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Benjamin Stearns

District of Puerto Rico Holds Article II of the Convention on Foreign Arbitral Awards Preempts the McCarran-Ferguson Act

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In a dispute over whether an international insurance policy provided coverage for losses resulting from a fire that destroyed the insured property, the U.S. District Court for the District of Puerto Rico determined that the Convention on the Recognition and Enforcement of Foreign Arbitral Awards and chapter 2 of the Federal Arbitration Act (FAA) preempt the McCarran-Ferguson Act. The plaintiff had purchased from several Lloyd’s syndicates an insurance policy containing an arbitration provision and providing coverage for property located in Puerto Rico. The plaintiff argued that the McCarran-Ferguson Act “reverse-preempted” the Convention and the FAA such that Puerto Rican insurance law controlled whether the parties’ dispute was arbitrable. The plaintiff further argued, and the insurers did not dispute, that the Puerto Rico Insurance Code prohibits insurance policies from requiring arbitration of disputes. The insurers, however, argued that the Convention and FAA preempted Puerto Rico’s Insurance Code, and therefore the arbitration provision must be enforced.

The district court agreed with the insurers. The court noted that this “inquiry is the subject of a complex circuit split,” with the Second and Eighth Circuits holding that state anti-arbitration laws reverse-preempt the Convention through the McCarran-Ferguson Act because the Convention is not a “self-executing treaty,” while the Fourth and Fifth Circuits have held that the Convention is not reverse-preempted because, among other reasons, the McCarran-Ferguson Act is “limited to the domestic realm and is thus not meant to grant state anti-arbitration laws reverse preemption against treaties or federal laws dealing with international relations.”

The Puerto Rico district court began its analysis by noting that the supremacy clause of the U.S. Constitution provides that treaties “shall be the supreme Law of the Land,” and the U.S. Supreme Court has held that courts must regard a treaty as “equivalent to an act of the legislature, whenever it operates of itself without the aid of any legislative provision.” Such a treaty is described as “self-executing.”

Because Article II of the Convention “unequivocally regulates the enforcement of international arbitration agreements and directly instructs courts to enforce its provisions without the need for legislative intervention,” the court found it to be self-executing. The court noted that Article III, on the other hand, may not be self-executing, but the Supreme Court has previously stated that portions of a treaty may be self-executing while others are not, so that finding is not an impediment to holding that Article II of the Convention is self-executing.

The Convention was signed by the United States in 1959 and ratified in 1970, whereas the McCarran-Ferguson Act was enacted in 1945. When a treaty and a federal statute conflict, the one last in date controls. Therefore, because the court found the Convention to be self-executing and therefore on par with an act of the legislature (i.e., a federal statute), and because the Convention was adopted and ratified after the McCarran-Ferguson Act was enacted, the Convention “is fully invocable and is not subject to the [McCarran-Ferguson Act’s] reverse preemption.”

Green Enterprises, LLC v. Dual Corp. Risks Ltd., No. 3:20-cv-01243 (D.P.R. June 15, 2021).

Court Holds the ACA and Implementing Regulations Do Not Preempt State Creditor Priority Laws in Reinsurance Debt Dispute

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In 2016, Colorado Health Insurance Cooperative Inc. was ordered into liquidation by a Colorado court. At the time, the federal government owed Colorado Health $24.5 million for reinsurance debts under the Affordable Care Act (ACA), while Colorado Health owed the federal government $42 million for risk adjustment debts pursuant to another program promulgated under the ACA. The government attempted to “leapfrog” other insolvency creditors by offsetting the amounts Colorado Health owed under one ACA program against the amounts the federal government owed the Colorado Health estate under the other federal program, rather than paying its debt to the estate in full and making a claim against the estate as an insolvency creditor. The trustee sued, and the U.S. Court of Federal Claims ordered the government to pay.

The U.S. Court of Appeals for the Federal Circuit affirmed. The court analyzed the explicit statutory and regulatory language and the structure and purpose of the federal scheme erected by the ACA and implementing regulations. The court found that, with specific regard to the prioritization of insolvency creditors, the text of the statutes and regulations was silent. The court also found that the structure of the law suggested that state law controlled creditor priority, and further that the purposes of the law did not evidence a preemptive intent that was otherwise absent from the text and structure of the federal scheme. As such, the federal scheme, collectively, did not demonstrate a “clear and manifest” intent to preempt state law fixing creditors’ rights during insolvency.

Therefore, applying the presumption against preemption, the court held that the federal scheme did not preempt Colorado’s creditor priority framework, and the federal government could not offset the amounts that were owed to it by Colorado Health rather than paying its debt to the estate and making a claim for the amounts it was owed, just as any other creditor would be required to do. 

Conway v. United States, No. 1:18-cv-01623 (Fed. Cir. May 17, 2021).

