Opinion
NOT TO BE PUBLISHED
APPEAL from a judgment of the Superior Court of San Diego County No. GIC867298, Eugenia Eyherabide, Judge.
HALLER, Acting P. J.
Wedbush Morgan Securities, Inc. (Wedbush) unsuccessfully petitioned to vacate and/or correct an arbitration award requiring it to pay compensatory and punitive damages. (Code Civ. Proc., §§ 1286.2, 1286.6.) Wedbush appeals, contending the court erred in refusing to vacate the award because the arbitrators applied the wrong legal standard in awarding punitive damages. We reject this contention because claimed legal or factual errors in an arbitration decision are not a valid basis for vacating or correcting the decision. Moreover, it is not clear on the record before us that the arbitrators applied an erroneous standard.
Statutory references are to the Code of Civil Procedure unless otherwise specified.
FACTUAL AND PROCEDURAL BACKGROUND
In 2001, Kent Wilson purchased school bonds from Wedbush, a securities firm. After a default on the bonds, Wilson (on behalf of himself and a trust) brought a lawsuit against Wedbush, alleging fraud, breach of fiduciary duty, elder abuse, and negligence. Wedbush responded by moving to compel arbitration before the National Association of Securities Dealers (NASD). The motion was based on the parties' contract providing for NASD arbitration of all disputes between the parties. The court granted Wedbush's motion to arbitrate over Wilson's opposition.
The contract provided: "You agree, and by carrying an account for you, we agree that all controversies which may arise between you and us or any of our officers, employees or agents concerning any transaction or the construction, performance or breach of this or any other agreement between you and us, shall be determined by arbitration in accordance with the rules, then in effect, of [NASD] or any other exchange or forum of which we are a member. . . . " The contract further stated: "(A) Arbitration is final and binding on the parties. [¶] (B) The parties are waiving their right to seek remedies in court, including the right to jury trial. [¶] . . . [¶] (D) The arbitrators' award is not required to include factual findings or legal reasoning and any party's right to appeal or to seek modification of rulings by the arbitrators is strictly limited. [¶] (E) The panel of arbitrators will typically include a minority of arbitrators who were or are affiliated with the Securities Industry."
Thereafter, an NASD arbitration was held in Utah before three arbitrators under NASD arbitration rules and California law. The NASD rules provided that "unless the applicable law directs otherwise, all awards rendered . . . shall be deemed final and not subject to review or appeal." After the hearing, the arbitrators issued a written decision, awarding Wilson $60,000 in compensatory damages, $25,250 in interest, and $120,000 in punitive damages. With respect to punitive damages, the award stated: "[Wedbush] is liable to and shall pay [Wilson] the sum of $120,000 in punitive damages. The award of punitive damages is based on recklessness."
In June 2006, Wedbush moved to vacate and/or correct the award, challenging the arbitration award on numerous grounds, including that the arbitrators used the wrong legal standard in awarding the punitive damages. At the hearing, Wedbush's counsel stated that he was not challenging the arbitrators' authority to award punitive damages under NASD rules and the parties' contract, but asserted that "[t]he problem in this case is that the NASD panel awarded punitive damages based upon the wrong standard [recklessness] which was lower than permitted by law." Concluding that it could not vacate an arbitration award for an alleged legal error, the trial court rejected the argument and entered a judgment confirming the arbitration award.
On appeal, Wedbush reasserts its challenge to the punitive damage award.
DISCUSSION
I. Overview
Based on our state's strong public policy favoring arbitration as a speedy and relatively inexpensive means of dispute resolution, the scope of judicial review of private, binding arbitration awards is extremely narrow. (Moshonov v. Walsh (2000) 22 Cal.4th 771, 775 (Moshonov); Moncharsh v. Heily & Blase (1992) 3 Cal.4th 1, 11-13 (Moncharsh).) We can neither review the merits of the controversy, the arbitrator's reasoning, or the sufficiency of the evidence supporting the award, nor correct or vacate an award because of an arbitrator's legal or factual error. (Ibid.) Even "an error of law apparent on the face of the award that causes substantial injustice does not provide grounds for judicial review." (Moncharsh, supra, at p. 33.)
