Arbitration: Connecticut Supreme Court Affirms Punitive Damages Award (Web)

Following its May 17 decision upholding a $5 million punitive damages arbitration award in MedValUSA Health Programs Inc. v. MemberWorks, Inc., 273 Conn. 634, 872 A.2d 423 (May 17, 2005), the Connecticut Supreme Court has ruled that $300,000 punitive damages award should be permitted to stand even without a minimal compensatory damages award.  Hadelman v. Deluca, 274 Conn. 442, 2005 WL 1576485, (July 12, 2005)(available at www.jud.state.ct.us/external/supapp/Cases/AROcr/CR274/274CR100.pdf).

The plaintiffs, who are Subway sandwich shop franchisees, ran for election to the board of directors of the Subway Franchise Advertising Fund Trust, which disburses advertising funds for the benefit of Subway stores nationwide. 

Defendant Frederick DeLuca is the founder of Subway, and a 50 percent owner of its franchiser, also a defendant. 

At Deluca’s urging, the trust board canceled the election and instituted new rules that prevented the plaintiffs from running for election to the trust’s board of directors.

Following the cancellation, the plaintiffs filed suit against the defendants, seeking injunctive relief and damages.  The court action was stayed pending arbitration.  “[T]he three person arbitration panel determined that the defendants had interfered improperly with the board of directors election and, in doing so, had prevented the election of the plaintiffs to the board. The panel further found that the defendants’ actions were in violation of the Connecticut Unfair Trade Practices Act, General Statutes § 42-110a et seq.  The arbitration panel awarded no compensatory damages, but awarded each of the plaintiffs $150,000 in punitive damages as well as attorney’s fees and arbitration expenses.” 

While the plaintiffs moved to enter this award, Deluca moved to vacate it on the grounds that the damages were excessive and the award was in violation of public policy.

The Court noted that where a party “challenges a consensual arbitral award on the ground that it violates public policy, and where that challenge has a legitimate, colorable basis, de novo review of the award is appropriate in order to determine whether the award does in fact violate public policy.”

Reviewing the award with this standard, the Connecticut Supreme Court, in MedValUSA Health Programs, “concluded that Connecticut does not have a well-defined public policy against the award of excessive punitive damages.”  That reasoning applied in Hadelman.

The MedValUSA Health Programs decision also applied to the defendants’ other appeal ground--the test set forth in BMW of North America, Inc. v. Gore, 517 U.S. 559, 575–85, 116 S. Ct. 1589, 134 L. Ed. 2d 809 (1996), on whether the punitive damages award violated the defendants’ due process rights—also didn’t apply in this in Hadelman.   “The Gore due process analysis is not implicated in the absence of state action,” the Court noted, because an arbitration award does not constitute state action and is not converted into state action by the trial court’s confirmation of that award, “regardless of how excessive the award may be.” 

The arbitral award granting $300,000 in punitive damages, with no compensatory damages was therefore affirmed.