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New reinsurance-related and arbitration developments from Carlton Fields

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Michael Wolgin

Second Circuit Rejects Enforcement of Class Waiver and Arbitration Agreement Under FAA, Finds That Provisions Impermissibly Limited “Plan-Wide” Remedies Under ERISA

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The plaintiff sued the trustee of his retirement plan, his former employer, and others for breach of fiduciary duties in connection with the plan’s purchase of shares of the employer’s parent company for more than fair market value. The plan was a defined contribution plan, with a separate individual account for each participant. The complaint sought relief under section 502(a)(2) of ERISA, including restoration of plan-wide losses, surcharge, accounting, constructive trust, disgorgement of profits, and other equitable relief.

The defendants moved to compel arbitration under the FAA on an individual basis, relying on plan provisions that required participants to resolve any legal claims solely in their “individual capacity and not in a representative capacity” and that prohibited participants from seeking or receiving “any remedy that has the purpose or effect of providing additional benefits or monetary or other relief to” other participants or beneficiaries. The defendants argued that compelling individual arbitration would not limit any substantive rights or remedies that the plaintiff “could personally achieve under ERISA section 502(a)(2),” as the plaintiff could only ever have recovered losses within his individual plan account.

The district court disagreed with the defendants and denied the motion, and a divided panel of the Second Circuit affirmed. The Second Circuit found, over a dissenting judge, that the above provisions were unenforceable because, as the Third, Seventh, and Tenth Circuits found in analogous cases, the provisions would prevent the plaintiff from pursuing remedies under section 502(a)(2) that were, by their nature, plan-wide. Analyzing U.S. Supreme Court precedent, the court explained that “the Section 502(a)(2) vehicle for enforcing Section 409(a) provides for only plan-wide remedies.” If the arbitration provisions prevented the plaintiff from pursuing the statutory plan-wide remedies, then it effectively prevented him from vindicating his substantive statutory rights under ERISA. Consequently, the above plan provisions (and the arbitration agreement as a whole) were unenforceable.

In reaching its decision, the court distinguished Supreme Court rulings, including Epic Systems, Italian Colors, Concepcion, and Gilmer, which enforced arbitration agreements containing a waiver of aggregated actions involving statutory rights. This case was different, the court explained, as precluding a representative action would deprive the plaintiff of the “full range” of statutory substantive rights and remedies. Drawing from another recent Supreme Court case, Viking River Cruises, the court highlighted a “qualitative difference” between waivers of collective action procedures, and waivers that purport to preclude a party from arbitrating in a representational capacity on behalf of a single absent principal (the plan). The court also observed that there would be “no legal way to provide many of the equitable remedies allowed by statute and sought by [the plaintiff] without impacting the accounts of other plan participants and beneficiaries or binding the Plan Administrator and Trustee vis-à-vis other participants.” The court affirmed the denial of the motion to compel arbitration.

Cedeno v. Sasson, No. 21-2891 (2d Cir. May 1, 2024).

Texas Supreme Court Remands Case in Light of Recent Ruling That Arbitrator Must Determine Arbitrability for AAA Arbitration Agreements

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In a lawsuit brought by a car dealership (Lone Star) against a car auction company (Alliance), the latter moved to compel arbitration as a third-party beneficiary of an agreement between Lone Star and a separate company that Alliance used to verify and authorize Lone Star to buy and sell in Alliance’s auctions. Lone Star opposed the motion, contending that its claims fell outside the scope of the arbitration agreement.

After the trial court denied Alliance’s motion to compel arbitration, Alliance appealed to the intermediate court of appeals. That court affirmed, in part premised on its determination that arbitrability is a “gateway issue that courts must decide at the outset of litigation.” (Emphasis added.)

Alliance petitioned the Texas Supreme Court for a review of the denial of arbitration. While the petition was pending, the Texas Supreme Court issued TotalEnergies E&P USA Inc. v. MP Gulf of Mexico LLC, which held that “as a general rule, an agreement to arbitrate in accordance with the AAA or similar rules constitutes a clear and unmistakable agreement that the arbitrator must decide whether the parties’ disputes must be resolved through arbitration.” (Emphasis added.) This holding, the court noted, is inconsistent with the holding of the intermediate court of appeals in this case.

