Smith - Application of Due Process

Journal of Dispute Resolution
Volume 2007 Issue 2 Article 3
2007
Application of Due Process to Arbitration Awards of Punitive

Damages - Where Is the State Action, The
Charles Smith
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Charles Smith, Application of Due Process to Arbitration Awards of Punitive Damages - Where Is the State
Action, The, 2007 J. Disp. Resol. (2007)
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Smith: Smith: Application of Due Process
The Application of Due Process to

Arbitration Awards of Punitive
Damages-Where is the State Action?
Charles Smith*
"[The] due process challenge to the arbitrationpanel's awardof punitive

damages must fail. To decide otherwise would constitutionalizeprivate arbitra-
tion proceedings and diminish both the effectiveness and the appeal of the arbitral
forum as an alternative meansfor resolving disputes.
I. INTRODUCTION
Arbitration is a private process that is similar to a court trial. It is often used

to gain a final decision as to a contested matter in a way that is generally less ex-
pensive and time consuming than litigating the same dispute in the court system.
Arbitration statutes such as the Federal Arbitration Act 2 (FAA) allow judicial
review of arbitration awards on very limited grounds.
State action is a requirement that a claim made pursuant to the Due Process
Clause of the Fourteenth Amendment of the United States Constitution must be
grounded in conduct by a state actor, such as a government employee or agency,
instead of a private actor. However, under specific circumstances, the conduct of
a private actor can be categorized as state action.
Therefore, at first blush, it would seem that arbitration and state action exist
in two separate areas of the law. However, in recent years, a number of cases and
commentators have addressed the issue of whether a court should confirm an arbi-
tration award when the award violates the Due Process Clause of the Fourteenth
Amendment. This would seemingly invoke the state action requirement in the
sense that any court is a state actor. The typical Due Process challenge to an arbi-
tration award features an award that includes punitive damages in excess of the
limits imposed by the United States Supreme Court. In other words, the losing
party in arbitration challenges the arbitrator's award as if it were a jury verdict.
However, the cases have uniformly declined to hold that a court is a state ac-
tor in this situation, and thus arbitration awards of punitive damages that would
otherwise violate Due Process should be confirmed. On the other hand, the com-
mentators are more open to the position that a court's confirmation of an arbitra-
* Lecturer, Business Law, Department of Management, California State University, Fullerton.

Earlier versions of this Article were submitted in May 2006, as my LL.M. Thesis, Pepperdine Univer-
sity School of Law (Straus Institute for Dispute Resolution), Malibu, California, and in August 2006,
as a Finalist for the Holmes-Cardozo Award, Annual Meeting of the Academy for Legal Studies in
Business, St. Petersburg, Florida. Many thanks go to my LL.M. Thesis Advisor, Professor Roger P.
Alford, and my family (wife Barbara, son Taylor, and daughter Emma), who provided great encou-
ragement to me during the many revisions of this Article.
1.Davis v. Prudential Secs., Inc., 59 F.3d 1186, 1193-94 (1
lth Cir. 1995). See infra Part VI.A.I.
2. 9 U.S.C. §§ 1-307 (2000).
Published by University of Missouri School of Law Scholarship Repository, 2007 1

Journal of Dispute Resolution, Vol. 2007, Iss. 2 [2007], Art. 3
JOURNAL OF DISPUTE RESOLUTION [Vol. 2007
tion award is state action, and thus the award must be evaluated according to the
strictures of Due Process.
Part II of this article will discuss the process of arbitration, including what
constitutes arbitration, the limited judicial review of arbitration awards, the policy
of finality of arbitration, and the contractual nature of arbitration. Part III will
analyze the concept of state action in the context of a recent United States Su-
preme Court case as well as an older case holding that a court was a state actor.
Part IV of this article will discuss United States Supreme Court cases dealing
with Due Process challenges to jury verdicts of punitive damages. Specifically,
these challenges are to the amount of punitive damages, which are currently li-
mited by the United States Supreme Court's Due Process jurisprudence to no
more than a single-digit ratio between punitive and compensatory damages. Part
V will analyze the availability of punitive damages in arbitration.
Part VI of this article will talk about the cases and articles that have consi-
dered whether there is state action when a party requests that a court confirm an
arbitration award as a judgment. As stated above, this issue is generally raised
with respect to an arbitration award that contains punitive damages in excess of
the limits imposed by the United States Supreme Court pursuant to Due Process.
In particular, this article will analyze why the position of the courts-no state
action-is correct. Specifically, this article will take the position that the policy of
finality traditionally found in arbitration law must trump any constitutional inqui-
ries. This is because arbitration is ultimately based on the parties' agreement,
which inevitably recites that the arbitrator's decision shall be final and, in any
event, this finality is generally implied.
To permit another avenue for judicial review of an arbitral award would fur-
ther chip away at both the policy of finality and the efficacy of arbitration itself.
a
A recent Eleventh Circuit case-B.L. HarbertInt'l, LLC v. Hercules Steel Co. -
put it well when it stated:
In litigating this case without good basis through the district court and
now through this Court, Harbert has deprived Hercules and the judicial
system itself of the principal benefits of arbitration. Instead of costing
less, the resolution of this dispute has cost more than it would have had
there been no arbitration agreement. Instead of being decided sooner, it
has taken longer than it would have to decide the matter without arbitra-
tion. Instead of being resolved outside the courts, this dispute has re-
quired the time and effort of the district court and this Court.
When a party who loses an arbitration award assumes a never-say-die at-

titude and drags the dispute through the court system without an objec-
tively reasonable belief it will prevail, the promise of arbitration is bro-
ken. Arbitration'sallure is dependent upon the arbitratorbeing the last
decision maker in all but the most unusual cases. The more cases there
3. 441 F.3d 905 (11th Cir. 2006). The B.L. Harbert case featured a challenge to an arbitration
award solely on the grounds that the award reflected a "manifest disregard of the law." Id. at 910. The
manifest disregard exception, which is not one of the Federal Arbitration Act's limited grounds for
judicial review, has been accepted by every federal circuit as well as a number of state courts. See
infra note 53.
https://scholarship.law.missouri.edu/jdr/vol2007/iss2/3 2
No. 2] Where is the State Action?
are, like this one, in which the arbitratoris only the first stop along the
way, the less arbitrationthere will be. If arbitration is to be a meaningful
alternative to litigation, the parties must be able to trust that the arbitra-
tor's decision will be honored sooner rather than later.4
Arbitration is a private process to which the parties have agreed, and the
courts' only obligation is to uphold that agreement pursuant to established arbitra-
tion and contract law. It follows that, in order to preserve the arbitration system
itself, judicial review based on Due Process cannot be allowed. Therefore, a
court's confirmation of an arbitration award cannot be state action.
II. ARBITRATION DEFINED
There are almost as many definitions of "arbitration" as there are courts and
commentators willing to define the process. The issue is complicated somewhat
by the failure of many arbitration statutes, including the FAA, to provide a defini-
tion. Set forth below are some guidelines pertaining to the procedure of arbitra-
tion, the limited judicial review of an arbitrator's award, the policy of finality
inherent in arbitration, and the contractual nature of arbitration.
A. ArbitrationProcedure
The procedure for an arbitration proceeding is informed by one or both of two

sources: (1) any guidelines provided by the courts, and (2) the parties' arbitration
agreement. More fundamentally, there can be no arbitration without the parties'
agreement thereto. Some courts define arbitration by setting forth a fairly precise
list of elements, 6 while other courts view the situation in a more philosophical
manner. 7 The courts have determined that arbitration has taken place in a number
of diverse circumstances as shown by the following cases.
4. 441 F.3d at 913 (emphasis added).

5. An arbitration agreement is generally a written contract executed by all parties, though an arbi-
tration agreement can also be created by way of an unsigned writing or ratification by the parties'
conduct. Examples of enforcement of an arbitration agreement based on an unsigned writing include:
Genesco, Inc. v. T. Kakiuchi & Co., 815 F.2d 840, 846 (2d Cir. 1987) ("[W]hile the [FAA] requires a
writing, it does not require that the writing be signed by the parties."); Valero Ref., Inc. v. M/T Lau-
berhom, 813 F.2d 60, 64 (5th Cir. 1987) (same conclusion). Examples of the parties' conduct forming
an arbitration agreement by ratification include: Nghiem v. NEC Elec., Inc., 25 F.3d 1437, 1440 (9th
Cir. 1994) ("[A]n agreement to arbitrate an issue need not be express; ... it may be implied from the
conduct of the parties." (quoting Fortune, Alsweet & Eldridge, Inc. v. Daniel, 724 F.2d 1355, 1356
(9th Cir. 1983))); Law Offices of Ian Herzog v. Law Offices of Joseph M. Fredrics, 71 Cal. Rptr. 2d
771, 774 (Cal. Ct. App. 1998) ("While the [California arbitration] statutes permit the courts to specifi-
cally enforce only written agreements to arbitrate, once the parties have arbitrated and a written award
is made, the courts can enforce the award even if the underlying agreement to arbitrate were oral.")
(citation omitted).
6. See, e.g., Am. Fed'n. of State, County & Mun. Employees v. Metro. Water Dist. of S. Cal., 24
Cal. Rptr. 3d 285, 291 (Cal. Ct. App. 2005) ("[A] dispute resolution procedure is not an arbitration
unless there is [1] a third party decision maker, [2] a final and binding decision, and [3] a mechanism
to assure a minimum level of impartiality with respect to the rendering of that decision.").
7. See, e.g., Bowles Fin. Group, Inc. v. Stifel, Nicolaus & Co., 22 F.3d 1010, 1011 (10th Cir.
1994):

JOURNAL OF DISPUTE RESOLUTION (Vol. 2007
The case of FIT Tech, Inc. v. Bally Total Fitness Holding Corp.8 showed that
an arbitration in everything but name is, in fact, an arbitration. The FIT case arose
out of an Asset Purchase Agreement under which the plaintiffs (primarily Laird
and Baker) sold eight health and fitness centers to the defendant (Bally).9 The
Asset Purchase Agreement contained provisions which provided for reference of
any dispute regarding the calculation of what was basically the final purchase
price "to the Accountants [designated as PriceWaterhouseCoopers elsewhere in
the contract] for final determination10 ... which determination shall be final and
binding on all of the parties hereto."'
Disputes developed between the parties and the plaintiffs filed an action for
breach of contract and other claims against the defendant alleging various ac-
counting and operating violations which purportedly reduced the amount of the
purchase price." The defendant moved to dismiss the complaint on the grounds
that the claims therein were required to be submitted to the accountants under the
Asset Purchase Agreement, but while the district court concluded that certain
factual allegations were within the purview of the accountants, the court decided
that most allegations were to be decided by the court.' 2 The defendant appealed,
arguing that all of the plaintiffs' claims should be submitted to the accountants or,
alternatively, all such claims
3 were subject to the pending arbitration as to the Em-
ployment Agreement.'
Initially, the court of appeals held that "arbitration" would be defined by fed-
eral law, not state law.14 The FIT court then decided the question of "[w]hether
the accounting remedy is 'arbitration' under the federal statute" in the affirmative
because "[t]he answer does not depend on the nomenclature used in the agreement
[citation omitted]; rather, the question is how closely the specified procedure re-
sembles classic arbitration and whether
'5
treating the procedure as arbitration serves
the intuited purposes of Congress."'
The FIT court noted that the Asset Purchase Agreement "makes the Price
Waterhouse remedy 'final' . . . and other common incidents of arbitration of a
contractual dispute are present: an independent adjudicator, substantive standards
Arbitration is a creature born of a contract between parties who are desirous of avoiding litigation
in a court of law. Arbitration requires the parties agree to rules of arbitration. Frequently, rules
of arbitration specifically exclude the application of judicial rules of evidence and, instead, the
arbitrators determine the materiality and relevance of all evidence offered. Arbitrators are not
judges of a court nor are they subject to the general superintending power of a court. Arbitration
provides neither the procedural protections nor the assurance of the proper application of substan-
tive law offered by the judicial system. Those who choose to resolve a dispute by arbitration can
expect no more than they have agreed. One choosing arbitration should not expect the full pa-
noply of procedural and substantive protection offered by a court of law. In short, "by agreeing
to arbitrate, a party 'trades the procedures and opportunity for review of the courtroom for the
[perceived] simplicity, informality, and expedition of arbitration."'
8. 374 F.3d 1 (Ist Cir. 2004).
9.Id.at 2-3.
10. Id.at 3.
11. Id. at4.
12. Id. The defendant's motion for reconsideration, which was based on the assertion that the plain-
tiffs had elected to submit all claims to arbitration due to the pendency of an arbitration commenced
under the provision in the Employment Agreement, was denied. Id.
at 4-5.
13. Id.at5.
14. Id. at 6.
15. Id. at 7.
(the contractual terms of the pay-out), and an opportunity for each side to present
its case."' 16 The court of appeals held that "the accounting remedy departs from a
common feature of many arbitrations" in that the reference to the accountants
would resolve only part of the disputes between the parties.17 However, the court
stated that "arbitrations
8
sometimes do cover only a part of the overall dispute be-
tween the parties."'
The finding that the "accounting remedy" in the Asset Purchase Agreement
featured in the FIT case evidences that special words such as "arbitration" or "ar-
bitrator"-or even any reference to an Alternative Dispute Resolution (ADR)
provider and its procedures-are not necessary in order for a process to be
deemed an arbitration.
9
This is consistent with the FAA's policy of encouraging
arbitration.'
The case of Kabia v. Koch20 showed that even The People's Court's proceed-
ings can constitute arbitration. The dispute in Kabia v. Koch was based on alle-
gedly defamatory statements made during a televised episode of The People's
Court by the defendant, "Arbitrator" Edward I. Koch, that the plaintiff was a
"kidnapper." 2' The plaintiffs underlying action for damages against his son had
originally been filed in small claims court, but the plaintiff and his son accepted22
the opportunity to instead have their dispute resolved on The People's Court.
They signed an agreement to arbitrate which provided that the show's producer
(not the losing party) would pay any award or, in the event of no award (such as a
defense judgment), all litigants would be paid $250.00 each by The People's
Court.23 Plaintiff's also granted a release of the defendant and others pertaining to
"statements during ...the arbitration which plaintiff and/or defendant [in the
underlying dispute] ... feel rightly or wrongly to be derogatory, defamatory or in
some other way injurious to themselves." 24
In the plaintiff's defamation action, the court ruled that the proceeding over
which the defendant presided on The People's Court was an arbitration, and thus
the defendant was immune from liability by first reasoning that arbitration is de-
fined by the Black's Law Dictionary as "[a] process of dispute resolution in which
a neutral third party (arbitrator) renders a decision after a hearing at which both
parties have an opportunity to be heard. 25 In addition, the plaintiff and his son
both agreed, in their underlying small claims action, "to arbitrate their dispute
16. Id.
17. Id.
18. Id.
19. See, e.g., Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 24-25 (1991) (the purpose of the
FAA "was to reverse the longstanding judicial hostility to arbitration agreements that had existed at
English common law and had been adopted by American courts, and to place arbitration agreements
upon the same footing as other contracts.... [The FAA's] provisions manifest a 'liberal federal policy
favoring arbitration agreements."'); Discover Bank v. Super. Ct., 113 P.3d 1100, 1110 (Cal. 2005)
("California law, like federal law, favors enforcement of valid arbitration agreements.... Thus, under
both federal and California law, arbitration agreements are valid, irrevocable, and enforceable, save
upon such grounds as exist at law or in equity for the revocation of any contract.") (Citation omitted).
20. 713 N.Y.S.2d 250 (N.Y. Civ. Ct. 2000).
21. Id. at 251-52.
22. Id.
23. Id. at 252.
24. Id. (quoting BLACK's LAW DICTIONARY 105 (6th ed. 1990)).
25. Id. at 254.

