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New reinsurance-related and arbitration developments from Carlton Fields

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Brendan Gooley

Court Enforces Arbitration Agreement Incorporated Into “Notice to Employees”

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The U.S. District Court for the Northern District of Texas compelled arbitration in a putative Fair Labor Standards Act class action based on language in a “notice to employees” that put the plaintiffs on notice that they were agreeing to arbitrate claims in an incorporated (and hyperlinked) arbitration agreement. The court also rejected various other defenses to arbitration raised by the plaintiffs in an attempt to avoid arbitration.

Cotton Patch Café LLC, a restaurant chain, hired Ian Norred to be a server when he was 17 years old. Cotton Patch also hired Rain Bennett when she was 18 years old. Norred and Bennett signed an electronic document titled “Notice to Employees” that contained a section titled “Arbitration Acknowledgment, Safety Pledge and Receipt” and another section titled “Agreement to Arbitrate.” The latter section provided, among other things: “I agree to use binding arbitration, instead of going to court, for any claims, including any claims now in existence or that may exist in the future” against Cotton Patch. It also referred Norred and Bennett to a hyperlink that read “View Agreement” where they could read the full arbitration agreement. The notice to employees also stated: “By my signature below, I acknowledge that I have received and read (or had the opportunity to read the … [a]rbitration [a]greement. …”

Norred sued Cotton Patch claiming that it had violated the Fair Labor Standards Act by not adequately compensating him and other similarly situated employees. Bennett joined Norred’s suit. Cotton Patch responded by seeking to invoke the arbitration provision. Norred and Bennett claimed that they were unaware of the terms of the agreement and could not have assented to them (because the terms were not in the notice to employees and were accessible by hyperlink). They also claimed that there was no valid agreement to arbitrate because the notice to employees did not indicate that Cotton Patch had offered consideration in exchange for the arbitration clause.

Applying Texas contract law, the Northern District of Texas concluded that a valid contract existed and that the contract included the notice to employees and arbitration agreement. The notice to employees contained sufficient language to incorporate the arbitration agreement by reference. The notice to employees was also clear on that point. The arbitration agreement was also supported by mutual consideration and was mutual, requiring all parties to arbitrate.

The court also rejected Norred and Bennett’s defenses. Norred and Bennett argued, among other things, that the contract was illusory because the agreement to arbitrate was unilateral and because Cotton Patch could unilaterally terminate the agreement. The court rejected that argument, noting that the agreement was mutual and Cotton Patch’s power to terminate the agreement did not apply to claims prior to termination. The court also rejected the argument that the language in the agreement established that it applied only to current employees (Norred and Bennett had previously stopped working at Cotton Patch.) Notably, the court rejected Norred’s argument that he was not bound by the agreement because he signed it while he was underage. Although it was true that a minor could repudiate a contract, he had to do so within a reasonable time after turning 18, which Norred did not do in this case. Finally, the court concluded that the agreement between Cotton Patch and Norred and Bennett was not unconscionable.

Norred v. Cotton Patch Café, LLC, No. 3:19-cv-01010 (N.D. Tex. Oct. 22, 2019).

North Carolina Court Rules Reimbursement for Extracontractual Losses Discretionary

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The Court of Appeals of North Carolina has concluded that the state’s Reinsurance Facility has discretion to approve or deny petitions from members for reimbursement for extracontractual losses and that members have no right to reimbursement for such losses under the governing statutory scheme. The decision relates to a significant bad faith case against Allstate.

Allstate issued an auto insurance policy to an insured and ceded the policy to the North Carolina Reinsurance Facility, a nonprofit entity that insures drivers whom insurers determine they do not want to insure individually. The insured subsequently struck a minor riding a bicycle, causing serious injury. The insured reported the accident to the Allstate agent who sold him the policy. She told him to call an Allstate phone number to report the accident, but he never did. Allstate received notice of the accident when it heard from counsel for the injured minor. It investigated and offered to tender the policy limit of $50,000, but the injury party rejected that offer. The insured stipulated to a $13.8 million judgment against him and assigned his claims against Allstate to the injured party. That party then sued Allstate for breaching its duty of good faith and ultimately received $11 million in a settlement after an adverse jury verdict.

Allstate sought reimbursement for the bad faith loss from the Reinsurance Facility. The Reinsurance Facility denied Allstate’s request, and Allstate appealed to the North Carolina Commissioner of Insurance. The Commissioner ordered the Reinsurance Facility to reconsider its denial. The Reinsurance Facility petitioned for judicial review, and the trial court affirmed the Commissioner’s decision.

