Reinsurance Focus

The Fifth Circuit addressed the question of whether a subcontract between the parties requires arbitration, a question that turned on the interpretation of the term “contract documents” in the subcontract. TRC Environmental Corporation hired LVI Facilities Services, Inc. as a subcontractor in an effort to decommission a power plant in Austin, Texas. The Fifth Circuit agreed with the district court’s interpretation that (1) the phrase “Contract Documents” in the subcontract, includes the subcontract itself; and (2) claims arising under the Contract Documents requires an alternative dispute resolution process as laid out in the separate Project Agreement, which did not require arbitration. Based on this interpretation of the two documents, the Fifth Circuit held, the district court correctly denied LVI’s motion to compel arbitration. TRC Environmental Corp. v. LVI Facility Servs., Inc., No. 14-51269 (5th Cir. May 22, 2015).

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

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In Walker v. TA Operating, LLC et. al., Case No. 14-41046 (5th Cir. May 22, 2015), the Fifth Circuit Court of Appeals dismissed an appeal of an employment discrimination case subject to an arbitration agreement due to lack of jurisdiction. In the underlying case, the district court granted the defendant’s motion to compel arbitration and administratively closed the case because the district court determined that the parties were subject to a valid and applicable arbitration agreement. The district court’s decision was dictated by the Federal Arbitration Act (the “FAA”), which grants district courts two powers: 1) the authority to issue an order directing that arbitration proceed in the manner provided for in such agreement; and 2) the authority to stay an arbitrable proceeding pending the outcome of the contractually-required arbitration. On appeal, the Fifth Circuit dismissed the cased due to lack of jurisdiction because an order by the district court administratively closing a case is tantamount to a stay, and bars appellate review. The Fifth Circuit explained that a district court has jurisdiction over final decisions of the district court and that Congress explicitly provided that appellate courts lack jurisdiction over a district court order granting a stay of any action under section 3 of the FAA or directing arbitration to proceed under section 4 of the FAA.

This post written by Kelly A. Cruz-Brown.

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In late May, the Tenth Circuit Court of Appeals affirmed a district court decision to lift an arbitration stay for Plaintiff Pre-Paid Legal Services, Inc. (“Pre-Paid”) as Defendant Todd Cahill (“Cahill”) failed to pay his respective share of the arbitration fees.

Pre-Paid sells legal service contracts whereby members deal with a network of attorneys. Cahill was a sales associate for Pre-Paid. His employment contract contained an arbitration provision as well as several non-compete provisions. Pre-Paid sued Cahill alleging that Cahill used information from his prior employment to recruit new associates after he left the company. Cahill removed the state filed action to federal court whereby the action was stayed pending arbitration. Cahill failed to pay his respective share of the arbitration fees, however, and the arbitration was cancelled. On appeal, Pre-Paid argued that the appellate court did not have jurisdiction to hear the appeal. Cahill argued that arbitration must be heard on the merits before any stay could be lifted.

Federal arbitration laws requires a court to stay an action pending arbitration provided that “the applicant for the stay is not in default in proceeding with the arbitration.” The court reasoned that Cahill’s failure to pay the required arbitration fees made him in default and therefore the federal stay guarantee should not apply. The court also found that they had jurisdiction to review the district court’s lift to stay the proceedings, citing to circuit court and supreme court authorities.

Pre-Paid Legal Serv., Inc. v. Cahill, No. 14-7032, (10th Cir. May 26, 2015)

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

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A New York district court denied defendant Gogo LLC and Gogo Inc. (collectively “Gogo”) motions to transfer venue, compel arbitration, and dismiss for lack of standing in a lawsuit relating to internet services.

Plaintiffs filed a putative class action against Gogo alleging common law breach of the implied covenant of good faith and fair dealing, unjust enrichment, and violation of various consumer protection statutes. The lawsuit stems from the purchase of wireless internet connectivity services, available in airports and aboard air flights. Plaintiffs’ allege that Gogo mislead customers into purchasing a single one-month wireless internet service subscription, but then automatically renewed those services without obtaining their signatures or authorization.

