Reinsurance Focus

The Second Circuit affirmed two cases in which financial services firms had succeeded in enjoining FINRA arbitrations that were initiated against them by public financing entities. The court held that in each case, the FINRA arbitration rules were superseded by broad forum selection clauses in broker-dealer agreements requiring “all actions and proceedings” related to the transactions between the parties to be brought in court. The court noted that the interplay between forum selection clauses and the FINRA arbitration rule has been considered by the Ninth and Fourth Circuits, with the former holding that the forum selection clause controls and the latter reaching the opposite conclusion. In the Second Circuit, the court explained, “an agreement to arbitrate is superseded by a later-executed agreement containing a forum selection clause if the clause ‘specifically precludes’ arbitration.” The court found that the language “all actions and proceedings” fit that description, notwithstanding that the clause did not specify arbitration. Goldman Sachs & Co. v. Golden Empire Schools Financing Authority, Nos. 13-797-cv, 13-2247-cv (2d Cir. Aug. 21, 2014).

This post written by Michael Wolgin.

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A federal district court has confirmed an arbitration panel’s interim award requiring Allied Provident, as reinsurer, to post security for unreimbursed losses and expenses that its cedent claims are due under the parties’ reinsurance agreement. The court first considered whether it even had the power to confirm the panel’s interim award because generally a court does not have the authority to review an interlocutory ruling by an arbitration panel. The court found, however, that an exception to that rule exists when a panel has granted an award of temporary equitable relief, such as a security award, separable from the merits of the arbitration. The court therefore found that it had the power to confirm the interim award and rejected all of Allied Provident’s arguments to vacate it.

The court also denied Allied Provident’s request to stay the interim award and to disqualify the entire arbitration panel. The court directed Allied Provident to appoint a new party arbitrator, as its arbitrator had resigned due to health reasons, so the proceedings could continue. Companion Property and Casualty Insurance Co. v. Allied Provident Insurance Inc., Case No. 13-CV-7865 (USDC S.D.N.Y. Sept. 26, 2014).

This post written by Renee Schimkat.

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The Southern District of New York ordered LG Electronics Inc. to arbitrate with technology patent licensing company Wi-LAN Inc. a dispute over whether certain LG television models infringe patents LG does not own.  The current dispute can be traced back to a 2012 Florida suit in which Wi-LAN alleged that two of its patents for video display technology were used in LG’s flat panel televisions without their consent. LG filed a motion to dismiss arguing that the televisions were subject to a previously entered into patent licensing agreement (the “PLA”), signed by both parties. In response, Wi-LAN filed a motion to compel arbitration based on language in the PLA that mandated arbitration in the case of disagreement between the parties.  LG subsequently brought suit in New York federal court seeking an injunction against arbitration in the Florida proceeding. LG argued that the matter should not be sent to arbitration because Wi-LAN waived its right to arbitrate under the PLA by suing LG for patent infringement initially.

The court determined that Wi-LAN had not waived this right because, even though Wi-LAN did not move to compel arbitration until approximately four months after it filed its Florida suit, LG could not show that it had suffered any prejudice as a result of this delay. Prejudice, the court noted, is the “key to waiver analysis.”  Further, the court held that the PLA contains “clear and unmistakable evidence that they intended the arbitrator to resolve both issues of contract interpretation and issues of arbitrability.” Consequently, it ordered that the arbitrator, and not the court, would determine whether the arbitration clause is inapplicable because Wi-LAN “chose” litigation.  LG Electronics, Inc. v. Wi-LAN USA, Inc., No. 13-CV-2237-RA, 2014 WL 3610796 (S.D.N.Y. July 21, 2014).

This post written by Whitney Fore.

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A dispute involving competing actions between two competing aeroponic farming companies, FarmedHere, LLC and Just Greens, LLC (doing business as Aero Farm Systems), was simultaneously at issue in a New York arbitration, a New York state court, and a Chicago federal court. Aero Farm had originally demanded arbitration in New York based on an arbitration clause in a distribution agreement between Aero Farm and a company affiliated with FarmedHere. In response, FarmedHere filed a petition to stay the arbitration in the New York court, contending that it was not a party to the distribution agreement, and a separate case in Chicago alleging unfair trade practices and seeking a declaration regarding certain patented aeroponic farming technology. Aero Farm then moved to dismiss the Chicago action, contending that (1) FarmedHere assumed obligations under the distribution agreement, (2) FarmedHere’s claims were therefore subject to the arbitration clause, and (3) the proper jurisdiction under the FAA to determine arbitrability was New York (where the arbitration was pending), and not Chicago. After a review of the evidence, the court agreed with Aero Farm and dismissed the Chicago proceedings without prejudice. FarmedHere can attempt to refile its claims in Chicago if the New York court determines that FarmedHere’s claims are not arbitrable. FarmedHere, LLC v. Jut Greens, LLC, Case No. 14 C 370 (USDC N.D. Ill. June 16, 2014).

