Carlton Fields

CALIFORNIA COURT OF APPEAL REMANDS MATTER FOR SUPERIOR COURT TO DECIDE ISSUE OF ARBITRABILITY AND WHETHER DELEGATION CLAUSE WAS UNCONSCIONABLE

February 7, 2018 by Carlton Fields

Plaintiff argued both the delegation clause and the arbitration provision of the agreement at issue were unconscionable, requiring the trial court to resolve the merits of the challenge, which it did not. “If the party’s challenge is directed to the agreement as a whole – even if it applies equally to the delegation clause – the delegation clause is severed out and enforced; thus, the arbitrator, not the court, will determine whether the agreement is enforceable. By contrast, if the party is making a specific challenge to the delegation clause, the court must determine whether the delegation clause itself may be enforced (and can only delegate the general issue of enforceability to the arbitrator if it first determines the delegation clause is enforceable).”

Under California law, a delegation clause must be clear and unmistakable to be enforceable. The delegation clause at issue stated “[a]ll disputes arising with respect to any provision of this Agreement shall be fully subject to the terms of this arbitration clause” and incorporated the AAA procedures. Relying on this, the Court determined the language of the AAA rules was sufficiently clear and unmistakable, and thus the delegation clause was enforceable unless it was unconscionable. The trial court erred by not deciding the arbitrability of the delegation clause in light of the unconscionability concerns raised by the Plaintiff. The case was remanded.

Ramar Prod. Servs., Inc. v. Applied Underwriters, Inc., D071443 (Cal. Ct. App. Dec. 22, 2017).

This post written by Nora A. Valenza-Frost.
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NINTH CIRCUIT FINDS ARBITRATION CLAUSE SHOWED CLEAR AND UNMISTAKABLE INTENT TO RESOLVE ARBITRABILITY QUESTIONS BY ARBITRATION

February 5, 2018 by Carlton Fields

Finding Montana law was inapplicable to the subject insurance policy under both federal maritime choice-of-law principles and the policy language, the Ninth Circuit Court of Appeals determined that an arbitration clause was not unenforceable, and remanded the matter to the Montana District Court with instructions to grant a motion to compel arbitration in its entirety.

As the insurance policy at issue concerned marine insurance, and the FAA specifically applies to “maritime transactions,” Montana state law did not govern the validity of the agreement’s arbitration provision. Nor was federal maritime law precluded by Montana law under the McCarran-Ferguson Act, as Montana’s insurance law is not invalidated, impaired or superseded by the application of federal maritime law. The same result was reached by applying maritime choice-of-law principles to the policy’s choice-of-law provisions.

Lastly, looking at the policy’s arbitration provision, in which the parties agreed “that any and all disputes arising under [the] policy shall be resolved exclusively by binding arbitration … conducted pursuant to the Rules” of the AAA, the Court found the parties “clearly and unmistakably indicated their intent to submit arbitrability questions to an arbitrator.” The AAA rules provide that “[t]he arbitrator shall have the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope or validity of the arbitration agreement or to the arbitrability of any claim or counterclaim.”

Galilea, LLC v. AGCS Marine Ins. Co., No. 16-35474 (9th Cir. Jan. 16, 2018).

This post written by Nora A. Valenza-Frost.
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DISTRICT COURT LARGELY DENIES DEFENDANTS’ REQUESTED PROTECTIVE ORDER ON VARIETY OF DISCOVERY REQUESTS IN CONSOLIDATED CLASS ACTIONS

January 31, 2018 by Carlton Fields

On November 15, 2017, we reported on two class actions alleging that the “EquityComp” workers’ compensation insurance program marketed and sold by Applied Underwriters (“defendants”) violated California insurance law and regulations. The class actions had been consolidated for pre-trial purposes. Defendants recently moved for a protective order and sought protection from discovery on a host of interrogatories and requests for production. The Eastern District of California granted the motion in part and denied it in part on the following grounds, largely rejecting defendants’ bid for protection against the discovery.

First, the court held plaintiffs were entitled to pre-certification discovery regarding absent class members, including personal and contact information. It noted that disclosure of putative class members’ information is “common practice” in this context and concluded defendants had failed to show any specific prejudice or harm associated with such production.

Second, the court described as “moot” a dispute over whether plaintiffs were entitled to documents regarding the SolutionOne program—different than the EquityComp program which the original plaintiffs participated in—because an amended complaint added a new plaintiff who did participate in the SolutionOne program. Even if it were not moot, the court said, defendants would not be entitled to protective order because they failed to allege more than a general “burden” to justify prevention.

Third, the court granted the protective order regarding plaintiffs’ request for defendants’ communications with non-California state regulators. It concluded the requests were disproportionate where there was at most “slight” relevance because of the wide variety in state insurance regulatory regimes and the lack of a “specific factual basis” for believing the non-California communications would be relevant to defendants’ compliance with California law.

