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A federal court in Louisiana upheld an arbitration panel’s award of punitive damages despite Louisiana law limiting when punitive damages may be awarded because the parties agreed to arbitrate under NASD rules, which allow for awards of punitive damages.
In Adams v. Securities America, Inc., Nos. 06-2509 c/w, 06-3042, 2006 WL 2631863 (E.D. La. Sept. 12, 2006), Adams and two other plaintiffs invested their retirement savings with Securities America, which lost the majority of the plaintiffs’ savings through self-dealing. The parties submitted their dispute to arbitration through the National Association of Securities Dealers (NASD), which issued an award – and $3.5 million in punitive damages – in favor of plaintiffs.
Securities America challenged the award, arguing that the arbitrators’ punitive damage award was in manifest disregard of the law because Louisiana law does not allow awards of punitive damages without a statutory basis.
The Court disagreed and confirmed the award, including the $3.5 million in punitive damages. The parties’ arbitration agreement required that disputes be arbitrated in accordance with NASD rules. NASD’s Code of Arbitration Procedure contains a broad damages provision, and the NASD Manual allows arbitrators to consider punitive damages as a remedy.
Securities America argued that the punitive damages award went against public policy. Once again, the Court disagreed, noting that “[a]ny public policy used to vacate an arbitration award must be ‘explicit,’ ‘well defined,’ and ‘dominant.’” United Paperworkers Int’l Union v. Misco, Inc., 484 U.S.29 (1987).
Since Securities America failed to point to anything showing that Louisiana public policy regarding punitive damages was “dominant” enough to override the fact that the parties agreed to arbitrate under NASD rules, the Court held that the punitive damages award did not constitute grounds for vacating the arbitration award.
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