JOURNAL OF DISPUTERESOLUTION [Vol. 2007
before an agreed-upon arbitrator [the defendant]. 26 Finally, the court noted the
limits on judicial review of any arbitration but stated that "[s]uch limits are the
essence of arbitration and allow for its economical and expeditious resolution of
disputes. 27
The Kabia v. Koch case took a situation that had the proper terminology in
the arbitration agreement and clarified that the "show business" aspects of the
process-in particular, the fact that the show's producer, not the losing party,
would pay any award or, if no award, each party would receive $250.00 from the
producer--did not remove the dispute from the arbitration arena.
B. The Arbitration Process is Dictatedby the Parties' Contract
The above discussion displays the courts' involvement in arbitration. How-

ever, at its core, arbitration is still a private proceeding subject to the parties' arbi-
tration agreement. 2 8 To this end, the FAA states:
A written provision ... to settle by arbitration a controversy thereafter

arising... or... to submit to arbitration an existing controversy... shall
be valid, irrevocable, and enforceable, save upon such grounds as exist at
29
law or in equity for the revocation of any contract.
Additionally, the parties to an arbitration agreement have considerable leeway

in crafting the process for their arbitration. These issues can include but are not
limited to (1) alteration of the statutory judicial review standards, (2) designation
of the substantive law to be applied, and (3) selection of the arbitrator(s).
The courts are split as to whether the parties to an arbitration agreement can
agree to expand the scope of judicial review of the arbitral award beyond the sta- 31
tutory grounds.3 0 The case of Gateway Techs., Inc. v. MCI Commc'ns Corp.
provides an example of where an arbitration agreement that expanded judicial
review was enforced. In Gateway, the arbitration agreement allowed for de novo
judicial review based on errors of law. 32 The Fifth Circuit emphasized the FAA's
policy of enforcing arbitration agreements, stating that "federal arbitration policy
26. Id.
27. Id. at 255.
28. Action Box Co. v. Panel Prints, Inc., 130 S.W.3d 249, 252 (Tex. App. 2004) ("The authority of
an arbitrator derives from the arbitration agreement and is limited to a decision of the matters submit-
ted therein.").
29. 9 U.S.C. § 2 (2000). This statutory provision "embodies the national policy favoring arbitration
and places arbitration agreements on equal footing with all other contracts." Buckeye Check Cashing,
Inc. v. Cardegna, 546 U.S. 440, 443 (2006).
30. This issue has been the topic of a significant amount of scholarship over the past several years.
E.g., Margaret Moses, Can Parties Tell Courts What to Do? Expanded Judicial Review of Arbitral
Awards, 52 U. KAN. L. REv. 429 (2004); Lee Goldman, Contractually Expanded Review of Arbitra-
tion Awards, 8 HARV. NEGOT. L. REV. 171 (2003); Eric van Ginkel, Refraining the Dilemma of Con-
tractually Expanded Judicial Review: Arbitral Appeal vs. Vacatur, 3 PEPP. DiSP. RESOL. L.J. 157
(2003); Margaret M. Maggio & Richard A. Bales, ContractingAround the FAA: The Enforceabilityof
PrivateAgreements to Expand JudicialReview of Arbitration Awards, 18 OHIO ST. J. ON DISP. RESOL.
151 (2002).
31. 64 F.3d 993 (5th Cir. 1995).
32. Id. at 995.
demands that
33
the court conduct its review according to the terms of the arbitration
contract."
On the other hand, many jurisdictions have declined to enforce arbitration
agreements which expand judicial review. For instance, in Kyocera Corp. v.
Prudential-BacheTrade Servs., Inc., 34 the Ninth Circuit acknowledged the federal
policy of following arbitration but still refused to enforce a provision of the par-
ties' contract that provided for expanded judicial review of the arbitrator's award,
reasoning:
[Plarties have complete freedom to contractually modify the arbitration

process by designing whatever procedures and systems they think will
best meet their needs . . . Once a case reaches the federal courts, howev-
er, the private arbitration process is complete, and because Congress has
specified standards for confirming an arbitration 35award, federal courts
must act pursuant to those standards and no others.
On a related issue, a few courts have dealt with the issue of whether an arbi-
tration agreement will be enforced if it deprives the court of the ability to review
on grounds permitted by law. 36 Also, arbitration agreements which provide for
"appellate" review of an arbitration award by another arbitration tribunal are en-
37
forceable.
In arbitration, the parties are free to designate by way of a choice of law
clause the applicable substantive and procedural law. In Volt Information
Sciences, Inc. v. Bd. of Trustees of Leland Stanford Jr. Univ., 38 the United States
Supreme Court recognized the parties' right to include a choice of law clause in
their arbitration agreement, reasoning that "[wihere, as here, the parties have
agreed to abide by state rules of arbitration, enforcing those rules according to the
terms of the agreement is fully consistent with the goals of the FAA, even if the
result is that
39
arbitration is stayed where the Act would otherwise permit it to go
forward."
33. Id. at 997.

34. 341 F.3d 987 (9th Cir. 2003).
35. Id. at 1000.
36. Compare Bowen v. Amoco Pipeline Co., 254 F.3d 925,931 (10th Cir. 2001) (limitation allowed
if clear and specific) with Hoeft v. MVL Group, Inc., 343 F.3d 57, 64 (2d Cir. 2003) ("Arbitration
agreements are private contracts, but at the end of the process the successful party may obtain a judg-
ment affording resort to the potent public legal remedies available to judgment creditors.... Congress
impressed limited, but critical, safeguards onto this process, ones that respected the importance and
flexibility of private dispute resolution mechanisms, but at the same time barred federal courts from
confirming awards tainted by partiality, a lack of elementary procedural fairness, corruption, or similar
misconduct.").
37. Cummings v. Future Nissan, 27 Cal. Rptr. 3d 10, 11, 12 & n.3, 17 (Cal. Ct. App. 2005) (arbitra-
tion agreement providing for second arbitrator's review of first arbitrator's award "according to the law
and procedures applicable to appellate review by the California Court of Appeal of a civil judgment
following [a] court trial" was enforceable; the second arbitrator's reversal of the first arbitrator's award
was judicially reviewable). Some private ADR providers have created "appellate arbitration" proce-
dures as part of the services they offer. E.g., J.A.M.S. OFTONAL ARBITRATION APPEAL PROCEDURE
(2003), availableat http://www.jamsadr.com/rules/optional.asp.
38. 489 U.S. 468 (1989).
39. Id. at 479.

JOURNAL OFDISPUTE RESOLUTION [Vol. 2007
In Sovak v. ChugaiPharmaceuticalCo.,4° the Ninth Circuit held the FAA, not

Illinois law, governed the arbitration procedures, holding:
Parties may agree to state law rules for arbitration even if such rules are
inconsistent with those set forth in the Federal Arbitration Act.... How-
ever, parties must clearly evidence their intent to be bound by such rules.
... In other words, the strong default presumption is that the FAA, not
state law, supplies the rules for arbitration.4'
In Sovak, the court stated that "a general choice-of-law clause within an arbi-
tration provision does not trump the presumption that the FAA supplies the rules
for arbitration" in support of its holding that the general choice-of-law
42 clause in
the parties' agreement applied to Illinois substantive law only.
Therefore, while the parties may be free to choose their own arbitration pro-
cedures by contract, they should be careful to specify the governing law in the
arbitration clause and not simply rely on a choice-of-law provision purporting to
pertain to the entire contract. Moreover, the parties should expressly designate
whether their choice-of-law clause applies to substantive law only, procedural law
only, or both.
Finally, "[o]ne of the main advantages of contractual arbitration is that it al-
lows the parties to designate a single arbitrator or a panel and to specify the quali-
fications the arbitrator(s) must possess. 43 This seemingly broad discretion in
picking an arbitrator or panel of arbitrators can be impacted by, inter alia, re-
quirements that the arbitrator must be impartial 44 and' 4this
5
impartiality requirement
holds true even in the situation of a "party arbitrator.
However, there is no requirement that the ADR provider selected by the par-
ties proffer a panel of potential arbitrators that features gender, racial, or ethnic
diversity as would be mandated for a jury panel in court. 4 In addition, the parties
can agree that the arbitrator(s) shall have special expertise with respect to the sub-
ject matter of the dispute or the process itself (e.g., complex litigation).47
40. 280 F.3d 1266 (9th Cir. 2002).

41. Id. at 1269.
42. Id. at 1270. Ordinarily, the FAA applies in both federal and state courts. A LITIGATOR's GUIDE
TO EFFECTIVE USE OF ADR IN CALIFORNIA 387, § 9.35 (2006). However, not everyone agrees with
this interpretation. E.g., Green Tree Fin. Corp. v. Bazzle, 539 U.S. 444, 460 (2003) (Thomas, J.,
dissenting) (citing other cases in which he has dissented on the same point).
43. H. WARREN KNIGHT ET AL., CAL. PRAC. GUIDE: ALTERNATIVE DISPUTE RESOLUTION 5-13
[5:24] (2006) [hereinafter "KNIGHT"].
44. See infra notes 45.
45. Traditionally, party arbitrators were assumed to not be neutral. E.g., Sunkist Soft Drinks, Inc. v.
Sunkist Growers, Inc., 10 F.3d 753, 758-60 (11 th Cir. 1993). However, the current trend is that all
arbitrators, "party" or not, shall be impartial. See AAA COMMERCIAL RULES AND MEDIATION
PROCEDURES, R. R-17(a)(iii) (2007).
46. Smith v. Am. Arbitration Ass'n, 233 F.3d 502, 504-07 (7th Cir. 2000). This case is analyzed
infra Part VI.A.2.
47. KNIGHT, supra note 43, at 8-30 [ 8:117-19].
C. Arbitration'sPolicy of Finality
Perhaps the main characteristic of arbitration is that, except for very limited
circumstances, the arbitrator's award is not subject to review by the courts as to
errors of law or fact.48 For instance, a recent United States Supreme Court case
stated, "When an arbitrator resolves disputes regarding the application of a con-
tract, and no dishonesty is alleged, the arbitrator's 'improvident, even silly, fact-
finding' does not provide a basis for a reviewing court to refuse to enforce the
49
award.
Furthermore, while many arbitration agreements specify that the arbitral
award shall be final and binding, this policy of finality is implied in arbitration
even if the arbitration agreement is silent on the point. As the California Supreme
Court put it:
Even had there been no such expression of intent [that the award be fi-
nal], however, it is the general rule that parties to a private arbitration
impliedly agree that the arbitrator'sdecision will be both binding andfi-
nal. Indeed, "The very essence of the term 'arbitration'[in this context]
connotes a binding award." In the early years of this state, this court
opined that, "When parties agree to leave their dispute to an arbitrator,
they are presumed to know that his award will be final and conclusive...
" One commentator explains, "Even in the absence of an explicit
agreement, conclusiveness is expected; the essence of the arbitration
process is that an arbitralaward shall put the dispute to rest.50
In accordance with these policies, statutes governing judicial review of an ar-

bitration award specify only limited conditions under which an award can be va-
cated. For example, the FAA provides grounds for vacatur based on procedural
improprieties such as corruption, fraud, or arbitrators who exceed their powers.51
48. Major League Baseball Players Ass'n v. Garvey, 532 U.S. 504, 509 (2001). See IBEW Local
No. 573 v. Steen Elec., Inc., 232 F. Supp. 2d 797, 802 (N.D. Ohio 2002) ("It is the arbitrator's con-
struction [of the parties' contract] which was bargained for; and so far as the arbitrator's decision
concerns construction of the contract, the courts have no business overruling him because their inter-
pretation of the contract is different from his."); City of Coffeyville v. IBEW, Local No. 1523, 14 P.3d
1, 9 (Kan. 2000) ("The court has a very limited scope of review when considering whether to set aside
an arbitrator's decision.").
49. Garvey, 532 U.S. at 509. The Second Circuit case of Wallace v. Buttar provided this illuminat-
ing observation:
This case raises questions regarding the scope of federal court review of a decision issued by an
arbitral panel.... Federal district judges are, of course, highly skilled in matters of weighing evi-
dence. As illustrated by the result we reach here [reversal of the vacatur of the arbitration award
and remand for the purpose of entering an order confirming the award], however, district judges
must put these skills aside when faced with the question of whether a decision issued by an arbi-
tral panel should be confirmed.
Wallace v. Buttar, 378 F.3d 182, 183 (2d Cir. 2004).
50. Moncharsh v. Heily & Blase, 832 P.2d 899, 903 (Cal. 1992) (emphasis added).
51. 9 U.S.C. § 10(a) (2000). These limited avenues for judicial review of arbitration awards are
typically repeated in state arbitration statutes. E.g., ALASKA STAT. § 09.43.120 (2006). Alaska is one
of the thirty-four states that have adopted the Uniform Arbitration Act. 27 AM. JUR. 3D Proofof Facts
103 § 2 & n.9 (2005). However, even states which have not adopted the UAA have very similar sta-

