Reinsurance Focus

In the recent unpublished opinion, the United States Court of Appeals for the Fifth Circuit confirmed that if an issue is voluntarily submitted to an arbitrator, then the arbitrator can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on the basis that there was no meetings of the minds and therefore the contract was unenforceable and should be rescinded, the plaintiffs, OMG, L.P. and Greg Martin, attempted to have the award vacated in federal district court.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arguments during the arbitration on whether there had been a meeting of the minds and whether the contracts should be rescinded.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 Eighth Circuit affirmed a decision by the U.S. District Court for the Eastern District of Missouri which rejected the contention that an arbitration agreement was unconscionable, and unenforceable under the Federal Arbitration Act, because (1) the prohibitively high costs associated with an individual arbitration proceeding prevented plaintiffs from pursuing their claims; and (2) it included a waiver of punitive damages and attorneys’ fees. In this case, a class of cleaning business franchisees sued a franchisor and related companies for RICO violations. Plaintiffs also contended that some defendants were non-signatories and therefore could not enforce the arbitration agreement. In response, defendants moved to compel individual arbitration citing the arbitration provision language in the respective franchise agreements.

Plaintiffs supported their claims with several figures including average loss per plaintiff, a range of individual filing fees, average daily fees for arbitrators in four cities, and a likely hearing length of three days. Altogether, plaintiffs asserted that their individual arbitration costs would exceed their respective damages. Ultimately, the court found that plaintiffs’ proof was insufficient because (1) the arbitrations would not take place in any of the four cities for which daily fees were provided and (2) plaintiffs did not submit individual affidavits demonstrating their inability to afford arbitration costs. The court emphasized that rather than a hypothetical inability to pay, plaintiffs must provide specific evidence of their individual inability to pay the actual arbitration fees likely to be incurred in order to overcome the federal policy favoring arbitration. The court also rejected plaintiffs’ claim that even if enforceable, the arbitration agreement prohibited non-signatories from compelling arbitration. The court also held that the arbitration agreement language was broad enough to include various non-signatory third parties, and deemed them capable of enforcing the arbitration provision. Torres v. Simpatico, Inc., No. 14-1567 (8th Cir. Mar. 25, 2015).

This post written by Rollie Goss.

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The Fifth Circuit addressed the question of whether a subcontract between the parties requires arbitration, a question that turned on the interpretation of the term “contract documents” in the subcontract. TRC Environmental Corporation hired LVI Facilities Services, Inc. as a subcontractor in an effort to decommission a power plant in Austin, Texas. The Fifth Circuit agreed with the district court’s interpretation that (1) the phrase “Contract Documents” in the subcontract, includes the subcontract itself; and (2) claims arising under the Contract Documents requires an alternative dispute resolution process as laid out in the separate Project Agreement, which did not require arbitration. Based on this interpretation of the two documents, the Fifth Circuit held, the district court correctly denied LVI’s motion to compel arbitration. TRC Environmental Corp. v. LVI Facility Servs., Inc., No. 14-51269 (5th Cir. May 22, 2015).

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

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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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In a case involving a dispute over steel production to replace a portion of the Whitestone Bridge spanning New York City’s East River, a federal district court remanded an arbitration award back to the arbitrator. Under the parties’ arbitration agreement, the arbitrator was to issue a reasoned award. However, the arbitrator’s award was a two-page award with the “arbitrator merely list[ing] various categories of monetary damages without explanation as to how he calculated those figures or determined liability.” Under the Southern District of New York standard, a reasoned award is one where the arbitrator presents “something short of findings of fact and conclusions of law but more than a simple result. Where the award offered no more than the damages, the court found that this low standard was not met.

The court chose not to vacate the award, however. Noting that some courts have completely vacated the award where arbiters have ignored the arbitration agreement and exceeded their powers, the court found that the doctrine of functus officio (once the award is made, the duty is done) was inapplicable. Because the arbitrator never completed his duty, the court found that remand to do so was proper. Tully Const. Co. v. Canam Steel Corp., No. 1:13-cv-03037-PGG (USDC S.D.N.Y. Mar. 2, 2015).

This post written by Zach Ludens.

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In a case involving a FINRA arbitration between investors and their financial advisor, Judge Anita S. Brody of the United States District Court for the Eastern District of Pennsylvania found that she did not have the jurisdiction to hear a challenge of the arbitration award. Though FINRA rules may be subject to heavy federal regulation and approval by the SEC, the court found that this was not enough to create a federal question to give the court jurisdiction over the challenge. Instead, the court found that under § 10 of the Federal Arbitration Act, review of an arbitration award with underlying federal questions does not in itself implicate a federal question sufficient for jurisdictional purposes. This is because where there is no merits review, “the substance of the underlying arbitration is generally irrelevant to a district court’s consideration of a motion to vacate.” Instead, the motion to vacate must raise a federal question on its face. The court further held that an argument of manifest disregard of federal law in such an instance was still heard as a claim under § 10 of the Federal Arbitration Act, which is “something of an anomaly in that it does not create any independent federal-question jurisdiction under 28 U.S.C. § 1331 or otherwise.” Accordingly, the court dismissed the case for lack of subject-matter jurisdiction. Goldman v. Citigroup Global Markets Inc., No. 2:12-cv-04469-AB (USDC E.D. Pa. May 19, 2015).

