Reinsurance Focus

The United States Supreme Court has granted DIRECTV’s petition for Writ of Certiorari and will hear the following question presented: Whether the California Court of Appeal erred by holding, in direct conflict with the Ninth Circuit, that a reference to state law in an arbitration agreement governed by the Federal Arbitration Act requires the application of state law preempted by the Federal Arbitration Act.

As reported here previously, DIRECTV had moved to dismiss or stay a class action litigation filed against it and to compel individual arbitration pursuant to the arbitration clause contained in DIRECTV’s customer agreements in California, which specifically prohibit class actions. The trial court denied the motion and the California Court of Appeal affirmed. The Court of Appeal focused on the arbitration clause’s non-severability provision and its reference to “state” law to hold that the class-action waiver in the arbitration clause was invalid under California law and the entire arbitration agreement was therefore unenforceable. In its petition, DIRECTV argued that the Court of Appeal did precisely what the Supreme Court’s Concepcion decision prohibits: “It applies state law to invalidate an arbitration agreement solely because that agreement includes a class-action waiver.” DIRECTV further argued that because the decision is in direct conflict with a recent Ninth Circuit decision, creates an acknowledged conflict between state and federal courts on a matter of federal law, and “evinces the very hostility to arbitration that led to the enactment of the FAA in the first place,” the Supreme Court’s review was warranted. Petitioner’s brief on the merits is to be filed with the Court by May 29, 2015, and Respondents’ brief is to be filed by July 17, 2015. The Court is scheduled to hear the case during its October 2015 term. DIRECTV, Inc. v. Imburgia, et al., Case No. 14-462.

This post written by Renee Schimkat.

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In a putative class action for denial of employment benefits brought by security contractors against their hiring firm, Blackwater Security Consulting, the court found that the governing agreements delegated the issue of arbitrability to an arbitrator and compelled arbitration. The contractors contended that the agreements contained no such delegation, but the court disagreed, finding that that the agreements’ incorporation of the AAA rules was sufficient to “clearly and unmistakably” submit arbitrability to an arbitrator. The court also found that the contractors’ challenge to the validity of the AAA clause based on fraud and duress failed “because it does not specifically address the delegation agreement itself as required by” the Supreme Court’s 2010 Rent-A-Center decision. The court further found that the contractors’ challenge based on mistake and unconsionability, “fails on the merits as a matter of law.” The contractors contended that they mistakenly believed that the agreements they signed did not contain arbitration provisions. This type of mistake, however, “about the nature of the contract and its contents—is not a mistake about an ‘existing or past fact’ that could satisfy” the law. As to unconscionability, the contractors argued that the shifting of attorneys’ fees and expenses from the firm to them was unfair, but the court rejected this argument as defective under Concepcion and other precedent. Mercadante v. XE Services, LLC, Case No. 1:11-cv-01044 (USDC D.D.C. Jan. 15, 2015).

This post written by Michael Wolgin.

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A federal district court has confirmed a $14 million arbitration award entered in favor of Amerisure against its reinsurer Everest. As we earlier reported, the court had previously denied the motion to seal briefing associated with Amerisure’s motion to confirm the award. Now at issue was the confirmation, modification, or vacatur of the award, which directed Everest to indemnify Amerisure for its share of asbestos losses that fell within the parties’ reinsurance treaties. Everest moved to vacate the award on several grounds, including an arbitrator’s “evident partiality” in the proceedings and the panel’s allegedly erroneous procedural and evidentiary rulings. At the core of the reinsurance dispute was whether Amerisure could aggregate individual asbestos losses into a single occurrence in order to exceed the applicable retention and thereby qualify for indemnification under the reinsurance treaties. The panel held that Amerisure could aggregate the losses by relying, in part, on what it found to be the “commonly accepted” business of treating multiple asbestos losses as a single occurrence. The panel rejected the argument that Amerisure’s claim was precluded or undercut by the fact that the underlying claims were settled as individual losses and further discounted the expert opinion testimony offered by Everest as unpersuasive. The district court, in turn, affirmed the award, rejecting all arguments of partiality or erroneous rulings. While Everest had established the panel exceeded its powers in one respect, it did not find that warranted vacatur or modification of the award. Amerisure Mutual Insurance Co. v. Everest Reinsurance Co., Case No. 14-cv-13060 (USDC E.D. Mich. Mar. 18, 2015).