The Legislature has provided for very limited exceptions to these general rules. (§§ 1286.2, 1286.6.) Relying on one of these exceptions, Wedbush contends judicial review of the award is appropriate because the arbitration panel "exceeded [its] powers" in awarding punitive damages based on recklessness. (§§ 1286.2, subd. (a)(4), 1286.6, subd. (b).) Wedbush alternatively urges this court to adopt a higher review standard for challenges to a punitive damages arbitration award because of the constitutional and public policy concerns implicated by the award. For the reasons explained below, we reject these contentions.
II. Arbitrators Did Not Exceed Their Powers in Awarding Punitive Damages
Sections 1286.2 and 1286.6 state that the court shall vacate and/or correct an arbitration award if the "arbitrators exceeded their powers." (§§ 1286.2, subd. (a)(4), 1286.6, subd. (b).) In reviewing a trial court's conclusion that the arbitrators did not exceed their powers, we apply a de novo review standard, but give "substantial deference towards the arbitrator's determination of his or her contractual authority." (Jones v. Humanscale Corp. (2005) 130 Cal.App.4th 401, 408; O'Flaherty v. Belgum (2004) 115 Cal.App.4th 1044, 1056.)
Wedbush contends the arbitrators exceeded their powers because they applied the wrong statutory standard ("recklessness") in awarding punitive damages. This argument is without merit for several reasons.
First, it is not clear on the record before us that the arbitrators applied the wrong standard. A punitive damage award may be imposed under Civil Code section 3294 if the defendant's conduct comes within the definition of malice, which includes "despicable conduct which is carried on by the defendant with a willful and conscious disregard of the rights or safety of others." (Civ. Code, § 3294, subd. (c)(1).) This requires that " 'the defendant was aware of the probable dangerous consequences of his conduct, and that he willfully and deliberately failed to avoid those consequences.' " (Lackner v. North (2006) 135 Cal.App.4th 1188, 1211.) Under this standard, unintentional conduct, even if committed with a conscious disregard of the consequences, is insufficient to support a punitive damages award. (Id. at pp. 1210-1211; see Ford Motor Co. v. Home Ins. Co. (1981) 116 Cal.App.3d 374, 380.)
Although the term "recklessness" is frequently used to refer to conduct that is highly culpable but unintentional ("gross negligence"), courts have also used the term to mean a knowing and conscious disregard of another's rights that includes a willfulness component. (See Saudi Basic Industries Corp. v. ExxonMobil Corp. (D.N.J. 2005) 401 F.Supp.2d 383, 394 [noting that recklessness has been defined "in a number of contexts to be more than negligence and to include an element of willfulness"]; Securities and Exchange Commission v. Cenco, Inc. (N.D.Ill. 1977) 436 F.Supp. 193, 200 [referring to " 'the kind of recklessness that is equivalent to willful fraud' "]; see also Delaney v. Baker (1999) 20 Cal.4th 23, 31-32; Conservatorship of Gregory (2000) 80 Cal.App.4th 514, 520.)
On the record before us, we cannot determine whether the arbitrators used the term "recklessness" in the written order to mean a form of extreme carelessness (which would not support a punitive damage award) or to mean the type of knowing and willful conscious disregard that is equivalent to malice (which would support a punitive damage award). In determining whether the arbitrators acted within their authority, we are required to "draw all reasonable inferences in support of the award." (Jones v. Humanscale Corp., supra, 130 Cal.App.4th at p. 408.) Thus, for purposes of our review, we must assume the arbitrators found the level of culpability that supports a punitive damage award under Civil Code section 3294.