The Reinsurance Facility then appealed to the Court of Appeals of North Carolina. The court reversed and remanded the trial court’s decision. Analyzing the plain language of the statute governing the Reinsurance Facility, the court concluded that the Reinsurance Facility was required to consider a petition for reimbursement and gave member insurers the right to receive reimbursement for contractual losses, but concluded that members had no right to reimbursement for extracontractual losses and that the Reinsurance Facility had discretion to approve or deny such petitions. Thus, the Reinsurance Facility was well within its statutory rights to deny Allstate’s petition for reimbursement.

The Supreme Court of North Carolina then denied Allstate’s petition for further review.

N.C. Reinsurance Facility v. Causey, 830 S.E.2d 850 (N.C. Ct. App. 2019), review denied, 832 S.E.2d 731 (N.C. 2019).

Court Compels Arbitration Based on Clause Incorporated Into Guaranty Agreement

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The U.S. District Court for the District of the Virgin Islands recently compelled arbitration after concluding that a personal guaranty incorporated an arbitration agreement from an underlying contract and rejecting various arguments to the contrary.

Solar Leasing Inc. signed a leasing agreement with Dun-Run Holdings to install solar panels at a golf course in the Virgin Islands. William Hutchinson, a principal at Dun-Run, guaranteed Dun-Run’s obligations in a personal guaranty. The leasing agreement contained an arbitration provision, but the personal guaranty did not. The personal guaranty did, however, provide that Hutchinson guaranteed the “performance of any and all financial obligations of the Lessee to the Lessor … subject to the terms and conditions contained in the … Leasing Agreement.”

Solar Leasing subsequently sought to bring suit claiming that Hutchinson, in his capacity as a principal at Dun-Run, had breached the leasing agreement’s terms by, among other things, selling the golf course. Hutchinson sought to compel arbitration under the terms of the leasing agreement. Solar Leasing opposed, arguing that the personal guaranty, which it was seeking to enforce, did not contain an arbitration provision, that even if the leasing agreement’s arbitration clause was incorporated into the personal guaranty, it was not enforceable, and that a condition precedent to arbitration had not been met because the parties were required to first engage in informal efforts to resolve their dispute and then proceed to mediation before arbitration.

The district court sided with Hutchinson and compelled arbitration. The plain language of the personal guaranty incorporated the arbitration provision from the leasing agreement. The personal guaranty did not incorporate only the financial obligations as Solar Leasing suggested. The limitation regarding financial obligations “only describe[d] what [was] being guaranteed, not how th[e] guaranty may be enforced.”

The leasing agreement, meanwhile, clearly articulated a desire to arbitrate by stating that a dispute regarding the leasing agreement would be “resolved by binding arbitration.” Although the leasing agreement did not delineate the process for selecting arbitrators, that was not fatal.

The dispute in the instant case was within the scope of the leasing agreement’s arbitration clause because all of the alleged breaches that Solar Leasing complained of were financial in nature. Even if that was not the case, however, the language was at best for Solar Leasing ambiguous and the court was required to resolve that ambiguity in favor of arbitration.

Solar Leasing, Inc. v. Hutchinson, No. 3:17-cv-00076 (D.V.I. Sept. 20, 2019).

Second Circuit Confirms Arbitration Awards That Are (Literally) Out of This World

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Arbitration over whether a South Korean company or a Bermuda company headquartered in Hong Kong owns a geostationary satellite in light of an order from a South Korean regulatory agency can be complicated. The Second Circuit recently affirmed a decision confirming an arbitration award adjudicating ownership of the satellite in question and awarding damages related to a party’s failure to obtain regulatory approvals necessary to complete the sale over claims that the arbitration panel exceeded its power, disregarded the law, and violated public policy.

KT Corp., a Korean company, agreed to sell a satellite to ABS Holdings Ltd., a Bermuda company headquartered in Hong Kong. The companies signed a purchase agreement to convey the title to the satellite and an operations agreement under which KT agreed to operate the satellite on behalf of ABS. Both agreements contained New York choice-of-law provisions and mandatory arbitration clauses. The purchase agreement required KT to obtain and maintain all necessary licenses and authorizations for the sale and the continued operation of the satellite.

The sale was completed and title to the satellite was transferred.

Nearly two years later, a South Korean regulatory agency issued an order declaring the purchase agreement null and void because KT had failed to obtain a required export permit. The agency canceled KT’s permission to use certain frequencies to operate the satellite.

