Reinsurance Focus

The manner in which a replacement arbitrator is selected where the agreement is silent was resolved in a recent case. Northwestern National Insurance Company petitioned the court to appoint an ARIAS-certified replacement arbitrator for its reinsurer Insco, Ltd. Insco’s arbitrator had resigned three days before argument on Northwestern’s summary judgment motion amid allegations from both sides that the other’s arbitrator was improperly partial. The arbitration agreement provided that each party would select its own arbitrator and that a neutral umpire would be appointed; the agreement, however, did not supply a method for replacing an arbitrator. Shortly after Northwestern filed its petition, Insco appointed an ARIAS-certified arbitrator of its own choosing. The court denied Northwestern’s request. Although the court had the power to appoint an arbitrator under Section 5 of the FAA, allowing Insco to appoint a replacement was consistent with the terms of the reinsurance agreement and the underlying goals of arbitration. Northwestern National Insurance Co. v. INSCO, Ltd., Case No. 11 Civ. 1124 (USDC S.D.N.Y. May 12, 2011).

This post written by Ben Seessel.

The Second Circuit Court of Appeals has recently reversed a court decision to apply New York law to bar the arbitration of a Brazilian construction dispute as untimely, holding that this issue should have been determined by the arbitrator. The Second Circuit held that the underlying contract ambiguously contained both a provision calling for “any” contract dispute to “be finally settled by arbitration” and a New York choice of law provision. New York law permits a party to litigate in court a statute of limitations defense. In resolving the ambiguity in favor of arbitration, the Second Circuit applied Supreme Court precedent, which holds that where a contract contains a broad arbitration provision and a general choice of law provision that does not itself specify that a timeliness defense should be withheld from arbitration, the choice of law provision “encompasses substantive principles” that courts would apply, but not “special rules limiting the authority of the arbitrators.” Bechtel Do Brasil Construcoes Ltda. v. UEG Araucaria LTDA, No. 10-0341 (2d Cir. March 22, 2011).

This post written by Michael Wolgin.

In a Special Focus analysis, we profile the long-awaited Supreme Court decision in AT&T v. Concepcion, which holds that the Federal Arbitration Act prohibits states from conditioning the enforceability of an arbitration agreement on the availability of class wide arbitration procedures. AT&T v. Concepcion, No. 09-893 (US Apr. 27, 2011).

This post written by John Black.

National Casualty is one of several reinsurers providing reinsurance to Munich Re under a single treaty. Munich Re submitted claims under the treaty that were denied by National Casualty and another reinsurer, Wasau. The treaty provided disputes would be submitted to arbitration and that if more than one reinsurer was involved in the same dispute, all the reinsurers would constitute and act as one party. Wasau refused to submit to the arbitration, however, and National Casualty refused to proceed without Wasau, taking the position that the treaty’s “act-as-one” clause prohibited the arbitration from going forward without Wasau as a party. Munich Re successfully moved to compel. The district court held that whether the “act-as-one” provision prohibited a separate arbitration against National Casualty was a threshold procedural issue for the arbitrators to decide. Munich Reinsurance America, Inc. v. National Casualty Co., Case No. 10 Civ. 5782 (USDC S.D.N.Y. April 26, 2011).

This post written by Ben Seessel.

On April 27th, the Supreme Court issued its long-awaited opinion in AT&T v. Concepcion, reversing the Ninth Circuit in a 5-4 decision and holding that California’s Discover Bank rule is preempted by the Federal Arbitration Act. At issue was whether the state law – which provided that class action waivers in arbitration agreements are unenforceable in certain circumstances – frustrated the overarching purpose of the FAA, and by extension Congressional intent. The dispute arose out of a telephone contract between respondents (Concepcions) and petitioner (AT&T) which provided for arbitration of all disputes, but did not permit classwide arbitration. The District Court denied AT&T’s motion to compel arbitration under the contract. The Ninth Circuit affirmed.

