Reinsurance Focus

The Tenth Circuit Court of Appeals reversed a trial court order denying an employer’s motion to compel arbitration of a wage dispute under the arbitration clause contained in the plaintiffs’ Confidentiality/Non-Compete Agreement. The plaintiff employees brought suit against their employer, an oil-rig servicer, under the Fair Labor Standards Act and Oklahoma Protection of Labor Act. The employer moved to compel arbitration under a provision in the parties’ non-compete agreements. The plaintiffs argued – successfully to the trial court – that the wage disputes did not come within the purview of the arbitration provision, which, although in an agreement that related mostly to non-compete and confidentiality issues, nevertheless contained a broad clause mandating arbitration of “any dispute.” The Tenth Circuit noted that, while the scope of the parties’ contract was narrow, the scope of the arbitration provision was broad, and that, under the Supreme Court’s decision in AT&T Mobility LLC v. Concepcion, and the broad federal policy favoring arbitration embodied in the FAA, it was constrained to enforce the agreement. It remanded with instructions to compel arbitration. Sanchez v. Nitro-Lift Technologies, LLC, Nos. 12-7046 and 12-7057 (10th Cir. Aug. 8, 2014).

This post written by John Pitblado.

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In a life settlement transaction, in which a life insurance policy is sold by its owner to another for more than its cash-surrender value but less than the net death benefit, the seller contended that the broker and purchaser conspired to rig the bidding process, resulting in undisclosed kickbacks to the broker. The seller filed a putative class action against the broker, purchaser, and related entities alleging fraud and other similar claims. The defendants moved to compel arbitration (among other things), relying on an arbitration clause in the purchase agreement. The seller, however, had formed a trust to acquire the policy and never personally participated in the purchase agreement. The trial court thus denied arbitration, finding that the seller was a non-signatory against whom arbitration could not be compelled. The defendants appealed, and the Third Circuit affirmed, holding that the seller of the policy could not be equitably estopped from avoiding the reach of the purchase agreement. The court explained that the “alleged fraud was related to the purchase agreement—it set the purchase price and, allegedly, the inflated, undisclosed broker’s commission. But that alone is not sufficient to compel arbitration under the equitable estoppel doctrine: the claims must be based directly on the agreement.” Here, the allegedly fraudulent kickback agreement “took place prior to and apart from the execution of the purchase agreement.” Griswold v. Coventry First LLC, Case No. 13-1879 (3d Cir. Aug. 11, 2014).

This post written by Michael Wolgin.

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The Third Circuit recently was presented with the question of whether, in the context of an otherwise silent contract, the availability of classwide arbitration is to be decided by a court rather than an arbitrator. The underlying dispute involved a putative class action brought under the Fair Labor Standards Act concerning an employer’s classification of its workers as overtime-exempt employees. The two named plaintiffs each had signed an employment agreement requiring that any dispute relating to their employment be submitted to arbitration, but the agreements did not mention classwide arbitration. A New Jersey federal court granted the employer’s motion to compel arbitration, but held that the arbitrator would have to decide whether the arbitration could include classwide claims. The arbitrator issued a partial award, and addressed the “who decides” issue, ruling that the employment agreements permitted classwide arbitration. The employer then returned to federal court and filed a motion to vacate the arbitrator’s award, and the district court denied the motion. On appeal, the Third Circuit reversed, concluding that the issue of the availability of classwide arbitration should be decided by a court, not an arbitrator.

In reaching its conclusion, the Third Circuit noted that “questions of arbitrability,” such as whether the parties are bound by a given arbitration clause or whether an arbitration clause in a concededly binding contract applies to a particular type of controversy – are “gateway issues” to be resolved by a court. This is in contrast to “procedural” questions that are resolved by arbitrators. The Third Circuit ruled that the permissibility of classwide arbitration is not solely a question of procedure or contract interpretation (which would be decided by an arbitrator) but rather involves a “substantive gateway dispute qualitatively separate from deciding an individual quarrel” (which would be decided by a court). In reaching this conclusion, the Third Circuit followed the Sixth Circuit holding in Reed Elsevier, Inc. v. Crockett, 734 F.3d 594 (6th Cir. 2013), which is the only other circuit court opinion to have squarely addressed the “who decides” issue.

David Opalinski v. Robert Half Int’l Inc., No. 12-4444 (3rd Cir. July 30, 2014).

This post written by Catherine Acree.