A host of cases recite that the statutory grounds are the sole grounds for judi-
cial review in accordance with the general rule of arbitral finality. 52 However,
many federal and state courts also permit some non-statutory grounds for vacating
an arbitration award, such as manifest disregard of law, 53 violation of public poli-
cy, 54 or the parties' agreement
55 to expand the grounds of judicial review beyond
the statutory grounds.
D. Closing Remarks as to Arbitration
In reviewing the cases cited above, it appears that any attempt to define arbi-
tration could easily be summarized in the famous words of Justice Potter Stewart:
"I know it when I see it." 56 However, the cases reveal a few important characte-
ristics: arbitration is a private procedure intended to result in a final decision ren-
dered by a neutral tribunal with no appeal due to an error of law or fact, with an
emphasis on the finality of the arbitral decision.
tutes providing for limited judicial review of arbitration awards. E.g., CAL. CIV. PROC. CODE § 1286.2
(West 2007).
52. E.g., Positive Software Solutions, Inc. v. New Century Mortgage Corp., 476 F.3d 278, 280 (5th
Cir. 2007) ("[Tjhe FAA narrowly restricts judicial review of arbitrators' awards."); Schoenduve Corp.
v. Lucent Techs., Inc., 442 F.3d 727, 731 (9th Cir. 2005) ("We must affirm an order to confirm an
arbitration award unless it can be vacated, modified, or corrected as prescribed by the FAA."); Johnson
Real Estate Invs. v. Aqua Indus., Inc., 639 S.E.2d 589, 593 (Ga. 2006) ("[T]he Georgia Arbitration
Code lists five grounds for vacating arbitration awards . . . and these statutory grounds provide the
exclusive bases for vacating an arbitration award under Georgia law.")
53. E.g., Elec. Data Sys. Corp. v. Donelson, 473 F.3d 684, 691 (6th Cir. 2007) ("An arbitration panel
acts with manifest disregard if '(1) the applicable legal principle is clearly defined and not subject to
reasonable debate; and (2) the arbitrators refused to heed that legal principle."'); Birmingham News
Co. v. Horn, 901 So.2d 27, 47-52 (Ala. 2004) (collecting cases from all federal circuits applying the
manifest disregard exception). At least one state has codified the manifest disregard exception. GA.
CODE ANN. § 9-9-13(b)(5) (2006). However, some jurisdictions have declined to adopt the exception.
E.g., Siegel v. Prudential Ins. Co. of Am., 79 Cal. Rptr. 2d 726 (Cal. Ct. App. 1998); Coors Brewing
Co. v. Cabo, 114 P.3d 60 (Colo. Ct. App. 2004). Moreover, because of the difficulty of meeting the
requirements, a judicial challenge to an arbitrator's award based on the manifest disregard exception is
rarely successful. See Wien & Malkin LLP v. Helmsley-Spear, Inc., 813 N.Y.S.2d 691, 697 n.lI
(N.Y. 2006) ("[Slince 1960 the Second Circuit has vacated some part or all of an arbitral award for
manifest disregard in only four out of 48 cases."); Michael A. Scodro, Deterrence and Implied Limits
on Arbitral Power, 55 Duke L.J. 547, 577 (2005) (The federal courts have "effectively defined [manif-
est disregard] out of existence.").
54. Rintin Corp., S.A. v. Domar, Ltd., 476 F.3d 1254, 1258 (1 th Cir. 2007) (In order to vacate an
arbitral award due to public policy, it must "offend[] 'some basic principle of justice or morality or
[threaten[]] to frustrate some urgent public necessity."'); Jordan v. Cal. Dep't of Motor Vehicles, 123
Cal. Rptr. 2d 122, 139 (Cal. App. 2002) (arbitrator's award set aside since it "violates the clear expres-
sion of public policy against gifts of public funds" as forbidden by the California Constitution); Cheve-
rie v. Ashcraft & Gerel, 783 A.2d 474, 482-83 (Conn. App. Ct. 2001) ("IT]he public policy exception
to arbitral authority should be narrowly construed and [a] court's refusal to enforce an arbitrator's
interpretation of [collective bargaining agreements] is limited to situations where the contract as inter-
preted would violate some explicit public policy that is well defined and dominant, and is to be ascer-
tained by reference to the laws and legal precedents and not from general considerations of supposed
public interests.").
55. This practice is discussed infra pp. 6-7.
56. Jacobellis v. Ohio, 378 U.S. 184, 197 (1964) (Stewart, J., concurring) (expressing the difficulty
in defining obscenity).
II."STATE ACTION" DEFINED
The concept of "state action" is vital to the question of whether a violation of

the United States Constitution has occurred. This is because a cause of action
based on a violation of the Constitution 57 must be a result of state action in order
for the claim to be valid due to the "essential dichotomy set forth in th[e Four-
teenth] Amendment between deprivation by the State, subject to scrutiny under its
provisions, and private conduct, 'however discriminatory or wrongful,' against
which the Fourteenth Amendment offers no shield. 58
The state action doctrine has been subject to a number of different interpreta-
tions over the years. 59 The discussion of the following United States Supreme
Court cases will show how troublesome this area of the law can be.6 °
A. Tarkanian v. NCAA-The NCAA is Not a State Actor and Thus it is Not

Subject to Due ProcessRestrictions
The Tarkanian case featured disciplinary action taken by the National Colle-
giate Athletic Association (NCAA) against a state university, the University of
Nevada, Las Vegas ("UNLV"), as well as its coach, Jerry Tarkanian 6 1, based on
numerous violations of the NCAA's rules. In particular, the NCAA put UNLV's
basketball team on probation and ordered the school to show why further penalties
should not be imposed, unless it severed all ties between its athletic program and
Tarkanian during the probationary period.62 When UNLV accordingly notified
Tarkanian that it planned to suspend him, Tarkanian filed suit in Nevada state
court, alleging deprivation of his Fourteenth Amendment Due Process rights in
violation of 42 U.S.C. § 1983.63
57. Or, for that matter, a claim pursuant to 42 U.S.C. § 1983 (2000). Lugar v. Edmondson Oil Co.,
457 U.S. 922, 928-29 (1982) ("In cases under § 1983, 'under color' of law has consistently been
treated as the same thing as the 'state action' required under the Fourteenth Amendment.").
58. Jackson v. Metro. Edison Co., 419 U.S. 345, 349 (1974). While Jackson dealt with an alleged
Due Process violation, it should be noted that cases involving violations of other Constitutional provi-
sions, such as Equal Protection, also invoke the state action requirement. B.E. WITKIN ET AL., 8
SUMMARY OF CALIFORNIA LAW, "CONSTITUTIONAL LAW," 70, § 697 (10th ed. 2005) ("Like the Due
Process Clause, the Equal Protection Clause applies only to state action, and not to private discrimina-
tion.").
59. Sarah Rudolph Cole, Fairnessin Securities Arbitration:A ConstitutionalMandate?, 26 Pace L.
Rev. 73, 84-85 (2005) (providing brief descriptions of the four standards used for determining whether
there is state action).
60. See Jackson, 419 U.S. at 349-50 ("[Tjhe question whether particular conduct is 'private,' on the
one hand, or 'state action,' on the other, frequently admits of no easy answer."); Rudolph Cole, supra
note 59, at 84 ("While the theory underlying state action is well-understood, determining whether an
individual is a state actor when she allegedly violates constitutional rights is not easily predictable.").
61. Tarkanian won 729 games as a Division I college coach (including 509 victories at UNLV), and
on August 8, 2005, UNLV announced that it was naming the basketball court at the school's arena,
Thomas & Mack Center, in honor of Tarkanian. UNLV to Honor Coach Jerry Tarkanian,
http://unlvrebels.collegesports.com/sports/m-baskb/spec-rel/080805aab.html (last visited March 8,
2006).
62. Nat'l Collegiate Athletic Ass'n v. Tarkanian, 488 U.S. 179, 181 (1988).
63. Id. at 180-81. Section 1983 is the federal civil rights statute that "establishes a tort-like remedy
for persons deprived of federally protected rights 'under color of [state] law."' Jack M. Beerman, A
Critical Approach to Section 1983 with Special Attention to Sources of Law, 42 STAN. L. REV. 51, 51
(1989).

Tarkanian prevailed in the state courts, obtaining injunctive relief and an

award of attorney's fees against both UNLV and the NCAA on the grounds that
Tarkanian's suspension was state action that was prohibited by the Fourteenth
Amendment and therefore in violation of § 1983. 64 The United States Supreme
Court granted certiorari to review the state 65 action holding as to the NCAA and
ruled that the NCAA was not a state actor.
Litigation to enjoin Tarkanian's suspension on Due Process grounds pro-
ceeded through the Nevada state court system, and the Nevada Supreme Court
ultimately affirmed the trial court's decision that the NCAA's conduct66 constituted
state action for the purposes of Tarkanian's Due Process allegations.
Tarkanian argued that the NCAA was a state actor due to its misuse of power
possessed by virtue of state law, alleging that UNLV delegated its functions to the
NCAA. 6 The United 678 States Supreme Court rejected that argument.68
The Tarkanian court dubbed the situation a "mirror image" of the typical
state action case and stated the question as "whether UNLV's actions in com-
pliance with the NCAA rules and recommendations turned the NCAA's conduct
into state action." 69 The Court first pointed out that UNLV was just one of many
institutions that belonged to the NCAA and, since the vast majority of those insti-
tutions were located outside of the State of Nevada, these institutions "did not act
under color of Nevada law." 70 Therefore, the source of the NCAA's rules "is not
Nevada but the collective membership, speaking through an organization that is
independent of any particular State.'
The Supreme Court conceded that state action could result if UNLV trans-
formed the NCAA's rules into state rules and the NCAA into a state actor.72
64. Tarkanian,488 U.S. at 181-82.

65. Id. at 182. The question of whether the NCAA could be a state actor had been decided by a
number of lower courts, with more recent cases holding that the NCAA was not a state actor. Id. at n.5
(collecting cases); but see Brentwood Acad. v. Tenn. Secondary Sch. Athletic Ass'n, 531 U.S. 288,
294 n.1 (2001) (citing recent cases ruling that private organizations in charge of state high school
athletics were state actors). There was no dispute that UNLV, as a public university, was a state actor
that engaged in state action when it suspended Tarkanian. Tarkanian, 488 U.S. at 183; see also id. at
199 (White, J., dissenting) ("All agree that UNLV, a public university, is a state actor, and that the
suspension of Jerry Tarkanian, a public employee, was state action. The question here is whether the
NCAA acted jointly with UNLV in suspending Tarkanian and thereby also became a state actor.").
66. Tarkanian, 488 U.S. at 189. The Nevada Supreme Court further affirmed the trial court's hold-
ing that Tarkanian's Due Process rights had been violated by the NCAA, reduced the award of attor-
ney's fees awarded by the trial court, and later awarded additional fees based on the appeal. Id. at 188-
89 & n.10. UNLV, which was also a defendant, did not appeal from the trial court's order that it pay
10% of the attorney's fees awarded to Tarkanian by the trial court. Id. at 189.
67. Id. at 191-92. Specifically, Tarkanian claimed that this delegation by UNLV "cloth[ed] the
[NCAA] with authority both to adopt rules governing UNLV's athletic programs and to enforce those
rules on behalf of UNLV," and the Nevada Supreme Court reasoned that UNLV and the NCAA "acted
jointly to deprive Tarkanian of liberty and property interests, making the NCAA as well as UNLV a
state actor." Id. at 192.
68. Id.
69. Id. at 192-93.
70. Id. at 193-94.
71. Id. In what could be considered a prophecy of the Court's holding in the Brentwood Academy
case fifteen years later, the Tarkanian Court stated in a footnote that "[tihe situation of course would
be different if the membership consisted entirely of institutions located within the same State, many of
them public institutions created by the same sovereign." Id. at 194 n.13.
72. Id. at 194.
No. 21 Where is the State Action?
However, the Court then noted that "[n]either UNLV's decision to adopt the
NCAA's standards nor its minor role in their formulation is a sufficient reason for
concluding that the NCAA was acting under color of Nevada law when it promul-
gated standards
73 governing athlete recruitment, eligibility, and academic perfor-
mance."
The Court declined to adopt Tarkanian's assertion that there was state action
by the NCAA due to delegation of power by UNLV, noting that the school had
not given the NCAA any power to do anything regarding Tarkanian (or any other
employee); instead, "[t]he commitment by UNLV to adhere to NCAA enforce-
ment procedures was
74 enforceable only by sanctions that the NCAA might impose
on UNLV itself."
Likewise, the Court rejected Tarkanian's argument that UNLV's promise to
cooperate in the NCAA's enforcement proceedings created a partnership or trans-
fer of certain university powers to the NCAA, noting that "the NCAA and UNLV
acted much more like adversaries than like partners" as UNLV sought to retain its
highly successful basketball coach.75 Moreover, the NCAA had no traditional
prosecutorial powers-such as the ability to subpoena witnesses or impose con-
tempt sanctions-in pursuing its enforcement action against UNLV; rather, "[i]ts
greatest authority was to threaten sanctions against UNLV. 76 In particular, the
NCAA could not, and did not, directly discipline Tarkanian since its "show cause"
order gave UNLV options other than suspending the coach.77
The Supreme Court dealt with Tarkanian's last contention as follows:
Finally, Tarkanian argues that the power of the NCAA is so great that the
UNLV had no practical alternative to compliance with its demands. We
are not at all sure this is true, but even if we assume that a private mono-
polist can impose its will on a state agency by a threatened refusal to deal
with it, it does not follow that such a private party is therefore acting un-
der color of state law.78
In a final note, the majority opinion cited the irony that would occur if the
NCAA's sanctions against UNLV-which were contested by UNLV and its coun-
sel, including
79
the Nevada state attorney general-were attributed to the State of
Nevada.
73. Id. at 195.