But even if the arbitrators applied the wrong legal standard, this error does not show the arbitrators "exceeded their powers" supporting a vacation or modification of the award. (§§ 1286.2, subd. (a)(4), 1286.6, subd. (b).) "[A]rbitrators do not 'exceed their powers' . . . merely by rendering an erroneous decision on a legal or factual issue." (Moshonov, supra, 22 Cal.4th at p. 775; Moncharsh, supra, 3 Cal.4th at p. 28; Marsch v. Williams (1994) 23 Cal.App.4th 238, 244; see also Baize v. Eastridge Companies, LLC (2006) 142 Cal.App.4th 293, 301.)
Wedbush contends that an exception to this rule applies in this case because the arbitration award was inconsistent with a specific statute. This contention is without merit. Although the courts have recognized that a statutory right may create an exception to the general rule of nonreviewability, this exception has been limited to the situation when the arbitration itself is in contravention of a statutory protection. (See Jones v. Humanscale Corp., supra, 130 Cal.App.4th at pp. 409-410.)
In Moncharsh, the California Supreme Court explained this exception by citing Shearson/American Express Inc. v. McMahon (1987) 482 U.S. 220, which held that federal statutory claims are arbitrable unless " 'Congress intended to preclude a waiver of judicial remedies for the statutory rights at issue.' " (Moncharsh, supra, 3 Cal.4th at p. 32.) The court later applied this exception to conclude judicial review of an arbitration award was appropriate because the enforcement of the underlying attorney-client arbitration agreement contravened a specific statutory scheme providing the client with the option to reject arbitration. (Aguilar v. Lerner (2004) 32 Cal.4th 974, 981-982.) Similarly, in Board of Education v. Round Valley Teachers Assn. (1996) 13 Cal.4th 269, the court found the arbitrators exceeded their powers in an arbitration pertaining to a public probationary employee's rights because the arbitration itself was inconsistent with a specific statute providing that arbitration was not permitted to determine such rights. (Id. at pp. 276-277.)
The circumstances here are different. The statutes do not provide that a punitive damage claim is not subject to arbitration, or that a party cannot waive the right to have a jury determine whether punitive damages are warranted in a particular case. Indeed, it was Wedbush that insisted on proceeding to arbitration despite Wilson's strong objections, and Wedbush concedes the arbitrators had the authority under the parties' contract to award punitive damages in the case. Because Wedbush has not identified a statutory right that conflicts with the arbitration and/or the arbitrator's authority to grant punitive damages, the statutory rights exception is inapplicable. (See Jones v. Humanscale Corp., supra, 130 Cal.App.4th at pp. 409-410 [case did not fall within the statutory rights exception merely because arbitrators erred in applying the applicable law and enforcing a covenant not to compete that violated California law and public policy].)
For similar reasons, we reject Wedbush's argument that the arbitrators exceeded their powers because the punitive damage award (based on "mere recklessness") violates public policy. In Moncharsh, the court recognized that a public policy may justify judicial review of an arbitrator's decision, but admonished that "without an explicit legislative expression of public policy . . . courts should be reluctant to invalidate an arbitrator's award on this ground. . . ." (Moncharsh, supra, 3 Cal.4th at p. 32; see City of Palo Alto v. Service Employees Internat. Union (1999) 77 Cal.App.4th 327, 334.) Wedbush does not identify an explicit legislative expression of public policy that prohibits a punitive damage award based on reckless conduct. Although one could say that any misapplication of a statutory mandate violates a public policy and thus would support a basis to vacate an award, the courts have never adopted such a broad exception. (See City of Palo Alto, supra, 77 Cal.App.4th at pp. 334-338.) To do so would "swallow the rule of limited judicial review." (Moncharsh, supra, 3 Cal.4th at p. 28.)
The trial court properly found the arbitrators did not exceed their authority in imposing punitive damages, even if they applied the wrong legal standard in their determination on the issue.