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Lincoln Memorial Insurance Company and Hannover Life Reinsurance Company of America became engaged in a long-running reinsurance dispute, arising from an allegedly fraudulent scheme by Lincoln and others in the sale of pre-need funeral service contracts. Hannover reinsured some of those contracts. The matter was arbitrated, and Lincoln claim that Hannover wrongfully accused Lincoln of fraud and intentional misconduct during the court of that arbitration.

Ultimately, Lincoln became insolvent and entered into receivership in Texas. Lincoln asserted that Hannover’s conduct in the arbitration was a factor in driving it to insolvency. The Texas Department of Insurance appointed a receiver and issued a permanent injunction, which, among other things, enjoined further arbitration against Lincoln, before the arbitrator ever issued an award.

The Special Deputy Receiver, Jo Ann Howard & Associates, thereafter brought claims in federal court against several entities alleging, among other things, RICO, breach of fiduciary duty, and gross negligence, which purportedly caused or contributed to Lincoln’s insolvency.

As we previously reported, one of the defendants in the action brought by the receiver, National City Bank, subpoenaed the arbitrator in the Hannover Re arbitration, seeking his un-issued award. National City also asserted several special defenses to the receiver’s suit, including failure to mitigate damages. The receiver moved to quash the subpoena and to strike National City’s failure to mitigate affirmative defense. The court granted both motions.

National City thereafter moved for reconsideration and clarification of the Court’s order. Construing the motion as a Rule 60(b) motion to amend, the Court held that National City was not entitled to the “extraordinary relief” available under that rule, as it had not met the high burden of demonstrating “exceptional circumstances” warranting the correction of any error, even if a substantial error had been made, which, the Court duly noted, was not the case. Jo Ann Howard & Associates, P.C. v. Cassity (USDC E.D. Mo. July 15, 2014).

This post written by John Pitblado.

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A federal district court has dismissed a motion to vacate an arbitration decision denying a party’s request to unilaterally withdraw a claim that was subject to a pending arbitration. Finding the arbitration decision was not final, and did not fall within any exception to the finality requirement, the court held it lacked jurisdiction to consider the motion to vacate it. The court also rejected application of the collateral order doctrine which, if applicable, would justify the court’s jurisdiction to hear the motion. That doctrine is reserved for only a few substantial interests, such as defenses of presidential immunity and double jeopardy. No such substantial interest was shown by the argument that consideration of the order could avoid unnecessary legal expenses. Bailey Shipping Ltd. v. American Bureau of Shipping, et al., Case No. 12-CV-5959 (USDC S.D.N.Y. Mar. 28, 2014).

This post written by Renee Schimkat.

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Odyssey Reinsurance Co. petitioned the court to appoint an umpire to serve in arbitration with its retrocessionaries, certain Lloyd’s underwriters and Reliastar Reinsurance Group, over a disputed reinsurance claim. Odyssey argued that arbitration had been unduly delayed due to what it contended were poorly qualified candidates proposed by the retrocessionaires. The court held that Odyssey’s arguments were insufficient to obtain relief from the court at that time, and that in its view, there had “not been a breakdown in the process that justifies court intervention.” The court directed the parties “to proceed to the next stage of arbitrator selection” as described in the agreements between them. Odyssey Reinsurance Co. v. Certain Underwriters at Lloyd’s London Syndicate 53, et al., Case No. 1:13-cv-09014 (USDC S.D.N.Y. June 30, 2014) (Opinion & Order and Judgment).

This post written by Michael Wolgin.

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The appeal arose from a lawsuit to clarify an arbitration award concerning an alleged breach of a corporate merger agreement containing a binding arbitration clause. The federal district court found the arbitration panel had exceeded its authority under that arbitration clause by failing to provide sufficient findings of fact and conclusions of law regarding a damages claim. The district court therefore remanded the case back to the panel for consideration of that issue and clarification of the award. On appeal, the Fifth Circuit held that because the district court neither confirmed nor vacated the award, the order was not final, a point on which the dissent strongly disagreed, and it therefore did not have appellate jurisdiction over the order. The court further reasoned that it was necessary to decline jurisdiction to avoid generating piecemeal appeals and in light of the court’s deferential standard of review of arbitration awards. Murchison Capital Partners, L.P., et al. v. Nuance Communications, Inc., No. 13-10852 (5th Cir. July 25, 2014).

This post written by Renee Schimkat.