74. Id. at 195-96.
75. Id. at 196.
76. Id. at 197.
77. Id. at 197-98.
78. Id. at 198-99 (footnote omitted). This attractive argument was acknowledged by the Court when
it said that "[UNLV]'s desire to remain a powerhouse among the Nation's college basketball teams is
understandable, and nonmembership in the NCAA obviously would thwart that goal." Id. at 198 n.19.
79. Id. at 199. In dissent, Justice White wrote that the NCAA was a state actor since it acted jointly
with UNLV, which was undisputedly a state actor. Id. (White, J., dissenting). The dissent concluded:
Had UNLV refused to suspend Tarkanian, and the NCAA responded by imposing sanctions
against UNLV, it would be hard indeed to find any state action that harmed Tarkanian. But that
is not this case. Here, UNLV did suspend Tarkanian, and it did so because it embraced the
NCAA rules governing conduct of its athletic program and adopted the results of the hearings
conducted by the NCAA concerning Tarkanian, as it had agreed that it would. Under these facts,
I would find that the NCAA acted jointly with UNLV and therefore is a state actor.

The Court's opinion was well reasoned but it did not recognize the reality that
the NCAA's control over intercollegiate athletics is overwhelming. Simply put,
the vast majority of all top athletes go to colleges and universities with leading
sports programs, and these schools are NCAA members. Therefore, the NCAA
has a monopoly over the college sports scene. This monopoly, coupled with the
prevalent membership of state universities, creates at the least the appearance that
the NCAA is some sort of public agency instead of a purely private enterprise.
B. Shelley v. Kraemer8° -A Court is a State Actor in a Fourteenth

Amendment Case Involving Race Discrimination
In Shelley v. Kraemer, the United States Supreme Court was presented with
the question of whether court enforcement of private restrictive covenants as to
real property which discriminated on the basis of race or color infringed on their
Fourteenth Amendment rights.8 1 The Court observed that the restrictive covenants
were private agreements and the "[p]articipation of the State consists in the en-
forcement of the restrictions so defined."8? In other words, there would be no83
state action if there were voluntary compliance with the restrictive covenants.
The issue then became whether the cases before the Court-all of which involved
scenarios where the purposes of the restrictive covenants were secured only by
judicial enforcement-involved state action. 84
The Supreme Court began its analysis by stating it has long been established
that judicial action was state action for the purposes of the Fourteenth Amend-
ment.8 5 The Court then held that judicial enforcement of the restrictive covenants
was state action for three reasons. First, except for "the active intervention of the
state courts," the plaintiffs could have occupied the properties otherwise subject to
the restrictive covenants. 86 Second, the "full coercive power of government" was
made available by the states to individuals to deny others, based on race or color,
the enjoyment of property rights.8 7 Third, the Court stated:
The enforcement of the restrictive agreements by the state courts in these

cases was directed pursuant to the common-law policy of the States as
formulated by those courts in earlier decisions .... The judicial action in
each case bears the clear and unmistakable imprimatur of the State....
Id. at 203 (White, J., dissenting).

80. 334 U.S. 1(1948).
81. Id. at 8. The restrictive covenants in question were agreements signed by most or all residents of
a certain section of a street by which they agreed to not sell to or permit occupation by other than
"those of the Caucasian race." Id. at 6. Therefore, if an owner of land subject to one of these restric-
tive covenants attempted to sell his or her property to a non-White person, one or more of the other
parties to the covenant could filed suit to enjoin the buyer from taking possession and to divest the
buyer of title and revest title in the seller or another person directed by the court, which is what hap-
pened in the cases that gave rise to Shelley v. Kraemer. Id. at 6-8.
82. Id. at 13.
83. Id.
84. Id. at 13-14.
85. Id. at 14.
86. Id. at 19.
87. Id.
Nor is the Amendment ineffective simply because the particular pattern

of discrimination, which the State has enforced, was defined initially by
the terms of a private agreement. State action, as that phrase is unders-
tood for the purposes of the 88 Fourteenth Amendment, refers
to exertions
of state power in all forms.
In Shelley v. Kraemer, the subject contracts were all private agreements that
could have been performed without any state involvement. The state entered the
picture only when parties to the restrictive covenants filed suit to enjoin the buyers
from taking possession of the properties that had ostensibly been sold to them.
On its face, this scenario is very similar to a situation where, pursuant to an
arbitration agreement, arbitration takes place and the arbitrator renders an award
of punitive damages, and then one of the parties challenges the award in court by
arguing that the award is invalid under the Fourteenth Amendment.
C. Closing Remarks as to State Action
The Tarkanian case is illustrative of the typical dispute over the existence of
state action-i.e., action by a private actor that could be interpreted to be a public
function. In Tarkanian, the party bringing the Due Process challenges tried to
emphasize the relationship-as memorialized by contract between the state and
private actors-in order to show that the private actor's conduct constituted state
action.
On the other hand, Shelley v. Kraemer featured private agreements-the re-
strictive covenants-that had nothing to do with the state until one of the contract-
ing parties wished to force compliance by another contracting party who was
transferring the property to a non-White person. When this forced compliance
was required, it was undertaken by filing suit in a state court. According to Shel-
ley v. Kraemer, the court's enforcement of the restrictive covenant was state ac-
tion, which permitted application of Due Process strictures. Therefore, the analyt-
ical structure set forth in Shelley v. Kraemer would indicate that any private con-
tract, including an arbitration agreement, could involve state action whenever
judicial intervention is requested with respect to the contract.
However, the analysis is not that simple. This is because the holding of Shel-
ley v. Kraemer has been limited to race discrimination cases. For instance, the
case of Davis v. Prudential Securities, Inc.89 disregarded the impact of Shelley v.
Kraemer, stating on the grounds that "[t]he holding of Shelley,
'
however, has not
been extended beyond the context of race discrimination. 90
88. Id. at 19-20 (footnotes omitted).

89. 59 F.3d 1186 (11 th Cir. 1995).
90. Id. at 1191. A recent law review article expanded on this criticism of Shelley v. Kraemer, not-
ing:
Many commentators worried about Shelley's possible implications. According to some, Shelley
could be interpreted to create state action in any contract dispute that resulted in court involve-
ment. Concerns over Shelley's implications never materialized, however. The Court, perhaps
concerned about the loss of the critical dichotomy between public and private law and the consti-
tutionalization of contract law, has rejected the invitation to extend Shelley. Since Shelley, no
other case hasfound state action solely on the basis that the court enforced an otherwise private
arrangement. [91]Commentators have, however, exaggerated Shelley's influence. If the contract

Thus, the availability of Shelley v. Kraemer as precedent in support of the ar-

gument that judicial confirmation of an arbitral award is state action is, at best,
weak and, at worst, nonexistent.
IV. DUE PROCESS LIMITS ON AWARDS OF PUNITIVE DAMAGES
A. The United States Supreme Court'sJurisprudenceas to Constitutional

Limits on PunitiveDamages
The United States Supreme Court's recent jurisprudence as to the issue of ex-
cessive punitive damages has involved constitutional challenges to verdicts in-
cluding punitive damages on the grounds that such verdicts violated the Excessive
Fines Clause of the Eighth Amendment and, more currently, the Fourteenth
Amendment's Due Process Clause.
The Court addressed the Eighth Amendment issue in the case of Browning-
Ferris Industries of Vermont v. Kelco Disposal, Inc.,91 in which the trial court
awarded approximately four hundred thousand dollars in compensatory and treble
damages, attorney's fees and costs, and just over six million dollars in punitive
damages. The Court's opinion was pertinent for two reasons.
First, the Court held that the Eighth Amendment did not apply to punitive
damages, reasoning that the Excessive Fines Clause pertains only to criminal mat-
ters prosecuted by the government and does not "[serve] as a check on the power
of a jury to award damages in a civil case" between private parties. 9 Second, the
Court declined to reach the Due Process issue raised by the defendants on the
grounds that they had not raised it before the District Court or Court of Appeals,
nor did they raise it in their petition for writ of certiorari. 94 However, the Court
did acknowledge:
There is some authority in our opinions for the view that the Due Process
Clause places outer limits on the size of a civil damages award made pur-
suant to a statutory scheme [citation omitted], but we have never ad-
dressed the precise question presented here: whether due process acts as
the Court enforced in Shelley had not been racially restrictive on its face, the argument that ap-
plying Shelley in subsequent cases would constitutionalize contracts might be viable. Moreover,
Shelley is an unusual case that will not likely be repeated. The Court's decision turned on the fact
that the lower court had to look at the color of Shelley's skin in order to determine whether to en-
force the contract. Without race as a factor, the enforcement of a facially neutral covenant would
not have been state action. [ ] The Court's refusal to extend Shelley has resulted in reluctance to
find state action, even in comparable situations where race discriminationis a consequence of
the private litigants' behavior.
Sarah Rudolph Cole, Arbitration and State Action, 2005 BYU L. Rev. I, 10-11 (2005) (footnotes
omitted; emphasis added).
This article is discussed infra Part VI.B.1.
91. 492 U.S. 257 (1989).
92. Id. at 262.
93. Id. at 259-60.
94. Id. at 277.
a check on undue jury discretion to95 award punitive damages in the ab-
sence of any express statutory limit.
Therefore, the Court declined to permit an Eighth Amendment attack on a

punitive damages award in a civil case because the Eighth Amendment applied to
criminal matters only. However, it left the door open for a Due Process attack,
and that invitation was quickly accepted, as shown by the following cases.
In Pacific Mutual Life Ins. Co. v. Haslip,96 the Court took up the issue that the
Browning-Ferris case declined to address-i.e., whether an award of punitive
damages could violate Due Process. In Pacific Mutual, the verdict was in the
amount of $1,040,000, with "a punitive damages component of not less than
$840,000.00." 97 The Court affirmed the punitive damages award by first approv-
ing the jury instruction given at trial based on "deterrence and retribution, the state
policy concerns sought to be advanced.",98 Next, the Court recognized the efficacy
of the post-trial review procedure. 99 Finally, the state supreme court provided an
additional check by undertaking a comparative analysis as well as evaluating pu-
nitive damages under a detailed seven-part standard.'0
Based on the variety of checks under which the punitive damages award was
reviewed by the lower courts in Pacific Mutual, the Court held that no "constitu-
tional impropriety" occurred and thus the Due Process challenge was rejected. 01
However, the Court did not establish any mathematical criteria by which to meas-
ure punitive damages. 102
In Honda Motor Co., Ltd. v. Oberg,1°3 the plaintiff won a jury verdict in an
Oregon state court for compensatory damages of $735,512.31 and punitive dam-
95. Id. at 276-77. Justice Brennan, in a concurring opinion, underscored the efficacy of a Due
Process attack on a punitive damages award, noting "that punitive damages are imposed by juries
guided by little more than an admonition to do what they think is best." Id. at 281(Brennan, J., concur-
ring). Two other justices rued the "skyrocketing" awards of punitive damages. Id. at 282 (O'Connor,
J., concurring and dissenting).
96. 499 U.S. 1 (1991).
97. Id. at 6-7 & n.2. The Court observed that the punitive damage award is "more than 4 times the
amount of compensatory damages, is more than 200 times the out-of-pocket expenses . . .and, of
course, is much in excess of the fine that could be imposed for insurance fraud.... Imprisonment,
however, could also be required of an individual in the criminal context." Id. at 23.
98. Id. at 19. The text of the jury instruction is set forth in a lengthy footnote. Id. at 6 & n. I.
99. The trial court was obligated to consider several matters when reviewing an award of punitive
damages including but not limited to "the 'culpability of the defendant's conduct,' the 'desirability of
discouraging others from similar conduct,' the 'impact upon the parties,' and 'other factors, such as the
impact on third parties."' Id. at 20.
100. Id. at 21-22.
101. Id. at 23-24. In an extended discussion, Justice Scalia averred that the "traditional practice of
American courts" was to leave the amount of punitive damages to the jury's discretion and therefore he
would not inquire into the "fairness" or "reasonableness" of the procedure for determining the amount
of punitive damages. Id. at 24-25 (Scalia, J., concurring). Justice Kennedy, while writing separately,
relied heavily on the concept that "[jiury determination of punitive damages has ...[a] long and prin-
cipled recognition as a central part of our system .. ." Id. at 40 (Kennedy, J., concurring). The dissent
lamented that the jury was provided with discretion without direction in setting the amount of punitive
damages; the jury instructions regarding punitive damages "are so fraught with uncertainty that they
defy rational implementation." Id. at 43 (O'Connor, J., dissenting).
102. Id. at 18 ("We need not, and indeed we cannot, draw a mathematical bright line between the
constitutionally acceptable and the constitutionally unacceptable that would fit every case.").
103. 512 U.S. 415 (1994).

ages of $5,000,000.00.' 04 The defendant appealed through the state court system,
unsuccessfully asserting that the amount of punitive damages was excessive, and
the Oregon Constitution prohibited judicial review of a jury verdict as to the
amount of punitive damages. °5 The United States Supreme Court granted certi-
orari "to consider whether Oregon's limited judicial review10 of
6 the size of punitive
damages awards is consistent with our decision in Haslip."'
The Court noted that the Oregon procedure permitted a new trial to be granted
as to whether there was any evidentiary support for punitive damages but that no 07
judicial review existed if the amount of punitive damages were the only issue.
The defendant unconvincingly argued that the Oregon courts did have the power
to reduce the amount of an award of punitive damages on the grounds that the jury
was influenced by "passion and prejudice" since "[n]o Oregon court for more than
half a century has inferred passion and prejudice from the size of a [punitive]
damages award, and no court in more1 8 than a decade has even hinted that courts
might possess the power to do so."'
The Supreme Court held that judicial review of punitive damages provided a
protection against arbitrary awards and that Oregon's deprivation of any such
judicial review violated Due Process. 1° 9 Thus, the Supreme Court imposed a pro-
cedural limitation-i.e., the availability of judicial review of the amount of the
punitive damages-in Honda. However, the Court did not create a substantive
limitation on punitive damages.
Eventually, in State Farm Mutual Automobile Ins. Co. v. Campbell,"l0 the
United States Supreme Court created a mathematical formula for limiting punitive
damages. The State Farm case involved a matter in which the jury rendered a
verdict of $1 million in compensatory damages and $145 million in punitive dam-
ages."' The Court held that the jury's $145 million punitive damages award vi-
olated Due Process.1 2 The following analysis will concentrate on the part of the
Court's analysis regarding the disparity--or ratio-between the plaintiffs actual
or potential harm and the amount of punitive damages.
The Court rejected the imposition of a "bright-line ratio" for placing a limit
on the amount of punitive damages," 13 but it endorsed a single-digit ratio between
punitive and compensatory damages, stating:
104. Id. at418.

