Reinsurance Focus

A disappointed claimant in a FINRA arbitration filed suit under section 10 of the Federal Arbitration Act (“FAA”) in United States District Court to vacate the arbitral award.  The court dismissed the case for lack of subject-matter jurisdiction.  The court noted the well established principle that the FAA is not itself a source of subject-matter jurisdiction.  Stating that the parties were not diverse, the court proceeded to evaluate whether it could exercise subject-matter jurisdiction based upon the existence of a federal question.  The plaintiff proposed two bases for federal question jurisdiction: (1) the failure of its opponent to produce certain documents, which it argued constituted a violation of FINRA rules, or a disregard by the panel of FINRA rules; and (2) the fact that the claims pursued in the arbitration included claims under federal securities laws and SEC regulations.  The court rejected both  contentions, finding with respect to the first issue that many courts have held that “manifest disregard” of FINRA or NASD rules do not constitute manifest disregard of federal law for purposes of the FAA.  With respect to the second contention, the court followed a Second Circuit opinion which held that a court may not “look through” the petition to the claims in the underlying arbitration for a basis for subject-matter jurisdiction.  The court rejected the argument that jurisdiction was supported by Vaden v. Discover Bank, 556 U.S. 49 (2009), which held that, with respect to petitions to compel arbitration under section 4 of the FAA, courts may look through the petition to determine whether it is predicated on an action that “arises under” federal law. Citing textual differences between sections 4 and 10 of the FAA, the court held that Vaden did not provide support for looking through the petition for purposes of evaluating whether the court had subject-matter jurisdiction over an action predicted on section 10 of the FAA. Doscher v. Sea Port Group Securities, LLC, Case No. 15-cv-384 (USDC S.D.N.Y. August 5, 2015).

This post written by Rollie Goss.

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The Fourth Circuit considered whether an arbitrator manifestly disregarded the law by failing to find actual damages and failing to award sufficient attorney’s fees against certain non-profit credit repair companies, despite the arbitrator’s finding that the companies had made inadequate disclosures under the Credit Repair Organizations Act (CROA). Regarding damages, the arbitrator had determined that plaintiffs were not entitled to “amount[s] paid” under the CROA as damages, because plaintiffs made “voluntary contributions” to the non-profit credit repair organizations, rather than actual payments contemplated within the meaning of the CROA. The Fourth Circuit held that, given the absence of binding precedent requiring a contrary interpretation of the CROA, the arbitrator’s ruling “did not constitute a refusal to heed a clearly defined legal principle.” The court further noted that it was not for it “to pass judgment on the strength of the arbitrator’s chosen rationale.” Similarly, with respect to the arbitrator’s ruling on attorney’s fees, the Fourth Circuit held that while “it may be debatable whether the arbitrator performed [the] task ‘well,’ the record in this case shows that the arbitrator undertook a careful analysis of the applicable legal principles and reached a decision supported by his interpretation of our precedent.” In reaching its decision, the Fourth Circuit considered certain U.S. Supreme Court rulings in making clear that the “limited review” of an arbitration award is appropriate even when “the arbitrator considered remedies created by statute, rather than rights established by contract.” Jones, et al. v. Dancel, et al., Case No. 14-2160 (4th Cir. July 6, 2015).

This post written by Michael Wolgin.

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The United States Court of Appeals for the Second Circuit issued a summary order affirming a decision by the district court for the district of Connecticut compelling arbitration pursuant to an employee handbook’s mandatory arbitration provision. Reviewing de novo, the court upheld the lower court’s order compelling arbitration based on its finding that (1) plaintiff’s employment had been at-will since its inception and (2) her continued employment after the amendment of defendants’ employee handbook, which included the mandatory arbitration requirement, equated to an acceptance of the new terms. The court noted that in Connecticut, the terms of employment may be determined even in the absence of an express written agreement. Focusing on whether plaintiff validly accepted the modification to her original unilateral employment contract, which at the time of hiring did not contain a mandatory arbitration requirement, the court answered in the affirmative. The fact that plaintiff continued to work for defendants for approximately 15 years following the arbitration amendment to the employee handbook, coupled with the fact that defendants produced evidence that plaintiff electronically accepted the modified employee handbook several times after it was amended, together demonstrated plaintiff’s consent to the added arbitration provision. McAllister v. East, No. 11-4696 (2d Cir. May 5, 2015).

This post written by Brian Perryman.

