UNITED STATES SUPREME COURT CONSIDERING A CALIFORNIA APPELLATE COURT OPINION INVALIDATING A CLASS ACTION ARBITRATION WAIVER

In a Special Focus article Rollie Goss previews another arbitration case coming before the United States Supreme Court involving the issue of whether a class arbitration waiver is unconscionable, and the impact of such a finding on the viability of the agreement to arbitrate.

This post written by Rollie Goss.

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PARTY WAIVED UNTIMELY DEFENSE TO ARBITRATION, NOTWITHSTANDING PARTY’S CLAIM THAT COUNSEL COMMITTED MALPRACTICE

The court confirmed an arbitration decision awarding damages in favor of workers compensation insurers against various insured employee-staffing companies. One of the defendant companies contended that it never executed the underlying agreement with the insurers, that the panel thus exceeded their powers in entering the award, and that the award should be vacated. The court rejected this argument, agreeing with the panel’s determination that the company waived its non-signatory defense. The court examined the procedural history of the arbitration and held that the arbitration proceeding continued for twenty-six months before the defendant asserted its defense. The court found that the company was “represented by legal counsel throughout the dispute resolution process,” that as “a matter of law, litigants are bound by the acts and omissions of their chosen agents, including lawyers,” and that “legal bungling” did “not justify reopening a judgment.” The court was further persuaded by the fact that the company first raised the defense only after a partial final award was entered, ordering the company to post a bond. While the court noted that it did “not take lightly” the company’s sworn statement that it did not authorize its purported attorney to represent that it approved or ratified the underlying arbitration agreement, the court explained that this was an alleged legal malpractice matter and not a basis to vacate the arbitration award. Zurich American Insurance Co., et al. v. Staffing Concepts International, Inc., et al., Case No. 1:14-cv-03454 (USDC N.D. Ill. July 23, 2015).

This post written by Michael Wolgin.

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TEXAS APPEALS COURT AFFIRMS SUMMARY JUDGMENT FOR TEXAS COMPTROLLER IN RISK POOL ROW

A Texas appeals court affirmed a summary judgment that rejected an attempt by two insurers to recover more than $1.1 million for taxes, penalties, and interest on certain reinsurance agreements. Argonaut Insurance Company and Argonaut Great Central Insurance Company (jointly “Argonaut”) provided insurance to two self-funded government risk pools formed on behalf of Texas counties and school districts. These risk pools provided various insurance products to their membership. As part of a reinsurance arrangement with these risk pools, Argonaut agreed to provide indemnity for losses accumulated under member insurance policies in return for member premium payments. Argonaut considered these premium payments non-taxable “reinsurance income,” but the Texas Comptroller rejected this classification finding that “for premiums to qualify as paid for reinsurance, the transaction must occur between two licensed insurance companies.”

On appeal, all parties agreed that the main issue centered on “whether the premiums received by Argonaut from [the risk pools] are premiums received from another insurer for reinsurance.” Argonaut argued that the agreements with the risk pools have reinsurance characteristics, a factor that outweighs whether or not the risk pools are licensed insurance companies. The court found that while a risk pool “is expressly authorized to purchase reinsurance, it is also expressly declared not to be insurance or an insurer” under Texas insurance and tax codes. For these reasons, the court affirmed the trial court’s grant of summary judgment for the Texas Comptroller. Argonaut Ins. Co. et al. v. Hegar et al., No. 03-13-00619-CV (Tex. Ct. App. June 24, 2015).

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

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FOURTH CIRCUIT APPLIES “LIMITED REVIEW” OF CLASS ARBITRATION AWARD AND FINDS NO MANIFEST DISREGARD OF THE LAW

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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SECOND CIRCUIT DENIES JP MORGAN’S ATTEMPT TO FORCE ARBITRATION

The Second Circuit affirmed a New York district court ruling that found that the FINRA arbitration rules, one of which prohibits arbitration of putative or collective class actions, was incorporated within the subject employment agreement. Former financial advisers of the progeny of J.P. Morgan Chase & Co. sued J.P. Morgan under state and federal law for violations of overtime laws. J.P. Morgan moved to compel arbitration pursuant to a clause within the advisers’ employment contracts. In denying their motion, the district court reasoned “that the arbitration clause requires arbitration of only those claims required to be arbitrated under the FINRA Rules and that, under New Rule 13204, Plaintiffs’ claims cannot be arbitrated.”

