Arbitrators can award punitive damages

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“The majority’s result is unnecessary, and unfortunate for Wisconsin farmers and others who sell commodities to organizations capable of litigating until the cows come home.” Hon. Charles P. Dykman In dissent

An arbitrator can award attorney fees and punitive damages, the Wisconsin Court of Appeals held on Jan. 27. However, a court cannot award attorney fees incurred in proceedings to confirm an arbitration award.

John W. Winkelman agreed to sell the entire output of milk produced on his farm to Kraft Foods, Inc., at a price set under the contract, for a period of one year. The contract provided, "Any disputes arising under this agreement will be resolved by binding arbitration pursuant to the rules of the American Arbitration Association."

Early in the contract year, milk prices rose substantially, and Winkelman sought to be released from the contract. Kraft refused to cancel the contract, threatening to sue him for damages if he breached the contract and to sue any milk purchasers who bought his milk during the balance of the contract year. Winkelman continued to provide all of his milk to Kraft for the remainder of the contract year, but he demanded arbitration of his claim that Kraft should have allowed him to terminate the contract for a minimal penalty when he requested it.

Winkelman claimed that he was told by Kraft’s agent that if price of milk rose, he could quit shipping milk to Kraft, and the only penalty would be the loss of a one- month premium.

The arbitrator allowed Winkelman to amend his claim to add requests for punitive damages and reasonable attorney fees in addition to compensatory damages. The parties stipulated to the amount of compensatory damages should Winkel-man prevail, and arbitration proceeded on the allegations of fraudulent inducement.

The arbitrator found that Kraft’s agent had in fact misrepresented to Winkelman and other farmers that they could get out of the contract with one month’s penalty.

Pursuant to her earlier holding, she also awarded attorney’s fees, costs, and punitive damages.

As to her authority to award attorney fees, the arbitrator cited the AAA Rules agreed to by the parties, which provide for "an award of attorneys’ fees if … it is authorized by law," and sec. 100.18(11)(b), which permits "reasonable attorney fees" to be awarded to someone who incurs pecuniary loss because of a violation of that statute. Regarding punitive damages, the arbitrator relied on the arbitration rule authorizing her to "grant any remedy or relief that the arbitrator deems just and equitable and within the scope of the agreement of the parties," and the absence of any Wisconsin law prohibiting an award of punitive damages in arbitration proceedings.

Winkelman then commenced an action to confirm the arbitrator’s award. Dane County Circuit Court Judge Patrick J. Fiedler confirmed the compensatory damage award, but concluded that the awards of attorney fees and punitive damages exceeded the arbitrator’s authority.

Both parties appealed, and the court of appeals reversed in a decision written by Judge David G. Deininger and joined by Judge Paul G. Lundsten. The court held that the arbitrator had authority to award punitive damages and attorney’s fees. However, he court held that no attorney fees could be awarded for court proceedings to confirm the arbitration.

Judge Charles P. Dykman joined the first two holdings, but dissented from the third.

Attorney Fees

The court began by setting forth the grounds in sec. 788.10(1) for vacating an arbitrator’s award: (a) Where the award was procured by corruption, fraud or undue means; (b) Where there was evident partiality or corruption on the part of the arbitrators, or either of them; (c) Where the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy; or of any other misbehavior by which the rights of any party have been prejudiced; and (d) Where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final and definite award upon the subject matter submitted was not made.

Turning to the award of attorney fees under sec. 100.18, the court held that the award did not exceed the arbitrator’s authority.

Kraft argued that the statute does not apply to commercial transactions, but is limited to sales to "the public," as referenced in the statute. Kraft noted that there was no "sales promotion" or "sale of services" by Kraft and that milk is not "merchandise." Finally, Kraft argued that an arbitrator cannot award attorney fees for a violation of sec. 100.18 because the statute allows only "a court of competent jurisdiction" to do so.