Writing for the majority, Justice Antonin Scalia emphasized the liberal federal policy favoring arbitration and noted that courts must enforce arbitration agreements according to their terms, as with other contracts. Justice Scalia found that FAA §2’s saving clause preserved generally applicable contract defenses but does not act to preserve state-law rules that stand as an obstacle to the accomplishment of the FAA’s objectives. Justice Scalia ruled that the class arbitration mandate created by Discover Bank was not consensual and thus violated a fundamental attribute of arbitration, that parties are free to limit with whom they will arbitrate. Further, class arbitration will likely complicate the dispute resolution rather than streamlining it as arbitration usually does. Thus, the California state law stood as an obstacle to the accomplishment and execution of the full purposes and objectives of the FAA and the Discovery Bank rule was accordingly preempted by the FAA. The Court reversed and remanded the Ninth Circuit’s judgment.

Chief Justice Roberts and Justices Kennedy, Alito and Thomas (filing a concurring opinion) joined in Justice Scalia’s opinion. Justice Breyer filed a dissenting opinion which was joined by Justices Ginsburg, Sotomayor, and Kagan. AT&T Mobility LLC v. Concepcion, Case No. 09-895 (S. Ct. Nov. 9, 2010)

This post written by John Black.

Kevin Imhoff left his job as a broker for Primerica, for whom he sold various securities and insurance products, to go work for a competitor. He sued Primerica in state court, alleging that they harmed his relationship with his clients and with AIG (one of the insurance companies whose products he sold), as a result of various communications Primerica sent announcing his departure. Primerica filed a petition in federal court seeking to compel arbitration under FINRA. Imhoff conceded he agreed to arbitrate certain disputes, as set forth in his FINRA registration, but that the dispute pertaining to his sale of insurance products was exempt from arbitration by FINRA Rule 13200. The Court rejected this claim, narrowly construing Rule 13200’s exception for “insurance related claims,” which states that “disputes arising out of insurance business activities of a member that is also an insurance company are not required to be arbitrated under FINRA,” and finding that it does not encompass employment disputes, but rather only “intrinsically insurance” claims. The Court compelled arbitration of all claims. PFS Investments, Inc. v. Imhoff, No. 11-10142 (USDC E.D. Mich. March 25, 2011).

This post written by John Pitblado.

Plaintiff filed a complaint in federal court alleging breach of contract and fraud against StoresOnline, its parent corporation, IMergent, and several officers and directors of the companies. StoresOnline offers software and support services for conducting internet businesses; Plaintiff had contracted with StoresOnline to purchase six web-stores. The contract between plaintiff and StoresOnline contained an arbitration clause, which provided that: “any and all disputes that arise . . . concerning this Agreement . . . or that concern any aspect of the relationship . . . shall be decided exclusively in binding arbitration.” Plaintiff asserted two arguments in opposition to the defendants’ motion to compel arbitration. First, Plaintiff argued that she only agreed to arbitrate with StoresOnline and not the other defendants, and, second, that the agreement was unenforceable because it had been procured by fraud. The court rejected both arguments and compelled arbitration. The court held that plaintiff’s claims against all defendants arose out of her relationship with StoresOnline and thus were governed by the terms of the arbitration clause, and that a claim of fraudulent inducement that generally challenges the enforceability of a contract, and not specifically the arbitration provision itself, may be subject to arbitration. Hird v. IMergent, Inc., Case No. 10-166 (USDC S.D.N.Y. Jan. 6, 2011).

This post written by Ben Seessel.