The court looked into whether plaintiffs were given effective notice of the terms and conditions for their online purchases. As such, the offeror, in this case Gogo, “must show that a reasonable person in the position of the consumer would have known about what he was assenting to.” The court found that Gogo did not effectively draw plaintiffs’ attention to their terms and conditions nor did they provide their terms and conditions to purchasers via email or other methods of delivery. The court finally addressed Gogo’s jurisdictional argument. Gogo alleged that because plaintiffs were eventually fully reimbursed for subsequent internet charges, they lacked standing to sue. The court, citing Second Circuit precedent, found that since plaintiffs have “a practical stake in the dispute,” they continue to have standing to sue. Berkson v. Gogo, Case No. 14-CV-1199 (USDC E.D.N.Y. April 9, 2015).

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

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This case involved a FINRA arbitration held to resolve a dispute over money allegedly owed to Ameriprise Financial Services by a former financial adviser. The financial adviser appealed the district court’s confirmation of the award favoring Ameriprise, contending that the award was procured by fraud and that the arbitrator committed a manifest disregard of the law. On appeal, the financial adviser first contended that the award should be reviewed under the Wisconsin Arbitration Act instead of the FAA. The Seventh Circuit, however, disagreed, holding that the parties’ arbitration agreement expressly selected the FAA, and that the FAA was applicable notwithstanding potential application of other Wisconsin law on the merits of the dispute. Regarding “manifest disregard,” the Seventh Circuit rejected the financial adviser’s contention that the panel inappropriately applied federal securities laws instead of certain states’ laws. The court explained that it “is not manifest disregard of a law to consider [the state law] and its relation to [federal law] and then conclude that the law does not apply in the specific factual situation at issue.” The court also noted that the panel had not issued a written opinion, and that the court would not “second-guess the arbitrators’ decision based on speculation when it is possible for the panel to have reached the decision it did based on the evidence presented to it.” As to fraud, the Seventh Circuit held that Ameriprise’s counsel’s closing argument, in which counsel asserted that the financial adviser “violated” certain laws and characterized certain cases as “on point,” did not misrepresent the record or the law. Renard v. Ameriprise Financial Services, Inc., No. 14-1730 (7th Cir. Jan. 30, 2015).

This post written by Michael Wolgin.

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A state appellate court in California reversed a trial court’s decision to deny defendant Santa Lucia Preserve Company’s (“Santa Lucia”) motion to compel arbitration, holding that plaintiffs failed to prove that the underlying arbitration agreement was substantively unconscionable in order for that agreement to be invalidated.

Plaintiffs filed a putative class action complaint against Santa Lucia alleging the company failed to pay requisite overtime compensation in addition to other violations of California’s Business and Professions Code. Santa Lucia moved to compel arbitration under previously signed employment agreements with plaintiffs. Plaintiffs alleged that the arbitration agreements were substantively unconscionable as they lacked mutuality and that they did not provide for judicial review. The trial court denied Santa Lucia’s motion to compel arbitration finding the agreements unconscionable both procedurally and substantively.

The appellate court reversed, finding that the arbitration agreements were not substantively unconscionable for a number of reasons. First, the agreements bound both employee and employer to arbitration for “any dispute or claim.” Second, the agreements waived court and jury trials for both parties. The court noted that judicial review is allowed when “arbitrators exceed[] their power and the award cannot be corrected without affecting the merits of the decisions…” The court determined that plaintiffs’ claims for overtime pay are subject only to the review requirements in Armendariz, namely that an arbitration decision be written and be reviewed under limited circumstances. Valdez v. Santa Lucia Preserve Co., No. H040685 (Cal. App. 6th Dist., Mar. 23, 2015).

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

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The dispute at issue in this case involved claims of fraud in the sale of condominium units asserted by unit purchasers against the condominium developer. Arbitration under the AAA was underway between the parties, when it was discovered that the arbitrator had failed to disclose that he had become involved in business ventures to finance litigation for investment purposes. The developer requested that the AAA disqualify the arbitrator and stay the arbitration, but the AAA denied the request. The developer then convinced the district court to intervene in the pending arbitration and disqualify the arbitrator.

On appeal, the Ninth Circuit determined that the court committed “clear error,” holding that: (1) “the financial relationship in this case is contingent, attenuated, and merely potential” and did not satisfy “evident partiality”; and (2) “the district court’s equitable concern that delays and expenses would result if an arbitration award were vacated is manifestly inadequate to justify a mid-arbitration intervention, regardless of the size and early stage of the arbitration.” The Ninth Circuit entered a writ of mandamus, and directed the district court to vacate its ruling, finding that the lower court’s “interference in ongoing arbitration proceedings raises the specter” of confusion in the court system, and creates “new and important problems” and an issue of law of first impression. In re Sussex, No. 14-70158 (9th Cir. Jan. 27, 2015).

