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John Pitblado

NINTH CIRCUIT FINDS PLAINTIFF ENTITLED TO TRIAL ON ISSUE OF WHETHER AN ARBITRATION AGREEMENT WAS EXECUTED

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Defendant provided the district court with copies of two contracts – a Reinsurance Participation Agreement and a Request to Bind – that were purportedly signed by Plaintiff’s CEO and contained arbitration clauses. However, Plaintiff submitted a declaration by the CEO’s son and successor, stating that “he is very familiar with his father’s signature an did not recognize the signatures or believe they were written by his father.”  Thus, the Court concluded Plaintiff raised a genuine issue of fact with respect to the execution of the agreements and was entitled to a trial pursuant to Section 4 of the FAA, as it states that “if the making of the arbitration … be in issue, the court shall proceed summarily to a trial thereof.”  9 U.S.C. § 4.

Arevalo Tortilleria, Inc. v. Applied Underwriters Captive Risk Assurance Company, Inc., No. 15-56830 (9th Cir. Aug. 4, 2017)

This post written by Nora A. Valenza-Frost.
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SIXTH CIRCUIT AFFIRMS VACATUR OF ARBITRATION AWARD BASED ON PRIOR TERMINATION OF SALES CONTRACT

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The Sixth Circuit has affirmed an order vacating an arbitration award, agreeing with the district court that the mandatory arbitration clause at issue was unenforceable upon termination of the agreement in which it was contained.

The plaintiff, Gridsmart Technologies, Inc. (“Gridsmart”), manufactured camera equipment that it sold to the defendant, Marlin Controls, Inc. (“Marlin”). The parties had an agreement granting Marlin the exclusive right to distribute Gridsmart’s products within a defined region of the United States (the “Agreement”). An arbitration clause in the Agreement required the parties to submit all disputes arising under it to the American Arbitration Association.

Gridsmart exercised its right to terminate the Agreement in June 2015. Thereafter, the parties tried to reconcile the handling of outstanding orders that Gridsmart first delivered to Marlin in September 2015. Marlin ultimately returned these items to Gridsmart, claiming it was unable to sell them due to a lost construction contract. Gridsmart nevertheless demanded payment for the items and Marlin refused. Gridsmart filed an arbitration claim to resolve the issue, but Marlin did not participate. As such, the arbitrator granted an award in favor of Gridsmart, which Gridsmart then sought to enforce against Marlin in a Tennessee state court action.

Marlin removed the enforcement action to district court and moved to have the award vacated. The district court granted the motion, finding that the arbitration clause in the Agreement did not survive after it was terminated by Gridsmart in June 2015. The Sixth Circuit affirmed. Under the plain language of the Agreement, the Court found it was clear that the parties’ rights as to orders outstanding upon termination were to be governed by a separate “mutual agreement.” No such agreement existed here. The Court ruled that, absent a separate contract concerning the handling of outstanding orders, it was equally clear that the parties rights under the Agreement with respect to such orders – including the right to enforce the arbitration clause – immediately ceased when the Agreement was terminated in June 2015.

The Court held that Tennessee Uniform Commercial Code demanded the same conclusion. It provided that when, as here, a party terminates a contract for the sale of goods, all executory obligations on both sides are “discharged.” Moreover, after finding that Gridsmart waived additional contractual interpretation arguments, the Court went on to reject them in dicta. It held that the presence of “survival” language in certain other provisions of the Agreement – but not in the arbitration clause – plainly demonstrated that the parties did not intend for the arbitration clause to survive upon termination of the agreement.

Gridsmart Technologies, Inc. v. Marlin Controls, Inc., No. 17-5121 (6th Cir. July 20, 2017).

This post written by Alex Silverman.
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SECOND CIRCUIT VACATES DISTRICT COURT’S CONFIRMATION OF CLASS CERTIFICATION AWARD

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The question presented was whether the arbitrator had the authority to certify a class that included absent class members, i.e., employees other than the named plaintiffs and those who have opted into the class. Finding the district court improperly relied on Jock v. Sterling Jewelers, Inc., 646 F.3d 113, 124 (2d Cir. 2011) (“Jock I”), the law of the case did not conclusively resolve this question. The Court also distinguished Justice Alito’s concurrence in Oxford Health Plans LLC v. Sutter, 133 S.C.t. 2064, 2066 (2013), as the case did not speak to whether an arbitrator has authority to certify a class containing absent class members. The Second Circuit vacated and remanded for further consideration of the issue of whether the arbitrator exceeded her authority in certifying a class that contained absent class members who have not opted in.

