Reinsurance Focus

In a case involving a dispute between a not-for-profit corporation administering a self-insured group workers’ compensation fund and their investment advisor and broker-dealer, the Supreme Court of Alabama granted the fund’s motion to vacate an arbitration award in the advisors’ favor. The arbitration was conducted pursuant to FINRA’s rules for arbitration proceedings, which call for the selection of a three-arbitrator panel. However, because the court found that one of the arbiters failed to disclose a potential conflict of interest prior to his selection, it reversed the panel’s award. The arbiter was a vice president and partner in a financial-services firm that had served as a co-underwriter with the advisors on 36 equity and debt issuances, had been codefendants with the advisors in a number of lawsuits, was represented by the same counsel as the advisors, and had involvement with the investment product alleged in this lawsuit. This was enough to constitute a “reasonable impression of partiality” even though the arbiter claimed that he did not know about this relationship on behalf of his firm. Applying the constructive knowledge doctrine, the court found that there was “evident partiality” on the part of the arbiter and reversed the arbitration award under the Federal Arbitration Act. The lower court had refused to disturb the award, necessitating the lower court’s reversal as well. Municipal Workers Compensation Fund, Inc. v. Morgan Keegan & Co., No. 1120532 (Ala. Apr. 3, 2015).

This post written by Zach Ludens.

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In a dispute involving the expansion of the Panama Canal, a federal district court has denied an application for an order pursuant to 28 U.S.C. § 1782 to obtain discovery in aid of foreign litigation. The controversy concerned Grupo Unidos por el Canal, S.A.’s (GUPC’s) ex parte application to obtain discovery from an entity with whom the Autoridad del Canal de Panama (ACP) contracted to provide program management services in connection with the Panama Canal project. The contract between GUPC and ACP contains an arbitration clause which provides that any dispute arising from the Canal project be arbitrated in Miami, Florida, under the Rules of Arbitration of the International Chamber of Commerce.

GUPC, along with several co-claimants, commenced the arbitration proceeding against ACP. The Miami-based proceeding is alleged to be the “international tribunal” supporting GUPC’s Section 1782 request for documents. Several objections were made to that request, including (1) the Miami arbitration is a private commercial arbitration and not a “tribunal” within the ambit of Section 1782, (2) the Miami arbitration is not a “foreign or international” tribunal within the meaning of Section 1782 because the seat of the arbitration is in the United States, and (3) the proposed subpoena is unduly burdensome, intrusive, and an attempt to circumvent the contractual procedural and discovery limitations in the arbitration. The court found the proceeding was not a “tribunal” for purposes of Section 1782 and, therefore, found it unnecessary to consider whether the private, Miami-based arbitration was “international.” The court also found that even if the statutory requirements were met, Grupo would not be allowed discovery of 165 million documents that were physically located in Panama, noting that such discovery would be overly burdensome. Grupo’s ex parte application was denied. In re Grupo Unidos Por El Canal, S.A., No. 1:14-mc-00226 (USDC D. Colo. Apr. 17, 2015).

This post written by Renee Schimkat.

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A Special Focus article by Rollie Goss discusses a Court of Appeals opinion which gives practical effect to the honorable engagement provision of a reinsurance agreement.

This post written by Rollie Goss.

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A New York district court denied defendant Gogo LLC and Gogo Inc. (collectively “Gogo”) motions to transfer venue, compel arbitration, and dismiss for lack of standing in a lawsuit relating to internet services.

Plaintiffs filed a putative class action against Gogo alleging common law breach of the implied covenant of good faith and fair dealing, unjust enrichment, and violation of various consumer protection statutes. The lawsuit stems from the purchase of wireless internet connectivity services, available in airports and aboard air flights. Plaintiffs’ allege that Gogo mislead customers into purchasing a single one-month wireless internet service subscription, but then automatically renewed those services without obtaining their signatures or authorization.

