Reinsurance Focus

Affirming a district court’s denial of a motion to compel arbitration, the United States Court of Appeals for the Seventh Circuit has held unenforceable a provision of an employment agreement mandating that wage-and-hour claims could be brought only through individual arbitration and that employees waived “the right to participate in or receive money or any other relief from any class, collective, or representative proceeding.”  The provision further provided that  if the waiver provision was unenforceable, “any claim brought on a class, collective, or representative action basis must be filed in a court of competent jurisdiction.”  Employees were not permitted to opt out of this provision; it was a requirement of continued employment.  The Court found the waiver of collective action prohibited by the National Labor Relations Act (“NLRA”), and rejected the contention that the case involved any conflict between the NLRA and the Federal Arbitration Act (“FAA”).  This decision appears to conflict with decisions of the Second, Fifth, Eighth and Ninth Circuits, laying the potential basis for the review of this issue by the Supreme Court.

The Court found that the contractual waiver of the right to proceed in a collective manner was an unlawful restriction of the exercise by the employee of the right to collective action protected by section 7 of the NLRA, a right it termed substantive and”at the heart” of the purpose of the NLRA rather than a procedural right.  Addressing the employer’s contrary interpretation of section 7, the Court found persuasive interpretations of the scope of the protections of section 7 by the National Labor Relations Board, which the Court found to be “a sensible way to understand the statutory language, and thus we must follow it.”

The Court then rejected the employer’s assertion that the case involved a conflict between the NLRA, as it interpreted it, and the FAA, as interpreted by the Supreme Court.  The Court reasoned that since the contractual provision at issue is unlawful under section 7 of the NLRA, “it is illegal, and meets the criteria of the FAA’s savings clause for nonenforcement.”  The FAA’s savings clause provides that agreements to arbitrate “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.”  Stating that finding the NLRA in conflict with the FAA “would render the FAA’s savings clause a nullity,” the Court rejected that its decision created a Circuit split, contending that none of the opinions from the other four Circuits “has engaged substantively with the relevant arguments.”  Despite this disclaimer, it appears that the Seventh Circuit’s opinion does conflict with the decisions of other Circuits, and accords the FAA a different role and emphasis than do the opinions of other Circuits. Lewis v. Epic Systems Corp., No. 15-2997 (7th Cir. May 26, 2016).

This post written by Rollie Goss.

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On August 26, the Second Circuit Court of Appeals considered whether a trial court had appointment authority under the Federal Arbitration Act (“FAA”). Overturning a prior order that denied Odyssey Reinsurance Company’s (Odyssey) motion to appoint, the Second Circuit found that the trial court not only had the authority to appoint an arbitration umpire but “the obligation to appoint an umpire to correct a breakdown in the umpire selection process.”

The trial court found that it did not need to intervene in a dispute over worker’s compensation billings. The Second Circuit Court disagreed, finding the parties deadlocked as to the interpretation of various terms in the arbitration agreement concerning umpire qualifications. This “lapse” therefore necessitated the trial court to appoint an arbitration umpire.

Odyssey Reinsurance Co. v. Certain Underwriters at Lloyd’s London Syndicate 53, No. 14-2840-cv (2nd Cir. Aug. 26, 2015)

This post written by Matthew Burrows, a law clerk at Carlton Fields Jorden Burt in Washington, DC.

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In a dispute involving an earlier arbitration ordering American United Life Insurance Company (“AUL”) to make a commutation payment to The Travelers Indemnity, the parties filed cross petitions for arbitration pursuant to different clauses of a reinsurance contract. AUL argued arbitration should proceed pursuant to the Article 16 in the contract requiring all disputes between the company and the reinsurer be submitted to arbitration. It further argued that Travelers had forfeited its right to name umpire candidates, and that the court should appoint an umpire from the names submitted by AUL. Travelers, for its part, argued that the matter should proceed pursuant to Article 6 of the contract that required actuaries to make the determination concerning the amount of the loss.

The Court sided with AUL stating that an arbitration panel needed to decide the threshold issue of whether the matter should proceed pursuant to Article 16 or Article 6. The court reasoned that in order to determine whether to proceed by a panel of actuaries, the reinsurance contract had to be interpreted and that Article 16 was clear that “any dispute between the Company and the Reinsurer arising out of, or relating to the formation, interpretation, performance or breach of this Contract, whether such dispute arises before or after termination of this Contract, shall be submitted to arbitration.” Regarding AUL’s request that the court appoint an umpire from its list of candidates, the court noted that the parties were engaged in settlement discussions and Travelers had offered to name umpire candidates but AUL never responded. Based on this, the court held that Travelers never knowingly waived its right to name umpire candidates, and ordered Travelers to comply with Article 16. American United Life Insurance Co. v. Travelers Indemnity Co., et al., Case No. 3:14-cv-1339 (USDC D. Conn. Aug. 18, 2015).

