10.4.3.2 Notes - Garrity v. Lyle Stuart, Inc.

NOTE

1. The principal case is annotated at 83 A.L.R.3d 1024. Suppose the arbitration clause in the parties' contract had explicitly authorized an award of punitive damages in any amount the arbitrator thought fair and reasonable. Do you think Judge Breitel's analysis of the case would have been affected? Even if it had contained such a provision, couldn't one still distinguish the contract at issue here from the agreement involved in the Associated General Contractors case (discussed in both the majority and dissenting opinions)?

Judge Breitel's conclusion that the plaintiff's punitive damages should be disallowed appears to rest on considerations of public policy. Couldn't it have been based as easily, and perhaps less controversially, on familiar principles of contract interpretation? If the arbitrator thought the parties meant one thing, and Judge Breitel thought they meant another, whose interpretation should control (in the absence of any considerations of public policy)?

2. The facts in Matter of Aimcee Wholesale Corp., cited in the principal case, were these: Aimcee had purchased merchandise from Tomar Products, Inc. under a sales contract that contained a broad arbitration clause stating that "[a]ny controversy or claim arising out of or relating to" the contract was to be submitted to arbitration. Maintaining that the merchandise was defective, Aimcee sought arbitration of its claim for damages. Tomar responded by bringing a legal action against Aimcee for breach of contract. Aimcee then demanded that Tomar's counterclaim also be submitted to arbitration, and Tomar agreed. At this point, however, Tomar interposed a second counterclaim based on the allegation that Aimcee had violated certain federal and state antitrust laws by exacting a discriminatory reduction in the price of the goods it was purchasing. Aimcee moved to stay arbitration of Tomar's antitrust claims. Tomar consented to the stay with respect to its federal antitrust claim, but sought arbitration of its parallel state law claim. The trial court denied Aimcee's motion on the grounds that Tomar's state law antitrust claim was arbitrable. Following an affirmance by the Appellate Division, the Court of Appeals reversed. Writing for a unanimous court, Judge Keating had this to say:

Arbitrators are not bound by rules of law and their decisions are essentially final. Certainly the awards may not be set aside for misapplication of the law (CPLR 7511). Even if our courts were to review the merits of the arbitrators' decision in antitrust cases, errors may not even appear in the record which need not be kept in any case. More important, arbitrators are not obliged to give reasons for their rulings or awards. Thus our courts may be called upon to enforce arbitration awards which are directly at variance with statutory law and judicial decision interpreting that law. Furthermore, there is no way to assure consistency of interpretation or application. The same conduct could be condemned or condoned by different arbitrators.

If the arbitrators here should decide wrongly that the goods were or were not defective, the injustice done is essentially only to the parties concerned. If, however, they should proceed to decide erroneously that there was or was not a violation of the Donnelly Act [the New York antitrust statute at issue in the case], the injury extends to the people of the State as a whole. To illustrate, if Tomar is correct in its claim that the rebate here violates the Donnelly Act, and the arbitration panel should deny the claim, then in effect the arbitrators have permitted Aimcee to receive an unjustifiable price reduction which weakens the position of Aimcee's competitors. Conversely, if Tomar is incorrect in its contention, but the arbitrators should rule in its favor, then the award may be passed on to the consumer in the form of higher prices.

Thus the issue which the arbitrators will be called upon to decide transcends the private interests of the parties. It is not simply that arbitrators can impose unnecessarily restrictive or lenient standards. The evil is that, if the enforcement of antitrust policies is left in the hands of arbitrators, erroneous decisions will have adverse consequences for the public in general, and the guardians of the public interest, the courts, will have no say in the results reached. To paraphrase the court's language in the Manhattan Stor. & Warehouse case, the parties will obtain a decision here on a matter of moment to the public at large, although the State is not a party to the proceedings, and no party to the proceedings is authorized to defend the interests of the public. . . .

The realities of the commercial arbitration process bolster the conclusion that commercial arbitration is not a proper mechanism for a determination as to whether the price rebate here was discriminatory and violated the Donnelly Act. Arbitrators are often businessmen chosen usually for their familiarity with the practices of a particular industry or for their expertise with the real issues in dispute, which ate almost always unrelated to antitrust claims. This problem is aggravated by the fact that the enforcement of the State's antitrust policy has often been a by-product of Federal enforcement. Thus, even if we were to assume that we have knowledgeable arbitrators, who would willingly and earnestly seek to follow judicial precedent, we cannot ignore the fact that many of the most important issues in antitrust law, including specifically those in this case, have never been resolved definitely under New York law. This is shown by the fact that it has never been determined whether price discrimination would violate the Donnelly Act.

Moreover, we cannot overlook the fact that many undeserving litigants are awarded damages in antitrust cases. Arbitrators are more likely to give more consideration to equitable notions such as waiver, estoppel and in pari delicto. Every time this is done, however, the deterrent effect of the law on antitrust violations is severely diminished.

21 N.Y.2d 621, 626-629, 237 N.E.2d 223, 225-227 (1968).