Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

SDNY Confirms Arbitration Order, Holding Order Was Final and Arbitrator Did Not Exceed Authority

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In Subway Franchise Systems of Canada ULC v. Subway Developments 2000 Inc., the U.S. District Court for the Southern District of New York addressed whether an arbitrator exceeded her authority when ordering that one of the parties to the arbitration must continue making interim payments during the pendency of the arbitration, and whether the arbitrator’s order was final and subject to appeal.

The underlying arbitration involved claims brought by Subway Developments 2000 Inc. against Subway Franchise Systems of Canada ULC alleging that Subway Franchise wrongfully terminated two development-agent agreements between the parties. The development-agent agreements included a mandatory arbitration provision that covered disputes regarding the termination of the agreements. The agreements further provided that any arbitration initiated under the agreements is limited to a determination by the arbitrator of the validity of the termination of the agreement by Subway Franchise, potential reinstatement of Subway Development if the termination is found to be invalid, and for a determination of damages. The agreements also included a provision requiring Subway Franchise to make 50% of the periodic payments due to Subway Development during the pendency of the arbitration until the arbitrator issued a decision. Subway Franchise initially took the position that it was excused from making the required payments but later made the payments either directly to Subway Developments or to Subway Franchise’s attorney trust account. Subway Developments objected and brought the matter to the arbitrator’s attention. After a hearing, the arbitrator issued an order requiring Subway Franchise to resume making the payments required under the development-agent agreements directly to Subway Developments during the pendency of the arbitration. Three months later, the arbitrator entered another order imposing sanctions if Subway Franchise failed to comply with the prior order and denying Subway Franchise’s motion to stay the order.

Subway Franchise then filed a petition in the district court seeking to vacate the arbitrator’s order, contending that the arbitrator exceeded her authority by compelling it to make interim payments directly to Subway Developments during the pendency of the arbitration. Subway Developments opposed the petition, arguing that the arbitrator’s order was not final and thus not subject to appeal, or in the alternative, to confirm the arbitrator’s order. In reviewing the petition, the court noted that the case is governed by the New York Convention since both parties to the proceeding maintained their principal place of business outside the United States and that the domestic provisions of the Federal Arbitration Act (FAA) also applied since the arbitration was being conducted in the United States. The court then addressed whether the arbitrator’s order was final and subject to appeal, concluding that since the order “determines temporary control over the money that would be used to secure any potential judgment” the order is “final for the purpose of judicial review.” The court then addressed Subway Franchise’s petition to vacate the order under section 10(a)(4) of the FAA, which allows a party to seek to vacate an arbitration award when the arbitrator “exceeded her powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made.” After a thorough review of applicable case law and the record submitted, the court concluded that Subway Franchise “fails to meet the high standard to demonstrate that the arbitrator exceeded her authority here” and denied Subway Franchise’s petition to vacate the order. The court then addressed Subway Developments’ petition to confirm the arbitration order, concluding that it must confirm the arbitration order under the New York Convention since no grounds exist to vacate the award.

Subway Franchise Systems of Canada, ULC v. Subway Developments 2000, Inc., No. 1:24-cv-00593 (S.D.N.Y. June 21, 2024).

Seventh Circuit Refuses to Vacate Arbitration Award Under Public Policy Exception

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The Seventh Circuit Court of Appeals recently refused to invalidate an arbitration award in a breach of contract case involving patent royalties based on purported violations of public policy.

Dr. John Insall patented various knee replacement devices and licensed them to medical device company Zimmer Biomet Holdings Inc. Zimmer paid Dr. Insall, and later his estate, royalties in return. Dr. Insall’s last patent expired in 2018, and Zimmer informed his estate it would be ceasing royalty payments because it believed further payments ran “counter to the policy and purpose of patent laws.” The estate claimed that was improper and the parties arbitrated the matter. An arbitration panel concluded that the payments could continue and thus ruled for the estate. Zimmer moved to vacate the award on public policy grounds. The district court confirmed the award.