This post written by Michael Wolgin.

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In late July, a New York federal court denied Harris Corporation’s (“Harris”) motion to dismiss for lack of subject-matter jurisdiction. The motion sought to dismiss HBC Solutions Inc.’s (“HBC”) Amended Petition to Compel Arbitration.  The dispute centered on a memorialized Asset Sale Agreement (“Sale Agreement”) in which HBC agreed to purchase Harris’s Broadcast Communications Division. The Sale Agreement stated that the final purchase price would be determined after closing with resolution of any pricing dispute handled through an independent accountancy to determine the “adjustment amount.” Harris did not contact the accountancy firm for resolution.

Without a federal question and without diversity of citizenship between the parties, the court looked to whether it had jurisdiction under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“The New York Convention”) and its codification in the Federal Arbitration Act. Harris argued first that the New York Convention should not apply, as the parties were both domestic. Second, Harris argued that the additional provision in the Sale Agreement was not arbitration but an “expert determination.”  Considering Harris’s first argument, the Court noted that the New York Convention would typically not apply if both parties were citizens of the United States. However, the sale included a transfer of property in fourteen different countries, making the transaction “significantly international.” Further, the Court reasoned that the language in the Sale Agreement was evidence of a desire to adjudicate any pricing dispute through a third party, here an accountancy. As the New York Convention applies, the motion to dismiss for lack of subject-matter jurisdiction was denied.

The Court concluded that the contract’s clearly stated intention to refer disputes to an accountant for resolution qualified as an agreement to arbitrate, and directed the respondent to serve an opposition to the Amended Petition.  Given that some reinsurance agreements provide for somewhat similar alternative dispute resolution avenues, this opinion may be of interest to reinsurance practitioners.  HBC Solutions, Inc., v. Harris Corp., No. 13-CV-6327 (JMF) (S.D.N.Y. July 18th, 2014).

This post written by Matthew Burrows.

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A federal court in California recently rejected efforts to remove a state court arbitration confirmation proceeding to federal court. The underlying royalties dispute had been addressed in an arbitration, and ultimately the dispute arrived in California state court in a proceeding to confirm the arbitration award. The defendant opposed the petition for confirmation and filed a separate petition to vacate or modify the award. That pleading included a count for “Declaratory Judgment for No Liability under Federal Patent Laws.” Based on the assertion of federal relief in its own petition, the defendant filed a notice of removal. The federal court rejected the defendant’s assertion of jurisdiction and remanded the case back to state court. The court concluded that there was no subject matter jurisdiction — despite the patent-related request for relief — due to the limited nature of the proceedings before the state court. The court determined that the declaratory judgment count did not belong in the state court action in the first place, and it ruled that issues of patent law need not be decided to resolve the limited issues presented in the case. In sum, the court refused to allow the defendant “to create jurisdiction where none can possibly exist in order to bring a properly-situated case before a new forum.”

Amkor Tech., Inc. v. Tessera, Inc., 5:14-CV-03604 EJD, 2014 WL 4467715 (USDC N.D. Cal. Sept. 9, 2014).

This post written by Catherine Acree.

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A New York federal court recently denied a motion to dismiss a claim filed by two reinsurers, Employers Insurance Company of Wausau and National Casualty Company. The claim sought a declaration disqualifying Hunton & Williams as counsel for their reinsured, Utica Mutual Insurance Company, in a subsequent arbitration dispute concerning the reinsurers’ obligations for the amounts paid in an underlying settlement. Hunton & Williams had represented Utica in negotiating the underlying settlement and in litigating coverage issues against Utica’s insured. The reinsurers argued that, in the underlying litigation, Utica had a “common interest” with its reinsurers to minimize the liability to Utica’s insured; therefore, the Hunton & Williams attorneys, in effect, represented the reinsurers’ interests in the underlying litigation. The reinsurers argued that the rules of professional conduct prohibit the attorneys from representing Utica in the subsequent arbitration because such representation was adverse to them. The district court concluded that the reinsurers had stated a valid claim to disqualify the attorneys based on the rules governing concurrent and successive representation, noting that even if the reinsurers were not the clients of Hunton & Williams in the “traditional sense,” an inquiry into the potential conflict was still warranted. The court also found that the reinsurers had plausibly alleged that the “witness-advocate” rule may apply in the case because the attorneys may be called as witnesses in the arbitration proceeding to testify concerning the reasonableness of the underlying settlement.

