Reinsurance Focus

Lorena Nelsen brought a putative class action in California state court against her former employer, Legacy Partners Residential, Inc. (“LPR”), alleging violations of the California Labor Code. LPR moved to compel individual arbitration based on the parties’ arbitration agreement. The trial court rejected Nelsen’s contention that the arbitration clause was unconscionable and unenforceable. The Appellate Court affirmed, distancing itself from its previous holdings that have been called into question by the U.S. Supreme Court’s ruling in AT&T Mobility v. Concepcion, upon which the decision heavily relies. Nelsen v. Legacy Partners Residential, Inc., No. A132927 (Cal. App. July 18, 2012).

This post written by John Pitblado.

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Several developments have occurred in the ongoing reinsurance dispute between Aurum Asset Managers and several Brazilian companies. In April, Aurum filed a petition in federal district court to confirm an amended arbitration award, entering judgment in Aurum’s favor, and granting Aurum equitable relief. On June 11th, the district court denied the award as against respondent Banco do Estado do Rio Grande do Sul. The court, however, confirmed the award as against two respondents (Bradesco Companhia de Seguros and Bradesco Auto/Re Companhia de Seguros) unless and until the court received arguments from any party opposing the confirmation prior to June 22nd. On June 26th, having not heard any arguments opposed, the court confirmed the final arbitration award and entered judgment against the two Bradesco entities. Aurum Asset Managers, LLC v. Banco do Estado do Rio Grande do Sol, No. 08-mc-102 (USDC E.D. Pa. June 12, 2012 & June 26, 2012).

This post written by John Black.

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The 11th Circuit ruled that SunTrust Bank account holders must arbitrate claims against it for excessive overdraft fees pursuant to an arbitration clause in its depositor agreement. Plaintiffs alleged that SunTrust breached its contract, converted funds, acted unconscionably, and was unjustly enriched by deceptively processing transactions to maximize overdraft fees. Although the district court initially denied SunTrust’s Motion to Compel individual arbitration, finding the clause substantively unconscionable under Georgia state law because it contained a class action waiver, the 11th Circuit remanded SunTrust’s appeal in light of the Supreme Court’s decision in AT&T Mobility LLC v. Concepcion, which held that the Federal Arbitration Act (“FAA”) preempted a California state rule relating to the unconscionability of class arbitration waivers.

Upon SunTrust’s renewed motion, the district court again found the clause substantively unconscionable because its fee-shifting provisions disproportionately allocated the risks of loss in the dispute to the Plaintiffs. Reversing that decision, the 11th Circuit ruled that the bank was entitled under the FAA to arbitration “in the manner provided for in [its deposit] agreement” and held that the clause was “neither procedurally nor substantively unconscionable.” The court noted that arbitration agreements, even when entered by parties with unequal bargaining power, are not per se unconscionable under Georgia law, particularly when given equal prominence to other adhesion contract provisions. Additionally, 11th Circuit precedent and a Georgia statute affirm the legality and conscionability of SunTrust’s multi-party account setoff rights to collect fees. In re Checking Account Overdraft Litigation, No. 11-14316 (11th Cir. Mar. 1, 2012).

This post written by Rollie Goss.

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Plaintiff brought an action against a cruise line, claiming to have suffered injuries while working on the defendant’s ship. Pursuant to the removal provision of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“the New York Convention”), 9 U.S.C. § 205, the defendant removed the action and moved to compel arbitration. The plaintiff claimed that the arbitration agreement was void as against public policy because its choice of law provision would preclude U.S. common law and statutory claims. In a prior Order the court granted the defendant’s motion to compel arbitration, noting that such a public policy defense could only be made after an arbitral award was ordered and expressing skepticism at the ultimate efficacy of the argument. The court later upheld its arbitration order upon new motion by the plaintiff, in which she claimed that her inability to afford the initial costs associated with arbitration justified vacating the previous order or requiring the defendant to pay those costs. The court found that because the plaintiff had the option of pursuing her claims through union representation, in which case the defendant would bear the initial costs, she failed to show the arbitration agreement was incapable of being performed. The parties later reached an amicable settlement. Tomevska v. NCL Bahamas Ltd., Case No. 10-23665 (USDC SD Fla. May 18, 2012).

This post written by Rollie Goss.