This post written by Renee Schimkat.

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An arbitration award to Petitioner, Employers Insurance of Wausau A Mural Company (“Wausau”), has been confirmed after Respondents withdrew their prior objections.  The dispute arose over payment obligations stemming from a Quota Share reinsurance agreement between the Respondents, Nutmeg Insurance Company and Twin City Fire Insurance Company (“Nutmeg/Twin”), and Wausau. The dispute went to arbitration where a panel, finding in favor of Wausau, directed Nutmeg/Twin to provide documentation relating to the claim of loss— including proof of payment and a narrative on the appropriateness of a loss settlement award.

Nutmeg/Twin subsequently objected to Wausau’s petition to confirm the award on jurisdictional grounds for “non-final issues,” specifically the parties’ obligations under various remaining claims. Wausau argued that Nutmeg/Twin’s objections were moot as the parties’ obligations had been performed. The court, however, did not need to resolve this question as Nutmeg/Twin withdrew their arbitration award objections as part of a settlement arrangement.  Employers Insurance of Wausau v. Nutmeg Insurance Company, Case No. 14-CV-9284 (USDC S.D.N.Y. Mar. 10, 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 federal district judge denied Plaintiffs McKenna Long & Aldridge, LLP (“McKenna”) and Vincent W. Sedmak (“Sedmak”) motions for summary judgment which sought to stop an arbitration action from Ironshore Specialty Insurance Company (“Ironshore”).

Five years ago, Eidos, LLC (“Eidos”), with McKenna serving as counsel, obtained a $20 million loan from Stairway Capital Management II LP (“Stairway”) to finance an enforcement litigation program. As a precondition for the issuance of the loan, Ironshore provided a loss reimbursement policy in case the original loan was not paid back. The arbitration provision in that policy provided the framework for this litigation. Ironshore refused to pay Eidos pursuant to the loss reimbursement policy due to the alleged misuse of loan funds from Sedmak. Ironshore sued to compel arbitration under the policy and McKenna and Sedmak simultaneously moved for summary judgment. As both McKenna and Sedmak did not sign the loss reimbursement policy agreement, the court noted that the arbitration provision therein would only be enforced under the following theories–1) incorporation by reference; 2) assumption; 3) agency; 4) veil-piercing/alter ego; and 5) estoppel.

The court found “no triable issue as to whether plaintiffs have directly benefited from the Policy, or as to whether McKenna was an intended third-party beneficiary of the Policy and knowingly accepted benefits stemming from the Policy.” The court noted that McKenna was estopped from denying arbitration as they were the direct recipient of over $11 million in legal fees. Furthermore, as part of the loan was used to pay Sedmak’s salary and certain loan proceeds were transferred to a corporation owned by Sedmak, Sedmak was a third party beneficiary and therefore could not contest Ironshore’s right to arbitration. McKenna Long & Aldridge, LLP v. Ironshore Specialty Ins. Co., No. 14-CV-6633 KBF, 2015 WL 144190, at *1 (S.D.N.Y. Jan. 12, 2015).