The Seventh Circuit affirmed. It noted that even if Zimmer’s arguments that there is a “well-defined public policy that a party may not be compensated for patent rights after the patent’s expiration,” the arbitration award still needed to be confirmed because “the panel determined that the royalty payments in question were not grounded in any patent rights” but were instead “untied” to Dr. Insall’s “patents, products, or technology.” Put differently, the panel interpreted the contract as providing for payments for “non-patent rights” that were “closely related” to patents. The court noted that the Federal Arbitration Act does not allow it to question whether the arbitrators erred or even clearly erred in interpreting a contract, but to only determine whether it interpreted the contract.

Zimmer Biomet Holdings, Inc. v. Insall, No. 23-1888 (7th Cir. July 12, 2024).

Alabama Federal Court Holds That Tort of Bad Faith Does Not Extend to Reinsurance Contracts

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In Alabama Municipal Insurance Corp. v. Munich Reinsurance America Inc., the U.S. District Court for the Middle District of Alabama addressed whether, under Alabama law, “reinsurance falls within the limited category of insurance agreements to which the tort of bad faith applies.” The case involved claims brought by plaintiff Alabama Municipal Insurance Corp. (AMIC), a nonprofit joint insurance company owned by several municipalities, against its reinsurer Munich Reinsurance America Inc. AMIC obtained contracts for reinsurance from Munich under which Munich covered and would be responsible for paying a portion of claims received by AMIC that exceeded a base amount noted in the reinsurance contracts. AMIC alleged that Munich wrongfully declined reinsurance coverage for the full amount due under five separate insurance claims submitted to AMIC, and Munich underpaid the claims by approximately $1.9 million.

AMIC filed a lawsuit against Munich alleging breach of the reinsurance contracts for the five claims and for bad faith for refusing to pay on three of the claims. Munich filed a motion to dismiss the three counts of bad faith under Federal Rule of Civil Procedure 12(b)(6), arguing that “Alabama does not recognize the tort of bad faith in the reinsurance context.” The parties agreed the dispute was governed by Alabama state law. In addressing the motion to dismiss, the court observed that the Alabama Supreme Court had not addressed whether a claim for bad faith may be brought in connection with a reinsurance contract. The court then noted that “[w]here no state court has decided the issue a federal court must make an educated guess as to how that state’s supreme court would rule.” Applying this principle after a thorough review of decisions addressing the tort of bad faith, the court concluded that “[g]iven the Alabama Supreme Court’s repeated efforts to limit the application of the tort [of bad faith], as well as its emphasis on the primary purpose of the tort as a means to protect consumers, this court concludes that the Alabama Supreme Court would not extend the tort of bad faith to the reinsurance context.” The court then granted Munich’s motion to dismiss the bad faith claims and denied AMIC’s motion to amend its complaint to add additional claims of bad faith.

Alabama Municipal Insurance Corp v. Munich Reinsurance America Inc., No. 2:20-cv-00300 (M.D. Ala. July 22, 2024).

 

Sixth Circuit Confirms Arbitration Award Despite Argument That Case Was International and Beyond Arbitrator’s Authority

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The arbitration award stemmed from the pro se complaint of Joseph Ruzindana for wrongful termination against his former employer, FCA US. In the arbitration, Ruzindana claimed that he was harassed and discriminated against by FCA US.

After the arbitrator rendered an award in favor of FCA US, Ruzindana filed a motion to vacate, arguing that the case “was an international one beyond the Arbitrator’s and state Authority because some of FCA US’s vehicles would be sold in Brazil and some of his colleagues were located in Brazil.” However, the arbitration agreement between the parties authorized the arbitrator to decide “whether the challenged personnel decision or action was (1) lawful under applicable federal, state and local law, or (2) consistent with the Company’s At Will employment policy.” As a result, the resolution of Ruzindana’s employment-related claims fell within the arbitrator’s powers, regardless of any connection between those claims and Brazil.

