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New reinsurance-related and arbitration developments from Carlton Fields

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COURT MUST RULE ON MOTION TO COMPEL ARBITRATION FIRST

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Plaintiff sued his former employer in a putative class action alleging that a payroll practice violated Pennsylvania law. The defendant filed a motion to compel arbitration and a separate motion to dismiss. The district court opted to “delay ruling” on the motion to compel arbitration and proceeded to deny the motion to dismiss. The former employer appealed. The Court of Appeal found that the district court erred in not ruling on the motion to compel arbitration first, vacated, and remanded for the district court to consider the motion to compel arbitration in the first instance.

The Court held that the Federal Arbitration Act requires that the gateway issue of arbitrability must be addressed first. Therefore, once a motion to compel arbitration is filed the court must refrain from further action until it determines arbitrability.  The court noted that there is an exception if the record is unclear as to the agreement to arbitrate, in which case limited discovery should be permitted limited to the issue of arbitrability. Since the plaintiff did not deny receipt of and consent to the agreement to arbitrate, and did not seek discovery with respect to arbitrability, the district court should have proceeded to consider the motion to compel arbitration before considering the pending motion to dismiss. Silfee v. Automatic Data Processing, Inc., No. 16-3725 (3rd Cir. June 13, 2017).

This post written by Rollie Goss.
See our disclaimer.

SUPREME COURT HOLDS FEDERAL ARBITRATION ACT PREEMPTION APPLIES TO CONTRACT FORMATION RULES

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Last week, the U.S. Supreme Court rejected the Kentucky Supreme Court’s use of a clear-statement rule to require that powers of attorney specifically authorize a representative to enter into an arbitration agreement, finding that the rule violated the Federal Arbitration Act’s (“FAA”) equal treatment principle. The plaintiffs in two consolidated cases were the wife and daughter of individuals who lived and died at a Kindred Nursing Centers facility. They each held powers of attorney with broad authority to manage their family members’ affairs. When each plaintiff signed the necessary paperwork to move their family member into the Kindred facility, they signed binding arbitration agreements.

The present dispute arose from a lower court action in which the plaintiffs sued Kindred over allegations that substandard care caused their family members’ deaths. Kindred moved to dismiss the suits on the basis of the arbitration agreements, the lower courts denied those motions, and the Kentucky Supreme Court affirmed. The state’s highest court found that one plaintiff’s (Wellner) power of attorney was not broad enough to permit her to enter into an arbitration agreement on behalf of her husband, but that the other plaintiff’s (Clark) power of attorney was sufficiently broad. However, the Kentucky court invalidated both arbitration agreements based upon a so-called clear-statement rule—that a power of attorney must specifically state that the representative has the power to enter into an arbitration agreement lest the individual’s “sacred” right of access to the courts and to trial by jury be violated. This rule complied with FAA’s demands that arbitration agreements be treated equally, the court explained, because it would apply to arbitration and other contracts implicating “fundamental constitutional rights.”

Justice Kagan authored an opinion for seven justices that squarely rejected the Kentucky Supreme Court’s reliance on the clear-statement rule, holding that it failed to put arbitration agreements on “an equal plane” with other contracts. The FAA includes an equal treatment principle that courts may invalidate arbitration agreements based upon generally applicable contract defenses, but not on legal rules singling out arbitration. The Supreme Court found that the clear-statement rule did exactly what its prior precedent (Concepcion) barred: it adopted a legal rule turning on the distinctive, primary characteristic of an arbitration agreement—the waiver of the right of access to the court and to a jury trial.

The Supreme Court dismissed the Kentucky court’s attempt to sidestep the equal treatment principle by suggesting the clear-statement rule could apply to other fundamental constitutional rights, referring to the hypothetical examples as “patently objectionable and utterly fanciful contracts.”  The Court stated that adopting the respondents’ view “would make it trivially easy for States to undermine the Act—indeed, to wholly defeat it.”

Importantly, the Supreme Court rejected an argument by respondents attempting to salvage the clear-statement rule by characterizing it as only affecting contract formation, and thus, outside of the FAA’s purview. In rejecting that characterization, the Court relied upon the FAA’s text as well as case law. By its terms, the FAA states arbitration agreements be treated as “valid, irrevocable, and enforceable,” thus covering the initial “valid[ity]” of arbitration contracts.” The Court explained that its discussion of duress in Concepcion, a doctrine involving unfair dealing at the contract formation stage, would not make sense if the FAA did not apply to the contract formation stage. Furthermore, if respondents were correct, states could easily make an end-run around it by declaring everyone incompetent to sign arbitration agreements—a rule only affecting contract formation.

In dispensing with the consolidated cases, the Court reversed and ordered enforcement of Clark’s arbitration agreement because the Kentucky court had invalidated that agreement only based on the clear-statement rule. On the other hand, the Court vacated and remanded Wellner’s case for the state court to determine whether its interpretation of the power of attorney was independent of the clear-statement rule.

Kindred Nursing Ctrs. Ltd. P’ship v. Clark, No. 16-32 (USSC May 15, 2017).