III. A Different Review Standard Does Not Apply to Punitive Damage Awards
Wedbush next contends that even if there is no specific statutory exception to the rule prohibiting review of an arbitration award, we should adopt a new rule requiring a full judicial review of punitive damages awarded in an arbitration. Wedbush posits that a party challenging a punitive damage award has a right to a more exacting review because the United States Supreme Court has held that a punitive damages award implicates a defendant's due process rights and involves significant public, as opposed to private, objectives of deterring and punishing the defendant's conduct. (See State Farm Mut. Automobile Ins. Co. v. Campbell (2003) 538 U.S. 408, 416; Grassilli v. Barr (2006) 142 Cal.App.4th 1260, 1287.)
In Rifkind & Sterling, Inc. v. Rifkind (1994) 28 Cal.App.4th 1282, the court rejected similar arguments. The Rifkind court explained that "the fundamental fallacy resides in [the appellant's] basic premise, that due process requires judicial review of private arbitral awards of punitive damages. The premise misconceives the applicability of the due process clause. That clause applies only to state action. . . . The requirement of judicial review recognized . . . [by the United States Supreme Court] was triggered by, and assessed against, state regimes that undertook to impose punitive damages upon civil defendants through common law, statutory, and constitutional rules and processes. . . . [¶] The arbitration in this case . . . was a private proceeding, arranged by contract, without legal compulsion. It was intended to provide a simple, final dispute resolution mechanism, independent of legal or court proceedings or, for that matter, of compulsory reliance on either procedural or substantive law imposed by statutes and judicial interpretations." (Id. at p. 1291.)
We agree with the Rifkin court's reasoning and conclusion. Punitive damage awards in judicial proceedings are limited by the federal due process clause. (Pacific Mutual Life Insurance Co. v. Haslip (1991) 499 U.S. 1, 20.) However, the due process clause does not require judicial review of awards made in a private arbitration proceeding under a voluntary agreement to arbitrate. Those awards are the result of parties agreeing to be bound by a private arbitrator's decision on the facts and the law. In this case, it was undisputed that the parties voluntarily gave the arbitrators the power to award punitive damages. Imposing a layer of judicial scrutiny on the resulting award would undermine the fundamental objectives of the parties' private agreement.
The fact that a punitive damage award is intended to benefit the public (as opposed to merely compensate for a private loss) does not change this conclusion. Although Wedbush argues persuasively that a greater scrutiny of punitive damage arbitration awards would serve a beneficial public purpose, the issue is whether these benefits are outweighed by the loss of arbitral finality. The Legislature is responsible for weighing the benefits of a final and binding arbitration process with the costs to private parties and to the public resulting from a legal or factual error, and establishing any necessary exceptions. (Moncharsh, supra, 3 Cal.4th at pp. 27-28.) Absent a specific statutory exception for the review of punitive damage awards in an arbitration proceeding, we decline to create one merely because punitive damages serve a public function.
Wedbush additionally argues that we should create an exception to the rule of limited arbitration review because "[a]rbitrators would essentially have free reign to impose at their whim what is supposed to be a penalty in service of societal norms and having little to do with the immediate complainant . . . ." In support, Wedbush discusses various scenarios under which arbitrators could impose punitive damages that would bankrupt the defendant for "mere" negligence.
The problem with this argument is that these assertions could apply to almost any wrong decision by an arbitrator. In any case, it is theoretically possible for arbitrators to impose compensatory damages that are far beyond the supporting evidence or to render a judgment that is wholly unsupported by the law or applicable public policy. However, our high court has interpreted the relevant statutes as reflecting a legislative intent that an arbitrator's decision cannot be reviewed for errors of fact or law, even if the error appears on the face of the award and would cause "substantial injustice." (Moncharsh, supra, 3 Cal.4th at p. 33.) To the extent that Wedbush believes it is a more important public policy to ensure punitive damage awards are legally correct, these arguments should be directed to the Legislature.
DISPOSITION
Judgment affirmed. Appellant to pay respondent's costs on appeal.
WE CONCUR: O'ROURKE, J. AARON, J.