This post written by Barry Weissman.

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The Ninth Circuit held that an arbitration agreement between Opus Bank and its former executive vice president Carey Brennan should be interpreted under federal, not state, law unless the parties unambiguously agreed otherwise. While Brennan’s employment contract contained a California choice-of law clause, his arbitration agreement required any employment-related dispute be resolved “by binding arbitration in accordance with the Rules of the American Arbitration Association.” Brennan argued that the arbitration agreement’s clause was substantively and procedurally unconscionable, while Opus moved to compel arbitration under the Federal Arbitration Act.

The Ninth Circuit affirmed the district court’s finding that because the contract involves interstate commerce, the FAA applies. Further, because the arbitration agreement, did not incorporate California law expressly, federal law applies. “While the Employment Agreement is clear that California’s procedural rules, rights, and remedies apply during arbitration, it says nothing about whether California’s law governs the question whether certain disputes are to be submitted to arbitration in the first place. Further, the incorporation of the AAA rules constituted “clear and unmistakable” evidence that the parties intended to have an arbitrator decide the threshold question of arbitrability. Brennan v. Opus Bank, Nos. 13-35580, 13-35598 (9th Cir. Aug. 11, 2015).

This post written by Whitney Fore, a law clerk at Carlton Fields Jorden Burt in Washington, DC.

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In Katz v. Cellco Partnership, the United States Court of Appeals for the Second Circuit confronted the question of “whether district courts retain the discretion to dismiss an action after all claims have been referred proceedings,” or should stay the litigation. Acknowledging a split in the circuits, the court, in the context of an order compelling arbitration under the Federal Arbitration Act answered, “stay.”

Katz sued Cellco (better known as Verizon) on behalf of a putative class of Verizon subscribers. Katz’s contract with Verizon contained an arbitration clause that required arbitration under the FAA. Verizon moved to compel arbitration and stay the proceedings. Katz sought to void the arbitration provision on constitutional grounds. The district court (1) rejected Katz’s constitutional argument; (2) granted Verizon’s motion to compel arbitration; and (3) having compelled arbitration, dismissed Katz’s claims. The sole issue addressed by the Second Circuit was whether the case should have been dismissed or stayed.

The Second Circuit outlined the divide among federal circuit courts on the stay versus dismiss question. The federal courts of appeals requiring a stay include the Third, Seventh, and Tenth Circuits; those allowing dismissal include the First, Fifth, and Ninth Circuits; the Fourth Circuit remains uncommitted. The Second Circuit then analyzed the question in the light of the Act’s language, which states that if a suit is “referable to arbitration,” the court “shall … stay the trial of the action until such arbitration has been had….” That language, along with the Act’s underlying policy, makes a stay mandatory. Thus, the Second Circuit joined the circuit’s ruling in favor of a stay over dismissal. Katz v. Cellco Partnership, No. 14-138 (2d Cir. July 28, 2015).

This post written by John A. Camp.

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A federal district court in New York entered an order enjoining an attempt at a second arbitration initiated by Equitas Insurance Limited and Certain Underwriters at Lloyd’s of London against Arrowood Indemnity Company. The second attempt at arbitration comes after five years of dispute, which resulted in a $45 million arbitration award in favor of Arrowood. After the arbitral award and a court order confirming the award, the Underwriters filed a motion for post-judgment discovery and relief from judgment based on a document that the Underwriters had obtained in another proceeding against Arrowood that purportedly showed the disingenuity of Arrowood’s stance in the arbitration. The court denied the motion, finding that such a motion “cannot be used to collaterally attack an arbitration award for misconduct in the arbitration in the guise of an attack on the judgment confirming it.” Following the court’s order, the Underwriters demanded a second arbitration. In response, Arrowood filed a motion seeking to enforce the court’s earlier order.

The court held that Section 10 of the Federal Arbitration Act provides “the exclusive means of addressing and redressing wrongdoing in an arbitration proceeding” and that any such grounds must be raised within three months of the award. Finding that the Underwriters’ second attempt at arbitration was “in direct contravention of the FAA” and that a second arbitration cannot be used to undo the award of the first, the court enjoined the Underwriters’ attempts at a second arbitration—perhaps bringing the dispute to a conclusion. Arrowood Indemnity Co. v. Equitas Insurance Limited, No. 1:13-cv-07680-DLC (USDC S.D.N.Y. July 30, 2015).