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A recent case out of the District of Massachusetts reviewing an arbitration award against Ace American Insurance Company (“Ace”) found that an arbitrator did not exceed her power in crafting an arbitration award when she relied almost exclusively on her equitable powers under the arbitration provision. In the underlying dispute, Ace had insured a thirteen year old boat, which sank following severe weather. Ace denied coverage claiming that such an incident would fall under the wear and tear provision of the coverage. However, the arbitrator disagreed, finding that “if the ‘wear and tear’ exclusion were enforceable in this case, Ace would comfortably insure boats beyond a certain age without an expectation of ever having to pay” and that allowing Ace to deny coverage would violate Massachusetts Chapter 93A. Where the arbitration provision gave the arbiter authority to resolve “any controversy or claim based in any legal or equitable theory,” the District Court found that the arbiter was well within her powers in making this finding, thereby making a vacation of this arbitration award unwarranted.

Ace American Ins. Co. v. Puccio, Case No. 15-cv-10262-IT (USDC D. Mass. June 4, 2015).

This post written by Zach Ludens.

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A district court refused to vacate an arbitration award where Preis, a terminated employee, failed to produce sufficient evidence of bias or misconduct in the arbitration panel’s decision. Preis moved to vacate the award in favor of former employee Citigroup Global Markets Inc. on the grounds that (1) the panel was biased, and (2) the panel manifestly disregarded the law. Although Preis relied on New York’s civil practice laws and Citigroup relied on the Federal Arbitration Act, the court decided choice of law was irrelevant because no conflict existed between state and federal law on the grounds for vacating arbitration awards.

On the issue of bias, the court found that the examples cited by Preis were neutral, did not suggest prejudice, and “would not lead a reasonable person to conclude that the panel was biased.” The court was even more skeptical of Preis’s manifest disregard claim, finding that he failed to show the panel intentionally defied a well-defined, applicable law. His claims did not rise to the level of showing “some egregious impropriety on the part of the arbitrator,” and thus, did not warrant vacating the award. The court did, however, deny Citigroup’s request for attorneys’ fees and costs, finding it failed to show that Preis acted in bad faith in seeking to overturn the award. Preis v. Citigroup Global Markets Inc., Case No. 14-06327 (USDC S.D.N.Y. Apr. 8, 2015).

This post written by Brian Perryman.

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Collective defendants, Nationwide, appealed from a Massachusetts superior court judgment confirming an arbitration award in favor of collective plaintiffs, Liberty Mutual. The underlying dispute involved a 1972 reinsurance treaty wherein Nationwide, the reinsurer, indemnified Liberty Mutual, the cedant, for a portion of the losses paid on Liberty Mutual’s general liability and worker’s compensation policies. At issue was a provision in the treaty granting Nationwide a right of access to Liberty Mutual’s documents concerning the covered policies. The dispute arose when Liberty Mutual refused to produce documents it claimed were protected by attorney-client and work product privileges. At arbitration, the panel dismissed Nationwide’s argument that it was entitled to any and all documents relating to the covered policies, reasoning that the right of access provision excluded privileged documents. Liberty Mutual thereafter submitted an application to the superior court to confirm the award and Nationwide submitted a cross-application to vacate the access to records portion of the judgment.

Despite a de novo review, the court’s discretion was limited as it was bound by the arbitrators’ findings and legal conclusions, even if they appeared erroneous, inconsistent, or unsupported by the record. Through this lens, the court of appeals upheld the arbitrators’ decision, dismissing Nationwide’s argument that the arbitrators exceeded their powers in interpreting the access to records provision in the reinsurance treaty. The appellate court reasoned that where the parties do not dispute the scope of the arbitrators’ powers and where the claimed error is in the interpretation of the terms of the parties’ underlying contract and not in the agreement to arbitrate in the first place, it must apply a severely limited review of arbitration awards. Liberty Mutual v. Nationwide, No. 14-1129 (Mass. App. Ct. June 5, 2015).

This post written by Brian Perryman.

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The Third Circuit affirmed an arbitration award under the Labor Management Relations Act (“LMRA”) as the decision reached by the arbitrator comported with the collective bargaining agreement (“CBA”) between the parties. Washington Hospital (“WH”) employed Deborah Holden, an LPN, before terminating her employment pursuant to the CBA’s absenteeism policy. Holden’s union filed a grievance protesting Holden’s discharge. An arbitrator decided that the termination was improper and reinstated Holden, because WH failed to follow contractually agreed upon discipline procedures. The arbitrator made this decision despite noting that Holden’s ten absences in a 12-month time period would be sufficient grounds on which to terminate an employee. WH sought to vacate the award, but the district court upheld the award.

