November 2011 #1. A Case of Form Fallowing Function.

Authorby Gregory M. Sato and Nicholas R. Monlux

Hawaii Bar Journal


November 2011 #1.

A Case of Form Fallowing Function

Hawaii State Bar JournalNovember 2011A Case of Form Fallowing FunctionPunitive Damages and Attorney's Fees in Arbitration:by Gregory M. Sato and Nicholas R. MonluxArbitrations can be segregated into two categories- labor arbitrations (those arbitrations arising out of a collective bargaining agreement) and employment law arbitrations (those arbitrations arising out of an ad hoc agreement, e.g., employee handbook, employment agreement, or settlement agreement). Based upon a review of labor and employment law arbitration decisions reported in Westlaw, from 1999 to 2010,(fn1) it appears that the award of punitive damages' and attorneys' fees are shaped to a very large degree by the setting from which the arbitration arises.

In the labor arbitration setting, punitive damages and attorneys' fees are rarely granted. According to scholars:

Even though a party is found to have violated the agreement, the arbitrator may be expected to refuse to award any rehef that would, in essence, be an award of punitive damages, unless there is evidence of such bad faith as to shock the conscience of the arbitrator One arbitrator observed: "The concept of punishment, that is awarding punitive damages, is disruptive to the promotion of an amicable, and a continuing relationship that must exist between the employer and the union for years into the future."(fn3)

"Some arbitrators [, however,] have felt justified in awarding punitive damages on a showing that the contractual violation was knowing and repeated, or willful and flagrant, or in bad faith or intended for the purpose of delay, or otherwise 'egregiously wrongful."(fn4)

By contrast, employment law arbitrations generally arise after the employment relationship has failed or at least is so exhausted that third-party intervention is necessary In these situations, the employment law arbitrator, unlike the labor arbitrator, is less concerned about any on-going employment relationship. Thus, it is not surprising thatin employment law arbitrations, arbitrators behave just like jurors. Employment law arbitrators will award punitive damages and attorneys' fees if they have the statutory or contractual authority to do so and if there is the necessary factual foundation for doing so.

Labor Arbitration Decisions

With respect to labor arbitrations, in the eleven-year period that the authors surveyed, there were no labor arbitration decisions where there was a substantive discussion of the merits of awarding or denying attorneys' fees. In that same period, there were six decisions that discussed, but declined to award, punitive damages.

Arbitrator Richard E. Allen's decision in In re Morton Salt reflects the view that the award of punitive damages is corrosive to the long-term bargaining interests of labor and management.(fn5) In Morton Salt, Allen found that the employer violated the terms of the collective bargaining agreement, which required the plant manager to designate specific days as floating holidays. The union sought an award of premium pay for the lost of holiday time; however, the arbitrator denied the union's request, writing, "Arbitrators have generally been unwilling to award punitive or exemplary damages . . . [because] [t]he concept of punishment, that is awarding punitive damages, is disruptive to the promotion of an amicable, and a continuing relationship that must exist between the employer and the union for years into the future."(fn6) Arbitrator Allen concluded with these remarks:

It seems to me punitive damages are extraordinary in nature, and should be reserved for situations that cannot be corrected by other remedies. Punitive damages should be awarded only as a deterrent to future similar violations. In the present situation, there is another remedy available to insure future violations will not occur. That remedy is a ruling the employer must select a specific date, in advance, for each of the four Floating Holidays, and such a date shall not be a personal selection day of individual employees.(fn7)

In In re Safeway Stores Inc.,(fn8) Arbitrator John P. DiFalco reached a similar ruling as Arbitrator Allen in Morton Salt, but this time in regard to back pay interest in a termination arbitration decision. In Safeway Stores Inc., Arbitrator DiFalco found Safeway failed to establish just cause and ordered Safeway to reinstate the terminated employee with back pay and benefits. The union subsequently sought the award of interest on the back pay amount; the arbitrator said, "no":

The prevailing view has been and continues to be, that interest is not generally awarded in cases in which an employee has been discharged and awarded back pay upon reinstatement. The theory being that the grievants who are awarded back pay were viewed as being justly compensated by receiving monies for which they did not work. To add interest would be to cause compensatory damages to become punitive damages and it was thought unfair to penalize the employer further by adding interest on the award.(fn9)

Arbitrator DiFalco cited a number of prior decisions in support of his position, including American Chain Co., Intermountain Operators League, Oil Transport Co. and Gypsum Transport, Inc., Hollander and Co., and Skaggs Pay Less Drug Stores.(fn10) DiFalco continued:

The general practice of denying requests for interest as well as the offset of interim earnings, is a recognition under arbitral law that an employee should not receive any windfalls or benefits that would place them in a position better than a make-whole remedy, especially when there are no compelling reasons, such as Company misconduct, delay, or basis for sanctions which may, in a given case, compel the award of interest.(fn11)

In In re Georgia-Pacific Corp.,(fn12) even the employer agreed that there was a breach of the collective bargaining agreement. Arbitrator Thomas E. Terrill, however, rejected the union's demand that affected employees, who were overlooked for overtime work, be awarded pay for time they could have worked because it would be punitive in character:

In the instant case, nothing indicates that the Company deliberately or unreasonably deprived the grievants of an overtime...

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