Jock et al. v. Sterling Jewelers, Inc., No. 15-3947 (2d Cir. July 24, 2017)

This post written by Nora A. Valenza-Frost.
See our disclaimer.

COURT UPHOLDS ATTORNEY-CLIENT PRIVILEGE DESPITE ADVICE OF COUNSEL DEFENSE IN TAX CASE INVOLVING REINSURANCE TRANSACTIONS

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This case involves a tax dispute centering on whether certain “purported” insurance and reinsurance transactions “lacked economic substance.” Following an in camera review of communications identified in Respondents’ privilege logs, the Court denied Petitioner’s motion to compel the production of communications between Respondents’ and counsel. Petitioner’s argued the privilege was waived upon Respondents’ assertion of the advice of counsel defense, and that the substance of the insurance transactions were put in issue, including all underlying facts claimed protected by the attorney-client privilege. Respondents’ argued the subject matter in the withheld emails is not related to the reasonable cause and good-faith defense raised in their petition before the Tax Court.

The Court, looking at “counsel, ownership history, management, insured operation/ownership, and personnel” and the “real-world structure of the relationships, including the joint retention of the law firm and need for legal advice on identical issues and concerns”, found a common-interest privilege existed “despite the separate ownership of the later captives”, and thus, there was no third-party waiver.

With respect to whether Respondents’ advice of counsel or “reasonable cause” defense put the communications at issue, the Court held that, because the Tax Court litigation is in an early stage, if Respondents persist in asserting the “reasonable cause” defense, then “disclosure of privileged documents may later result before the Tax Court. This, however, is a strategic choice that must be made by Respondents in the Tax Court proceedings at some later point in time. Should Respondents make the strategic choice to persist with their ‘reasonable cause’ defense and produce the privileged communications setting forth the legal advice they purportedly relied on, the Tax Court will be in a far better position to determine which of these emails are related to the legal advice.” United States of America v. Owensboro Dermatology Assocs., P.S.C., et al., 4:16-mc-00003, 00004, 00005 (USDC W.D. Ky. July 7, 2017)

This post written by Nora A. Valenza-Frost.

See our disclaimer.

PENNSYLVANIA FEDERAL COURT GRANTS MOTION TO DISMISS BASED ON LACK OF SUBJECT MATTER JURISDICTION

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Plaintiff RAD Manufacturing, LLC (“RAD”), a Delaware corporation with its principal place of business in Pennsylvania, and its insurer and reinsurer (as subrogees) brought an action in federal court in Pennsylvania against Advanced Fabrication Services, Inc. (“AFS”), a Pennsylvania corporation with its principal place of business in Pennsylvania. The underlying dispute involves allegations that RAD had hired and contracted with AFS to design, install and service a boiler control system on its premises, and the boiler dry-fired and caused damage to RAD’s property. RAD filed a motion to dismiss primarily based on lack of subject matter jurisdiction.

The Pennsylvania federal court noted that RAD’s presence in the action destroyed complete diversity and that RAD, the insured, is a necessary party and thus an indispensable party, and thus cannot be dismissed from the action to cure the jurisdictional defect. In particular, the court noted that there is another state court action pending involving the same parties. Thus, the court was particularly concerned with RAD’s ability to protect its interest in the state court if the federal action proceeded without RAD and was resolved first, and thus would likely have a res judicata effect on that state court action.

Thus, the Pennsylvania federal court held that RAD, the insured/subrogor, is an indispensable party and that the action cannot proceed without RAD, and as such, the complaint was dismissed for lack of subject matter jurisdiction.

RAD Manufacturing LLC, et al. v. Advanced Fabrication Services, No. 3:16-2138 (M.D. Pa. June 20, 2107).

This post written by Jeanne Kohler.

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