Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

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Alex Silverman

Ninth Circuit Agrees Non-Signatory Cannot Be Compelled to Arbitrate Under California Law

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Defendants appealed a California federal district court order denying their motion to compel arbitration of the plaintiff’s claims for trade secret misappropriation, common law misappropriation, and unfair competition. The issue was whether the plaintiff could be equitably compelled to arbitrate, despite there being no contract in which it agreed to do so. The Ninth Circuit held there was no basis for compelling arbitration. The court noted that under California law, a non-signatory to an arbitration agreement may be compelled to arbitrate under two circumstances: (i) if its claims are “dependent, on or inextricably intertwined” with the underlying contractual obligations of the agreement containing the arbitration clause; or (ii) if it receives a “direct benefit” from the contract containing the arbitration clause. Agreeing that neither circumstance was present here, the court affirmed the district court order denying the defendants’ motion to compel.

Thrasio, LLC v. Boosted Commerce, Inc., No. 21-55621 (9th Cir. Mar. 18, 2022).

SDNY Rules Non-Signatories to Agreement May Compel Signatory to Arbitrate Issues of Arbitrability

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Plaintiffs, the Republic of Kazakhstan and Outrider Management LLC, filed suit in New York state court claiming the defendants conspired to obtain a fraudulent international arbitral award against them of nearly $500 million. The defendants removed the case to the U.S. District Court for the Southern District of New York, relying on the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, as implemented by the Federal Arbitration Act. The plaintiffs moved to remand the action to state court. The defendants cross-moved to compel arbitration of Outrider’s claims.

On the issue of remand, the court noted at the outset that Kazakhstan and Outrider stood in very different positions, as Kazakhstan was not a party to the contract in which Outrider and others agreed to arbitrate. Despite Kazakhstan being a non-signatory, the defendants claimed the Southern District of New York still had subject matter jurisdiction of its claims because, according to the defendants, section 205 of the FAA creates such jurisdiction for any case that is “related to” an arbitration agreement or award falling under the Convention. However, the court found this interpretation to be inconsistent with the plain language of the statute and Second Circuit precedent. Because only section 203 of the FAA creates subject matter jurisdiction — and did not do so here for Kazakhstan’s claims — Kazakhstan’s motion to remand was granted. Outrider’s motion to remand was denied, however, as it was a party to the arbitration agreement, the defendants were seeking to compel arbitration pursuant to that agreement, and the other jurisdictional requirements were satisfied.

As to the motion to compel, the defendants contended that Outrider’s arbitrability arguments were for the arbitrator, not the court, to decide, citing a “delegation” clause in the arbitration agreement. The plaintiffs countered that the defendants were not parties to the agreement and that the delegation clause did not delegate arbitrability issues involving disputes with a non-signatory. The issue thus became whether it was for the court or the arbitrator to determine whether non-signatories may invoke arbitration against a signatory. The court read two Second Circuit decisions as creating or implying a two-part inquiry: first, the court must decide whether the arbitration agreement permits or precludes invocation by non-signatories; and second, the court must decide whether a threshold of “relational sufficiency” exists between and among the parties to the dispute and the arbitration clause. The court found the requirements were met here, emphasizing both the breadth of the delegation clause and that it did not explicitly state only a signatory could invoke it. The court also concluded that Outrider and the defendants had sufficient relationships to each other and to the rights created under the arbitration agreement. The court therefore held that the defendants may compel Outrider to submit the arbitrability of its claims to the arbitrator.

Republic of Kazakhstan v. Chapman, No. 1:21-cv-03507 (S.D.N.Y. Feb. 10, 2022).

Maine Supreme Court Holds Uber Cannot Enforce Arbitration Clause in Its User Terms and Conditions, Agrees User Was Not Provided Reasonable Notice

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The Supreme Court of Maine has affirmed an order denying Uber’s motion to compel arbitration of claims that it and its subsidiary violated the Maine Human Rights Act. The action was filed after an Uber driver refused to drive plaintiff Patricia Sarchi, who is blind, because of her guide dog. Uber moved to compel arbitration pursuant to the terms and conditions of its user agreement. The plaintiffs (Sarchi and the Maine Human Rights Commission) argued that the manner in which the terms were presented rendered them, and the arbitration agreement, unenforceable.