Under the Federal Arbitration Act, a district court may vacate an arbitration award under only four circumstances:

  1. Where the award was procured by corruption, fraud, or undue means;
  2. Where there was evident partiality or corruption in the arbitrators, or either of them;
  3. Where the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy, or of any other misbehavior by which the rights of any party have been prejudiced; or
  4. Where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made.

Ruzindana did not allege that the arbitration award was procured by corruption, fraud, or undue means or that the arbitrator was partial, corrupt, or guilty of any misconduct. He did allege that the matter was “beyond the arbitrator’s” authority but, as noted above, the district court and the Sixth Circuit held to the contrary.

Because Ruzindana did not satisfy any of the grounds for vacating an arbitration award under 9 U.S.C. § 10(a), the Sixth Circuit held that the district court properly denied his motion to vacate the arbitration award.

Ruzindana v. FCA US, LLC, No. 23-1649 (6th Cir. July 3, 2024).

NJ Court Finds No Waiver of Arbitration Rights in FDCPA Case, Grants Motion to Compel

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In Hejamadi v. Midland Funding LLC, the U.S. District Court for the District of New Jersey, on remand from the Third Circuit Court of Appeals, addressed whether the defendants waived their rights to compel arbitration of the plaintiffs’ putative class action claims alleging violations of the Fair Debt Collection Practices Act (FDCPA).

The court’s opinion notes that the case involved a lengthy procedural history set forth in two prior opinions and in the Third Circuit’s decision remanding the matter to the district court. In sum, in 2017, the defendants purchased various credit card accounts from Citibank and then filed a debt collection action against plaintiff Shanthi Hejamadi, who in turn filed a counterclaim against the defendants pursuant to the FDCPA. The defendants dismissed the collection claim, removed the remaining counterclaim to federal court, and moved to compel arbitration under the mandatory arbitration and class action waiver provisions in the plaintiff’s original credit card agreements with Citibank. After amendments to the class action complaint, the court denied the motion to compel arbitration without prejudice and ordered limited discovery on the arbitrability issue. The defendants renewed their motion to compel arbitration, which was granted by the court on March 31, 2022. The court found that the defendants “had the right to arbitrate plaintiff’s claims … and had not waived that right.” The court based its opinion on Third Circuit precedent at that time, which focused on analyzing prejudice to the party opposing arbitration in analyzing a motion to compel like the one before the court.

The plaintiffs appealed the court’s March 31 opinion and while the appeal was pending, the U.S Supreme Court issued its opinion in Morgan v. Sundance Inc., 596 U.S. 411 (2022), which, as noted by the district court, held that “whether a party waived a contractual right to arbitrate is decided by the same standard as waiver of any other contractual right” and that “there are no arbitration-specific variants of federal procedural rules, like those concerning waiver, based on the Federal Arbitration Act’s policy favoring arbitration.” The Third Circuit remanded the plaintiffs’ pending appeal of the order compelling arbitration to the district court to address the waiver issue now governed by the decision in Morgan.

On remand, the district court noted that Morgan “rejected the case law of various circuits, including the Third Circuit, that conditioned arbitration waiver on a showing of prejudice” and that the Third Circuit’s test in determining whether a party waived its right to arbitrate will now focus “on the actions of the party seeking to arbitrate, rather than the effects of those actions on the party opposing arbitration.” Applying this new standard to the defendants’ renewed motion to compel arbitration in the Hejamadi action, the court noted that the “waiver inquiry — whether a party has intentionally relinquished or abandoned its rights to arbitrate — is informed by the circumstances and context of each case.” After a thorough review of the record, the court found that the defendants’ conduct did not establish a waiver of their right to arbitrate and ordered that the parties proceed to arbitration.

Hejamadi v. Midland Funding LLC, No. 2:18-cv-13203 (D.N.J. June 25, 2024).