Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

Second Circuit Affirms Confirmation of Arbitration Award Involving Dispute About Foreign Restaurant Franchises

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The Second Circuit Court of Appeals has rejected a challenge to a confirmation of an arbitration award upholding the nonrenewal of a master franchise agreement for Subway restaurants.

Beginning in the 1990s, Subway International B.V. entered into a series of master franchise agreements with Subway Russia that allowed Subway Russia to operate Subway sandwich franchises in Russia. In 2020, Subway decided not to renew the master franchise agreement, claiming that it had the right to do so because of certain “defaults” by Subway Russia. Subway Russia disagreed and the parties arbitrated the matter.

An arbitrator ruled in favor of Subway. The parties cross-moved to confirm and vacate that award. The district court remanded the case for the arbitrator to decide one additional issue. After the arbitrator had ruled on that issue, the parties again cross-moved to confirm and vacate the award and the district court confirmed the award.

Subway Russia appealed and the Second Circuit affirmed. The court rejected Subway Russia’s arguments that: (1) Subway’s second petition to confirm was untimely; (2) the district court erred in changing its initial decision; and (3) the district court’s decisions were contradictory. The court explained that the district court appropriately remanded the case and thus exercised jurisdiction over the second petition for confirmation. The court held that the district court had authority to correct its first decision, which remanded the matter for a further ruling, and that its second decision did not conflict with its first decision.

Subway International B.V. v. Subway Russia Franchising Co., No. 24-1702 (2d Cir. May 12, 2025).

Ohio Federal Court Grants Motion to Confirm Arbitrator’s Award of Attorneys’ Fees and Costs to Prevailing Party

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In Preferred Wireless LLC v. T-Mobile USA Inc., the U.S. District Court for the Southern District of Ohio addressed a motion by defendant T-Mobile to confirm an arbitrator’s award of attorneys’ fees and costs, and also addressed a motion by plaintiff Preferred Wireless to vacate that award.

The underlying arbitration arose out of the merger between T-Mobile and Sprint in April 2020. Preferred Wireless was a Sprint retailer operating more than 80 stores at the time of the merger. After the merger, T-Mobile absorbed Sprint’s operations, and Preferred Wireless and T-Mobile entered into a retailer services agreement (RSA). After T-Mobile closed several stores, Preferred Wireless filed a lawsuit alleging that T-Mobile misrepresented the number of stores it intended to close, which “induc[ed] Preferred Wireless to sign the RSA.” Preferred Wireless filed its complaint in the Delaware County Court of Common Pleas alleging fraud, fraudulent inducement, breach of contract, and violations of the Washington Consumer Protection Act and the Washington Franchise Investment Protection Act. T-Mobile removed the case to the U.S. District Court for the Southern District of Ohio, and the parties then agreed to arbitration.

The arbitrator dismissed the Washington Franchise Investment Protection Act claim and then held a five-day hearing, after which all remaining claims of Preferred Wireless were dismissed. T-Mobile then filed a fee petition requesting more than $3.3 million in attorneys’ fees and costs under the RSA, which provided that the “prevailing party” is entitled to recover reasonable attorneys’ fees and costs. Preferred Wireless opposed the fee application, arguing that “because the Interim Arbitration Award did not include an award of damages, Defendants were not considered the prevailing party under the RSA.” The arbitrator rejected the argument, reduced the amount of the fee request, and awarded T-Mobile approximately $2.9 million. The court granted T-Mobile’s motion to confirm the award, finding that the arbitrator did not exceed his authority in awarding fees to T-Mobile as the prevailing party and rejecting the argument that a prevailing party must be awarded monetary relief to be entitled to a prevailing party fee award. The court also found that the arbitrator did not “act in manifest disregard of the law” by awarding fees without contemporaneous billing records to support the application, finding that the fee request was reasonable. The court confirmed the award of $2.9 million in attorneys’ fees, costs, and expert fees, and denied the motion by Preferred Wireless to vacate the award.

Preferred Wireless LLC v. T-Mobile USA Inc., No. 2:22-cv-00978 (S.D. Ohio, May 6, 2025).

Court Denies Vacatur of Zero-Damage Arbitration Award, Finding No Manifest Disregard of the Law

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The case involved a dispute between a medical device manufacturer and a purchaser. The petitioner, Northgate Technologies Inc., alleged that United States Endoscopy Group Inc. breached a requirements contract by purchasing medical devices and supplies from a different manufacturer. U.S. Endoscopy had been purchasing the devices and supplies from Northgate for years, but, in 2021, U.S. Endoscopy began purchasing devices and supplies from a new competing company that had been acquired by its corporate parent. Northgate alleged that this change resulted in nearly $4 million in damages from lost sales.

In February 2024, Northgate filed a demand for arbitration against U.S. Endoscopy, contending that U.S. Endoscopy breached the parties’ agreement. The parties attended an American Arbitration Association commercial arbitration in which the arbitrator found that U.S. Endoscopy’s parent company breached the parties’ agreement. The arbitrator determined, however, that there were no damages for lost profits because, among other reasons, the number of devices that U.S. Endoscopy or its affiliates purchased from Northgate remained consistent throughout the term of their agreement.

In October 2024, Northgate filed a petition in federal court to vacate the arbitration award, contending that the arbitrator exceeded his powers and displayed a manifest disregard of the law (a doctrine recognized in certain circuits, including the Sixth Circuit). The court denied the petition under the Federal Arbitration Act and the Illinois Uniform Arbitration Act. The court explained that, to show manifest disregard, a party must show more than a mere error in interpretation or application of the law. A party must provide evidence that the arbitrators were aware of the relevant law but chose to ignore it.