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We previously posted on the NLRB’s rejection of the application of the Supreme Court’s Concepcion decision in contracts subject to the National Labor Relations Act, invalidating a class arbitration waiver which Concepcion arguably would have upheld (In Re D.R. Horton, Inc.). A district court has refused to follow Horton in an action alleging that the assessment of redemption fees to cash voucher payments rendered wages below the legal minimum, ruling instead that temporary staffing service employees must arbitrate their claims on an individual basis against their employer pursuant to their employment agreements. Relying on Concepcion, the court rejected Plaintiffs’ argument that collective-arbitration waivers in adhesion contracts were per se unconscionable and ruled that the Federal Arbitration Act preempted the state’s unconscionability doctrine in both the consumer contract and employment contract contexts. The district court also excused Defendants’ fifteen-month delay in invoking arbitration, holding that Concepcion constituted a post-commencement “intervening change in the law” that unambiguously weighed against a finding of waiver.

In an opinion on a motion for reconsideration, Plaintiffs argued that Horton prohibits employers from compelling employees to waive their right to pursue collective litigation of employment claims in both arbitral and judicial forums, rendering the arbitration clause void. The court found the NLRA argument procedurally defective because it lacked binding authority and substantively defective because neither state nor federal courts possess jurisdiction over claims based on activity that is arguably subject to the NLRA’s exclusive collective action provisions. Brown v. Trueblue, Inc., No. 10-CV-0514, 2012 WL 1268644 (M.D. Pa. Apr. 16, 2012).

This post written by Rollie Goss.

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Parties to a stock purchase agreement between two British Virgin Islands companies arbitrated a dispute in Miami, Florida. One party was required to pay a $11 million award. The prevailing party applied to the High Court of the British Virgin Islands (“the BVI court”) for enforcement of the award, pursuant to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, while the losing party moved to vacate the award in the U.S. District Court for the Southern District of Florida. Although the BVI court offered to stay the action pending the resolution of the district court case if the losing party posted bond, the losing party failed to either provide the requested $7 million security or appeal the order. The BVI court then granted the application and entered a judgment on the award, which the losing party failed to appeal. The BVI court appointed liquidators, who collected enough funds to satisfy the judgment. The losing party then moved to reopen the vacatur proceedings, which the district court had stayed at the liquidators’ request. The district court reopened the case and granted the prevailing party’s motion to dismiss, holding that it did not have subject matter jurisdiction over the motion to vacate the award.

On appeal, the Eleventh Circuit affirmed the dismissal on other grounds, concluding that the case was prudentially moot, as the district court would be unable to provide effective relief, holding that a party may not sit idly by while an arbitration award is confirmed and only then seek to vacate it. Emphasizing the uniqueness of the facts of the present case, the court stated that the failure to act in the BVI court and consent to a stay of the district court proceeding allowed the BVI case to take precedence. Furthermore, the BVI court had indicated that vacatur in the district court would not affect its final judgment, except in the case of fraud or mistake, which, combined with losing party’s own failure to act, made the likelihood of meaningful relief in the district court virtually non-existent. Ingaseosas Int’l. Co. v. Aconcagua Investing Ltd., No. 11-10914 (11th Cir. July 5, 2012).

This post written by Rollie Goss.

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The Second Circuit has summarily affirmed a district court’s denial of a petition to vacate an arbitration award, and granted the cross-petition to confirm. We noted in our December 15, 2010 post that the Southern District of New York confirmed the award to Bayou Funds, a group of bankrupt entities which had been run as a massive Ponzi scheme. The district court ruled that the arbitrator did not manifestly disregard the law, even though he did not explicate the reasons for his ruling. Goldman Sachs, Bayou Funds’ clearing broker, continued to argue on appeal that the award must be vacated because it was rendered in manifest disregard of the law. After confirming that the manifest disregard doctrine remains viable in the Second Circuit, the appeals court rejected, among other things, Goldman’s arguments that it was not an “initial transferee” under the Bankruptcy Code’s § 550(a), and that the panel manifestly disregarded the law in concluding that it was. A district court decision in a different case supported Bayou Funds’ position and, although the Second Circuit declined to expressly endorse that earlier decision, it was enough to hold there was no manifest disregard. Goldman Sachs Execution & Clearing L.P. v. The Official Unsecured Creditors’ Committee of Bayou Group, LLC, No. 10-5049 (2d Cir. July 3, 2012).