The court looked into whether plaintiffs were given effective notice of the terms and conditions for their online purchases. As such, the offeror, in this case Gogo, “must show that a reasonable person in the position of the consumer would have known about what he was assenting to.” The court found that Gogo did not effectively draw plaintiffs’ attention to their terms and conditions nor did they provide their terms and conditions to purchasers via email or other methods of delivery. The court finally addressed Gogo’s jurisdictional argument. Gogo alleged that because plaintiffs were eventually fully reimbursed for subsequent internet charges, they lacked standing to sue. The court, citing Second Circuit precedent, found that since plaintiffs have “a practical stake in the dispute,” they continue to have standing to sue. Berkson v. Gogo, Case No. 14-CV-1199 (USDC E.D.N.Y. April 9, 2015).

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

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This case involved a FINRA arbitration held to resolve a dispute over money allegedly owed to Ameriprise Financial Services by a former financial adviser. The financial adviser appealed the district court’s confirmation of the award favoring Ameriprise, contending that the award was procured by fraud and that the arbitrator committed a manifest disregard of the law. On appeal, the financial adviser first contended that the award should be reviewed under the Wisconsin Arbitration Act instead of the FAA. The Seventh Circuit, however, disagreed, holding that the parties’ arbitration agreement expressly selected the FAA, and that the FAA was applicable notwithstanding potential application of other Wisconsin law on the merits of the dispute. Regarding “manifest disregard,” the Seventh Circuit rejected the financial adviser’s contention that the panel inappropriately applied federal securities laws instead of certain states’ laws. The court explained that it “is not manifest disregard of a law to consider [the state law] and its relation to [federal law] and then conclude that the law does not apply in the specific factual situation at issue.” The court also noted that the panel had not issued a written opinion, and that the court would not “second-guess the arbitrators’ decision based on speculation when it is possible for the panel to have reached the decision it did based on the evidence presented to it.” As to fraud, the Seventh Circuit held that Ameriprise’s counsel’s closing argument, in which counsel asserted that the financial adviser “violated” certain laws and characterized certain cases as “on point,” did not misrepresent the record or the law. Renard v. Ameriprise Financial Services, Inc., No. 14-1730 (7th Cir. Jan. 30, 2015).

This post written by Michael Wolgin.

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A state appellate court in California reversed a trial court’s decision to deny defendant Santa Lucia Preserve Company’s (“Santa Lucia”) motion to compel arbitration, holding that plaintiffs failed to prove that the underlying arbitration agreement was substantively unconscionable in order for that agreement to be invalidated.

Plaintiffs filed a putative class action complaint against Santa Lucia alleging the company failed to pay requisite overtime compensation in addition to other violations of California’s Business and Professions Code. Santa Lucia moved to compel arbitration under previously signed employment agreements with plaintiffs. Plaintiffs alleged that the arbitration agreements were substantively unconscionable as they lacked mutuality and that they did not provide for judicial review. The trial court denied Santa Lucia’s motion to compel arbitration finding the agreements unconscionable both procedurally and substantively.

The appellate court reversed, finding that the arbitration agreements were not substantively unconscionable for a number of reasons. First, the agreements bound both employee and employer to arbitration for “any dispute or claim.” Second, the agreements waived court and jury trials for both parties. The court noted that judicial review is allowed when “arbitrators exceed[] their power and the award cannot be corrected without affecting the merits of the decisions…” The court determined that plaintiffs’ claims for overtime pay are subject only to the review requirements in Armendariz, namely that an arbitration decision be written and be reviewed under limited circumstances. Valdez v. Santa Lucia Preserve Co., No. H040685 (Cal. App. 6th Dist., Mar. 23, 2015).

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

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The dispute at issue in this case involved claims of fraud in the sale of condominium units asserted by unit purchasers against the condominium developer. Arbitration under the AAA was underway between the parties, when it was discovered that the arbitrator had failed to disclose that he had become involved in business ventures to finance litigation for investment purposes. The developer requested that the AAA disqualify the arbitrator and stay the arbitration, but the AAA denied the request. The developer then convinced the district court to intervene in the pending arbitration and disqualify the arbitrator.