A state court of appeals held that the an order granting respondent’s motion to dismiss an arbitration on the merits was an “award” within the meaning of the Uniform Arbitration Act of 1975, separate and apart from a “Final Award” issued two months later in which the arbitrator awarded respondent costs and denied its application for attorney’s fees. Respondent filed a motion in court to confirm the order of dismissal and award of costs; claimant opposed and moved to vacate both orders. The trial court held that the dismissal order constituted a distinct “award,” and, accordingly, the statutory thirty-day period to seek vacatur had expired. The appellate court affirmed, likening the situation to litigation in state and federal court, where an order of dismissal on the merits is final and appealable, notwithstanding extant unresolved issues of attorneys fees and costs. One judge dissented, opining that an “award” is an arbitral decision that represents the complete determination of every issue submitted to arbitration, and that the reference to state and federal judicial procedure is inapposite, given that the scope of judicial review of arbitral awards is strictly limited. American Numismatic Assoc. v. Cipoletti, Case No. 09CA2597 (Colo. Ct. App. Mar. 3, 2011).

This post written by Ben Seessel.

The Second and Third Circuit Courts of Appeal recently issued conflicting opinions on the enforceability of class arbitration waivers. Jose Ivan Vilches brought a purported class action against his former employer, The Travelers Companies, Inc., for unpaid wages and overtime, in violation of labor laws. Travelers moved to compel arbitration on an individual basis, citing the class arbitration waiver in the employment contract. The district court granted the motion and compelled individual arbitration. On appeal, the Third Circuit held, citing Stolt-Nielsen S.A. v. Animalfeeds Int’l Corp., 130 S. Ct. 1758 (2010), that it was error for the district court to have decided whether the case could be arbitrated as a class action, finding that it should have left decision on that point to the panel. It also rejected plaintiff’s contention that the class action waiver was unconscionable, and therefore unenforceable. It vacated that portion of the district court’s decision, and ordered the parties to arbitrate the question of the applicability of the class arbitration waiver to the panel. Vilches v. The Travelers Companies, Inc., No. 10-2888 (3d Cir. Feb. 9, 2011)

Meanwhile, the Second Circuit came to precisely the opposite conclusions in a case that was remanded back to it after the U.S. Supreme Court vacated its prior decision for consideration in light of Stolt-Nielsen S.A. v. Animalfeeds Int’l Corp., 130 S. Ct. 1758 (2010). The case involved a putative class of vendors who alleged that they were improperly charged by American Express for accepting payments from its cardholders. American Express sought to have the matter arbitrated on an individual, rather than class, basis. The Second Circuit held that: (1) the issue of whether the case can be arbitrated as a class action is for the Court, not the arbitration panel to decide; and (2) the class arbitration waiver was unconscionable and therefore unenforceable because it effectively deprived the plaintiffs of a statutory right. In re: American Express Merchants’ Litigation, No. 06-1871 (2d Cir. March 8, 2011).

This post written by John Pitblado.

The Ninth Circuit Court of Appeals recently issued an opinion holding that it was improper for a District Court to pass initial review of an arbitration award onto an appellate court rather than reviewing the award itself when presented with motions to confirm and to vacate. The parties, following a lengthy discovery process, had submitted to binding arbitration with appeal rights. After the arbitrator issued an award, and plaintiff moved the federal district court to confirm, defendant Wells Fargo informed the district court of an arithmetical error in the arbitrator’s calculations. Wells Fargo indicated that it did not intend to appeal the arbitrator’s judgment, but moved to modify or vacate the award. The district court refused to review the award, stating that such objections should be taken up on appeal. Wells Fargo subsequently filed the instant appeal.

Finding that it was proper to review the procedural error sua sponte, the Ninth Circuit remanded the case to the district court. The appeal court saw no reason justifying the district court’s circumvention of the Congressionally-established structure of the federal courts and the Federal Arbitration Act’s process for the review of arbitration awards. The Supreme Court’s Hall Street Associates opinion prevents parties from contracting for a standard of review different than that contained in the FAA, and similarly, parties should not be able to contract for a different review process. The district court was thus directed to rule on the motion to modify or vacate. Johnson v. Wells Fargo Home Mortgage, Inc., Case No. 05-321 (9th Cir. Feb. 15, 2011).

This post written by John Black.