KT and ABS arbitrated who held title to the satellite and whether KT had violated the purchase agreement before a panel of the International Chamber of Commerce. In two awards, the panel concluded that ABS held title to the satellite because title had lawfully passed when the conditions precedent to the purchase agreement were completed when there was no requirement that KT obtain an export permit. And even if that was not the case, the panel concluded, the regulatory order had no effect because it was issued retroactively without notice to the parties in violation of New York law, and KT breached its obligations by failing to obtain all the approvals necessary for the continued operation of the satellite (even though an export permit may not have been required for the sale of the satellite, one was necessary to maintain the satellite’s operations).

KT petitioned the Southern District of New York to vacate the award, and ABS petitioned the court to confirm it. The district court granted ABS’ petition and confirmed the panel’s award.

The Second Circuit affirmed. KT argued that the panel had exceeded its authority and that the award disregarded the law and violated public policy. KT claimed that the panel’s conclusion that the regulatory order was without effect violated due process principles. The court disagreed, noting that KT had not challenged the order, its counsel had questioned its validity, and the panel did not rest on the validity of the order; the panel referenced the propriety of the order as an alternate basis for its primary conclusion that title to the satellite properly changed hands. The court also rejected KT’s argument that the panel had disregarded New York contract law. Regarding public policy, although the court recognized that it is the public policy of the United States to enforce foreign judgments that are not repugnant to U.S. policy, it was unclear whether that public policy extended to foreign regulatory orders, and it was not even clear that the regulatory order in this case was enforceable under South Korean law according to KT’s expert.

KT Corp. v. ABS Holdings, Ltd., No. 18-2300 (2d Cir. Sept. 12, 2019).

Southern District Concludes That Invocation of AAA’s Rules Subjects Arbitrability Questions to Arbitrator, Rejects Waiver Claim

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The Southern District of New York declined to decide arbitrability questions after the arbitration agreement at issue incorporated the rules of the American Arbitration Association, which include a rule that arbitrators determine their own jurisdiction. The court also rejected a claim that the defendant waived its right to seek arbitration. It therefore compelled arbitration.

Policy Administration Solutions Inc. (PAS) licensed underwriting software for use by insurers. The software was licensed to a subsidiary eventually acquired by QBE Holdings Inc. That subsidiary, Clarendon Insurance Group Inc., entered into a license agreement with PAS to use the software. The license agreement contained an arbitration clause. Clarendon and PAS subsequently entered into a confidentiality agreement. The confidentiality agreement did not contain an arbitration clause and provided that it superseded any prior agreements regarding confidential information received under the confidentiality agreement. PAS claimed that QBE’s subsidiaries made unauthorized changes to its software. PAS ultimately brought suit alleging, among other things, violations of the Copyright Act. PAS moved for a preliminary injunction and a temporary restraining order, and the defendants moved to dismiss PAS’ claims. The district court denied both parties’ motions (it denied the motion to dismiss without prejudice) and stayed proceedings pending the resolution of state court proceedings regarding an arbitration award related to other agreements between the parties. QBE sought to initiate arbitration after the stay was lifted.

PAS opposed arbitration. The court concluded, however, that the license agreement’s arbitration clause left the question of arbitrability to the arbitrator. The arbitration clause incorporated the rules of the American Arbitration Association, one of which provided that the arbitrator had “the power to rule on his or her own jurisdiction.” PAS argued, however, that the license agreement’s arbitration agreement was not operative because the confidentiality agreement superseded the license agreement. The court explained that this presented a question of arbitrability, which, as the court had already noted, was a question for the arbitrator. The court also rejected PAS’ contention that its claims did not relate at all to the license agreement and were instead solely related to the confidentiality agreement. PAS’ reading of the license agreement’s arbitration clause was too narrow and was yet another arbitrability question for the arbitrator to address in any event.

The court also rejected PAS’ argument that QBE had waived its right to seek arbitration by litigating the dispute in federal court. The parties had been in active litigation for 14 months, which the court found to be “well within the range of delays that have not resulted in waiver.” Merely filing a motion to dismiss did not waive the right to seek arbitration, and after the stay had been lifted QBE promptly announced its intention to seek to compel arbitration. Although PAS had asserted that it spent $70,000 litigating the federal action, it was not clear how much of that was due to PAS’ own decision to seek a preliminary injunction.

The court therefore granted QBE’s motion to compel arbitration.

Policy Admin. Sols., Inc. v. QBE Holdings, Inc., No. 7:15-cv-02473 (S.D.N.Y. Aug. 30, 2019).