This post written by Michael Wolgin.

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Defendant‐appellant Benihana of Tokyo, LLC appealed a 2014 order of the United States District Court for the Southern District of New York granting the application of plaintiff‐appellee Benihana, Inc. for a preliminary injunction in aid of arbitration of a dispute arising under the parties’ license agreement. The district court enjoined Benihana of Tokyo from: (1) selling unauthorized food items at the restaurant it operates pursuant to the license agreement; (2) using certain trademarks in connection with the restaurant in a manner not approved by the license agreement; and (3) arguing to the arbitral panel, if it rules that Benihana of Tokyo breached the license agreement, that Benihana of Tokyo should be given additional time to cure any defaults. The Second Circuit concluded that the district court was within its discretion in granting the first and second components of the injunction. However, the district court erred in restricting the arguments Benihana of Tokyo may make to the arbitral panel because the parties’ dispute had been submitted to arbitration. The district court undermined the arbital process by independently assessing the merits of the case instead of confining its role to preserving the status quo pending arbitration. Prohibiting a court’s assessment of the merits of the case until after the arbitral decision has been rendered was consistent with the Federal Arbitration Act and the “strong federal policy” favoring arbitration. The Act contains no provision for a court’s pre‐arbitration assessment of whether a particular remedy is supported by the parties’ agreement and therefore may be awarded by the arbitrator. Also, the Second Circuit pointed out that if a court determines the merits of the parties’ arguments in advance of a pending arbitration, the purpose for resorting to arbitration – to avoid litigation – would be frustrated. Finally, refraining from a view on the merits of the case until after an arbitral decision was rendered would also assist the district court in applying the proper and highly deferential standard of review to those decisions. Benihana, Inc. v. Benihana of Tokyo, LLC, No. 14-841 (2d Cir. Apr. 28, 2015).

This post written by Kelly A. Cruz-Brown.

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Because a reinsurer participated in the arbitrator selection process, the reinsurer was precluded from seeking a stay on statute of limitations grounds pursuant to New York law, a New York appellate court ruled. As discussed in a previous post, the arbitration agreement stated that the parties’ arbitration would be governed by the “arbitration laws of New York State.” New York’s arbitration laws state that a party may raise statute of limitations defense as a threshold issue in the courts. By contrast, the Federal Arbitration Act states that the limitations defense is presumed to be reserved to the arbitrator, rather than the court, except where the parties agree to leave that issue to the court. In its most recent ruling, the court held that although the reinsurer had waived its ability to have the courts determine the statute of limitations issue, that issue may be determined by the arbitrators. In re ROM Reinsurance Management Co. v. Continental Insurance Co., No. 11809 654480/12 (N.Y. App. Div. May 21, 2014).

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

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A federal judge in New York has denied reinsurers’ motions for relief from a prior judgment. The reinsurers, Equitas Insurance Limited and Certain Underwriters at Lloyd’s of London, argued that they were entitled to judicial relief because the insured, Arrowood Indemnity Company, procured an arbitration award later confirmed by the Southern District through fraud. Arrowood entered into a casualty reinsurance agreement with the underwriters. To recover under this agreement, claims needed to fall within one of three types of coverage. The underwriters denied a series of Arrowood’s asbestos claims under the “Common Cause Coverage” because it believed that the asbestos claims needed to be noticed during the original contract period. The parties submitted the matter to arbitration, where the panel agreed that Arrowood’s interpretation of the contract: that Common Cause Coverage was intended only to prevent recovery on known losses whose “common cause” occurred before the term of the original contract. The court confirmed the award.

Months later, the underwriters obtained a letter produced by Arrowood in a separate action that revealed Arrowood interpreted the Common Cause Coverage clause in the same way the underwriters had posited in the previous arbitration. The underwriters filed a motion seeking to relieve it from the judgment because of fraud. While relief on this basis under the Federal Rules of Civil Procedure is not time-limited, similar relief under the Federal Arbitration Act imposes a time limit – a motion to vacate an arbitration award must be served upon the adverse party within three months after the award is filed or delivered. Because the Act trumps civil rules when those rules conflict, the underwriters were time-barred. Arrowood Indemnity Co. v. Equitas Insurance Ltd., Case No. 13 Civ. 7680 (USDC S.D.N.Y. May 14, 2015).

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

See our disclaimer.