105. Id. Specifically, the Oregon Constitution prohibited judicial review of such a jury verdict "un-
less the court can affirmatively say there is no evidence to support the verdict." Id. at 418.
106. Id. at 420.
107. Id. at 426-27. Moreover, "[e]very other State in the Union affords postverdict judicial review of
the amount of a punitive damages award." Id. at 427-28.
108. Id. at 428.
109. Id. at 432.
110. 538 U.S. 408 (2003).
111. Id. at 412. The determination of the amount of the verdict took an interesting path that need not
be recounted here in detail. Suffice it to say that (1) the jury's verdict was $2.6 million in compensato-
ry damages and $145 million in punitive damages, (2) the trial judge reduced the verdict to $1 million
in compensatory damages and $25 million in punitive damages, and (3) the Utah Supreme Court reins-
tated the punitive damages award of $145 million. Id. at 415.
112. Id. at 418.
113. Id. at 425.
Our jurisprudence and the principles it has now established demonstrate,

however, that, in practice, few awards exceeding a single-digit ratio be-
tween punitive and compensatory damages, to a significant degree, will
satisfy due process. In Haslip, in upholding a punitive damages award,
we concluded that an award of more than four times the amount of com-
pensatory damages might be close to the line of constitutional improprie-
ty. 499 U.S., at 23-24. We cited that 4-to-1 ratio again in Gore. 517
U.S., at 581. The Court further referenced a long legislative history, dat-
ing back over 700 years and going forward to today, providing for sanc-
tions of double, treble, or quadruple damages to deter and punish. Id., at
581, and n. 33. While these ratios are not binding, they are instructive.
They demonstrate what should be obvious: Single-digit multipliers are
more likely to comport with due process, while still achieving the State's
goals of deterrence and retribution, than awards with ratios in range of
500 to 1, id., at 582, or, in this case, of 145 to 1.114
The Court opined that, in this case, the presumption was against a verdict fea-
turing Fpunitive damages that were 145 times greater than the compensatory dam-
ages." The Court provided a number of reasons in support of this presumption
including, the substantial nature of the award of compensatory damages, the pure-
ly economic nature of the case (with no physical injuries), the inclusion of emo-
tional distress damages in the award of compensatory damages that should not be
duplicated in the award of punitive damages, the irrelevance of a $100 million
punitive damages award in another state in a dissimilar case, and the notion that
the defendant's wealth could not justify an otherwise unconstitutional award of
punitive damages.' 16
Therefore, according to the State Farm case, the amount of punitive damages
should be less than ten times the amount of compensatory damages.
B. Closing Remarks as to the Determinationof the Amount of Punitive

Damages
The United States Supreme Court has addressed an important issue: how to
determine the amount of punitive damages in a way that provides some certainty
but still gives lower courts the discretion to award punitive damages in an amount
greater than the single-digit ratio scheme approved in State Farm. The bottom
line is that this judicially established ratio still affords plaintiffs the possibility of
obtaining substantial monies in addition to their being fully compensated for all
tangible and intangible losses.
114. Id. (emphasis added).

115. Id. at 426.
116. Id. at 426-28.

V. WHEN PUNITIVE DAMAGES ARE AVAILABLE IN ARBITRATION
In Mastrobuono v. Shearson Lehman Hutton, Inc.,1 1 7 the United States Su-

preme Court ruled that arbitrators can award punitive damages when the parties'
arbitration agreement provides for them. In accordance with the holding of Ma-
strobuono specifically as well as the FAA' s general policy of the enforceability of
arbitration agreements, the courts have often construed arbitration agreements so
as to allow arbitral awards of punitive damages.
A. Mastrobuonov. Shearson Lehman Hutton, Inc.-An ArbitralAward

Can Include Punitive Damages if Permittedby the Parties' Arbitration
Agreement
In Mastrobuono, the parties proceeded to arbitration before the National As-

sociation of Securities Dealers (NASD) pursuant to a contract that included an
arbitration agreement as well as a choice of law clause providing that the contract
"shall be governed by the laws of the State of New York."' 18 The arbitration
1 19
award contained compensatory and punitive damages in favor of the petitioners.
The respondents, who claimed at the arbitration that arbitrators could not award
punitive damages under New York law, paid the compensatory damages but made
a motion to vacate the award as to the punitive damages.1 20 The district court
granted the motion to vacate and the Seventh Circuit affirmed, relying on the
choice of law clause and a decision by the New York Court of Appeals barring
arbitrators from awarding punitive damages. 12' The United States Supreme Court
granted certioraridue to a split in the federal circuits "on whether a contractual
choice-of-law provision may preclude an arbitral award of punitive damages
22 that
otherwise would be proper" and reversed the lower courts' decisions. 1
The Mastrobuono Court first held that punitive damages could be available in
arbitration so long as the parties' arbitration agreement provided therefor, con-
cluding:
[W]e think our decisions in Allied-Bruce, Southland, and Perry make

clear that if contracting parties agree to include claims for punitive dam-
ages within the issues to be arbitrated, the FAA ensures that their agree-
ment will be enforced according to its terms even if a rule of state law
would otherwise exclude such claims from arbitration. Thus, the case be-
fore us comes down to what the contract has 23 to say about the arbitrability
of petitioners' claim for punitive damages. 1
The Court then needed to reconcile two apparently conflicting contractual

provisions: first, a general choice-of-law clause designating New York law as
117. 514 U.S. 52 (1995).

118. Id. at 53-54.
119. Id. at54.
120. Id.
121. Id. at 54-55 (citing Garrity v. Lyle Stuart, Inc., 386 N.Y.S.2d 831 (1976)).
122. Id. at 55.
123. Id. at 58.
governing the contract; second, an agreement to arbitrate "in accordance with the
rules then in effect, of the National Association of Securities Dealers, Inc. or the
Boards of Directors of the New York Stock Exchange, Inc. and/or the American
Stock Exchange Inc. as [the petitioners] may elect."'2W
The Court held that choice-of-law clause was "reasonably [to] be read as
merely a substitute for the conflict-of-laws analysis that otherwise would deter-
' 25
mine what law to apply to disputes arising out of the contractual relationship."'
Moreover, the choice-of-law clause could even be read to allow punitive damages
in that it "might include only New York's substantive rights and obligations, and
not the State's allocation of power between alternative tribunals.' 26
If anything, the arbitration agreement weighed more in favor of permitting an
arbitral award of punitive damages since the arbitration agreement authorized
proceeding under NASD rules, which allowed arbitrators to award "damages and
other relief."' 127 In fact, a manual provided to NASD arbitrators stated in pertinent
part that "[plarties to arbitration
128
are informed that arbitrators can consider punitive
damages as a remedy."'
The Court rejected the argument that, read together, the choice-of-law clause
and the arbitration agreement expressed intent to preclude punitive damages by
noting that the choice-of-law clause created an ambiguity as to whether the arbi-
tration agreement would otherwise allow punitive damages. 129 Instead, the Court
asserted that "'ambiguities as to the 30
scope of the arbitration clause itself [must be]
resolved in favor of arbitration.""
Finally, the Supreme Court relied on two established rules of contract inter-
pretation in support of its ruling that punitive damages were available under the
subject contract. First, the Court reasoned that any ambiguity had to be inter-
preted against the drafting party. Second, "a document should be read to give
effect to all its provisions and to render them consistent with each other."' 13' The
Court stated:
We think the best way to harmonize the choice-of-law provision with the
arbitration provision is to read "the laws of the State of New York" to
encompass substantive principles that New York courts would apply, but
not to include special rules limiting the authority of arbitrators. Thus, the
choice-of-law provision covers the rights and duties of the parties, while
the arbitrationclause covers arbitration;neither sentence intrudes upon
the other. In contrast, respondents' reading sets up the two clauses in
124. Id. at 58-59 & n.2.

125. Id.at 59.
126. Id.at 60.
127. Id.at 60-61.
128. Id.at 61.
129. Id.at 62.
130. Id.
131. Id.at 63.

conflict with one another: one foreclosing punitive

32 damages, the other al-
lowing them. This interpretation is untenable.'
It follows that the Mastrobuono case simply complied with the line of United
States Supreme Court authorities which have declared that "the central purpose of
the FAA [is] to ensure 'that private agreements to arbitrate are enforced according
to their terms."' 133 Furthermore, the Court could have further supported its ruling
based on the maxim of jurisprudence that says "[p]articular expressions qualify
those which are general"1 34 in coming to the same conclusion in that the particular
designation of NASD rules permitting punitive damages in the arbitration agree-
ment would control in the face of35the more general choice-of-law clause purport-
ing to govern the entire contract.'
B. Post-MastrobuonoJurisprudenceRelating to ArbitrationAwards of
Punitive and Other Extra-CompensatoryDamages
Cases decided after Mastrobuono have reflected the courts' willingness to

permit arbitral awards to include punitive damages. A leading reason justifying
confirmation of an arbitration award of punitive damages is that the parties' arbi-
tration agreement designates a certain state's law as governing the proceeding and
that state's law allows punitive damages for the matter that is the subject of the
arbitration.
For instance, the contract in the case of Stark v. Sandberg, Phoenix & von
Gontard,P.C.13 6 featured a provision stating: "To the extent allowed by applica-
ble law, any Claim ... shall be resolved by binding arbitration in accordance with
37
[the FAA, AAA rules and] ... this Agreement."' The contract further provided
132. Id. at 63-64 (emphasis added). The dissent disagreed with the majority's conclusions that (1) a
choice-of-law clause governing the entire contract did not impact the arbitration agreement contained
therein; and (2) NASD rules permitted punitive damages. Id. at 64-72 (Thomas, J., dissenting).
133. Id. at 53-54 (citing Volt Info. Scis., Inc. v. Bd. of Trs. of Leland Stanford Junior Univ., 489 U.S.
468, 479 (1989)).
134. CAL. CIVIL CODE § 3534 (West 1997).
135. One commentator expressed concerns about arbitral awards of punitive damages in the context
of NAFTA arbitration due to the extremely limited opportunity for review, stating:
Chapter 11 review also tends to be less accountable because Chapter II tribunals are themselves
more insulated from review. Whether a Mississippi punitive damages award is excessive is de-
termined in the first instance by the trial judge and ultimately by the Mississippi Supreme Court.
Indeed, the U.S. Supreme Court has held that the Due Process Clause requires appellate review
of punitive damages awards and that such review must be de novo. The decisions of the Missis-
sippi Supreme Court are in turn reviewable by the U.S. Supreme Court to ensure compliance with
the substantive requirements of the Due Process Clause discussed above. Although review by the
U.S. Supreme Court itself is rare, the possibility of such review exerts a restraining influence on
state courts. Review of NAFTA Chapter 11 decisions is far more limited. A court reviewing a
Chapter 11 award may not set it aside if the tribunal misinterpreted the law or misapplied it to the
facts but only if the tribunal was improperly constituted or decided matters beyond the scope of
the arbitration. This more limited review of Chapter 11 tribunals increases the chances that re-
view by such tribunals will result in errors.
William S. Dodge, Loewen v. United States: Trials and Errors Under NAFTA Chapter Eleven, 52
DEPAUL L. REV. 563, 571 (2002).
136. 381 F.3d 793 (8th Cir. 2004).
137. Id. at 800.
that Missouri law would be the applicable law.' 38 The Eighth Circuit found that
Missouri law did not permit a waiver of punitive damages and, therefore, the dis-
trict court's
139
confirmation of the arbitral award of punitive damages was affirmed
on appeal.
The Montana Supreme Court case of Wallace v. Hayes' 4° also purported to
follow state law when it held that the arbitral award properly included punitive
damages. 14 However, the Wallace court then indicated that an arbitration award
of punitive damages was still reviewable by the court pursuant to any grounds
provided by the state statute governing punitive damages since any arbitration
award can be vacated if the arbitrator exceeds his or her power. 142 But, this sort of
reasoning runs contrary to the usual jurisprudence pertaining to the "exceeding
arbitral powers" standard because
143
an error of law does not mean that the arbitrator
exceeded his or her powers.
Finally, to show that the courts will look to sources other than the parties' ar-
bitration agreement to support an arbitration award of punitive damages, the case
of Rosati v. Bekhor'44 held that, even in the absence of a formal arbitration agree-
ment, an arbitral award of punitive damages can still be confirmed by the court if
both sides to the proceeding request punitive damages. 45 Thus, it is clear that an
arbitration award of punitive damages is proper and will be confirmed by the court
so long as the award is justified by the law applicable to the arbitration proceed-
ing.
An interesting twist on the question of whether an arbitrator can award puni-
tive damages occurs when the arbitration agreement expressly prohibits punitive
damages but the claimant is requesting an award of some other type of extra-
compensatory damages such as treble damages. This was addressed by the United
States Supreme Court in the case of PacifCareHealth Systems, Inc. v. Book. 146
In PacifiCare,the claimants were physicians (collectively "the physicians")
who had contracted with managed-health-care organizations (collectively "Pacifi-
Care") to provide health care services to PacifiCare's insureds. 147 The physicians
alleged violations of the Racketeer Influenced and Corrupt Organizations Act
(RICO). 148 PacifiCare moved to compel arbitration under the subject contracts,
and the physicians opposed on the grounds that "because the arbitration provisions
138. Id.
139. Id. at 800-01.
140. 124 P.3d 110 (Mont. 2005).
141. Id. at 111,116.
142. Id. at 116.
143. E.g., DiRussa v. Dean Witter Reynolds, Inc., 121 F.3d 818, 824 (2d Cir. 1997) (the proper in-
quiry is the scope of the arbitrator's power, not whether the arbitrator made the correct decision);
Moshonov v. Walsh, 996 P.2d 699, 702 (Cal. 2000) ("[Alrbitrators do not 'exceed[] their powers' ...
merely by rendering an erroneous decision on a legal or factual issue, so long as the issue was within
the scope of the controversy submitted to the arbitrators."); In re United Fed'n of Teachers v. Bd. of
Educ. of the City Sch. Dist. of the City of N.Y., 801 N.E.2d 827, 834-35 (N.Y. 2003) (arbitral award
based on contract interpretation confirmed "even in circumstances where an arbitrator makes errors of
law or fact" (emphasis removed)).
144. 167 F. Supp. 2d 1340 (M.D. Fla. 2001).
145. Id. at 1347.
146. 538 U.S. 401 (2003).
147. Id. at 402.
148. Id.

