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Brendan Gooley

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).

Court Concludes That Bankruptcy Discharge Does Not Affect Arbitration Clause

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The Eastern District of Pennsylvania recently granted a creditor’s request to compel arbitration over a plaintiff’s argument that the arbitration agreement he had signed was void as a result of a bankruptcy court discharging the loan that was governed by the agreement. The court held that the bankruptcy ruling discharged the plaintiff’s debt obligations, not his other obligations under the agreement such as his obligation to arbitrate claims related to the agreement.

Soldon Winton entered into a loan agreement with OneMain Financial Group LLC. That agreement contained an arbitration clause. Winton subsequently filed for bankruptcy, and the bankruptcy court discharged Winton’s debt to OneMain. Winton allegedly discovered that his credit report still included an outstanding debt to OneMain. He therefore brought suit against OneMain, Trans Union LLC, and other defendants for violations of the Fair Credit Reporting Act.

OneMain responded by moving to compel arbitration under the agreement. Winton opposed OneMain’s motion. Although there was no dispute that Winton’s claim was within the scope of the arbitration agreement, Winton claimed that the bankruptcy ruling discharged all of his obligations under the agreement. Winton also sought to avoid arbitration on several other grounds or, in the alternative, to require OneMain to cover all of the costs of the arbitration.

The district court rejected Winton’s arguments. It held that the bankruptcy court had discharged Winton’s debt obligations, not his other obligations, including his obligation to arbitrate disputes related to the loan agreement. The court also rejected Winton’s arguments that it would be unfair to require him to pursue his claims in two different forums (in arbitration against OneMain and in court against the other defendants). Finally, the court denied without prejudice Winton’s request that OneMain bear the costs of arbitration. Among other issues, the arbitration agreement allowed Winton to request that OneMain bear Winton’s costs. Winton had apparently not done so, and the court determined that he should do so before seeking judicial relief.

Winton v. Trans Union, LLC, No. 2:18-cv-05587 (E.D. Pa. Aug. 27, 2019).

SDNY Denies Class Certification in Action Alleging Rate Regulation Violations

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The Southern District of New York denied class certification to a group of plaintiffs seeking to collectively sue a group of insurers over purported regulatory approval violations regarding workers’ compensation policies. The court concluded that class adjudication was not the superior method of litigation, in part because of the significant recovery purportedly available to each of the approximately 220 members of the prospective class.

A number of New York employers filed a putative class action alleging that several insurers from whom they purchased workers’ compensation policies had violated New York law requiring regulatory approval of, among other things, rates. Specifically, the plaintiffs claimed that the insurers sold them guaranteed cost policies that were properly approved by New York’s Department of Financial Services but later entered into “reinsurance participation agreements” with the plaintiffs that were not approved by the Department and that effectively converted the guaranteed cost policies to “quasi retrospective rating plans.” In essence, the plaintiffs alleged that the insurers converted the plans from fixed premium plans to variable premium plans that created the possibility that the employers would have to pay more for coverage.

The plaintiffs sought to certify a class of New York employers who were charged more for premiums as a result of the “reinsurance participation agreements.” The putative class purportedly encompassed some 220 class members collectively owed $62 million. Approximately a dozen of those class members had already initiated their own actions. In addition, the defendant insurers noted that all of the putative class members had agreed to forum-selection clauses agreeing to litigate disputes regarding the policies in Nebraska and/or class action waivers.

The district court denied class certification after concluding that the plaintiffs had failed to establish that a class action was the superior method of litigation under Rule 23(b)(3).

Under the first factor considered under Rule 23(b)(3) — whether class members have a strong interest in individually controlling the litigation — the court concluded that the individual plaintiffs had a strong interest in individually litigating this case. The value of the case per plaintiff was high ($62 million for 220 plaintiffs), and several of the plaintiffs had already initiated individual litigation. This was not a prototypical class action in which individual litigation was precluded because the cost of litigation far exceeded the value to individual plaintiffs.

Turning to the second factor — whether members of the class had already brought suit — the court reiterated that a dozen plaintiffs were pursuing individual actions and arbitrations.

With respect to the third factor — the desirability of concentrating the litigation in a particular forum — the court noted that there was some appeal to concentrating the litigation in New York because the plaintiffs were New York businesses, but the existence of Nebraska forum-selection clauses and class action waivers precluded a finding that New York was desirable.

Finally, the court concluded that the fourth factor — the manageability of a class action — weighed against certification because of the 12 individual actions, the class action waivers, and the forum-selection clauses. The court would be required to make individual determinations as to which individual actions to enjoin and which plaintiffs could remain part of the class.

In closing, the court once again emphasized that the significant potential recovery available to each plaintiff rendered a class action unnecessary in light of the above factors.

The court therefore denied the plaintiffs’ motion to certify their class.