On appeal, WH argued that the court abused its discretion by denying WH’s request for discovery based on remarks by Holden that put her honesty at issue. However, the court found that Holden’s testimony was not fraudulent, and further, that Holden’s testimony was “immaterial” to the arbitration decision. Instead, the court upheld the district court’s decision because WH did not follow the CBA’s procedures, specifically—WH failed to give two warning notices before terminating Holden. Washington Hosp. v. SEIU Health Care Inc. Penn., Case No. 14-3951 (3d Cir. June 12, 2015).

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

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The Second Circuit reversed the district court’s dismissal of a claim for vacatur without prejudice, which had been based on the panel’s finding that it lacked personal jurisdiction. The Second Circuit examined the merits of the vacatur claim and ruled that it should have been dismissed with prejudice. Based on that determination, the Second Circuit then affirmed the district court’s dismissal without prejudice of the second claim filed in the district court for relief on the merits of the dispute (a claim for breach of contract). The Second Circuit explained that dismissal of this claim without prejudice was appropriate due to the preclusive effect of the ruling in arbitration that personal jurisdiction was lacking. The court noted: “Although it may seem odd to deny the award preclusive effect over one claim and to grant it preclusive effect over another in the same suit, that is the logical result anytime a suit includes both a claim to vacate an award and other claims that might be precluded by a final award.” Global Gold Mining, LLC v. Ayvazian, Case No. 13-4759-cv (2d Cir. Apr. 27, 2015).

This post written by Michael Wolgin.

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In the recent unpublished opinion, the United States Court of Appeals for the Fifth Circuit confirmed that if an issue is voluntarily submitted to an arbitrator, then the arbitrator can decide the issue, even if it is one that should have been left to the court. After the arbitrator found for the defendant, Heritage Actions, on the basis that there was no meetings of the minds and therefore the contract was unenforceable and should be rescinded, the plaintiffs, OMG, L.P. and Greg Martin, attempted to have the award vacated in federal district court. The district court agreed with OMG and vacated the award on the basis that “a court was the proper decision-maker as to the contract formation issues in this case, not the arbitrator.” The Fifth Circuit reversed, pointing out that if the parties agree, they may arbitrate issues that are not part of the arbitration agreement. While OMG argued that the issue of the contract’s validity had not been submitted to the arbitrator either by the arbitration contract or by agreement, the Fifth Circuit found that both parties actively put forth arguments during the arbitration on whether there had been a meeting of the minds and whether the contracts should be rescinded. At no time during the arbitration did OMG argue that the arbitrator did not have the authority to decide this issue. The remedy OMG should have sought, said the Fifth Circuit, was to have “refused to arbitrate, leaving a court to decide whether the arbitrator could decide the contract formation issue,” i.e., whether there was a meeting of the minds. The district court’s judgment was reversed and the case remanded with instructions to confirm the arbitration award. OMG, L.P. v. Heritage Actions, Inc., No. 14-10403 (5th Cir. May 8, 2015).

This post written by Barry Weissman.

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The court ruled that ACC Resources is bound by an arbitral award issued by the China International Economic & Trade Arbitration Commission (“CIETAC”). The award required the mineral company to pay its supplier, Calbex Mineral Limited the unpaid balance for minerals supplied. ACC argued that the award was made without its knowledge and without offering the company the opportunity to defend itself. ACC also argued that the arbitration award was void because the CIETAC subcommission that initially rendered the award in favor of Calbex had broken away from CIETAC.

The district court held that ACC failed to meet the standards of the New York Convention—which governs the enforceability of international arbitration—by not providing sufficient proof to show that they had not been given notice of the proceedings. Further, the court noted that ACC failed to offer evidence that it knew about the subcommission’s split from CIETAC during the relevant time. ACC also disputed the panel’s failure to forward evidence received in the course of its investigation, but the district court held that ACC did not show prejudice from this violation. Because ACC had not been prejudiced, the arbitral award must stand. Calbex Mineral Ltd. v. ACC Resources Co., L.P., No. 13-276 (USDC W.D. Pa. Mar. 13, 2015).

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

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