J. Alexander Securities, Inc. v. Mendez

Background

A Los Angeles brokerage firm and one of its customers had an arbitration agreement that said New York law would govern. After the customer alleged deceptive trading and lost money, an NASD arbitration panel awarded $27,000 in compensatory damages and $27,000 in punitive damages. The brokerage asked a court to set aside the punitive award, arguing New York law bars arbitrators from awarding punitive damages. California courts upheld the award under the Federal Arbitration Act.

Reasoning

The central question is whether arbitrators may award punitive damages when the parties’ contract adopts New York law, which some state cases say forbids such awards. Lower courts disagree: some hold the federal Arbitration Act lets arbitrators award punitive damages despite state rules, while others, like the Seventh Circuit, set such awards aside as contrary to the incorporated New York prohibition. The opinion before the Court reached the view that arbitrators could award punitive damages; Justice O’Connor dissented from the Court’s refusal to take the case and said the split among courts warranted review.

Real world impact

Because the Court declined review, the conflicting decisions in different circuits remain in place. Investors, brokerage firms, and arbitration panels will continue to face different outcomes depending on where a dispute is decided. This ruling is not a final national answer; the issue can still be resolved later if the Court takes a similar case.

Dissents or concurrances

Justice O’Connor, joined by the Chief Justice, argued the Court should grant review to resolve the recurring, important question about punitive damages in securities arbitrations.