prohibit an award of punitive damages... respondents could not obtain 'meaning-

ful relief in arbitration for their claims under the RICO statute, which authorizes
treble damages."' 149 The district court denied the motion to compel arbitration50 and
the Eleventh Circuit affirmed based on the grounds stated by the physicians. 1
Upon grant of certiorari,the Supreme Court first determined that the issue of
arbitrability was to be decided by the court and not the arbitrator. 5' The Pacifi-
Care Court then cited several precedents which indicated that treble damages
were more compensatory or remedial than punitive in nature. 52 The Court con-
cluded:
In light of our case law's treatment of statutory treble damages, and given
the uncertainty surrounding the parties' intent with respect to the contrac-
tual term "punitive," the application of the disputed language to respon-
dents' RICO claims is, to say the least, in doubt. And Vimar instructs
that we should not, on the basis of "mere speculation" that an arbitrator
might interpret these ambiguous agreements in a manner that casts their
enforceability into doubt, take upon ourselves the authority to decide the
antecedent question of how the ambiguity is to be resolved. In short,
since we do not know how the arbitrator will construe the remedial limi-
tations, the questions whether they render the parties' agreements unen-
forceable and whether it is for courts or arbitrators to decide enforceabili-
ty in the first instance are unusually
153
abstract. As in Vimar, the proper
course is to compel arbitration.
PacifiCare provides a good example of giving the parties what they con-
tracted for-i.e., arbitration according to agreed-upon rules. This is consistent
with "the federal policy of favoring arbitration." ' 54 However, the PacifiCare
Court went further than simply following this policy when it narrowly interpreted
the arbitration agreement's ban on punitive damages so as to allow the physicians
to seek the extra-contractual remedy of treble damages. This holding serves no-
tice on parties who include arbitration clauses in their contracts, if they wish to
prohibit a particular type of remedy, to specify that remedy as one that the arbitra-
tor may not award. For that matter, parties should be free to permit punitive55 dam-
ages in their arbitration agreements but place limits on the amount thereof.1
149. Id. at 403.

150. Id.
151. Id. at 404-05. On the other hand, the Court recently held that "a challenge to the validity of the
contract as a whole, and not specifically to the arbitration clause, must go the arbitrator." Buckeye
Check Cashing v. Cardegna, Inc., 546 U.S. 440,449 (2006).
152. PacifiCare, 538 U.S. at 405-06.
153. Id. at 406-07 (footnotes and citation omitted).
154. Booker v. Robert Half Int'l, Inc., 413 F.3d 77, 79 (D.C. Cir. 2005).
155. See KNIGHT, supra note 43, at 8-36, § 8:154 ("mini/max" or "high/low" clauses acceptable in
arbitration agreements).
C. Closing Remarks as to the Availability of Punitive Damages in Arbitra-

tion
The Mastrobuono case and its progeny make it clear that an arbitrator can
award punitive damages so long as the parties' arbitration agreement so provides.
The cases also make it clear that, in the absence of a contract provision expressly
barring punitive damages, an arbitral award of punitive damages is proper. There-
fore, parties who wish to negate the possibility of punitive damages in arbitration
should include a specific prohibition thereof in their arbitration agreement.
VI. WHETHER A COURT'S CONFIRMATION OF AN ARBITRATION AWARD

CONSTITUTES STATE ACTION FOR DUE PROCESS PURPOSES
While Mastrobuono made it clear that an arbitral award can include punitive
damages if permitted by the parties' arbitration agreement, there can still be an
issue as to whether punitive damages awarded in arbitration are subject to Due
Process limitations. However, for Due Process to be applicable, there must be
state action.
The courts have uniformly declined-with two exceptions in dicta only-to
accept this Due Process argument on the grounds that there is no state action. On
the other hand, the commentators have generally reached the opposite conclusion.
The following discussion will analyze some of the cases and articles that have
dealt with the issue of whether a court's confirmation of an arbitrator's award is
the state action required for a claim based on Due Process.
A. Cases on Whether a Court's Confirmation of an ArbitrationAward is

State Action for Due Process Purposes
1. Davis v. PrudentialSecurities, Inc. '5 6-No State Action Due to the Fi-
nality of Arbitrationand the Inapplicabilityof Shelley v. Kraemer
In Davis, the parties (Davis and PSI) agreed to have their dispute arbitrated
by the American Arbitration Association.1 57 The arbitration panel rendered an
award in favor of Davis for compensatory damages of $483,684 and punitive
damages of $300,000, and this award was confirmed by the district court.
On appeal, PSI asserted that confirmation of the punitive damages award vi-
olated Due Process, alleging that "arbitration lacks the procedural protections and
meaningful judicial review required for the imposition of punitive damages 1 59
as
required by the United States Supreme Court in the Haslip and Honda cases."
The Davis court began its examination of the state action issue by stating that
"it is axiomatic that constitutional due process protections 'do not extend to "pri-
vate conduct abridging individual rights.' '' ' ' 60 The court agreed with the many
156. 59 F.3d 1186 (1lth Cir. 1995).

157. Id. at 1187.
158. Id. at 1187-88.
159. Id. at 1188, 1190; see the discussion of these cases supra Part V.A.
160. Id. at 1190.

courts that have held that Due Process does not apply to private arbitration cases
because of the lack of state action, finding that "the arbitration was a private pro-
ceeding arranged by a voluntary
16 1 contractual agreement of the parties ... [that] did
not constitute state action.'
The Eleventh Circuit then rejected the applicability of Shelley v. Kraemer on
the grounds that its holding had not been extended to situations other than race
discrimination, and the concept 62 of state action had been further limited by the
United States Supreme Court.
The Davis court returned to basic principles of arbitration law in distinguish-
ing the Honda case, reasoning that Honda involved circumstances in which a jury
was given unreviewable discretion to determine punitive damages and that the
problems associated with a jury-e.g., bias against a large corporation without a
local presence-would
63
not obtain in the case where an arbitrator determined puni-
tive damages.'
The court also noted the deference given by Congress to arbitrators' expertise
as well as the "'federal policy [established by the FAA] favoring arbitration...
requiring that [courts] rigorously enforce agreements to arbitrate. ' ' 64 Davis even
noted the commentators' prediction that the problem65of runaway punitive damages
verdicts would be diminished in the arbitral forum.'
Davis also discussed how the United States Supreme Court has upheld the ar-
bitrability of RICO claims which include treble damages 66 and that the Court did
not broach the Due Process question in Mastrobuono which featured an 67 arbitration
award of punitive damages greater than the award in the instant case. 1
The Davis court concluded:
Finally, we find it significant that PSI was a voluntary participantin the

arbitrationprocedure. As the Supreme Court has stated, "arbitration
under the [FederalArbitration]Act is a matter of consent, not coercion,
and parties are generally free to structure their arbitrationagreements
as they see fit." Thus, an agreement to arbitrate is equivalent to volunta-
rily entering into a contract, the terms of which the parties are free to
specify.... In this case, we agree that PSI may not require customers to
arbitrate under the terms of an account agreement that PSI drafted and
later complain about the adequacy of the procedures afforded by the fo-
rum of its own choosing.
In sum, we are persuaded that PSI's due process challenge to the arbi-
trationpanel's awardof punitive damages must fail. To decide otherwise
would constitutionalize private arbitration proceedings and diminish
161. Id. at 1191.

162. Id. at 1191-92.
163. Id. at 1192.
164. Id. (quoting Shearson/Am. Express, Inc. v. McMahon, 482 U.S. 220, 226 (1987)).
165. Id. (citing Stephen J. Ware, Punitive Damages in Arbitration: Contracting Out of Government's
Role in Punishment and Federal Preemption of State Law, 63 FORDHAM L. REV. 529, 570 (1994)).
166. Id. at 1193 (citing McMahon, 482 U.S. at 240-42).
167. Id. (citing Mastrobuono, 514 U.S. 52, 54 (1995)).
both the effectiveness and the appeal

68 of the arbitralforum as an alterna-
tive means for resolving disputes.'
Davis provided a thorough analysis of the issues presented in the context of a

Due Process challenge to an arbitration award of punitive damages. The court
cited the general concepts of arbitration law highlighting the policy of finality.
The court also discussed the inefficacy of Shelley v. Kraemer since it has been
narrowly applied to race discrimination cases only. In sum, Davis gives us an
excellent template of arguments to make in opposing a Due Process challenge to
an arbitration award of punitive damages.
2. Smith v. American ArbitrationAss 'n' 69-No State Action to Support an

Equal Protection Claim Based on a PrivateADR Company's Allegedly
Providinga Pool of Arbitrators With Insufficient Gender Diversity
In Smith, the situation was a little different in that the plaintiff challenged the
arbitration procedure on the grounds of lack of gender diversity as to the arbitra-
tion panel.' 7 Specifically, the plaintiff's request for an injunction was denied by
the district court, which dismissed the lawsuit for failure to state a claim.' 7' The
arbitration proceeded and, according to the appellate court, "the arbitrators an-
nounced that they would issue their decision shortly."'' 72 The Seventh Circuit
rebuffed the plaintiffs contention that the Equal Protection Clause of the Fifth
Amendment required gender diversity for an arbitration panel, reasoning:
Arbitration is a private self-help remedy. The American Arbitration As-

sociation is a private organization selling a private service to private par-
ties who are under no legal obligation to agree to arbitrate their disputes
or, if they decide to use arbitration to resolve disputes, to use the services
of the Association, which is not the only provider of such services. [Ci-
tation omitted.] When arbitrators issue awards, they do so pursuant to
the disputants' contract-in fact the award is a supplemental contract ob-
ligating the losing party to pay the winner. The fact that the courts en-
force these contracts,just as they enforce other contracts, does not con-
vert the contracts into state
73
orfederal action and so bring the equal pro-
tection clause into play.1
The Smith case showed that the strictures of Equal Protection-whether it is

based on an allegation of gender, racial, or some other illicit discrimination--do
not apply to arbitration proceedings administered and decided by private parties.
This is analogous to the finding of no state action in private party discipline pro-
ceedings such as the circumstances in the Tarkanian case analyzed above.
168. Davis, 59 F.3d at 1193-94 (citations and footnotes omitted; emphasis added).
169. 233 F.3d 502 (7th Cir. 2000).
170. Id. at 504 (the panel, drawn from a pool of fourteen men and only one woman provided by
defendant American Arbitration Association, was all male).
171. Id.
172. Id.
173. Id. at 507 (emphasis partially added).

However, there was a curious point which was briefly discussed by the Smith
court but not necessary to its decision: what would happen if a party to an arbitra-
tion agreement challenged a provision therein requiring a certain gender composi-
tion of the arbitration panel? The Seventh Circuit commented about this issue:
But we do not suppose that there is anything in the law that would forbid
private parties to stipulate to a mode of private dispute resolution that
specified a particular gender composition of the tribunal, assuming the
arbitrators are not employees of the American Arbitration Association or
of some other dispute-resolution agency174
conducting the arbitration,
which might bring Title VII into play.
This sort of analysis seems to take the fundamentally contractual nature of ar-
bitration to the extreme. In other words, according to Smith, an arbitration service
provider is under no obligation to follow any laws-except to avoid vacatur pur-
suant to the grounds under federal and state law-so long as that provider follows
the contractual limitations dictated by the parties. While the parties' arbitration
agreement should be respected, this raises the potential for a court to be in 1the
75
position of confirming an arbitration award achieved through unusual methods.
3. MedValUSA Health Programs,Inc. v. Memberworks, Inc.176-Court

Confirmationof an ArbitrationAward is Not State Action Under the Prin-
ciples of Shelley v. Kraemer
In MedValUSA, the arbitrator awarded the plaintiff no compensatory damages

and five million dollars in punitive damages. 77 Finding no state action, the Con-
necticut Supreme Court rejected the defendant's contention that the78trial court's
confirmation of the arbitration award violated its Due Process rights. 1
Because the defendant argued that the award would be unenforceable except
for the judicial action, the MedValUSA court devoted most of its analysis to the
question of "whether the judicial confirmation of the arbitration award constituted
an incident of government authority that uniquely aggravated the defendant's
claimed injury ' 179 pursuant to Shelley v. Kramer. 8 The court allowed that "[alt
first glance, judicial confirmation of an arbitration award fits the Shelley pattern
perfectly."' 81 After all, without the judicial enforcement of the arbitral award, it
would have no effect; "[t]herefore, the same 'but for' reasoning that guided the
174. Id. at 504-05.

