Mastrobuono v. Shearson Lehman Hutton, Inc

514 U.S. 52 (1995)

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Nature of the Case

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Facts

In 1985 P opened a securities trading account with D, by executing D's standard-form Client's Agreement. They closed it in 1987. In 1989, P filed this action in the United States District Court alleging that D mishandled their account and claiming damages on a variety of state and federal law theories. D filed a motion to stay the court proceedings and to compel arbitration pursuant to the agreement between the parties and the rules of the National Association of Securities Dealers. The arbitrators ruled in favor of P. They included an award of punitive damages of $400,000, in addition to compensatory damages of $159,327. D paid the compensatory portion of the award but filed a motion in the District Court to vacate the award of punitive damages. The District Court granted the motion, the Court of Appeals for the Seventh Circuit affirmed. Both courts relied on the choice-of-law provision which specifies that the contract shall be governed by New York law. Because the New York Court of Appeals has decided that in New York the power to award punitive damages is limited to judicial tribunals and may not be exercised by arbitrators, Garrity v. Lyle Stuart, Inc., 40 N.Y.2d 354, 353 N.E.2d 793 (1976), the District Court and the Seventh Circuit held that the panel of arbitrators had no power to award punitive damages in this case. This appeal resulted.