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A New York federal district court denied Transatlantic Reinsurance Company’s petition to compel National Indemnity Company (“NICO”) to submit to arbitration. While the court’s order does not provide the basis for its ruling and only refers to the reasons set forth on the record, the issues were extensively analyzed in the parties’ briefing. The core issue was whether NICO, which was not a signatory to the reinsurance agreements between Transatlantic and AIG, should be compelled to arbitrate under those agreements’ arbitration provisions. Transatlantic argued that NICO was bound by the reinsurance agreements because it substituted itself for AIG by virtue of the Loss Portfolio Transfer wherein AIG to transferred NICO its asbestos-related liabilities which Transatlantic reinsured. According to Transatlantic, the principles of “direct benefits estoppel” required NICO to arbitrate under the reinsurance agreements in light of the benefits enjoyed by NICO as a result of those agreements.

The court rejected these arguments, evidently agreeing with NICO, which had challenged Transatlantic’s characterization of the Loss Portfolio Transfer and the reinsurance agreements. NICO argued it never agreed to arbitrate. Further, NICO maintained it was a third-party administrator acting on AIG’s behalf and did not substitute for AIG under the Loss Portfolio Transfer or any other agreement. NICO claimed it also did not receive any direct benefits under the reinsurance agreements, so the “direct benefits estoppel” theory was inapplicable. Finally, NICO pointed out that it was not a necessary party to the arbitration because Transatlantic could obtain complete relief without NICO being a party. Transatlantic Reinsurance Co. v. National Indemnity Co., Case No. 14 Civ. 2109 (ER) (USDC S.D.N.Y. July 22, 2014).

This post written by Leonor Lagomasino.

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The issue before the California Appellate Court was whether the trial court erred in enforcing a delegation clause in an arbitration agreement governed by the Federal Arbitration Act (“FAA”), and granting the defendant’s motion to compel arbitration.

Plaintiff/Petitioner brought a wage and hour action against her former employer. The defendant former employer moved to compel arbitration, pursuant to a clause contained in its employee handbook. The delegation clause provided, “The arbitrator has exclusive authority to resolve any dispute relating to the interpretation, applicability, or enforceability of this binding arbitration agreement.” Plaintiff opposed arbitration asserting that the arbitration agreement was unconscionable. Defendant, in turn, asserted that arbitration agreement contained a delegation clause providing that issues relating to the enforceability of the arbitration agreement were themselves delegated to the arbitrator for resolution. The dispute then turned to whether the delegation clause itself was unconscionable.

The appellate court upheld the trial court’s decision. The appellate court concluded a portion of the rationale underlying Murphy v. Check ‘N Go of California, Inc. (2007) 156 Cal.App.4th 138 (Murphy); Bruni v. Didion (2008) 160 Cal.App.4th 1272 (Bruni); and Ontiveros v. DHL Express (USA), Inc. (2008) 164 Cal.App.4th 494 (Ontiveros) was no longer viable under California law. Murphy, Bruni, and Ontiveros relied on three factors to conclude that the delegation clauses at issue were substantively unconscionable: (1) they were outside the reasonable expectations of the parties; (2) they were not bilateral; and (3) they provided for decisionmaking by arbitrators who would be biased by their financial self-interest. The appellate court found that the first two factors did not apply to the delegation clause at issue and that the third factor was preempted by the Federal Arbitration Act (“FAA”). Malone v. Superior Court, B253891 (Cal. Ct. App. June 17, 2014).

This post written by Kelly A. Cruz-Brown.

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A New York federal court recently was presented with a motion to compel arbitration in Georgia. The district court first concluded that the arbitration provision was enforceable and then proceeded to the question of whether it had the authority to compel arbitration in a district other than its own. The court described what it deemed an “internal conflict” within the Federal Arbitration Act because the Act provides both that (1) courts must enforce an arbitration agreement in accordance with its terms, and (2) arbitration must take place “within the district in which the petition for an order directing such arbitration is filed.” The court also noted an unresolved split in the Second Circuit on how a New York district court should proceed when a suit pending before it involves an arbitration agreement that specifies that arbitration should take place outside the court’s district. Ultimately, the court ruled that it had no authority to compel arbitration outside its district, but nevertheless wished to enforce the valid forum selection clause contained in the agreement. Accordingly, the district court elected to stay the action, pending arbitration of the plaintiff’s claims against the defendant in Georgia. This approach left the parties free to pursue their contractual rights and remedies in the appropriate venue without running afoul of the FAA. Klein v. ATP Flight School, No. 14-CV-1522 (USDC E.D. N.Y. July 3, 2014).

This post written by Catherine Acree.

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