175. At least the arbitration agreement in Smith did not call for the decision to be made "by flipping a
coin or studying the entrails of a dead fowl." See LaPine Tech. Corp. v. Kyocera Corp., 130 F.3d 884,
891 (9th Cir. 1997) (Kozinski, J., concurring), vacated, Kyocera Corp. v. Prudential-Bache Trade
Servs., 341 F.3d 987 (9th Cir. 2003).
176. 872 A.2d 423 (Conn. 2005). On a personal note, my discovery of the MedValUSA case in May
2005, first piqued my interest in the relationship between arbitration and state action.
177. Id. at 426.
178. Id.
179. Id. at 430.
180. This case is discussed supra Part IL.B-III.C.
181. MedValUSA, 872 A.2d at 430.
analysis of the Supreme Court in Shelley would seem to compel the conclusion ' 82
that the judicial confirmation of an arbitration award constitutes state action."'
However, the MedValUSA court quickly noted that Shelley v. Kraemer was
"the subject of much controversy and criticism" and its holding "has been effec-
tively confined to its facts."' 83 For instance, critics of Shelley v. Kraemer have
expressed misgivings about what would happen if its reasoning were extended
since, at least theoretically, all private contracts would be subject to constitutional
standards. 184 Moreover, the United States Supreme Court itself has placed "mi-
nimal reliance" on Shelley v. Kraemer as precedent, and extensive discussions of 85
the case usually appear in concurring rather than majority opinions of the Court.'
In addition, MedValUSA relied on many federal and state courts that "have
concluded that judicial confirmation of an arbitration award is not sufficient to
convert the action of an arbitrator into state action."'' 86 In citing these cases, the87
MedValUSA court referred to "arbitration [a]s a 'private self-help remedy.""1
MedValUSA further noted that the holding of Shelley v. Kraemer had been limited
to race discrimination cases.' 88 Also, if participation in arbitration is voluntary,
"there is no state action
89
involved, not even in the judicial confirmation of the pu-
nitive damage award.
Finally, the cases cited in support of the court-confirmation-as-state-action
position were distinguished by the MedValUSA court. For example, the court
distinguished the cases of New York Times v. Sullivan 90° and Cohen v. Cowles
Media Co.'91 by noting that, in both cases, "the court did not address whether the
conduct of a private actor was converted into state action by the actions of the
court-the only question was whether the action of the court itself constituted
state action."192
In MedValUSA, the Connecticut Supreme Court concentrated its analysis on
identifying and defining state action and showing its inapplicability to a situation
where judicial confirmation of an arbitration award is sought. The court did not
discuss at all the strong concept of finality inherent in arbitration. However,
MedVaIUSA's distinguishing of United States Supreme Court cases such as Shel-
182. Id.
183. Id. at 431.
184. Id. at n. 10.
185. Id. at 432. In fact, only one majority opinion by the United States Supreme Court-Evans v.
Abney, 396 U.S. 435 (1970)-has discussed Shelley at any length. MedVaIUSA, 872 A.2d at 433.
186. MedVaIUSA, 872 A.2d at 434.
187. Id. (quoting Smith v. Am. Arbitration Ass'n, Inc., 233 F.3d 502, 507 (2000)). The MedValUSA
case cited to several cases in support of this proposition, including the Davis and Smith cases discussed
supra Part VI.A.1-VI.A.2. MedVaIUSA, 872 A.2d at 434-35. MedValUSA also cited a number of
cases-including Birmingham News v. Horn, analyzed infra Part VI.A.6-that have distinguished and
criticized the "no state action" holding of the prevailing judicial view on this question. MedVaIUSA,
872 A.2d at 435.
188. MedVaIUSA, 872 A.2d at 434 (citing Davis v. Prudential Sec., Inc., 59 F.3d 1186, 1192 (11th
Cir. 1995)).
189. MedVaIUSA, 872 A.2d at 434-35 (citing Sawtelle v. Waddell & Reed, Inc., 754 N.Y.S.2d 264,
271 (N.Y. App. Div. 2003)).
190. 376 U.S. 254 (1964).
191. 501 U.S. 663 (1991).
192. MedVaIUSA, 872 A.2d at 435.

ley v. Kraemer carried the day as to the state action issue without the necessity of
19 3
delving specifically into arbitration law.
4. Sawtelle v. Waddell & Reed, Inc.9'4-CourtAcknowledges There is no

State Action but Uses Due Process Limits on Punitive Damages to Support
Vacatur Based on the Award's "Irrationality"
The Sawtelle case featured an arbitral award of approximately two million

dollars in compensatory damages and twenty-five million dollars in punitive dam-
ages.195 The trial court reduced the compensatory damages to slightly more than
one million dollars but confirmed the award as to the punitive damages. 196 In
particular, the trial court rejected the defendants' assertion that the amount of
punitive damages was governed by the standards set forth by the United States
Supreme Court since those standards "dealt purely with due process concerns not
relevant in arbitration proceedings."'' 97 The trial court also held that, even if those
standards obtained,
98
the award of punitive damages was not "irrational as grossly
excessive." 1
The appellate court agreed that Due Process did not apply to the award of pu-
nitive damages, reasoning:
[T]here is ample authority for the proposition that a private arbitration

does not implicate due process concerns since, where the parties have vo-
193. The MedValUSA court did not neglect the finality of arbitration completely. In response to a
challenge to the arbitral award on the grounds that it violates public policy, the court stated:
We have been wary about vacating arbitral awards on public policy grounds because 'implicit in
the stringent and narrow confines of this exception to the rule of deference to arbitrators' deter-
minations, is the notion that the exception must not be interpreted so broadly as to swallow the
rule.'
Id. at 438 (citation omitted).
Interestingly, the dissent in MedValUSA uses the public policy favoring arbitration to support its con-
tention that the amount of an arbitration award of punitive damages should be reviewable by the
courts, reasoning:
I also find it troubling that the majority's ill-conceived reasoning is not confined to this case, but
extends to any punitive damage award issued by an arbitrator no matter how large that award
may be. Under its rationale, a $50 million punitive damage award or even a $5 billion award
would not violate public policy and, therefore, would be immune from judicial review. It does
not take much foresight to predictthat the majority's decision will cause parties to shun arbitra-
tion as a preferred method of dispute resolution because it will expose them to virtually unlimited
punitive damage awards without any meaningful recourse from the courts. I therefore submit
that the majority opinion, in addition to violating the state's public policy disfavoring excessive
punitive damages, also undermines the well establishedpublic policy favoring arbitration. Even
the majority implicitly concedes that this latter policy is dominant, well-defined and expressly
stated.
Id. at 449-51 (Zarella, J. dissenting) (footnotes omitted; emphasis added); see Hadelman v. DeLuca,
876 A.2d 1136, 1139 (Conn. 2005) (Zaretla, J., concurring) ("[Tihe assessment of punitive damages
when there has been no award of compensatory damages violates the public policy of this state to
foster dispute resolution through arbitration.").
194. 754 N.Y.S.2d 264 (N.Y. App. Div. 2003).
195. Id. at 267.
196. Id. at 269.
197. Id.
198. Id.
luntarily participated in the arbitration process, there is no state action in-

volved, not even in the judicial confirmation of the punitive damage
award. 199
However, the Sawtelle court then skirted the state action rule by stating that
the Supreme Court's Due Process standards for punitive damages could "provide
a guide for determining whether such an award is irrational. '2 In fact, after an
extensive discussion, the appellate court in Sawtelle stated as to the "irrationality"
claim:
[T]he $ 25 million punitive damages awarded here bears no rational rela-

tionship to the amount of compensatory damages sustained by Sawtelle
or to the severity or extent of Waddell's misconduct, and is totally out of
proportion to the statutory penalty provided and damages awarded in
prior comparable cases and cannot stand. 20 1
Moreover, following a similar line of thinking, Sawtelle further justified vaca-

tur of the punitive damages award on "manifest disregard" grounds."202
Therefore, the Sawtelle case accepted precedent regarding the state action is-
sue. However, it employed the Due Process analysis as to punitive damages under
the guise of applying the non-statutory vacatur grounds of irrationality and manif-
est disregard. This type of analysis almost makes the state action requirement
superfluous because state action is not part of the irrationality or manifest disre-
gard standards. It seems unfair to be able to circumvent the state action require-
ment by using other non-statutory grounds for vacatur as a tool for what is, in
reality, a Due Process challenge.
5. Commonwealth Associates v. Letsos2 0 3-Limited JudicialReview Pre-

vails but the Court "Respectfully Doubts" the Acknowledged Rule of No
State Action
In Commonwealth, the defendant attacked the arbitration award of forty-five

thousand dollars.in punitive damages on Due Process grounds. 2° 4 The district
court declined to accept the defendant's argument. 205 However, in a footnote, the
district court criticized the usual rule of no state action, stating that "[w]hile the
procedures utilized in private arbitration do not constitute state action [citation
omitted], the application of the coercive power ' of
2 6 a court to confirm and enforce
an arbitration award arguably is another matter. , 0
The court in Commonwealth came to the correct result for one good reason-
i.e., the securities industry's inherent acceptance of the limited judicial review of
199. Id. at 271 (citations omitted).

200. Id.
201. Id. at 273.
202. Id. at 274.
203. 40 F. Supp. 2d 170 (S.D.N.Y. 1999).
204. Id. at 172.
205. Id. at 177.
206. Id. at 177 n.37 (citation omitted).

arbitral awards apparently waived any non-statutory challenge such as Due

Process2° 7-but seemingly declined to accept another good reason-i.e., no state
action to support a Due Process challenge. 208 Stockbroker-customer contracts
invariably include arbitration agreements, and20 9judicial review of arbitration
awards is always very limited in all jurisdictions.
6. Binningham News Co. v. Horn21° -Again, a "Finding"of State Action

to Support the Due Process Contention is Merely a Step in a Manifest Dis-
regardAnalysis
In Birmingham News, the Alabama Supreme Court appeared to be critical of

precedents for the no state action rule, stating with respect to the Davis case that
"there was no court involvement [in Davis] until after the award was made. In
these cases, but for the court action, there would have been no arbitration at all.
These appeals are appeals from the circuit court judgments of confirmation, not
from the underlying awards. 21'
However, in ostensibly finding state action, the Alabama Supreme Court then
noted that 212
its true purpose was to examine the matter under the manifest disregard
exception.
Like Commonwealth, the Birmingham News case has not been cited with ap-
proval as to its state action analysis. Moreover, a court which does not review
the arbitration award for a Due Process violation does not need to make a finding
of state action.. For example, in a manifest disregard situation, the court could
just acknowledge the established law-whether based on the Due Process Clause
or any other source of law-and then analyze whether the arbitrator manifestly
disregarded that established law in determining whether to vacate the arbitral
award.
207. Id. at 177.

208. In fact, Commonwealth has never been cited with approval by any case. See, e.g., MedVaIUSA
Health Programs, Inc. v. Memberworks, Inc., 872 A.2d 423, 435 (Conn. 2005); Sawtelle v. Waddell &
Reed, Inc., 754 N.Y.S.2d 264, 271.
209. Marissa C. Marion, Preemption of the California Ethical Standards in Securities Arbitration:
Jevne v. Superior Court, 7 U.C. Davis Bus. L.J. 401, 402, 427 (2007). See analysis regarding arbitra-
tion's policy of finality supra Part I.B-Il.C.
210. 901 So.2d 27 (Ala. 2004).
211. Id.at66.
212. Id.at 66-67. The manifest disregard exception refers to a situation where a court may vacate an
arbitral award if the arbitrator knew of applicable law yet refused to apply it and was "'well defined,
explicit, and clearly applicable to the case."' Id.at 50 (quoting Halligan v. Piper Jaffray, Inc., 148 F.3d
197, 202 (2d Cir. 1998)). Manifest disregard is a nonstatutory vacatur rule adopted by all federal
circuits as well as a number of state courts. James M. Gaitis, Unraveling the Mystery of Wilko v.
Swan: American Arbitration Vacatur Law and the Accidental Demise of Party Autonomy, 7 PEPP.
Disp. RESOL. L.J. 1, 3 (2007); Elizabeth D. Lauson, Annotation, Adoption of Manifest Disregardof
Law Standard as Nonstatutory Ground to Review Arbitration Awards Governed by Uniform Arbitra-
tion Act (UAA), 14 A.L.R. 6th 491 (2006); Birmingham News, 901 So.2d at 47-52 (discussed supra
Part VI A.6.).
213. See, e.g., MedVaIUSA, 872 A.2d at 435.
B. Articles Addressing the Issue of Whether a Court's Confirmation of an

ArbitrationAward is State Action for Due Process Purposes
Recent articles by two commentators, Sarah Rudolph Cole and Carole J.

Buckner, provide substantial analyses of the state action issue with regard to arbi-
tration. Professor Cole's article provides a detailed analysis of the state action
jurisprudence of the United States Supreme Court and applies it to various types
of arbitration. Professor Buckner's article discusses the specific question of the
applicability of Due Process to class arbitration.
1. Professor Cole-"StateAction is Easierto See

214
in Some Forms ofArbi-
tration Than in Others
Professor Cole divides arbitration into three types: court-ordered arbitration,

arbitration that is required by an agency (such as the NASD), and contractual arbi-
tration. 215 She concludes that state action is present in court-ordered and agency-
initiated arbitration but there is no state action with regard to contractual arbitra-
tion. 216
Professor Cole first discussed the state action aspect of court-ordered arbitra-
tion, which "provides for compulsory, nonbinding arbitration in smaller federal
civil actions, typically when damages claimed are less than $ 150,000. ,217 The
fact that the parties are required by the court to go through the arbitration process
satisfies the state action element. 2 18 The nonbinding aspect of court-ordered arbi-
tration avoids infringement of constitutional rights such as the right to a jury tri-
2 19
al.
Professor Cole next analyzed agency-initiated arbitration in the context of se-
curities arbitration, stating that "[a] more nuanced and complicated question is
whether agency-initiated arbitration involves state action." 220 She reasoned that,
because of the significant involvement of the Securities Exchange Commission in
214. Sarah Rudolph Cole, Arbitrationand State Action, 2005 BYU L. REV. 1, 2 (2005).
215. Id. at 2-3. This article has extensively addressed contractual arbitration, because in my mind,
that is "true" arbitration because of the finality of the process. See the analysis of the policy of finality
supra Part IV.A-IV.B, V.A. On the other hand, this article has not dealt with court-ordered arbitration
since it is nonbinding. See generally Rudolph Cole, supra note 214, at 23-26. As for agency-required
arbitration, I consider it to be a subset of contractual arbitration because there is an arbitration agree-
ment as a condition of employment. See id. at 30; but see Armendariz v. Found. Health Psychcare
Servs., Inc., 6 P.3d 669, 674 (Cal. 2000) (arbitration agreement must provide "essential fairness" to the
employee, including but not limited to a neutral arbitrator, adequate discovery, and limitations on the
cost of arbitration).
216. Rudolph Cole, supra note 214, at 23.
217. Id. State courts offer court-ordered nonbinding arbitration as well. See, e.g., CAL. R. CT. 3.810
et seq. (2007) (California court rule which refers to the procedure as "judicial arbitration").
218. Rudolph Cole, supra, note 214, at 24-25.
219. Id. at 27.
220. Id. at 25. This is the topic of a more recent article by Professor Cole. See Rudolph Cole, Fair-
ness in Securities Arbitration, supranote 59.

