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An appellate court ruling that reversed a $25 million punitive damages award is part of a trend of greater judicial scrutiny of arbitration awards, according to many experts. The experts disagree as to the causes of the trend and as to whether it’s a good thing or not. In Sawtelle v. Waddell & Reed Inc., No. 2330, handed down on Feb. 11, the New York Appellate Division, 1st Department, held that an arbitration panel acted irrationally when it awarded broker Stephen B. Sawtelle punitive damages nearly 25 times the size of his compensatory damages award. Seth M. Schwartz, who represented Sawtelle’s former employer, Kansas-based brokerage firm Waddell & Reed, said that it was the first decision in any jurisdiction to apply the damages-proportionality analysis set out in BMW of North America v. Gore, 517 U.S. 559 (1996), to an arbitration award. Schwartz is a partner at New York’s Skadden, Arps, Slate, Meagher & Flom. Schwartz does not believe the decision will open the floodgates to judicial second-guessing because it deals with one of the few aspects of arbitration awards — punitive damages — in which society has an interest. But University of Michigan law professor Theodore J. St. Antoine said that arbitration proceedings increasingly raise issues of public concern, making it inevitable that courts will continue what he sees as a clear trend toward greater intervention. He notes that arbitration once was used primarily to settle disputes between labor and management under terms agreed to by both sides through collective bargaining. Nowadays, it is much more common for individual employees to be compelled into arbitration under take-it-or-leave-it terms. The arbitration is wider in scope as well, said St. Antoine, covering not merely contractual rights, but such statutory and constitutional issues as discrimination. St. Antoine says that there are still too few cases to make a considered judgment, but he believes that courts have generally done a good job of stepping in when necessary without becoming so meddlesome that arbitration loses its virtues of speed and inexpensiveness. Hooters of America Inc. v. Phillips, 173 F.3d 933 (4th Cir. 1999), is one example of a case rightly decided, in his opinion. The court refused to compel into arbitration a Hooters bartender who alleged sexual harassment because the restaurant chain’s “dispute resolution process [was] utterly lacking in the rudiments of even-handedness.” Lewis Maltby, president of the Princeton, N.J.-based National Workrights Institute, is largely in agreement with St. Antoine on the causes of the trend, though not with his assessment of the courts’ achievements. “Arbitration used to be a gentlemen’s club of big corporations,” he said. “Now you have thousands upon thousands of employees and consumers compelled to be in arbitration. It’s only natural that there would be more appeals.” Maltby concludes that courts are doing a “mediocre” job. Maltby does not see enough cases that probe the basic procedural fairness of arbitration and sees too many that involve second-guessing evidentiary issues, factual determinations, and other routine matters. IS THERE ABUSE? Professor Barbara Black, director of Pace University School of Law’s Securities Arbitration Clinic, agrees that there is a trend, but does not see it in a favorable light. In particular, she believes courts are abusing the “manifest disregard of the law” standard. That standard is not found in the Federal Arbitration Act, which governs both federal and state arbitration proceedings, she said, but was created by the U.S. Supreme Court to address situations in which an arbitrator is confronted with a statute or precedent that applies unambiguously to the case at hand and nevertheless ignores it. Black claims the standard is increasingly being used by appellate courts to overturn what they see as incorrect interpretations of ambiguous contracts or statutes. She points to a case decided in October of last year by the same court that decided Sawtelle. In Sands Brothers & Co. Ltd. v. Generex Pharmaceuticals Inc., 298 A.D.2d 307, the court vacated an arbitration award because the panel had given insufficient attention to the court’s “directive regarding consideration of the third paragraph of Section E of the parties’ agreement.” Black believes that this kind of nitpicking robs arbitration of much of its value. Florence Peterson, general counsel of the American Arbitration Association, said that the trend includes the U.S. Supreme Court, which has recently taken two or three arbitration cases every term. She sees it as the natural outgrowth of the success of arbitration, noting that her organization alone conducts more than 200,000 proceedings a year. The vast majority of decisions are either accepted by the parties or confirmed by courts without revision, she said. She is not alarmed at the greater scrutiny, so long as it clarifies issues that are likely to crop up frequently in arbitration proceedings. That goal of clarification is something she sees the Supreme Court as consciously pursuing.

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