Carlton Fields

In Williams v. Medley Opportunity Fund II, LP, plaintiffs Christine Williams and Michael Stermel obtained payday loans from American Web Loan, Inc. (AWL), an online entity owned by the Otoe-Missouria Tribe of Indians. The loan agreement stated that the loan was governed by tribal law and that the borrowers consented to the application of tribal law. The plaintiffs filed a purported class action against AWL’s holding company, Red Stone, Inc., and three members of AWL’s board of directors, asserting that AWL charged unlawfully high interest rates, in violation of federal and Pennsylvania law, including the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. 1961-1968.

The defendants moved to compel arbitration pursuant to the arbitration clause in the loan agreement. The United States District Court for the Eastern District of Pennsylvania denied the defendants’ motion, holding that the loan agreement, which provided that only tribal law would apply in arbitration, stripped the plaintiffs of their right to assert statutory claims and were therefore unenforceable. Defendants appealed.

On appeal, the Third Circuit affirmed the district court’s decision, finding that because AWL permits borrowers to raise disputes in arbitration only under tribal law, and such a limitation constitutes a prospective waiver of statutory rights, its arbitration agreement violates public policy and is therefore unenforceable.

The Third Circuit specifically rejected defendants’ argument that plaintiffs could bring similar RICO-like claims under tribal law and receive similar relief. The panel noted, “The question is whether a party can bring and effectively pursue the federal claim – not whether some other law is a sufficient substitute.”

Williams v. Medley Opportunity Fund II, LP, 965 F.3d 229 (3d Cir. July 14, 2020)

Betty Frison invented a product related to hair weaving and subsequently entered into an agreement with Davison Design to promote her product. The agreement required that the parties arbitrate any dispute. After believing Davison Design misrepresented the financial gain that she would realize from the product, Frison initiated arbitration against Davison Design, pursuing a claim under the American Inventors Protection Act.

Frison received an award of more than $13,000 in damages and $10,000 in attorneys’ fees. Davison Design then filed an application in federal court under sections 10 and 11 of the Federal Arbitration Act to vacate or modify the award. The U.S. District Court for the Western District of Pennsylvania denied Davison Design’s application, and Frison sought additional attorneys’ fees for successfully upholding the arbitration award. The district court rejected Frison’s request, and Frison appealed.

On appeal, Frison argued that the attorneys’ fees provision of the American Inventors Protection Act entitled her to fees for upholding the arbitration award. Relying on the “American Rule,” which provides that each party bear its own attorneys’ fees unless a statute or contract provides otherwise, the Third Circuit found that Frison did not have a basis in statute or contract to recover fees for successfully defending the arbitration award. Although the fee-shifting provision of the American Inventors Protection Act allows the recovery of attorneys’ fees “in a civil action against the invention promoter,” the Third Circuit held that this action was brought by the invention promoter not under the American Inventors Protection Act for damages, but under the Federal Arbitration Act to vacate or modify an arbitration award.

Accordingly, the Third Circuit found that the district court did not err in denying Frison’s request for additional attorney’s fees.

Davison Design & Development Inc. v. Frison, No. 19-2045 (3d Cir. Aug. 11, 2020).

In this action, Caradigm USA, a computer software company, brought a breach of contract action against health care provider PruittHealth Inc. in the U.S. District Court for the Northern District of Georgia, alleging that Pruitt breached a contract with Caradigm to consolidate and organize patient medical and billing records. Pruitt argued that it was dissatisfied with Caradigm’s progress and that it had a right to abandon the contract. After discovery, the parties filed dueling summary judgment motions. The district court decided that Pruitt had anticipatorily repudiated the contract before Caradigm’s performance was required and that Pruitt was therefore liable for breach. However, because the value of the contract was unclear, the district court left the issue of damages for trial.

After a four-day trial, the jury awarded Caradigm $11 million, comprising $5.1 million in contract damages, $3.6 million in compound interest, and $2.3 million in attorneys’ fees and expenses under a Georgia statute that provides for fee awards against “stubbornly litigious” parties.

Pruitt appealed, arguing that the district court erred in several ways in the run-up to and during the damages trial, which led to the overstated contract damages award and erroneous awards of interest and attorneys’ fees. Specifically, Pruitt claimed that the district court was wrong in its construction of the parties’ contractual obligations, that the court held Caradigm to a lower burden of proof than it should have, and that it was wrong to exclude evidence that Caradigm’s future revenues might have decreased.

