OK for arbitrator to award punitive damages

Finding: willful and malicious misappropriation of plaintiff’s trade secrets. NXEGEN won an arbitration award against John Carbone, its former chief operations officer. After finding that Carbone maliciously misappropriated trade secrets in violation of the Connecticut Uniform Trade Secrets Act, the arbitrator awarded punitive damages.

Carbone went to court, claiming that the arbitrator had acted in manifest disregard of the law. The trial court affirmed the award, and the Connecticut Court of Appeals affirmed. NXEGEN v. Carbone (Conn Ct App 02/03/2015).

To get punitive damages under the Trade Secrets Act, you have to prove willfulness and malice. Carbone claimed that the arbitrator used the wrong definition for "malice," and therefore acted "in manifest disregard of the law."

The court said there were three things Carbone had to prove in order to vacate the award under the "manifest disregard of the law" doctrine:

(1) the error was obvious and capable of being readily and instantly perceived by the average person qualified to serve as an arbitrator;

(2) the arbitration panel appreciated the existence of a clearly governing legal principle but decided to ignore it; and

(3) the governing law alleged to have been ignored by the arbitration panel is well defined, explicit, and clearly applicable.

Here, the arbitrator set forth the reasons he found that Carbone's conduct was malicious. So there was no obvious error, and the arbitrator did not consciously ignore the law.

This case is another example that shows that courts do not review arbitration awards the same way they review lower court decisions. In reviewing a lower court decision, an appellate court will reverse if the lower court was wrong on the law. In reviewing an arbitration award, it is not enough to show that the arbitrator was wrong. You also have to show that the arbitrator appreciated the existence of a clearly governing legal principle but decided to ignore it.