Rejecting the arguments, the court wrote, "Kraft’s argument regarding the arbitrator’s application of Wis. Stat. sec. 100.18 is, essentially, that the arbitrator got it wrong. Even if that is so, however, we cannot set aside the award for ‘mere errors of law or fact.’ Winkelman took his claim against Kraft to an arbitrator because Kraft’s standard form contract required him to do so. The parties having thus contracted to arbitrate any disputes between them arising from the forward pricing contract, our role ‘is essentially supervisory, with the goal of assuring that the parties are getting the arbitration that they contracted for…. [T]he parties get the arbitrator’s award, whether that award is correct or incorrect as a matter of fact or law.’ Court proceedings to confirm an arbitrator’s award do not provide a forum for a losing party to re-litigate the issues decided by the arbitrator, and we will not vacate the present award unless Kraft convinces us that the arbitrator deliberately disregarded the law (cites omitted)."

The court noted that nothing in the arbitration provision of the parties’ contract limits the relief or remedies an arbitrator may grant. Thus, the court concluded, "the arbitrator plainly wa
s within her right to rule on Winkelman’s motion to have his claims for punitive damages and attorney fees arbitrated. Similarly, her reliance on the arbitration rule granting her the authority to award attorney fees if ‘it is authorized by law,’ and her reliance on a Wisconsin statute for such authority, were within the scope of the powers these parties agreed to confer on the arbitrator by way of the rules they adopted."

The court further found nothing "perverse" in the arbitrator’s conclusion that sec. 100.18 permitted her to award attorney fees in a commercial case, noting that the Supreme Court allowed a farm partnership to recover attorney fees from a pesticide company Gorton v. American Cyanamid Co., 194 Wis. 2d 203, 533 N.W.2d 746 (1995).

In addition, the court of appeals recently held that "the public" could consist of only one person, in Kailin v. Armstrong, 2002 WI App 70, par. 44, 252 Wis. 2d 676, 643 N.W.2d 132, so this conclusion by the arbitrator could not be perverse either.

The court also found it irrelevant that Kraft’s claims were not related to a sales promotion, sale of services or merchandise, concluding, "we see no reason why the seller of a product who is fraudulently induced by a buyer’s misrepresentation to contract for its sale on terms advantageous to the buyer should be any less worthy of protection under the statute than a buyer who is induced by a seller’s falsehood into overpaying for a product or service."

The court acknowledged that, in Milwaukee Teacher’s Education Association, 147 Wis. 2d 791, 795, 433 N.W.2d 669 (Ct.App.1988), it held that, in the absence of express authority in the arbitration agreement, an arbitrator may not award attorney fees as that would "substantially erode Wisconsin’s long adherence to the American rule." However, the contract at issue permitted fees if "authorized by law."

The court thus concluded, "In this case, that authority is supplied by Wis. Stat. sec. 100.18, which in turn also satisfies the exception to the American Rule allowing fee shifting if a statute provides for it."

Punitive Damages

The court also held that the arbitrator did not "perversely misconstrue or manifestly disregard Wisconsin law" in awarding punitive damages.

The court noted that no Wisconsin case has expressly held that such damages may not be awarded, and that the U.S. Supreme Court permitted punitive damages in Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52, 60-63 (1995), when interpreting the Federal Arbitration Act, which is persuasive authority in interpreting sec. 788.10.

The court acknowledged that other jurisdictions have taken three different approaches to arbitrators awarding punitive damages: (1) arbitrators may award them unless the arbitration agreement provides otherwise; (2) private arbitrators may never award them because only the state may do so; or (3) arbitrators may award them if the arbitration agreement expressly so provides.

Declining Kraft’s request to adopt the third approach, the court wrote: "We decline to make this policy choice for the state of Wisconsin. We are primarily an error-correcting court. … If Wisconsin is to depart from the federal approach on this issue and adopt some other rule, that policy choice must come from the legislature or the supreme court, not this court."

The court emphasized, "we are not here adopting the ‘federal approach’ as the law in Wisconsin. Rather, we conclude only that the arbitrator’s reliance on the federal precedents and her analysis of the scope of her authority under the parties’ agreement was not a perverse misconstruction or deliberate defiance of present Wisconsin law. In the absence of controlling Wisconsin statutes or precedent to the contrary, we can reach no other conclusion."