Nat’l Convention Servs., LLC v. Applied Underwriters Captive Risk Assurance Co., No. 1:15-cv-07063 (S.D.N.Y. July 27, 2019).

Ninth Circuit Concludes Defendant Waived Right to Seek Arbitration of Class Action

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The Ninth Circuit has concluded that a defendant in a putative class action waived its right to compel arbitration after sitting on that right for nearly a year while it sought adjudication of a merits-based dispositive motion to dismiss in the Northern District of California.

June Newirth and several other named plaintiffs filed a putative class action against Aegis Senior Communities LLC, the operator of the senior living communities in which they resided. The plaintiffs claimed that Aegis defrauded seniors by falsely representing that staffing levels were based on the needs of residents when staffing was in fact determined by budget considerations.

The agreements between the plaintiffs and Aegis contained an arbitration clause requiring the parties to arbitrate “any legal claim or civil action arising out of or relating to care or services provided” by Aegis. Aegis removed the plaintiffs’ action to federal court and filed a motion to compel arbitration and a motion to dismiss. Aegis subsequently withdrew its motion to compel arbitration, however. Over the course of the next year, the parties engaged in discovery, mediation, and litigated a motion to dismiss filed by Aegis on the merits of several of the plaintiffs’ claims.

The district court denied Aegis’ motion to dismiss. Aegis then filed a new motion to compel arbitration. By then, nearly a year had passed since Aegis’ original motion to compel.

The district court denied Aegis’ new motion to compel arbitration. The court concluded that Aegis had waived its right to seek to compel arbitration. Aegis appealed that decision.

The Ninth Circuit affirmed. The court noted that arbitration agreements are subject to general contract principles, including waiver, but that waiver of an arbitration clause is not favored and a party seeking to establish such a waiver bears a heavy burden of proof. The court also explained that the question whether a right to arbitrate has been waived is subject to a federal law standard that requires the party claiming waiver to establish: “(1) knowledge of an existing right to compel arbitration; (2) intentional acts inconsistent with that existing right; and (3) prejudice to the person opposing arbitration from such inconsistent acts.”

The first requirement — knowledge of a right to compel arbitration — was not at issue in this case. Aegis had moved to compel arbitration when the case was filed; it knew it had a right.

With respect to the second requirement — that Aegis had to engage in acts inconsistent with its right to compel — the Ninth Circuit looked to the totality of Aegis’ actions to determine whether Aegis “(1) ma[de] an intentional decision not to move to compel arbitration and (2) actively litigate[d] the merits of a case for a prolonged period of time in order to take advantage of being in court.” After surveying its case law applying that test, the court concluded that “Aegis took actions inconsistent with its known right to arbitrate” by filing and withdrawing its initial motion to compel and actively litigated the case by filing a motion to dismiss for failure to state a claim, which sought dismissal with prejudice on a key merits issue. (The court noted, however, that seeking to avoid or frustrate litigation, by, for example, opposing discovery or filing a motion to dismiss on a non-merits issue, is insufficient to avail oneself of the judicial forum.) (Aegis did not argue that the factual issue regarding one of the named plaintiffs affected Aegis’ knowledge of its ability to compel arbitration under the first factor described above. Aegis clearly knew it could compel arbitration with respect to the other plaintiffs, but it apparently elected not to do so at least in part because it originally mistakenly believed it would still have had to litigate the class action in federal court because of the named plaintiff who it thought had not agreed to arbitrate.)

The Ninth Circuit rejected Aegis’ various arguments regarding its acts that were inconsistent with its right to arbitrate, including: (1) Aegis never expressly waived its right to compel arbitration (a party can impliedly waive a right); (2) Aegis filed a motion to compel (but Aegis withdrew that motion); (3) Aegis engaged in the minimum amount of litigation necessary to comply with court rules and orders (Aegis failed to renew its motion until after an adverse judgment, had sought a judgment on a merits issue, and failed to avail itself of rules allowing relief from case management and discovery obligations); and (4) Aegis mistakenly believed that one of the named plaintiffs had not signed an arbitration agreement (the record established that Aegis had learned that the plaintiff in question had signed such an agreement more than seven months before Aegis ultimately renewed its motion to compel arbitration).

Turning to the third and final requirement — prejudice to the opposing party — the Ninth Circuit concluded that the plaintiffs had been prejudiced by having to defend against Aegis’ motion to dismiss. That was a merits-based issue that the plaintiffs had been forced to address by Aegis’ decision to file a dispositive merits-based motion. The court noted, however, that the plaintiffs had not been prejudiced by issues directly related to their decision to file an action instead of seeking arbitration, including participating in discovery and conferring about mediation, etc.

While the court recognized that a party seeking to establish waiver of an arbitration clause faces a heavy burden, the Ninth Circuit concluded that burden was satisfied in this case.

Newirth v. Aegis Senior Cmtys., LLC, 931 F.3d 935 (9th Cir. July 24, 2019).