This post written by Brian Perryman.

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The Fourth Circuit issued an opinion “preserving the United States’ ability to speak with one voice” in regulating foreign arbitrations. ESAB Group argued that a South Carolina statute “reverse preempts” federal law pursuant to the McCarran-Ferguson Act which is directed at protecting state insurance regulation by implied preemption by federal domestic commerce legislation. In particular, the Court of Appeals considered whether McCarran-Ferguson applied such that state law can reverse preempt federal law to invalidate a foreign arbitration agreement mandating dispute resolution before Swedish tribunals. The court concluded that the federal government articulated a uniform policy in favor of enforcing agreements to arbitrate internationally (through a treaty and its enacting regulations) even when a contrary result would be forthcoming in a domestic context. Thus, insurance disputes were not exempted from the treaty, which controlled. In addition, the Court of Appeals held that the district court properly exercised personal jurisdiction over Zurich Insurance, and that the court was within its rights to remand nonarbitrable claims to state court. ESAB Group, Inc. v. Zurich Insurance PLC, No. 11-1243 (4th Cir. July 9, 2012).

This post written by John Black.

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An association of franchisees, Fantastic Sams Regional Owners Association (“FSRO”) made a demand for arbitration on behalf of its members against Fantastic Sams Franchise Corporation (“FSFC”). FSRO’s members have individual license agreements with FSFC and alleged breach of contract and related violations of the Massachusetts Consumer Protection Act. FSFC moved to stay arbitration and to compel that each member arbitrate its claims individually. The district court granted FSFC’s motion with respect to most of the agreements, which provided that “arbitration be of a licensee’s individual claim only,” but denied it as to ten other agreements that provided in broad terms that all disputes must be resolved by arbitration under AAA rules, but did not specifically preclude collective arbitration.

FSFC argued that collective arbitration of the remaining claims was foreclosed by the Supreme Court’s decision in Stolt-Nielsen, which FSFC contended holds that no class or collective arbitration can proceed unless “expressly authorized” by an arbitration agreement. The First Circuit held that FSFC was reading Stolt-Nielsen too broadly. According to the First Circuit, although the Supreme Court held that class arbitration may not be imposed “unless there is a contractual basis for concluding that the party agreed to” it, the Supreme Court had not decided what might constitute a contractual basis for class arbitration. The First Circuit rejected FSFC’s argument that Stolt-Nielsen requires “express contractual language evincing the parties’ intent to permit class or collective arbitration,” citing in support the Third Circuit’s decision in Sutter v. Oxford Health Plans LLC and the Second Circuit’s decision in Jock v. Sterling Jewelers, Inc. The court further distinguished Stolt-Nielsen on the basis that FSRO sought to arbitrate claims collectively on behalf of the individual members of its association, rather than to commence a class action arbitration. According to the First Circuit, the concerns regarding class action arbitrations raised by the Supreme Court in Stolt-Nielsen were thus inapplicable. The arbitrators will decide whether collective arbitration will be permitted with respect to the agreements that provide that all disputes will be arbitrated but do not specifically require arbitration on an individual basis. Fantastic Sams Franchise Corp. v. FSRO Ass’n Ltd., No. 11-2300 (1st Cir. Jun. 27, 2012).

This post written by Ben Seessel.

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On an appeal arising out of a foreign shipping contract billing dispute between Consorcio Ecuatoriano de Telecomunicaciones S.A. and Jet Air Service Equador S.A., the Eleventh Circuit held that the arbitral tribunal before which the dispute is pending is a foreign tribunal for purposes of 28 U.S.C. 1782’s discovery rules. Consorcio had applied in the Southern District of Florida to obtain discovery for use in proceedings in Ecuador. These proceedings included both a pending arbitration brought by Jet Air as well as possible other litigation. The district court granted the application and authorized Consorcio to issue a subpoena. Jet Air moved to quash the subpoena and vacate the order granting the application. Jet Air appealed the denial of its motions. The Eleventh Circuit affirmed, concluding that the arbitral panel acts as a first-instance decision maker and permits the gathering and submission of evidence. It resolves the dispute and issues a binding order which is subject to judicial review. Application of Consorcio Ecuatoriano de Telecomunicaciones S.A. v. JAS Forwarding (USA), Inc., No. 11-12897 (11th Cir. June 25, 2012).

This post written by John Black.

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