The court instructed, "nothing in Wisconsin law precludes arbitrators from awarding punitive damages if the parties’ agreement (or the rules they adopt under it) so permit. Some parties, however, may opt in their arbitration agreements to withhold from arbitrators the authority to award punitive damages. Thus, in that sense, some arbitrators will have the power to award punitive damages, and others will not, depending on the provisions of the parties’ agreement. … Moreover, although we agree with Kraft’s contention that, under a given agreement, properly construed, an arbitrator either will or will not have the authority to award punitive damages, some arbitrators may conclude that they have the authority under the agreement to award punitive damages, while others may reach the opposite conclusion. A court should uphold both determinations, although one is plainly wrong, so long as neither represents a ‘perverse misconstruction or positive misconduct’ on the part of the arbitrator."

More Attorney Fees

However, the court held that Winkelman was not entitled to recover attorney fees for the proceedings in the circuit court or on appeal, even though they were necessary to obtain the amounts the arbitrator awarded.

Distinguishing Radford v. J.J.B. Enterprises., Ltd., 163 Wis. 2d 534, 551, 472 N.W.2d 790 (Ct. App. 1991), in which the court held, "a party who prevails on appeal in an intentional misrepresentation case brought under sec 100.18 is likewise entitled to reasonable appellate attorney’s fees," the court concluded, "Unlike the plaintiff in Radford, Winkelman is not ‘a party who prevail[ed] on appeal in an intentional misrepresentation case brought under sec. 100.18.’ Winkelman commenced this action under Wis. Stat. sec. 788.09 to confirm an arbitration award. The litigation in the circuit court and on appeal had little to do with the arbitrator’s determination that Kraft’s agent induced Winkelman to enter into the pricing contract by misrepresenting its terms. Kraft has essentially conceded that the arbitrator’s decision to award Winkelman compensatory damages on his misrepresentation claim would be virtually impervious to attack on judicial review had the arbitrator not chosen to also award punitive damages and attorney fees. In short, the dispute that the parties litigated in the circuit court and this one was not whether Kraft had violated Wis. Stat. sec. 100.18, but whether the arbitrator had exceeded her powers or blatantly failed to follow established Wisconsin law in making the awards that she did."

The court concluded, "Because neither the parties’ agreement nor Wis. Stat. sec. 788.09 authorizes an award of attorney fees to a party who prevails in an action to confirm an arbitration award, we conclude that there is no contractual or statutory basis for us to direct that Winkelman recover from Kraft his post-arbitration attorney fees."

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Accordingly, the court affirmed the confirmation of the arbitrator’s award of compensatory damages and arbitration costs, reversed the refusal to confirm the awards of punitive damages and attorney fees, and remanded with instructions to confirm those amounts, but exclude attorney fees incurred in post-arbitration litigation.

The Dissent

Judge Dykman dissented from the final part of the decision which held that Winkelman could not recover attorney fees incurred in the circuit court or court of appeals.

Dykman concluded, "Since this is an arbitration case, the arbitrator is the fact and law finder, absent a perverse misconstruction. For me, that leaves us with two alternatives. We can conclude that the reasoning the arbitrator applied to award attorney fees necessarily applies to attorney fees in the circuit and appellate courts. Or, we can conclude that because the parties’ contract is the wellspring from which liability for attorney fees arises, the arbitrator should decide whether Kraft is liable for Winkelman’s circuit court and appellate attorney fees. … Kraft and Winkelman’s contract governs the issue, and they agreed that the arbitrator would make decisions such as this one."

Turning to the ramifications of the decision, Dykman wrote, "the majority’s result is unnecessary, and unfortunate for Wisconsin farmers and others who sell commodities to organizations capable of litigating until the cows come home. Even if a contract would permit the majority’s result, the advice any attorney will give to a farmer is: ‘Don’t litigate, don’t arbitrate. You can’t win. Even if your contract is identical to John Winkelman’s and you were deceived by the commodity purchaser, attorney fees for circuit court and appellate litigation will exceed any recovery you might obtain. Forget it.’"

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David Ziemer can be reached by email.