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

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Award Authorizing Class Action Litigation

Emilio v. Sprint Spectrum L.P., Case No. 14-732-cv (2d Cir. Nov. 12, 2014) (affirming denial of motion to vacate award; district court did not err by finding that arbitrator did not exceed powers nor manifestly disregard law when it ruled that Sprint could not be compelled to proceed with class arbitration and plaintiff could not be compelled to proceed with bilateral arbitration under state law, which the arbitration agreement stated would govern);

Emilio v. Sprint Spectrum L.P., Case No. 1:11-cv-03041 (USDC S.D.N.Y. Dec. 23, 2014) (denying motion to dismiss class action or strike class allegations; defendant collaterally estopped from relitigating basis for prior arbitration rulings authorizing class action litigation)

Manifest Disregard

NDV Investment Co. v. Apex Clearing Corp., Case No. 1:14-cv-00923 (USDC S.D.N.Y. Jan. 8, 2015) (denying motion to vacate FINRA award; granting cross-motion to confirm award; no manifest disregard of the law for misapplying FINRA rule or for the panel’s failure to permit a full hearing; no arbitrator “misconduct” for refusing to hear evidence);

Power Partners Mastec, LLC v. Premier Power Renewable Energy, Inc., Case No. 1:14-cv-08420 (USDC S.D.N.Y. Feb. 20, 2015) (granting petition to confirm nearly $3 million award; no manifest disregard of law; arbitrator’s findings were supported by the record);

Sotheby’s International Realty, Inc. v. Relocation Group, LLC, Case No. 14-253-cv (2d Cir. Jan. 6, 2015) (reversing district court’s order that vacated award as manifest disregard of law; court failed to apply test, which includes finding that relevant law was “clear,” determining that no “barely colorable justification” for the panel’s decision existed, and addressing alternate readings of the relevant law that might have supported the arbitrators’ decision)

Exceeding Authority

Seagate Technology, LLC v. Western Digital Corp., Case No. A12-1944 (Minn. Oct. 8, 2014) (affirming appellate court’s order reinstating $500 million arbitration award; defendants did not waive their rights to challenge the award, but a review of the merits of the award showed that arbitrator did not exceed authority by issuing punitive sanctions for defendants’ fabrication of evidence, which included excluding defendants’ evidence and defenses);

BNSF Railway Co. v. Alstom Transportation, Inc., Case No. 13-11274 (5th Cir. Feb. 6, 2015) (reversing order vacating arbitration award; court improperly reviewed merits of arbitrators’ interpretation of contract instead of limiting review to “whether the arbitrators even arguably interpreted the Agreement in reaching their award”)

Scope of FAA

Wiand v. Schneiderman, Case No. 14-11203 (11th Cir. Feb. 10, 2015) (affirming district court’s order compelling arbitration and denying motion to vacate award; court-appointed receiver’s “clawback” action against estate of investor in Ponzi scheme is not exempt from FAA; court did not err in referring validity of contract to arbitration; court did not err in holding arbitrator did not exceed powers; court would not review arbitrator’s evidence-based rulings)

This post written by Michael Wolgin.
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In a putative class action alleging violation of Pennsylvania labor laws, unfair trade practices, and other state law claims brought by a franchisee against the franchisor and two subsidiaries, the court stayed the proceedings and compelled individual arbitration. The franchise agreement contained an arbitration clause and a class arbitration waiver provision, among other provisions limiting litigation, discovery, and certain damages, and shifting certain fees and costs. The plaintiff franchisee argued that the arbitration provision was unenforceable because it prevented him from effectively vindicating his state statutory rights. The court rejected this argument, holding that Concepcion and other U.S. Supreme Court precedent confirmed that there is “absolutely no rule that prevents arbitration when a person cannot effectively vindicate his or her state statutory rights,” and that the “effective-vindication” rule may apply only when the FAA is alleged to conflict with another federal law. The court also applied equitable estoppel to reject the franchisee’s alternative argument that only the franchisor, the sole signatory to the franchise agreement, could compel arbitration; the court found that the franchisee relied on the franchise agreement in his pleading, and that a close relationship existed among the defendant entities. The court also construed the agreements between the parties to find that the claims asserted by the franchisee fell within the scope of the arbitration agreement. Last, the court construed the scope of the arbitration provision and held that it applied to the franchisee’s claims, notwithstanding the franchisee’s argument that his claims did not arise out of the franchise agreement. The provision covered disputes “arising out of or relating to” the “rights and obligations of the parties,” which clearly applied. Moreover, “a party may not be compelled under the FAA to submit to class arbitration unless there is a contractual basis for concluding that the party agreed to do so” (citing Stolt-Nielsen). Torres v. Cleannet, U.S.A., Inc., et al., Case No. 2:14-cv-02818 (USDC E.D. Pa. Feb. 5, 2015).