Given the prevalence of online contracts, the court explained that “reasonably conspicuous notice of the existence of contract terms and unambiguous manifestation of assent to those terms by consumers are essential if electronic bargaining is to have integrity and credibility.” Ultimately, the question is “what level of notice and assent is required in order for a court to enforce an online adhesion contract?” Looking to other jurisdictions for guidance, the court identified a two-step inquiry. The first step looks at whether the user had reasonable notice of the contract terms from the standpoint of a reasonably prudent user of online technology. Assuming reasonable notice was provided, the second step is whether the user manifested assent to the terms. Here, the court found Uber’s terms did not make it beyond step one, likening this case to others in which Uber’s terms were deemed insufficient to provide reasonable notice. As in those other cases, the court explained that the user interface here — the appearance of the hyperlink to the relevant terms, the use of muted coloring, the font size, the emphasis on payment information, among other things — rendered the terms “inconspicuous.” While that alone warranted denial of Uber’s motion to compel arbitration, the court also found Sarchi could not have manifested assent to the terms given their presentation. The court expressly rejected the notion that Sarchi became bound by the arbitration clause by clicking on a “done” button after entering her payment information.

Sarchi v. Uber Technologies, Inc., No. 2022 ME 8 (Me. Jan. 27, 2022).

Eighth Circuit Rules Business Partners of Broker-Dealer Cannot Compel FINRA Arbitration, Agrees Partner Not a “Customer” Under FINRA Rules

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Plaintiff, Principal Securities Inc., filed suit in Iowa federal court seeking to enjoin a FINRA arbitration proceeding commenced by the defendants. Despite there being no arbitration agreement between the parties, the defendants claimed Principal was subject to arbitration based on FINRA Rule 1200, which states that parties must arbitrate a dispute if “requested by the customer.” The district court found the defendants were not “customers,” and enjoined the arbitration. The Eighth Circuit affirmed. The court explained that the defendants were at all relevant times business partners with a former Principal financial adviser and that the defendants relied on their own independent expertise when making investment decisions. The court found no evidence to suggest that the former Principal adviser ever actually provided investment advice or brokerage services to the defendants, or that the relationship between the parties was directly related to investment or brokerage services. As such, the court agreed with the district court that the defendants did not qualify as “customers” under applicable Eighth Circuit precedent. 

Principal Securities, Inc. v. Agarwal, No. 20-3312 (8th Cir. Jan. 31, 2022).

Massachusetts Federal Court Rules English Law Governs Reinsurance Dispute but Denies Reinsurers’ Motion for Summary Judgment

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Plaintiffs, Certain London Market Company Reinsurers (LMRs), filed suit against Lamorak Insurance Co. seeking a declaratory judgment that they were not obligated to pay reinsurance billings ceded by Lamorak. The disputed amounts stem from various settlements between Lamorak and its insured relating to numerous environmental damage claims dating back several decades. The LMRs moved for summary judgment in the reinsurance coverage dispute, arguing that English law governed the interpretation of the reinsurance agreements. Lamorak claimed that Massachusetts law applied. The Massachusetts federal court agreed with the LMRs.

Lamorak argued that the choice-of-law analysis was governed by Restatement section 193. But the court ruled that Restatement sections 6 and 188 controlled, noting it found no precedent supporting Lamorak’s position. Applying Restatement section 188 in the reinsurance context, the court held that choice of law is dictated by “the state where the reinsurance certificate issued and the location where performance is expected, i.e. the place to which the ceding insurer must make its demand for payment, typically control for purposes of choice of law.” Here, the reinsurance agreements were signed in England, the relevant documents were issued from England, and Lamorak’s demands for payment under the agreements were made to the LMRs in England. As such, the court found it was beyond dispute that English law applied. Notwithstanding, the court denied the LMRs’ motion for summary judgment, finding the disputed issues of material fact were too numerous to identify in the decision. The court ruled it was sufficient to deny the motion on the ground that the parties fundamentally disagreed as to whether the reinsurance agreements were the relevant contracts in the first instance.

Certain London Market Company Reinsurers v. Lamorak Insurance Co., No. 1:18-cv-10534 (D. Mass. Jan. 20, 2022).