This post written by Zach Ludens.

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In a Special Focus article Rollie Goss previews another arbitration case coming before the United States Supreme Court involving the issue of whether a class arbitration waiver is unconscionable, and the impact of such a finding on the viability of the agreement to arbitrate.

This post written by Rollie Goss.

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The court confirmed an arbitration decision awarding damages in favor of workers compensation insurers against various insured employee-staffing companies. One of the defendant companies contended that it never executed the underlying agreement with the insurers, that the panel thus exceeded their powers in entering the award, and that the award should be vacated. The court rejected this argument, agreeing with the panel’s determination that the company waived its non-signatory defense. The court examined the procedural history of the arbitration and held that the arbitration proceeding continued for twenty-six months before the defendant asserted its defense. The court found that the company was “represented by legal counsel throughout the dispute resolution process,” that as “a matter of law, litigants are bound by the acts and omissions of their chosen agents, including lawyers,” and that “legal bungling” did “not justify reopening a judgment.” The court was further persuaded by the fact that the company first raised the defense only after a partial final award was entered, ordering the company to post a bond. While the court noted that it did “not take lightly” the company’s sworn statement that it did not authorize its purported attorney to represent that it approved or ratified the underlying arbitration agreement, the court explained that this was an alleged legal malpractice matter and not a basis to vacate the arbitration award. Zurich American Insurance Co., et al. v. Staffing Concepts International, Inc., et al., Case No. 1:14-cv-03454 (USDC N.D. Ill. July 23, 2015).

This post written by Michael Wolgin.

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The Second Circuit affirmed a New York district court ruling that found that the FINRA arbitration rules, one of which prohibits arbitration of putative or collective class actions, was incorporated within the subject employment agreement. Former financial advisers of the progeny of J.P. Morgan Chase & Co. sued J.P. Morgan under state and federal law for violations of overtime laws. J.P. Morgan moved to compel arbitration pursuant to a clause within the advisers’ employment contracts. In denying their motion, the district court reasoned “that the arbitration clause requires arbitration of only those claims required to be arbitrated under the FINRA Rules and that, under New Rule 13204, Plaintiffs’ claims cannot be arbitrated.”

On appeal, J.P. Morgan argued against the trial court’s interpretation of the phrase “required to be arbitrated by the FINRA Rules” as well as the court’s use of the amended version of Rule 13204, which was not in effect when the parties originally entered into their contract. The court used a grammatical and definitional analysis to determine that the phrase applies to all claims and controversies. They also found that when JP Morgan agreed to arbitrate according to the FINRA rules, they also took on the risk that these rules may change. Regardless of that risk, the court noted that under either the original version of Rule 13204 or the amended version, FINRA prohibits the arbitration of collective class actions claims. Lloyd et al. v. JP Morgan Chase & Co. et al., No. 13-3963-cv (2d Cir. June 29, 2015).

This post written by Matthew Burrows, a law clerk at Carlton Fields Jorden Burt in Washington, DC.

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The Tenth Circuit recently held that Cox Communications, Inc., (Cox) had waived its right to arbitration while defending a class action lawsuit brought on behalf of its cable subscribers. These subscribers sued the communications company in 2009 in several jurisdictions, alleging that the company illegally tied provision of its cable service to rental of a set-top box. These lawsuits were consolidated and transferred to the United States District Court for the Western District of Oklahoma. In response, Cox moved to dismiss and while the motion was pending, began inserting mandatory arbitration clauses into its various customer contracts, including those of class members. Cox did not notify the district court it was doing so, however. Efforts to certify a nationwide class failed, so plaintiffs sought to certify various geographic classes. These class actions were once again consolidated and transferred to the Western District of Oklahoma.

Before the district court, Cox moved unsuccessfully to dismiss before the parties engaged in substantial discovery and named plaintiff Healy moved to certify the class. The district court granted class certification and Cox appealed to the Tenth Circuit, but its petition was denied. Throughout these proceedings, Cox never mentioned the arbitration clauses until it filed motions for summary judgment and to compel arbitration. The district court denied the motion to compel on the basis that Cox’s prior conduct in the litigation constituted waiver. Cox appealed, and the Tenth Circuit affirmed, noting that both plaintiffs and the two courts would be prejudiced if arbitration were allowed. Healy v. Cox Commc’ns., Inc., No. 14-6158 (10th Cir. June 24, 2015).

This post written by Whitney Fore, a law clerk at Carlton Fields Jorden Burt in Washington, DC.

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