Sawtelle Punitive Damage Award Vacated
Court vacates punitive damage award on constitutional due process grounds as being arbitrary and excessive, labeling the $25 million dollar punitive damage award at “grossly excessive.”
SAWTELLE v. WADDELL & REED, INC., No. 2330 (N.Y. App. Div., 1Dept., 2/11/03).
Courts may allow arbitrators to award punitive damages, but not if it runs afoul of BMW v. Gore. The Appellate Division vacates a punitive damage award of $25 million as vastly out of proportion to proportionality standards developed by the U.S. Supreme Court in BMW v. Gore, 517 U.S. 559. The Award, rendered in August 2001 (SAA 01-32), assessed Waddell & Reed Respondents about $28 million, which was confirmed in the lower court with a modification of the compensatory award from $1.8 million to $1.1 million (NASD ID #97-03642 (New York City, 8/7/01). That created a proportionality ratio of punitive to compensatory damages of about 23 to 1. The lower court decided that BMW v. Gores proportionality tests did not apply to arbitration proceedings, because there is no state action involved (SLA 2002-24). The Appellate Division rules that constitutional due process standards serve as benchmarks for determining as well that which is arbitrary and irrational under the FAA. Thus, the Court engages in a Gore analysis and decides the punitive portion of the Award must be vacated as grossly excessive. Otherwise, the modified Award is confirmed. To determine how much, if any, punitive damages should be awarded on remand, the Court returns the case to the same NASD Panel. (ed: A more detailed summary of this 28-page decision will appear in next weeks Lit Alert, SLA 2003-07. Skadden Arps (NY Partners Seth M. Schwartz & Susan L. Saltzstein, and Associates Timothy G. Nelson & Betsy A. Hellman) represented Waddell & Reed before the Court.) (SAC Ref. No. 03-06-01)
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