22 1
regulating and encouraging the ostensibly private organizations like ' 222 the NASD
to use arbitration, "state action is present in securities arbitration."
Professor Cole embraced the "entanglement" test for showing state action in
the context of securities arbitration, reasoning:
Prior to the 1998 NASD rule change exempting statutory discrimination

claims from arbitration, however, several member employees attempted
to convince courts that the SEC-SRO relationship transformed the SRO
into a state actor, at least when it mandated arbitration of discrimination
claims. While the employees failed to convince the courts that SROs are
state actors, the arguments they advanced support a finding that, at least
since 1993, when the SEC began mandating that brokers register with an
SRO, SROs are state actors when they require employees and customers
to participatein arbitration.
To establish state action in these discrimination cases, member em-

ployees relied principally on the excessive entanglement argument articu-
lated in Lugar. That is, the member employee claims that an SRO be-
comes excessively entangled with the government when the SEC moves
from simply approving an SRO's decision to require members to arbi-
trate to encouraging or endorsing that action. According to claimants, the
encouragement comes from 223
the SEC's ability to approve, reject, or abro-
gate existing SRO rules.
Professor Cole then discussed contractual arbitration, which she characterized

as "traditionally a private party arrangement."' 224 The only court involvement, if
any, occurs prior to the start of and after the completion of arbitration.225
After analyzing United States Supreme Court cases regarding state action,
Professor Cole concluded that contractual arbitration does not implicate state ac-
tion, reasoning:
Applying current Supreme Court jurisprudence, private party use of a

private dispute resolution system does not create state action. Nor is
state action present when one arbitralparty seeks to enforce an arbitra-
221. This type of organization is called a "self-regulatory organization" or SRO. Rudolph Cole,
supra, note 214, at 28. The relationship between the federal government and SROs is described as
follows:
Although SROs are responsible for protecting investors from wrongful acts their members com-
mit, they are not federal agencies. No statute mandated the creation of these SROs, and the gov-
ernment does not appoint SRO board members. Nor do government employees serve on any
NASD or NYSE board or committee. Nevertheless, SROs maintain significant government con-
nections. For example, the Securities Exchange Commission (SEC) is responsible for providing
oversight of the SROs. The SEC reviews existing SRO rules and may approve or disapprove
proposed new rules. Moreover, it can alter or abrogate existing rules and may proceed against a
SRO if the SRO does not enforce its own rules.
Id. at 30.
222. Id. at 29.
223. Id. at 30-31 (emphasis added; footnotes omitted).
224. Id. at 41. Contractual arbitration is extensively described supra Part IL
225. Id.
tion agreement or award. The FAA, which provides the mechanism by

which such enforcement actions proceed, is a neutral regulatoryscheme.
...[Jiudicial enforcement of neutral laws2 26is not state action even when
the result disadvantages protected groups.
Professor Cole's conclusions regarding court-ordered and contractual arbitra-

tion are well-taken.. Court-ordered arbitration implicates state action since the
parties are forced by the court to participate. Contractual arbitration, as shown by
ample case authority, does not implicate state action.
However, Professor Cole's analysis finding of state action with respect to se-
curities arbitration is misplaced since securities arbitration is merely a subset of
contractual arbitration. Securities arbitration, even if it is standard in the industry,
is still something to which the parties have agreed.221 After all, the standard arbi-
tration provision is not so overwhelming that 228 it bars anyone from opting out of
working or trading in the securities industry.
2. ProfessorBuckner-Is There State Action in ClassArbitration?
Professor Buckner's article provides a detailed discussion of state action juri-

sprudence and its application to non-class and class arbitrations. 229 Given the
specialized nature of her article, the following examination of it will touch on the
class arbitration setting only.
Professor Buckner divided her analysis of state action in class arbitrations in-
to two parts. First, she discussed "hybrid" class arbitration, which was described
as follows:
[U]nder the hybrid system of class arbitration, courts maintain "discre-

tion" to determine whether a particular case is appropriate for class arbi-
tration. Although arguably discretion violates the spirit of the Supreme
Court's plurality opinion in Bazzle, courts operating under the hybrid
model continue to assert that they (rather than the arbitrator) have discre-
tion to 0determine which cases are appropriate for class arbitration treat-
23
ment.
226. Id. at 49 (emphasis added).

227. Marion, supra note 209, at 402.
228. Please note that "[s]ome analysts, however, have historically regarded the NASD [which handles
90% of all securities arbitrations] as an expensive and unfriendly venue for investors." Id. at 422-23.
This could support a challenge to a petition to compel arbitration on the grounds that the standard
securities arbitration agreement is unconscionable. 9 U.S.C. § 2 (2000); Circuit City Stores, Inc. v.
Adams, 279 F.3d 889, 893-94 (9th Cir.) (an arbitration provision in an employment contract was
procedurally and substantively unconscionable since the arbitration provision was included in a stan-
dard-form contract prepared by the party with superior bargaining power, it gave the employee no
option but to sign or reject the contract, it required the employee to arbitrate but gave the employee the
option of arbitration or litigation, and the employee was limited to injunctive relief and front and back
pay only with no emotional distress or punitive damages as provided by state law).
229. Carole J. Buckner, Due Processin Class Arbitration, 58 FLA. L. REV. 185 (2006).
230. Id. at 226-27 (footnotes omitted). In Green Tree Fin. Corp. v. Bazzle, 539 U.S. 444 (2003), a
plurality of the United States Supreme Court held that whether the subject arbitration agreements could

Professor Buckner concluded that the hybrid model implicates state action for
two reasons. First, there is "entanglement" between a state actor-the court-and
a private actor-the arbitrator. 231 She made a particularly a!ft analogy to court-
ordered arbitration to support this entanglement argument. 23? Second, she con-
tended that state action exists because "the state has 'traditionally' and 'exclusive-
' 233
ly' controlled class action litigation."
Professor Buckner then analyzed the state action standard as to models of
class arbitration created by private ADR providers such as the American Arbtira-
tion Association (AAA) and JAMS. 23 She concluded that state action could ob-
tain under the entanglement test due to the possibility that judicial involvement
would be greater
23 5
in the class arbitration context rather than the non-class arbitra-
tion context.
Applying the public function test, Professor Buckner contended that the level
of judicial involvement would determine whether there was state action, reason-
ing:
To the extent that a private arbitrator accepts a judicial delegation as au-

thorized by the AAA Rules, the delegation element of the public function
arm of the state action doctrine continues to be satisfied. However, pri-
vate parties may make their way to arbitration providers for class arbitra-
tion without judicial involvement. After the Bazzle decision, it is more
likely that courts will simply compel the arbitrator to decide whether
class arbitration is proper or not, deferring all decisions from that point
onward to the arbitrator. Under such a scenario, discretionary judicial
delegation of an arbitral matter to class arbitration is absent. The in-
volvement of the courts is much like the court's involvement in non-class
arbitration in that it is not the state actor, but rather private parties who
delegate the power to the arbitrator or arbitration provider. Private pro-
vider models operating without delegation involve no state action and re-
be interpreted to forbid class arbitration was an issue of contract interpretation to be decided by the
arbitrator. Id. at 453-54.
231. Buckner, supra note 229, at 233-34.
232. Id. at 233 ("Much as judicially annexed arbitration involves state action, the hybrid system
involves state action.") (footnote omitted).
233. Id. at 234. In addition, Professor Buckner criticizes the hybrid model; since these criticisms
pertain to "doctrinal and practical issues," and not state action issues, her commentary will not be
discussed herein. See id. at 236-40.
234. These private ADR providers have created rules for class arbitrations that are "loosely patterned
on Federal Rule of Civil Procedure 23." Id. at 239.
235. Id. at 239, 245-46. Professor Buckner further noted:
Once the scene of the potential constitutional deprivation shifts from the arbitral forum to the
courtroom, whether for an initial determination of class certification (under the hybrid model) or
a review of an arbitrator's determination (under provider models), judicial participation places the
court's imprimatur upon the proceeding. Just as in the peremptory challenge cases, where the
court, in essence, 'reviews' the constitutionality of the private actors' jury selections, a court's
review of the private arbitration providers' certification determinations involves state action.
Id. at 245-46 (footnote omitted).
No. 2) Where is the State Action?
quire no due process under the public function prong of the state action
doctrine.236
Professor Buckner's analysis is apt given the unique scenario of class arbitra-
tions. The level of judicial involvement in class arbitrations appears to be much
higher than that found in non-class arbitrations. However, Professor Buckner did
not discuss the contractual nature of all arbitrations, whether class or not.
C. Closing Remarks as to Whether a Court's Confirmation of an Arbitra-

tion Award is State Action for Due Process Purposes
The cases are uniform in holding that court confirmation of an arbitral award
is not state action. Therefore, the losing party in an arbitration cannot count on
using the Due Process limits on punitive damages to challenge an award of puni-
tive damages when a court is presented with a motion to confirm the award as a
judgment. Once again, if the parties wish to exclude punitive damages from the
arbitration award, they should do so in their arbitration agreement because, once
the arbitrator rules, the award is final unless it can be challenged pursuant to the
limited grounds stated in arbitration statutes such as the FAA. However, Profes-
sor Buckner makes a good point with respect to class arbitrations, that there could
be state action since the court is generally more involved in the matter. This is not
true in the situation of the typical commercial arbitration in that the court's in-
volvement is restricted to deciding whether to confirm or vacate the arbitration
award.
VII. CONCLUSION
In recent years, a number of cases and commentators have addressed the issue
of whether a court should confirm an arbitration award of punitive damages when
it violates the Due Process Clause of the Fourteenth Amendment. This would
seemingly invoke the state action requirement in the sense that any court is a state
actor.
The uniform position of the courts-no state action-is correct. Specifically,
the policy of finality traditionally found in arbitration law must trump any consti-
tutional inquiries. This is because arbitration is ultimately based on the parties'
agreement, which inevitably will recite that the arbitrator's decision shall be final.
In any event, this finality is generally implied under established arbitration law.
The bottom line is that arbitration is a private process to which the parties
have agreed, and the courts' only obligation is to uphold that agreement pursuant
to established arbitration and contract law. It follows that Due Process challenges
to arbitration awards of punitive damages cannot be allowed. Therefore, a court's
confirmation of an arbitration award cannot be construed to be state action.
236. Id. at 248-49 (footnotes omitted). The public function test means that "state action [is] present in
the exercise by a private entity of powers traditionally exclusively reserved to the State." Jackson v.
Metro. Edison Co., 419 U.S. 345, 352 (1974). This standard requires more than extensive government
regulation or a monopoly granted by the government. Id. at 351-52; Kruger v. Wells Fargo Bank, 521
P.2d 441,449 (Cal. 1974).


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Journal of Dispute Resolution

Volume 2007 Issue 2 Article 3

Application of Due Process to Arbitration Awards of Punitive

Follow this and additional works at: https://scholarship.law.missouri.edu/jdr

Part of the Dispute Resolution and Arbitration Commons

The Application of Due Process to

"[The] due process challenge to the arbitrationpanel's awardof punitive

Arbitration is a private process that is similar to a court trial. It is often used

* Lecturer, Business Law, Department of Management, California State University, Fullerton.

Published by University of Missouri School of Law Scholarship Repository, 2007 1

When a party who loses an arbitration award assumes a never-say-die at-

II. ARBITRATION DEFINED

The procedure for an arbitration proceeding is informed by one or both of two

4. 441 F.3d at 913 (emphasis added).

Published by University of Missouri School of Law Scholarship Repository, 2007 3

Published by University of Missouri School of Law Scholarship Repository, 2007 5

B. The Arbitration Process is Dictatedby the Parties' Contract

The above discussion displays the courts' involvement in arbitration. How-

A written provision ... to settle by arbitration a controversy thereafter

Additionally, the parties to an arbitration agreement have considerable leeway

[Plarties have complete freedom to contractually modify the arbitration

33. Id. at 997.

Published by University of Missouri School of Law Scholarship Repository, 2007 7

In Sovak v. ChugaiPharmaceuticalCo.,4° the Ninth Circuit held the FAA, not

40. 280 F.3d 1266 (9th Cir. 2002).

In accordance with these policies, statutes governing judicial review of an ar-

Published by University of Missouri School of Law Scholarship Repository, 2007 9

D. Closing Remarks as to Arbitration

II."STATE ACTION" DEFINED

The concept of "state action" is vital to the question of whether a violation of

A. Tarkanian v. NCAA-The NCAA is Not a State Actor and Thus it is Not

Published by University of Missouri School of Law Scholarship Repository, 2007 11

Tarkanian prevailed in the state courts, obtaining injunctive relief and an

64. Tarkanian,488 U.S. at 181-82.

73. Id. at 195.

Published by University of Missouri School of Law Scholarship Repository, 2007 13

B. Shelley v. Kraemer8° -A Court is a State Actor in a Fourteenth

The enforcement of the restrictive agreements by the state courts in these

Id. at 203 (White, J., dissenting).

Nor is the Amendment ineffective simply because the particular pattern

C. Closing Remarks as to State Action

88. Id. at 19-20 (footnotes omitted).

Published by University of Missouri School of Law Scholarship Repository, 2007 15

Thus, the availability of Shelley v. Kraemer as precedent in support of the ar-

IV. DUE PROCESS LIMITS ON AWARDS OF PUNITIVE DAMAGES

A. The United States Supreme Court'sJurisprudenceas to Constitutional

Therefore, the Court declined to permit an Eighth Amendment attack on a

Published by University of Missouri School of Law Scholarship Repository, 2007 17

104. Id. at418.

Our jurisprudence and the principles it has now established demonstrate,

B. Closing Remarks as to the Determinationof the Amount of Punitive

114. Id. (emphasis added).

Published by University of Missouri School of Law Scholarship Repository, 2007 19

V. WHEN PUNITIVE DAMAGES ARE AVAILABLE IN ARBITRATION

In Mastrobuono v. Shearson Lehman Hutton, Inc.,1 1 7 the United States Su-

A. Mastrobuonov. Shearson Lehman Hutton, Inc.-An ArbitralAward

In Mastrobuono, the parties proceeded to arbitration before the National As-

[W]e think our decisions in Allied-Bruce, Southland, and Perry make

The Court then needed to reconcile two apparently conflicting contractual