 (1994) (urging that, if procedural safeguards such as caps, mathematical ratios, and bifurcated trials are employed, the jury, to achieve deterrence and retribution, should consider defendant's wealth in assessing punitive damages).
(101)Haslip, 499 U.S. at 24. See Pepek, supra note 100, at 1220 (lamenting the vagueness of the TXO reasonableness test).
(102)Two commentators argue that Haslip implicitly rejected the "shocks the conscience" test, by adopting the "detailed substantive standards" test, which requires certain, though ill-specified, procedural safeguards. Volz and Fayz, supra note 92, at 511-12. However, their argument addresses procedural due process. The Supreme Court in Haslip and even more clearly in TXO employed essentially a "shocks the conscience" test to determine the excessiveness of punitive awards under substantive due process.
(103)Justice O'Connor, joined in part by Justices White and Souter, would have held that the award violated due process, since the only plausible explanation for the "monumentally large punitive damages award" was the jury's bias against an out-of-state, wealthy corporation, TXO, 113 S. Ct. at 155 (O'Connor, J. dissenting), and since the procedural safeguards of adequate jury instructions and judicial review required under Haslip were not observed. Id. at 2727 (O'Connor, J. dissenting).
(104)Id. at 2718 (Scalia, J. concurring).
(105)Id. at 2716-18 (Kennedy, J. concurring).
(106)Honda Motor Co. v. Oberg, 114 S. Ct. 2331, 2341 (1994).
(107)See infra notes 108-22 and accompanying text.
(108)114 S. Ct. 2331 (1994).
(109)Id. at 2335. The Court noted that every state except Oregon provides for post-verdict review of punitive awards. Id. at 2338.
(110)Id. at 2342.
(111)Id.
(112)Id. at 2339.
(113)Id.
(114)Id. at 2341.
(115)Id.
(116)Id.
(117)Id.
(118)Id.
(119)Predictably, Justice Scalia concurred on the ground that, since judicial review of punitive damages awards was traditionally accorded at common law, it is a due process right. Id. at 2342-43 (Scalia, J. concurring).
(120)Id. at 2340-41.
(121)Ake v. Oklahoma, 470 U.S. 68, 76 (1984) (Speaking of the right to a hearing, the Court said: "This elementary principle [is] grounded in significant part in the Fourteenth Amendment's due process guarantee of fundamental fairness"); Snyder v. Massachusetts, 291 U.S. 97, 116 (1934) ("Due process of law requires that the proceedings shall be fair...")
(122)Justice Ginsburg, joined by Chief Justice Rehnquist, questioned the majority's conclusion that common law showed an unbroken tradition of judicial review of punitive jury awards. Honda Motor Co., 114 S. Ct. at 2348-49 (Ginsburg, J. dissenting). Believing review nonessential, she argued that other Oregon procedures afforded due process. Id. at 2343-44 (Ginsburg, J. dissenting). In reaching this conclusion, Justice Ginsburg was most impressed with Oregon's use of the "clear and convincing" burden of proof, and jury instructions that detailed seven criteria for imposing such awards, including the likelihood at the time of defendant's misconduct that serious harm would occur, defendant's awareness of that likelihood, the duration of the misconduct and any concealment of it, and the deterrent effect of other punishment imposed on the defendant, whether civil or criminal. Id. at 2344-45 (Ginsburg, J. dissenting).
(123)See infra notes 130, 131, 160-72 and accompanying text.
(124)E.g., Yasuda Fire & Marine Ins. Co. v. Continental Casualty Co., 37 F.3d 345, 353 (7th Cir. 1994) ("Courts have required arbitration panels, regardless of whether they have followed an agreement's procedural stipulations, to afford the parties a fundamentally fair hearing prior to awarding relief."); Grovner v. Georgia Pac. Corp., 625 F.2d 1289 (5th Cir. 1980) ("[A]n arbitration proceeding is less formal than judicial litigation (citations omitted). Arbitration need not follow all the 'niceties' of the federal courts; it need provide only a fundamentally fair hearing."); see also Bell Aerospace Co. v. Local 516, 500 F.2d 921, 923 (2d Cir. 1974); Essex Cement Co., 763 F. Supp. 55, 58 (S.D.N.Y. 1991); see generally IAN R. MACNEIL ET AL., FEDERAL ARBITRATION LAW: AGREEMENTS, AWARDS, AND REMEDIES UNDER THE FEDERAL ARBITRATION ACT [sections] 32.3.1 (1994).
(125)500 F.2d 921 (2d Cir. 1974).
(126)Id. at 923.
(127)607 F.2d 649 (5th Cir. 1979).
(128)Id. at 651.
(129)Id. (citing Bell Aerospace Co. v. Local 516, 500 F.2d 921, 923 (2d Cir. 1974)).
(130)See, e.g., Island Creek Coal Sales Co. v. Gainesville, 729 F.2d 1046 (6th Cir. 1984) (rejecting the argument that "the arbitrators denied Gainesville a fair hearing and due process throughout the arbitration proceedings," because "[a]rbitrators need not provide all the procedural formalities of a court of law"); Essex Cement Co. v. Italmare, S.p.A., 763 F. Supp. 55, 58 (S.D.N.Y. 1991) (implying that due process underlies the right to a fundamentally fair hearing in arbitration).