This post written by Thaddeus Ewald .
See our disclaimer.

ARBITRAL AWARD SETTLING BUYOUT PRICE IN DIAMOND BUSINESS DISPUTE AFFIRMED OVER ALLEGATIONS OF ARBITRATOR PARTIALITY

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The arbitration award in a dispute between former joint venture partners in a series of international diamond businesses has been confirmed by the Southern District of New York. The decision resolved motions by Julius Klein Diamonds, LLC, related entities, and several members of the Klein family (the “Kleins”) attempting to vacate the arbitration award ordering them to pay a buyout price of $179 million to LGC USA Holdings. The bulk of the Kleins’ substantive arguments challenging the award alleged bias on the part of the third neutral arbitrator selected by the two party-appointed arbitrators. At the outset of the arbitration, the arbitrator at issue disclosed professional relationships with LGC’s owner as well as the arbitrators, but failed to disclose the extent of those relationships or his pending indictment and later conviction on tax fraud charges.

First, applying the standard set forth by the Federal Arbitration Act and applicable case law, the court rejected the Kleins’ substantive challenges to the arbitral award. While the court noted that third arbitrator could have been more forthcoming concerning the scope of his business relationships with the other arbitrators and LGC’s owner, the court found his initial disclosure was sufficient to put the Kleins on inquiry notice. Thus, the court found that their failure to investigate or object until after an unfavorable award waived any such objection. The court also found insufficient admissible evidence to substantiate the assertion that the undisclosed relationship impacted his partiality in any way. Additionally, the court concluded the arbitrator’s failure to disclose his indictment and subsequent conviction for tax fraud issues did not warrant vacatur because the conviction was unrelated to and did not affect the outcome of the arbitration.

The court also rejected the Kleins’ additional substantive challenges that the arbitrators acted with manifest disregard for the law or exceeded their powers in issuing the award. Noting the high degree of deference afforded arbitration awards, the court found the particular arbitral agreement at issue to be broad, covering “[a]ny controversy or claim arising out of or relating to” the agreements. Thus, the arbitrators did not err by ordering a full buyout of the joint ventures at issue. Nor did the arbitrators err by finding the Kleins joint and severally liable with their associated entities, because the family members were personal signatories to the agreement, agreed to allow the arbitrators decide all disputes, and actively and voluntarily participated in the arbitral process.

LGC Holdings, Inc. v. Julius Klein Diamonds, LLC, Case No. 16-5352 (USDC S.D.N.Y. Feb. 28, 2017).

This post written by Thaddeus Ewald .
See our disclaimer.

COURT OF APPEALS AFFIRMS DISMISSAL OF “SHADOW INSURANCE” LAWSUITS

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In a summary order, the United States Court of Appeals for the Second Circuit has affirmed the dismissal of two “shadow insurance” putative class action lawsuits against Axa Equitable Life Insurance and Metropolitan Life Insurance on the basis that the plaintiffs lacked standing under Article III of the United States Constitution to sue them in United States District Court.  The Complaints alleged that the insurance companies misused captive reinsurers domiciled in foreign jurisdictions to avoid higher reserve requirements of U.S. jurisdictions, resulting in the misstatement of their financial information and increased risks for plaintiffs.  The District Court had dismissed the suits based on the failure of the plaintiffs to establish Article III standing.

The Court of Appeals found that the Complaints failed adequately to allege that the plaintiffs had suffered injury-in-fact, a necessary element of Article III standing.  First, the court rejected plaintiffs’ argument that allegations that the companies had violated New York Insurance Law section 4226 sufficiently alleged injury-in-fact because of injury “inherent in the statutory violation.”  The Court held that “[t]he mere fact that an insurer may make a misleading representation does not require or even lead to the necessary conclusion that the misleading representation is material or even likely to cause harm.”  Second, the Court held that to establish standing plaintiffs had to allege that the injury-in-fact was concrete, particularized, and “actual or imminent, not conjectural or hypothetical.”  (Citing Spokeo, Inc. v. Robbins, 136 S.Ct. 1540 (2016).  The Court found that the harm alleged in the Complaints was speculative and hypothetical, insufficient to establish standing.

For readers interested in a deeper reading of this appeal, following are links to the recording of the oral argument at the Second Circuit and some of the briefs of the parties in the consolidated appeal: Appellants’ principal brief; Axa’s brief; MetLife’s brief; and Appellants’ reply brief.

Appellate oral argument:


Ross v. Axa Equitable Life Insurance Company and Robainas v. Metropolitan Life Insurance Company, Nos. 15-2665, 15-3504, 15-3553 and 15-4189 (2d Cir. Feb. 23. 2017).

This post written by Rollie Goss.
See our disclaimer.

SPECIAL FOCUS: THE COVERED AGREEMENT

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The United States and the European Union have agreed on the final wording of a Covered Agreement which covers several topics, including the provision of collateral by foreign reinsurers.  We discuss the Covered Agreement and the initial responses to the agreement in a Special Focus article.

This post written by Rollie Goss.
See our disclaimer.