On appeal, J.P. Morgan argued against the trial court’s interpretation of the phrase “required to be arbitrated by the FINRA Rules” as well as the court’s use of the amended version of Rule 13204, which was not in effect when the parties originally entered into their contract. The court used a grammatical and definitional analysis to determine that the phrase applies to all claims and controversies. They also found that when JP Morgan agreed to arbitrate according to the FINRA rules, they also took on the risk that these rules may change. Regardless of that risk, the court noted that under either the original version of Rule 13204 or the amended version, FINRA prohibits the arbitration of collective class actions claims. Lloyd et al. v. JP Morgan Chase & Co. et al., No. 13-3963-cv (2d Cir. June 29, 2015).

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

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REINSURER’S MOTION FOR RECONSIDERATION OVER LIABILITY CAPS DENIED

In a case on which we previously reported, a federal court in New York recently denied plaintiff insurer’s motion to reconsider the court’s order granting defendant reinsurer’s motion for partial summary judgment. In that order, the court granted defendant Clearwater Insurance Company’s (Clearwater) motion for partial summary judgment because it found that the Liability Clauses in the facultative reinsurance certificates that Clearwater issued to plaintiff Utica Mutual Insurance Company (Utica) established limits on Clearwater’s liability. Specifically, these clauses capped Clearwater’s overall liability for losses (amounts an insurer pays to indemnify its policyholder) and expenses (amounts an insurer pays to defend its policyholder). Applying New York law, the court concluded that the contract was unambiguous and that the caps should be honored.

In its motion for reconsideration, Utica asked the court to deny Clearwater’s motion for partial summary judgment, arguing that a recent Second Circuit order represented an intervening change in controlling law. The court, however, denied Utica’s motion for three reasons: (1) because it was untimely; (2) because the order cited in Utica’s motion did not constitute an intervening change in controlling law; and (3) because even if the order were such an intervening change, it was distinguishable from the case at bar. Utica Mutual Ins. Co. v. Clearwater Ins. Co., No. 6:13-cv-01178 (USDC N.D.N.Y. July 23, 2015).

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

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PENNSYLVANIA DISTRICT COURT REJECTS REINSURER’S “FIRST-FILED” COMPLAINT AS IMPROPERLY ANTICIPATORY AND FILED IN BAD FAITH

A reinsurer filed a complaint in the Eastern District of Pennsylvania seeking declaratory relief regarding its obligations under a reinsurance contract on May 7, 2015. The defendants filed an action concerning the same parties, facts, and issues in the District of Connecticut on May 12, 2015. Despite the fact that the Pennsylvania action was filed first, the court declined to exercise jurisdiction under the Declaratory Judgment Act.

On May 1, 2015, the defendants requested payment by May 15th from the reinsurer under the parties’ reinsurance contract and indicated that they would file suit in the District of Connecticut if payment was not timely received. Instead of either paying or responding, the reinsurer filed its complaint for declaratory judgment, preemptively, in the Eastern District of Pennsylvania. The defendants moved to dismiss. Noting that the timing of these events suggested an improper first filing, the Pennsylvania court dismissed the reinsurer’s complaint. Fatal to the reinsurer’s action were the court’s finding that the Pennsylvania filing “was filed in bad faith, as it was improperly anticipatory and solely for declaratory relief.” Additionally, the court found that the reinsurer’s first filed action was merely an “attempt to secure better procedural law by rushing to the [Pennsylvania] courthouse ahead of [the defendants].” Finally, because the defendants were able to establish a nexus between Connecticut and the dispute, and because the plaintiff had improperly “fired the first shot” while the defendants’ pre-litigation demand was pending, the court held that the reinsurer was not entitled to the benefits of the equitable “first-filed” rule. Excalibur Reinsurance Corp v. Select Ins. Co., et al., Case No. 15-2522 (USDC E.D. Pa. July 7, 2015)

This post written by John A. Camp.