Fourth, the court ordered production regarding the submission of a Reinsurance Participation Agreement to the California Department of Insurance for approval because such information is relevant and because defendants did not satisfy their burden of showing harm or prejudice.

Fifth, the court rejected defendants’ request for a protective order regarding recently requested segregated “cell” accounts because there is a year left before the close of discovery, so defendants would not be harmed by the recent timing of the request.

Finally, the court allowed discovery of defendants’ total revenues related to the EquityComp program because it was relevant to plaintiffs’ central argument that defendants’ unfair and fraudulent business practices allowed them to “make hundreds of millions of dollars.” Nor, the court found, did defendants show harm from divulging their revenues.

Shasta Linen Supply, Inc. v. Applied Underwriters Inc., Case No. 16-158 (E.D. Cal. Jan. 12, 2018).

This post written by Thaddeus Ewald .
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NINTH CIRCUIT CONSIDERS JURISDICTION TO HEAR APPEAL OF DECISION VACATING ARBITRATION AWARD AND REMANDING FOR A NEW ARBITRATION

January 30, 2018 by Carlton Fields

The Ninth Circuit has found that it had jurisdiction to hear an appeal of a district court decision vacating an arbitration award and remanding the case for a new arbitration.

The appeal arose out of a FINRA arbitration involving claims that a securities broker had mismanaged a client’s investment portfolio. The petitioner claimed damages of $100,000 in his complaint. Because FINRA rules only provide for three arbitrator panels for claims over $100,000, the case was assigned to a single arbitrator.

Shortly before the arbitration hearing, the petitioner filed a brief in which he claimed his damages were $125,500, but he did not amend his complaint. The respondent objected to proceeding with a single arbitrator, but the arbitrator considered and rejected this objection, proceeded to hear the case alone, and awarded petitioner $75,000. The respondent asked a district court to vacate this award on several grounds, which the court did on the basis that the arbitrator exceeded his powers by proceeding as a single arbitrator despite the increased damages claim. The district court then remanded the case for a new arbitration before a three arbitrator panel.

On appeal, the court considered two issues: (1) whether the district court’s decision remanding the case for a new arbitration meant that the appellate court lacked jurisdiction over the case; and (2) if jurisdiction was present, whether the arbitrator had exceeded his authority.

In answer to the first question, the court found that while the FAA does not directly address the circumstance of a case that has been remanded for a new arbitration, the fact that the district court had vacated an award was enough under the statute to create appellate jurisdiction. In doing so, the court followed the lead of every circuit to have considered this issue, including the First, Second, Third, Fifth, and Seventh Circuits.

Having found that it had jurisdiction, the court found that the arbitrator had not exceeded his authority. The court emphasized that in order to overturn an arbitral award on the basis that the arbitrator exceeded his powers, the objecting party must show not simply that the arbitrator erred in his interpretation of the law or the agreement to arbitrate, but also that the arbitrator’s decision was “completely irrational” or showed a “manifest disregard of the law.” Finding that the arbitrator’s interpretation of FINRA’s rules on when to use a three arbitrator panel, while arguably incorrect, was neither irrational nor showed a manifest disregard for the law, the court remanded the case so that the district court could consider the respondent’s other arguments in favor of vacating the arbitrator’s award.

Sanchez v. Elizondo, No. 16-17345 (9th Cir. Dec. 4, 2017).

This post written by Jason Brost.
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THIRD CIRCUIT REFUSES TO COMPEL ARBITRATION IN LIGHT OF ALLEGED FRAUDULENT INDUCEMENT TO SIGN ARBITRATION AGREEMENT

January 29, 2018 by Carlton Fields

The Third Circuit recently affirmed a lower court’s decision refusing car dealership defendants’ motion to compel arbitration pursuant to an arbitration agreement the plaintiffs were allegedly induced to sign. First, the court rejected the dealerships’ argument that the plaintiffs agreed to arbitrate because they signed the arbitration agreement. It noted that a signed arbitration agreement does not necessarily demonstrate intent to be bound in all circumstances, nor did it negate plaintiffs’ argument they were induced to sign the agreement. More importantly, the court held plaintiffs responded to the motion to compel with sufficient additional facts and evidence to place the arbitration agreement into dispute so as to warrant discovery whether the plaintiffs intended to be bound to arbitration. Second, the court dismissed the dealerships’ claim that plaintiffs failed to specifically allege fraudulent inducement in signing the arbitration agreement rather than the contracts in whole, therefore requiring arbitration of the issue of arbitrability. The court found plaintiffs specifically alleged the defense of fraud-in-the-inducement regarding the arbitration agreement, which, if proven, would be grounds to invalidate the arbitration agreement. Therefore, the court affirmed and declined to compel arbitration.

Corchado v. Foulke Mgmt. Corp., No. 17-1433 (3d Cir. Dec. 21, 2017).

This post written by Thaddeus Ewald .
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