This post written by Zach Ludens.

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In Walker v. TA Operating, LLC et. al., Case No. 14-41046 (5th Cir. May 22, 2015), the Fifth Circuit Court of Appeals dismissed an appeal of an employment discrimination case subject to an arbitration agreement due to lack of jurisdiction. In the underlying case, the district court granted the defendant’s motion to compel arbitration and administratively closed the case because the district court determined that the parties were subject to a valid and applicable arbitration agreement. The district court’s decision was dictated by the Federal Arbitration Act (the “FAA”), which grants district courts two powers: 1) the authority to issue an order directing that arbitration proceed in the manner provided for in such agreement; and 2) the authority to stay an arbitrable proceeding pending the outcome of the contractually-required arbitration. On appeal, the Fifth Circuit dismissed the cased due to lack of jurisdiction because an order by the district court administratively closing a case is tantamount to a stay, and bars appellate review. The Fifth Circuit explained that a district court has jurisdiction over final decisions of the district court and that Congress explicitly provided that appellate courts lack jurisdiction over a district court order granting a stay of any action under section 3 of the FAA or directing arbitration to proceed under section 4 of the FAA.

This post written by Kelly A. Cruz-Brown.

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In late May, the Tenth Circuit Court of Appeals affirmed a district court decision to lift an arbitration stay for Plaintiff Pre-Paid Legal Services, Inc. (“Pre-Paid”) as Defendant Todd Cahill (“Cahill”) failed to pay his respective share of the arbitration fees.

Pre-Paid sells legal service contracts whereby members deal with a network of attorneys. Cahill was a sales associate for Pre-Paid. His employment contract contained an arbitration provision as well as several non-compete provisions. Pre-Paid sued Cahill alleging that Cahill used information from his prior employment to recruit new associates after he left the company. Cahill removed the state filed action to federal court whereby the action was stayed pending arbitration. Cahill failed to pay his respective share of the arbitration fees, however, and the arbitration was cancelled. On appeal, Pre-Paid argued that the appellate court did not have jurisdiction to hear the appeal. Cahill argued that arbitration must be heard on the merits before any stay could be lifted.

Federal arbitration laws requires a court to stay an action pending arbitration provided that “the applicant for the stay is not in default in proceeding with the arbitration.” The court reasoned that Cahill’s failure to pay the required arbitration fees made him in default and therefore the federal stay guarantee should not apply. The court also found that they had jurisdiction to review the district court’s lift to stay the proceedings, citing to circuit court and supreme court authorities.

Pre-Paid Legal Serv., Inc. v. Cahill, No. 14-7032, (10th Cir. May 26, 2015)

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

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Lincoln General Insurance Company (“Lincoln”) appealed a district court judgment, despite it having won a $16.5 million dollar tortious interference verdict, to the Fifth Circuit Court of Appeals. Lincoln alleged that the district court erred in dismissing various claims before the trial began, including: breach of contract, breach of fiduciary duty, conversion, and derivative liability.

The lawsuit arose from a fronting arrangement whereby Lincoln reinsured 100% of State and County Insurance Company’s (“State”) liabilities. According to the suit, U.S. Auto Insurance Services (“US Auto”) served as general agent to State. For this arrangement, Lincoln expected to receive 10% of premium payments. The rest of expected premium payments were to be divided between US Auto for management services in conjunction with payments to policyholders. Despite paying out less than anticipated for filed claims, Lincoln claimed it lost millions of dollars.

In a morass of procedural history spanning six years, the Fifth Circuit Court reversed the district court’s refusal to alter its judgment to include a breach of contract claim against U.S. Auto. The Fifth Circuit Court also reversed the dismissal of a tortious interference claim against Jim Maxwell. Jim and Doug Maxwell were co-owners of a business that became the recipient of $50 million dollars from US Auto. The Fifth Circuit Court noted that even if one included the more rigorous “active participation” element to tortious interface–a debatable position in Texas—Jim Maxwell’s conduct was tortious. Defendants attempted to skirt this issue altogether by alleging that the tortious interference award was barred by a two-year statute of limitations. The Fifth Circuit Court disagreed, noting that Lincoln filed the action before the limitations period had run out as they “did not and could not have” reasonably known about the facts comprising the tortious interference claim until US Auto became insolvent.

Lincoln Gen. Ins. Co. v. U.S. Auto Ins. Serv., Inc., No: 13-10589 (5th Cir. May, 18, 2015)

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

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A federal district court has entered judgment confirming an arbitration award entered in favor of Employers Insurance Company of Wausau against Continental Casualty. The dispute arose out of a certificate of casualty facultative reinsurance between the parties. At issue was Continental’s obligation under the certificate with respect to one claim submitted by Wausau. Wausau demanded arbitration with Continental under the certificate and the panel, without hearing oral argument on the parties’ motions for summary adjudication, issued its award. Continental did not object to Wausau’s prejudgment interest calculation on the award nor did it answer Wausau’s petition to confirm the award. By Order dated January 26, 2015, the court confirmed the award and directed the clerk of court to enter judgment thereon. The judgment was entered on February 20, 2015. Employers Insurance Co. of Wausau v. Continental Casualty Co., No. 1:14-CV-09192 (USDC S.D.N.Y. Feb. 20, 2015).

This post written by Renee Schimkat.

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