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TENTH CIRCUIT FINDS CONCEALMENT OF ARBITRATION AGREEMENT TO CONSTITUTE WAIVER OF RIGHT TO ARBITRATE

The Tenth Circuit recently held that Cox Communications, Inc., (Cox) had waived its right to arbitration while defending a class action lawsuit brought on behalf of its cable subscribers. These subscribers sued the communications company in 2009 in several jurisdictions, alleging that the company illegally tied provision of its cable service to rental of a set-top box. These lawsuits were consolidated and transferred to the United States District Court for the Western District of Oklahoma. In response, Cox moved to dismiss and while the motion was pending, began inserting mandatory arbitration clauses into its various customer contracts, including those of class members. Cox did not notify the district court it was doing so, however. Efforts to certify a nationwide class failed, so plaintiffs sought to certify various geographic classes. These class actions were once again consolidated and transferred to the Western District of Oklahoma.

Before the district court, Cox moved unsuccessfully to dismiss before the parties engaged in substantial discovery and named plaintiff Healy moved to certify the class. The district court granted class certification and Cox appealed to the Tenth Circuit, but its petition was denied. Throughout these proceedings, Cox never mentioned the arbitration clauses until it filed motions for summary judgment and to compel arbitration. The district court denied the motion to compel on the basis that Cox’s prior conduct in the litigation constituted waiver. Cox appealed, and the Tenth Circuit affirmed, noting that both plaintiffs and the two courts would be prejudiced if arbitration were allowed. Healy v. Cox Commc’ns., Inc., No. 14-6158 (10th Cir. June 24, 2015).

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

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CALIFORNIA SUPREME COURT UPHOLDS CONSUMER CONTRACT ARBITRATION PROVISION UNDER CALIFORNIA’S UNCONSCIONABILITY FRAMEWORK

In a dispute over the purchase of a car, the purchaser filed a class action in California against the car dealer, and the dealer moved to compel arbitration. The dealer invoked the arbitration agreement contained in the automobile sales contract. The agreement contained a class action waiver provision and further provided that if the class waiver is deemed unenforceable, the entire arbitration agreement is unenforceable. The trial court denied the dealer’s motion to compel arbitration, finding the class waiver, and, thus, the entire arbitration agreement to be unenforceable. As we previously reported, the Court of Appeal declined to address the class waiver issue, holding instead that the arbitration appeal provision and the agreement as a whole were unconscionably one-sided. Relying on the U.S. Supreme Court’s decision in AT&T Mobility, LLC v. Concepcion, 131 S. Ct. 1740 (2011), the dealer appealed.

After the trial court decision but before the appellate court ruled, the Supreme Court in Concepcion held that the Federal Arbitration Act (“FAA”) requires enforcement of class waivers in consumer arbitration agreements. The appellate court’s decision focused on whether the arbitration agreement was unconscionable, concluding that several of its provisions “have the effect of placing an unduly oppressive burden on the buyer.” The California Supreme Court noted that after Concepcion, unconscionability remains a valid defense to a motion to compel arbitration, but that state unconscionability laws must not disfavor arbitration by imposing procedures that interfere with the fundamental attributes of arbitration. The court then analyzed the arbitration agreement at issue under California’s unconscionability framework and concluded that while elements of the agreement were burdensome, the provisions the plaintiff claimed were substantively unconscionable — limits on appeals, allocation of costs, retention of the remedy of self-help — did not render the agreement unconscionable. The court likewise rejected the plaintiff’s class waiver arguments. Sanchez v. Valencia Holding Co., No. S199119 (Cal. Aug. 3, 2015)

This post written by John A. Camp.

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SECOND CIRCUIT UPHOLDS ARBITRATION AGREEMENT ABSENT EMPLOYEE’S SIGNATURE

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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