WASHINGTON -- The Supreme Court ruled 8-1 yesterday that punitive damages -- a sometimes costly addition to actual damages verdicts -- may be awarded under the standard arbitration agreement used by many stockbrokers.
Unless a broker and an investor make a specific contractual promise to each other that punitive damages will be excluded if they get into a dispute, their agreement to follow the securities industry's usual arbitration rules leaves that option open, the court said.
A punitive damages award is intended to punish a wrongdoer and to deter others from causing the same kind of harm. Such damages are calculated above the amount of ordinary damages awarded to cover actual dollars-and-cents losses.
The rules laid down by the New York Stock Exchange, the American Stock Exchange and the National Association of Securities Dealers, the court noted, do not rule out punitive damages and, in fact, are broad enough to include them as one remedy.
Thus, it said, a state law that forbids arbitrators to award punitive damages cannot forbid them if the broker-customer agreement has not specifically ruled them out.
The decision cleared up a conflict among lower federal courts on the availability of punitive damages when arbitrators decide securities transactions disputes. Securities brokers commonly ask customers to sign a standard arbitration promise. The standard form usually includes industry arbitration rules.
Stuart Kaswell, general counsel of the Securities Industry Association, said the industry was "extremely disappointed" by the ruling. He said punitive damages "often are disproportionate to the conditions of the real dispute and are often awarded without any check or balance."
The court's ruling to allow a punitive damage remedy came in the case of a Chicago couple who had been awarded $559,327 against Shearson Lehman Hutton Inc. over unauthorized trading and "churning" in their investment account.
The opinion was written by Justice John Paul Stevens. Justice Clarence Thomas was the lone dissenter.
In a separate decision, the court ruled unanimously that a company with an employee benefit plan, including pensions, does not have to follow any particular procedure in amending its plan to cut off retirement benefits. The court said that as long as the company has reserved the right to amend its plan, that is enough to meet its obligations.