South-Western Legal Studies in Business

Punitive Damage Award Vacated by Court as Grossly Excessive
Description New York appeals court reversed an arbitration award of $25 million in punitive damages as grossly excessive in violation of the Constitution. Such manifest disregard for the law is a basis on which arbitration awards may be vacated.
Topic Alternate Dispute Resolution
Key Words Arbitration; Award; Punitive Damages; Vacate
C A S E   S U M M A R Y
Facts Sawtelle was one of the most successful stock brokers for Waddell & Reed before he was fired in retaliation, he claimed, for testifying to the Securities and Exchange Commission about the activities of another Waddell broker who was convicted of embezzlement. Waddell sent Sawtelle's clients a letter that implied trouble if clients tried to move their accounts to Sawtelle's new company. When clients called his old office, they were told that Waddell did not know where Sawtelle, and it was implied that he may be in trouble. Waddell told the National Association of Securities Dealers, the industry regulators, that Sawtelle was under investigation for fraud or embezzlement, which was not true. Sawtelle brought a claim against Waddell, using NASD arbitration proceedings. The NASD arbitrators awarded Sawtelle $1.8 million in compensatory damages plus $25 million punitive damages. Waddell appealed to state court in New York, which reduced the award, that decision was appealed.

The punitive damage award is grossly excessive and is, therefore, in manifest disregard of the law, and so will be set aside. The Supreme Court has held that when punitive damage awards are grossly excessive they are in violation of the Constitution. The punitive damage award here bears no relationship to the compensatory damages and is out of proportion to statutory penalties allowed by law in cases of comparable misconduct. Even outrageous conduct will not support an oppressive or patently excessive award of damages. The award of punitive damages did not violate public policy, but is not a sum that can be upheld.

Citation Sawtelle v. Waddell & Reed, Inc., 2003 WL 288471 (Sup. Ct., App. Div., N.Y., 2003)

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