This post written by Michael Wolgin.

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The Consumer Financial Protection Bureau has issued a study that is critical of arbitration in the context of consumer claims, contenting that arbitration “restricts” the rights and remedies of consumers by limiting or prohibiting class actions.  For a summary of the study and links to the study and a summary fact sheet, visit our Class Action blog. It may be questionable whether the CFPB has given appropriate consideration to the various United States Supreme Court and federal Court of Appeals opinions concerning the enforceability of arbitration agreements under the Federal Arbitration Act, and it will be interesting to see how this CFPB’s arbitration-related pronouncements develop. Since the CFPB’s principal focus is on consumer issues, it remains to be seen if and how its activities in this area may affect the resolution of reinsurance disputes.

This post written by Rollie Goss.

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A federal district court in New York confirmed an arbitration panel’s final award, but directed the parties to brief the issue of whether the continued sealing of supporting documents, filed in connection with the petition to confirm that award, was appropriate. Clearwater Insurance and the respondent insurance companies were parties to multiple reinsurance contracts and arbitrated their dispute concerning amounts billed under those contracts. Clearwater’s petition to confirm the arbitration award was unopposed and the court found no basis for vacating, modifying, or correcting it. The court did, however, question whether the continued sealing of documents, requested by both parties, was warranted. The documents were filed under seal because their public filing would allegedly violate a confidentiality agreement between the parties. This, the court found, did not justify the sealing nor overcome the strong presumption of public access to judicial documents. The parties were directed to submit additional briefing to the court on this issue. Clearwater Insurance Co. v. Granite State Insurance Co., No. 1:15-cv-00165 (USDC S.D.N.Y. Feb. 5, 2015).

This post written by Renee Schimkat.

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Late last year, a district court judge in Connecticut granted Defendant General Electric’s (“GE”) motion to compel arbitration based on Plaintiff’s signature to GE’s Acknowledgement Conditions of Employment Form. Ms. Pingel, plaintiff, was hired by GE in 2006. Four years later she brought a discrimination action against GE, which was later resolved. As part of that resolution, Ms. Pingel received a new position within GE. That employment was contingent on Ms. Pingel signing an employment contract containing agreed upon procedures for alternative dispute resolution. GE did not provide a hard copy of these procedures to Ms. Pingel, but did provide the location of these forms online. Both parties signed the agreement. Two and a half years later, Ms. Pingel was fired. She subsequently sued for discrimination, and GE moved to compel arbitration.

Ms. Pingel opposed the motion to compel arbitration alleging (1) the agreement to arbitrate was unconscionable and (2) the parties did not have a meeting of the minds when the contract was signed. The court did not find these arguments dispositive. First, to find an agreement to arbitrate unconscionable, the provision need be oppressive or particularly one sided. The court found that as “the delegation provision equally binds both parties [this] weighs heavily against such a conclusion.” The court further noted that general challenges to a contract, here unconscionability of the arbitration agreement, does not necessarily preclude the enforcement of said agreement. That issue is for the arbitrator to decide. Ms. Pingel did not allege any specific unconscionable provisions within the arbitration agreement; therefore the general allegations are better decided by an arbitrator. Finally, as Ms. Pingel signed the acknowledgment form, the court found this compelling evidence to show a meeting of the minds. The court noted that ignorance from failing to read a contract is not a winning argument.

The District court therefore granted GE’s motion to compel arbitration on all of Ms. Pingel’s claims. Pingle v. General Electric Company, Case No. 3:14– 00632 (CSH) (USDC D. Conn. Dec. 19, 2014).

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

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