Here, the court held that section 2-708(2) of the Uniform Commercial Code provided the applicable measure of lost profit damages and that recovery of lost profits in Illinois is allowable if the loss is proved with a reasonable degree of certainty and such profits were within the reasonable contemplation of the parties at the time the contract was entered. The arbitrator considered applicable case law and analyzed whether the breach was reasonably foreseeable at the time of contracting, and rendered his decision based on finding a lack of evidence that met that legal standard. The court therefore found that the arbitrator came to a “legally plausible” conclusion and did not manifestly disregard the law.

The court rejected Northgate’s arguments, which conflated proof of the breach of contract with proof of damages, and which incorrectly contended that the arbitrator erred by considering evidence of historic sales and past profits. The court concluded: “[Northgate] fails to show that the arbitrator manifestly disregarded the law. Instead, [Northgate’s] arguments amount to a general dissatisfaction with the arbitrator’s decision.” Accordingly, the court denied Northgate’s motion to vacate the arbitrator’s award and granted U.S. Endoscopy’s motion to confirm the award.

Northgate Technologies Inc. v. United States Endoscopy Group, Inc., No. 1:24-cv-01885 (N.D. Ohio Apr. 29, 2025).

Second Circuit Affirms Dismissal of Challenge to FINRA Award

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The Second Circuit Court of Appeals has affirmed the dismissal of a challenge to a FINRA arbitration award after concluding that federal courts lacked jurisdiction over the matter.

Versel Green filed an action seeking to vacate a FINRA arbitration award in favor of Bank of America Merrill Lynch and other entities. The district court dismissed his action for lack of jurisdiction. Green appealed. He conceded that no diversity existed but claimed the federal courts had federal question jurisdiction over his claim. The Second Circuit disagreed. It noted that even though Green invoked the Federal Arbitration Act, he still had to present an “independent jurisdictional basis” for his claim that appeared “on the face of the application itself.” The Second Circuit concluded that Green had not done that, explaining that “quarrels about legal settlements — even settlements of federal claims — typically involve only state law, like disagreements about other contracts.”

Green v. Bank of America Merrill Lynch, No. 24-2550 (2d Cir. May 13, 2025).

Second Circuit Holds New York Convention Is “Self-Executing,” Reverses Orders Denying Motion to Compel Arbitration

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In an opinion issued on May 8, 2025, the Second Circuit Court of Appeals addressed two cases: Certain Underwriters at Lloyd’s London v. 3131 Veterans Blvd LLC and Certain Underwriters at Lloyd’s London v. MPIRE Properties LLC. At issue in both cases was an insurance policy issued by surplus lines insurers that included a mandatory arbitration clause covering “all matters in difference between the Insured and the [Insurers] … in relation to this insurance” and directing that the arbitration take place in New York with the arbitration tribunal applying New York law.

The insurance policies at issue in both cases covered commercial property in Louisiana damaged in August 2021 during Hurricane Ida. When their respective claims for damages could not be resolved, the insureds filed suit in Louisiana state court. In response, the insurers filed suit in the Southern District of New York to enjoin the insureds from pursuing their Louisiana state court actions and to compel arbitration under the Federal Arbitration Act (FAA) and the New York Convention. The insureds opposed, arguing Louisiana state insurance law voided the arbitration provisions in their policies because, under the McCarran-Ferguson Act (MFA), that Louisiana law “reverse preempted” the FAA and the New York Convention. The district court in both cases ruled the Louisiana law, which prohibits arbitration — rather than the FAA or New York Convention — is controlling because, under the MFA, the Louisiana law “reverse preempted” the FAA and the New York Convention. The insurers appealed.

The Second Circuit first noted that mandatory arbitration clauses are enforceable under the FAA, and the FAA would ordinarily preempt a state law that seeks to void or limit those clauses. Recognizing an exception to the rule, the court noted that “Congress created an exception to the usual rules of preemption” under the MFA, which provides that “state laws enacted for the purpose of regulating the business of insurance are generally exempt from preemption.” The court rejected the insurers’ argument that the reverse preemption issue should be resolved by the arbitration tribunal, concluding that it “cannot rely on the FAA to hand off to an arbitration tribunal the critical antecedent question of whether the MFA allows Louisiana law to void the arbitration clauses at issue in this case.”

The court then noted that the MFA’s reverse preemption rule does not apply to federal policies, but to acts of Congress, and a state law can reverse preempt a treaty provision under the MFA “only when that treaty provision relies on an ‘Act of Congress’ to take effect — in other words, when the provision is not ‘self-executing.’” With that backdrop, the court then framed the issue in these cases as “whether Article II Section 3 of the New York Convention is self-executing, making it exempt from reverse-preemption under the MFA, or whether it relies on an Act of Congress for its effect, such that it can be reverse-preempted by Louisiana law.” The court then applied applicable precedent and found the New York Convention is self-executing, “with the result that it cannot be reverse preempted by Louisiana law under the MFA.” The court abrogated a prior decision of the Second Circuit to the extent it held Article II Section 3 of the New York Convention is not self-executing and reversed the district court’s decisions to the extent they relied on the abrogated decision, and remanded both cases for further proceedings consistent with its opinion.

Certain Underwriters at Lloyd’s London v. 3131 Veterans Blvd LLC and Certain Underwriters at Lloyd’s London v. Mpire Properties LLC, Nos. 23-1268 and 23-7613 (2d Cir. May 8, 2025).