(131)See FDIC v. Air Florida System, Inc., 822 F.2d 833, 842 (9th Cir. 1987), cert. denied, 485 U.S. 987 (1988) ("So long as the hearing provided is 'full and fair,' a procedural attack must fail. Applying section 10(c) [of the FAA], a hearing is full and fair unless the arbitrator (1) despite a showing of cause, refuses a postponement; (2) refuses to hear pertinent and material evidence; or (3) engages in misbehavior that prejudices the rights of a party. 9 U.S.C. [sections] 10(c)."); Edward Brunet, Arbitration and Constitutional Rights, 71 N.C. L. REV. 81, 114-17 (1992) (arguing that the courts should construe the FAA to afford constitutional rights, including due process).
(132)See Ake v. Oklahoma, 470 U.S. 68, 76 (1984) (holding that the right of an indigent, who has made a preliminary showing of an insanity defense to a court-appointed psychologist, is "founded in significant part on the Fourteenth Amendment's due process guarantee of fundamental fairness..."); Fuentes v. Shevin, 407 U.S. 67, 80 (1972) (noting that the central meaning of procedural due process is the right to notice and a meaningful opportunity to be heard); Armstrong v. Manzo, 380 U.S. 545, 552 (1965) (observing that due process guarantees the opportunity to be heard "at a meaningful time and in a meaningful manner"); Snyder v. Massachusetts, 291 U.S. 97 (1934) (declaring that "[d]ue process of law requires that the proceedings be fair..."); see generally LAURENCE J. TRIBE, AMERICAN CONSTITUTIONAL LAW 683 (2d ed. 1988) (stating that due process is tied to notions of fundamental fairness and insures notice and the opportunity to be heard); Sandford H. Kadish, Methodology and Criteria in Due Process Adjudication, 66 YALE L.J. 319, 321 (1957) (commenting that fundamental fairness is the cornerstone of due process).
(133)U.S. CONST. amend. XIV, [sections] 1.
(134)The doctrine serves three purposes. First, it protects personal liberty by exempting individuals from the reach of Constitutional prohibitions contained in the First, Fifth and Fourteenth Amendments. Second, it promotes federalism. By restricting the scope of these Constitutional prohibitions, the role of the federal government, through the judicial branch, is likewise restricted. The result is a wider zone of power for the state governments. Third, limiting the scope of judicial decision-making prevents courts from trespassing into the legislative realm, thereby safeguarding the separation of powers. See TRIBE, supra note 132, [sections] 18-2, at 1691; William M. Burke and David J. Reber, State Action, Congressional Power and Creditor' Rights: An Essay on the Fourteenth Amendment, 46 S. CAL. L. REV. 1003, 1012-17 (1973).
(135)Civil Rights Cases, 109 U.S. 1 (1883).
(136)E.g., Adickes v. S. H. Kress & Co., 398 U.S. 144, 171 (1970) (state-enforced custom to discriminate). Reitman v. Mulkey, 387 U.S. 369, 381 (1967) (statutory encouragement to discriminate); Shelley v. Kraemer, 334 U.S. 1, 20 (1948) (judicial enforcement of restrictive covenants). Although these cases, and others cited below, involved equal protection rather than due process claims, the same general principles of state action apply to claims under both clauses. However, Reitman and Shelley imply unmistakably that the urgency of the policy against racial discrimination impelled the court to find state action under circumstances which, if in a commercial context, would not have led to such a finding.
(137)109 U.S. 3 (1883).
(138)Id. at 13.
(139)The Supreme Court has conceded that "the application and invention of a precise formula" of state action is an "impossible task." Kotch v. Pilot Comm'rs, 330 U.S. 552, 556 (1947). "Only by sifting facts and weighing circumstances can the nonobvious involvement of the State in private conduct be attributed its true significance." Burton v. Wilmington Parking Auth., 365 U.S. 715, 722 (1960).
(140)Scholars have lambasted the doctrine for being ruled by "chaos" and "anarchy," TRIBE, supra note 132, [sections] 18-1, at 1691, for being beleaguered by "multiple vagueness and ambiguities," Charles L. Black, Jr., "State Action," Equal Protection, and California's Proposition Fourteen, 81 HARV. L. REV. 69, 95 (1967), and for providing "a substitute for thought," Ira Nerken, A New Deal for the Protection of Fourteenth Amendment Right: Challenging the Doctrinal Bases of State Action Theory, 12 HARV. C.R.-C.L. L. REV. 297, 297 (1977).
(141)One author, believing that the state has woven itself into nearly all private affairs, concludes that the distinction between private conduct and state action has become meaningless and that the state action doctrine should therefore be abandoned. Nerken, supra note 148, at 361. He proposes as an alternative that when a rule of law grants someone power over others, the courts focus on the nature and extent of the power, including its effects in the community and society at large, and whether the person subjected to the power has options to avoid its consequences. This approach, as Nerken envisions it, would expand the reach of constitutional prohibitions, such as due process, beyond current limits. For example, in Jackson v. Metropolitan Edison Co., 419 U.S. 345 (1974), Metropolitan Edison's monopolistic power over customers would have required that termination of a customer's service be subject to due process protection. Id. at 364-66; see infra notes 148-50 and accompanying text. Other writers also emphasize "the actual impact of the state law upon the choice to engage in the private conduct" a