Utica Mutual Ins. Co. v. Employers ins. Co. of Wausau and Nat’l Cas. Co., No. 6:12-CV-1293 (USDC N.D. N.Y. Sep. 22, 2014).

This post written by Catherine Acree.

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Reversing the lower court, the Supreme Court of New Jersey found an arbitration provision in a service contract was unenforceable because it failed to notify the consumer clearly and unambiguously that, by entering into the agreement, the consumer was waiving the right to seek relief in a court of law. In this case, the arbitration clause stated that either party may submit any dispute “to binding arbitration”; that “the parties shall agree on a single arbitrator to resolve the dispute”; and that the arbitrator’s decision “shall be final and may be entered into judgment in any court of competent jurisdiction.” Basing its decision on the principle that an effective waiver requires a party to have full knowledge of his legal rights and intent to surrender those rights, the court found that the arbitration provision at issue failed to explain that the plaintiff was waiving her right to seek relief in court, what arbitration is, or how arbitration is different from a proceeding in a court of law. Patricia Atalese v. U.S. Legal Services Group, A-64-12 (072314) (N.J. Sept. 23, 2014).

This post written by Leonor Lagomasino.

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The Nebraska Supreme Court has held that Nebraska’s statute prohibiting mandatory arbitration clauses in insurance policies is preempted by the Liability Risk Retention Act of 1986 (LRRA). At issue was a professional liability insurance policy from Allied Professionals Insurance Company, a risk retention group incorporated in Arizona and registered with the Nebraska Department of Insurance as a foreign risk retention group. When a dispute arose between the policyholder and Allied, the policyholder filed an action seeking a declaration that Allied was obligated to provide coverage for an underlying civil suit pending against him. Allied moved to compel arbitration pursuant to the policy’s mandatory arbitration clause, which required binding arbitration of any dispute concerning the policy. The lower court rejected Allied’s argument that the Nebraska statute was preempted by federal law and concluded that the arbitration clause was neither valid nor enforceable. It therefore denied Allied’s motion to compel arbitration.

Nebraska’s Supreme Court reversed, finding that while the Federal Arbitration Act did not preempt Nebraska’s law, the LRRA did. The LRRA provides, in part, that a foreign risk retention group is exempt from any state law that would “regulate, directly or indirectly, the operation of a risk retention group.” Nebraska’s prohibition of arbitration clauses in insurance policies “regulates the operation of a risk retention group” within the meaning of the LRRA. As a result, the arbitration clause in the Allied policy was not prohibited by state statute, but was a valid and enforceable clause compelling arbitration. Speece v. Allied Professionals Insurance Co., 289 Neb. 75 (Neb. Sept. 19, 2014).

This post written by Renee Schimkat.

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The Eighth Circuit reversed a trial court’s decision to deny arbitration, based on the fact that the lower court failed to hold a trial (as required by the FAA) when disputed questions of fact surrounding the parties’ agreement remained. The case surrounded a disagreement over whether a seller of equipment agreed to indemnify a manufacturer of heavy machinery, in connection with litigation against the manufacturer by a third-party. Disputed facts surrounded whether the agreement between the manufacturer and the seller included a form containing indemnification terms and arbitration provisions. The district court denied arbitration because it concluded that the only undisputed contract terms were the terms of the purchase, sale, and payment; the court left undecided the issue of whether arbitration provisions were included in the agreement, as not subject to a “definitive answer.” Citing a recent Tenth Circuit decision, on which we reported on May 20, 2014, the Eighth Circuit reversed, holding that “if the motions record reveals a material issue of fact, the FAA maintains that the court move summarily to trial. And, when that trial is not demanded by the party opposing arbitration [as was the case here], ‘the court shall hear and determine such issue.’” The court explained that here, “the district court never resolved the factual issues concerning the making of the contract but merely recognized their existence.” The Eighth Circuit vacated the order and remanded “for the district court to hold a non-jury trial, make findings of fact, and apply the appropriate U.C.C. provisions in light of those facts.” Nebraska Machinery Co. v. Cargotec Solutions, LLC, Case No. 13-2753 (8th Cir. Aug. 7, 2014).

This post written by Michael Wolgin.

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