A three-judge panel of the Eleventh Circuit concluded that, in the main, the district court did not reversibly err, therefore affirming the awards of contract damages and fees, as well as the determination that Caradigm was entitled to recover interest on the damages award. However, the Eleventh Circuit concluded that it was error to compound the interest, and thus vacated that award and remanded so that the district court can calculate simple interest.

Although the Eleventh Circuit agreed that Pruitt failed to raise the compound interest order before trial, the court stated that Pruitt had not waived its compound interest argument. The court stated that Georgia law is clear that parties must explicitly agree to compound interest in their contract. Because the language in the contract between Pruitt and Caradigm did not establish that the parties agreed to compound interest, the Eleventh Circuit vacated the compound interest award and remanded for the district court to calculate simple interest.

Caradigm USA LLC v. PruittHealth, Inc., No. 19-11648 (11th Cir. July 10, 2020).

In a case involving an arbitration agreement between foreign nationals and U.S. citizens, which is governed by the Convention on the Recognition and Enforcement of Foreign Arbitral Awards and its implementing legislation, chapter II of the FAA, the U.S. District Court for the Western District of Arkansas found that the McCarran-Ferguson Act does not supersede the Convention or chapter II of the FAA, therefore directing the plaintiff’s claims for insurance coverage to arbitration.

Plaintiff J.B. Hunt Transport Inc.’s claims arose out of a dispute concerning two insurance policies issued to it by Certain Underwriters at Lloyd’s and Steadfast Insurance Co., under which the plaintiff sought defense and indemnity coverage for claims presented in a separate lawsuit involving the wrongful death of a woman by an employee of one of the plaintiff’s contracted carriers.

Underwriters moved for arbitration pursuant to the arbitration provision in its policy with the plaintiff directing any disputes to an arbitrator. In its motion to compel, Underwriters argued that the Convention, which provides that the “court of a Contracting State … shall, at the request of one of the parties, refer the parties to arbitration,” is controlling law under the Supremacy Clause, rendering the arbitration provision valid and enforceable. Conversely, the plaintiff argued that Arkansas law, which bars the enforcement of binding arbitration clauses in insurance contracts, should control pursuant to the McCarran-Ferguson Act, which creates a system of “reverse-preemption” for state insurance laws. Underwriters responded that the McCarran-Ferguson Act does not apply to the Convention or chapter II of the FAA and that, as a result, the court should enforce the arbitration provision. The lynchpin of Underwriters’ argument was that the Convention and chapter II of the FAA are not “acts of Congress” subject to the McCarran-Ferguson Act. In support of its argument, Underwriters cited a variety of cases concluding that the McCarran-Ferguson Act does not supersede the Convention or chapter II of the FAA.

Steadfast also opposed Underwriters’ motion for arbitration, arguing that it was not a party to the policy between Underwriters and the plaintiff and therefore was not subject to the arbitration provision. Steadfast asked the court to stay the plaintiff’s claims against it in the event the court granted arbitration.

The district court held that the McCarran-Ferguson Act does not supersede the Convention or chapter II of the FAA. The court noted that the McCarran-Ferguson Act does not nullify international agreements, but rather is limited to domestic affairs. As such, the Convention and chapter II of the FAA are not within the scope of the McCarran-Ferguson Act, and the Convention and chapter II of the FAA are not reverse-preempted by Arkansas law barring the enforcement of arbitration agreements in insurance contracts.

After finding the Convention controls, the district court analyzed four factors to determine whether the Convention applied to the arbitration provision at issue: (1) whether a written arbitration agreement exists between the parties; (2) whether the arbitration provision provides for arbitration in the territory of a signatory of the Convention; (3) whether the relationship between the parties involves a commercial subject matter; and (4) whether the relationship between the parties is not entirely domestic. The district court found that the second and third requirements for applying the Convention were easily met where the arbitration provision stated that the arbitration should occur in New York, which is located within the signatory’s territory, and the parties’ insurer/insured relationship is commercial in nature.

As to the first and fourth requirements, the plaintiff argued that the Convention did not apply because the arbitration provision only applies to disputes between reinsurers and that the relationship between the plaintiff and Underwriters was entirely domestic because it obtained the Underwriters policy through a U.S.-based broker. The district court rejected both arguments, finding that the arbitration provision was part of the policy held by the plaintiff, and referenced the policy to which the plaintiff was a party. The court also noted that while the plaintiff may have gone through a U.S. broker, Underwriters is a foreign-based company, and the broker had to go through the U.K.’s insurance market.

The court also stayed the remaining claims against Steadfast until the conclusion of arbitration.

J.B. Hunt Transport, Inc. v. Steadfast Insurance Co., No. 5:20-cv-05049 (W.D. Ark. July 1, 2020).