Private Employment Arbitration Agreement Not Binding on Secretary of Labor When Bringing an Enforcement Action on Behalf of One Party to Agreement Against the Other

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The Department of Labor brought an enforcement action against Arizona Logistics Inc. for alleged violations of the FLSA’s minimum wage, overtime, record-keeping, and anti-retaliation requirements resulting from the alleged misclassification of delivery drivers as independent contractors rather than employees. Arizona Logistics moved to compel arbitration under its agreements with the drivers, and the Arizona district court denied the motion on the authority of the Supreme Court’s decision in EEOC v. Waffle House Inc.

The Ninth Circuit Court of Appeals affirmed the denial, noting that the FAA does not provide that agreements to arbitrate are enforceable against nonparties, and the secretary of labor was not a party to the agreement. In addition, the court highlighted the fact that, under the statutory scheme enacted by Congress, the secretary is “master of [his] own case,” that the remedial statute at issue “unambiguously authorizes the Secretary to obtain monetary relief on behalf of specific aggrieved employees,” and that the enforcement action may be a vehicle to “vindicate broader governmental interests,” such as deterring other employers from violating the FLSA and protecting compliant employers from unfair wage competition. Moreover, the secretary not only controlled the case, but the employee did not even have a right to intervene in the secretary’s action once the secretary filed suit.

Quoting Waffle House, the Ninth Circuit concluded that a contrary holding “would undermine the detailed enforcement scheme created by Congress simply to give greater effect to an agreement between private parties that does not even contemplate the Secretary’s statutory function.”

Walsh v. Arizona Logistics, Inc., No. 20-15765 (9th Cir. May 18, 2021).

Ninth Circuit Compels Investment Banker to Arbitrate Statutory Employment Discrimination and Civil Rights Claims Despite Assumption That “Knowing Waiver” Doctrine Applied to Claims

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Shannon Zoller sued her former employer, GCA Advisors LLC, for violations of the Equal Pay Act, California’s Fair Pay Act, and the Civil Rights Act of 1871, among other alleged violations. GCA moved to compel arbitration pursuant to the arbitration agreements contained in various documents that Zoller signed when she began her employment, but the district court denied the motion, finding that the “knowing waiver” doctrine applied to Zoller’s statutory claims and that she had not knowingly waived her right to bring her claims in a judicial forum.

The “knowing waiver” doctrine is a “judicially created requirement that narrows the [Federal Arbitration Act’s] scope when other federal statutes explicitly limit the enforcement of arbitration agreements. The standard requires a party to an arbitration agreement to waive knowingly and explicitly their right to judicial determination of their Title VII claims.” The Supreme Court has held that, while not all statutory claims may be appropriate for arbitration, if a party agreed to arbitration, the party will be held to that agreement unless the party could prove a congressional intent to preclude a waiver of judicial remedies for the statutory rights at issue. Such an intent would be found in the statutory text, legislative history, or an “inherent conflict” between arbitration and the statutes’ underlying purposes.

Rather than engage in such an analysis, the district court analogized the claims brought by Zoller to other types of “civil rights claims” to which the knowing waiver doctrine had been held to apply. The Ninth Circuit noted that this analysis was incorrect but nevertheless assumed, without deciding, that the doctrine applied to Zoller’s claims. The court held that the arbitration agreement’s “clear language encompassing employment disputes” and additional evidence of Zoller’s knowing waiver were sufficient to meet the doctrine’s requirements. The contractual agreements “included explicit language regarding employment disputes so that Zoller’s statutory claims [were] clearly encompassed by the [arbitration] agreement.” In addition, Zoller, who was an attorney before becoming an investment banker, was given “full access” to the documents providing for arbitration and an opportunity to consult with legal counsel of her choice before signing. As such, the Ninth Circuit reversed the district court, finding that Zoller had knowingly waived her right to a judicial forum and compelled the parties to arbitrate all of her claims.

Zoller v. GCA Advisors, LLC, No. 20-15595 (9th Cir. Apr. 14, 2021).

Fourth Circuit Enforces Arbitration Agreement’s Waiver of Appellate Review

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The Fourth Circuit Court of Appeals upheld the enforceability of an employment agreement’s waiver of appellate review of an arbitration award. The waiver purported to waive both judicial and appellate review of the arbitrator’s decision. The district court held the waiver of all judicial review of the arbitration award was unenforceable under the Federal Arbitration Act, but nevertheless found the award was enforceable and dismissed the petition to vacate. On appeal, the Fourth Circuit appeared to agree, without deciding, that the complete waiver of all judicial review of an arbitration award was contrary to the FAA but found the waiver of appellate review to be consistent with the FAA’s policy objectives. In so doing, the court noted that arbitration awards are increasingly “reflexive[ly] appealed … leading to arbitration no longer being treated as an alternative to litigation, but as its precursor. The reflexive appeal of an arbitration award is all the more lamentable when the parties have expressly waived that right.” Finding no reason to reject the parties’ contractual agreement to waive appellate review, the court dismissed the appeal. 

Beckley Oncology Associates, Inc. v. Abumasmah, No. 19-1751 (4th Cir. Apr. 8, 2021).