On appeal, the Ninth Circuit determined that the court committed “clear error,” holding that: (1) “the financial relationship in this case is contingent, attenuated, and merely potential” and did not satisfy “evident partiality”; and (2) “the district court’s equitable concern that delays and expenses would result if an arbitration award were vacated is manifestly inadequate to justify a mid-arbitration intervention, regardless of the size and early stage of the arbitration.” The Ninth Circuit entered a writ of mandamus, and directed the district court to vacate its ruling, finding that the lower court’s “interference in ongoing arbitration proceedings raises the specter” of confusion in the court system, and creates “new and important problems” and an issue of law of first impression. In re Sussex, No. 14-70158 (9th Cir. Jan. 27, 2015).

This post written by Michael Wolgin.

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Defendant‐appellant Benihana of Tokyo, LLC appealed a 2014 order of the United States District Court for the Southern District of New York granting the application of plaintiff‐appellee Benihana, Inc. for a preliminary injunction in aid of arbitration of a dispute arising under the parties’ license agreement. The district court enjoined Benihana of Tokyo from: (1) selling unauthorized food items at the restaurant it operates pursuant to the license agreement; (2) using certain trademarks in connection with the restaurant in a manner not approved by the license agreement; and (3) arguing to the arbitral panel, if it rules that Benihana of Tokyo breached the license agreement, that Benihana of Tokyo should be given additional time to cure any defaults. The Second Circuit concluded that the district court was within its discretion in granting the first and second components of the injunction. However, the district court erred in restricting the arguments Benihana of Tokyo may make to the arbitral panel because the parties’ dispute had been submitted to arbitration. The district court undermined the arbital process by independently assessing the merits of the case instead of confining its role to preserving the status quo pending arbitration. Prohibiting a court’s assessment of the merits of the case until after the arbitral decision has been rendered was consistent with the Federal Arbitration Act and the “strong federal policy” favoring arbitration. The Act contains no provision for a court’s pre‐arbitration assessment of whether a particular remedy is supported by the parties’ agreement and therefore may be awarded by the arbitrator. Also, the Second Circuit pointed out that if a court determines the merits of the parties’ arguments in advance of a pending arbitration, the purpose for resorting to arbitration – to avoid litigation – would be frustrated. Finally, refraining from a view on the merits of the case until after an arbitral decision was rendered would also assist the district court in applying the proper and highly deferential standard of review to those decisions. Benihana, Inc. v. Benihana of Tokyo, LLC, No. 14-841 (2d Cir. Apr. 28, 2015).

This post written by Kelly A. Cruz-Brown.

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Because a reinsurer participated in the arbitrator selection process, the reinsurer was precluded from seeking a stay on statute of limitations grounds pursuant to New York law, a New York appellate court ruled. As discussed in a previous post, the arbitration agreement stated that the parties’ arbitration would be governed by the “arbitration laws of New York State.” New York’s arbitration laws state that a party may raise statute of limitations defense as a threshold issue in the courts. By contrast, the Federal Arbitration Act states that the limitations defense is presumed to be reserved to the arbitrator, rather than the court, except where the parties agree to leave that issue to the court. In its most recent ruling, the court held that although the reinsurer had waived its ability to have the courts determine the statute of limitations issue, that issue may be determined by the arbitrators. In re ROM Reinsurance Management Co. v. Continental Insurance Co., No. 11809 654480/12 (N.Y. App. Div. May 21, 2014).

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

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A district court in New York denied an insurer’s motion for reconsideration of a partial summary judgment order in favor of the reinsurer that concluded that the reinsurance limits set forth nine certificates of reinsurance at issue in the case were inclusive of costs and expenses, and created an overall cap of liability on the certificates. The insured moved for reconsideration of the district court’s opinion based on the Second Circuit’s intervening unpublished opinion, not to be cited as precedent, in Utica Mutual Insurance Co. v. Munich Reinsurance America, Inc., 594 F. App’x 700 (2d Cir. 2014). The district court denied the motion for reconsideration because the insurer conceded that the Utica decision represented an important clarification of existing law and was not in of itself an intervening change in law. Thus, the insurer failed to point to any change in controlling law or any new evidence that might reasonably be expected to alter the conclusion reached by the Court in granting the reinsurer’s partial summary motion. Global Reinsurance Corp. v. Century Indemnity Co., Case No. 13 Civ. 06577 (USDC S.D.N.Y. April 15, 2015).

This post written by Kelly A. Cruz-Brown.

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