The Texas Supreme Court accordingly reversed the intermediate court of appeals’ judgment and remanded the case to the intermediate court of appeals to reevaluate the appeal in light of TotalEnergies. The court deferred to the intermediate court to consider Lone Star’s arguments that this case is distinguishable because, here, (1) the parties agreed to arbitrate under the AAA rules only if they are unable to agree on a different ADR firm and (2) Alliance is not a party to the arbitration agreement but is instead a third-party beneficiary.

Alliance Auto Auction of Dallas, Inc. v. Lone Star Cleburne Autoplex, Inc., No. 22-0191 (Tex. Sept. 1, 2023).

Court Confirms Arbitration Award Against Non-Signatory Intervening Party in Arbitration

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Paychex Inc. had entered into an agreement to provide a company, Dan-Gulf Shipping Inc., with payroll-related services. The agreement contained an arbitration clause governed by the rules of the American Arbitration Association. In 2020, Dan-Gulf commenced arbitration against Paychex under the AAA’s commercial arbitration rules. During the course of the arbitration, Paychex filed a motion to dismiss, but prior to the ruling of the arbitration panel on the motion, another company affiliated with Dan-Gulf, Caytrans BBC LLC, intervened in the arbitration. Paychex then refiled its motion to dismiss to address Caytrans’ claims, which the panel subsequently granted against Caytrans. The panel then entered a partial final award dismissing all of Caytrans’ claims against Paychex (with one of Dan-Gulf’s claims surviving against Paychex).

In September 2020, Paychex filed a petition to confirm the partial final award, to which Caytrans failed to respond. In February 2023, a default was entered against Caytrans. The court has now determined that it is proper for it to enter an order confirming the award. The court found that Paychex demonstrated that diversity subject matter jurisdiction existed over the case. The court also determined that, by electing to intervene in the AAA arbitration, Caytrans consented to the AAA rules, which authorize “that judgment upon the arbitration award may be entered in any federal or state court having jurisdiction thereof.” The court further found that the arbitration was venued, and the partial final award was made, in Rochester, New York, “which is within this judicial district.” Finally, the court determined that the partial final award was valid, there was no “apparent basis for the court not to confirm it,” and the fact that the partial final award “only disposed of the claims between Caytrans and Paychex and not the claims between Dan-Gulf and Paychex is not a barrier to confirmation.” The court therefore confirmed the partial final award.

Paychex, Inc. v. Caytrans BBC LLC, No. 6:22-cv-06411 (W.D.N.Y. July 31, 2023).

Fifth Circuit Affirms Denial of Arbitration, Rejects Arbitration Provisions in “Battle of the Forms” Between Buyer and Seller in UCC Transaction

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The case involved the sale of mist eliminators (demisters) from MECS Inc. to Axiall Canada Inc., an owner of a Canadian manufacturing facility. A key issue involved the terms of the parties’ contractual relationship as formed through the sale and delivery process of the demisters: MECS typically would issue a proposal to Axiall; Axiall then sent a purchase order; MECS then sent an order acknowledgment; and Axiall would last accept the demisters. MECS’ proposals and order acknowledgments contained an arbitration clause. Axiall’s purchase order forms, however, did not contain an arbitration clause and contained language that acceptance of its purchase orders indicated an “irrevocable agreement” to Axiall’s general terms and conditions, which contained a no-modification provision and a forum-selection clause permitting Axiall to select a forum within either Louisiana or Kentucky.

When Axiall experienced problems with the demisters, Axiall sued MECS in Louisiana state court. MECS removed the case to federal court and then moved to dismiss, or alternatively stay, and compel arbitration under MECS’ proposal and order acknowledgment forms. The district court, however, denied MECS’ motion, holding that under Louisiana law, the parties had not agreed to the arbitration clauses.

On appeal to the Fifth Circuit, the court held that the case presented a “battle of the forms,” which is governed by two provisions of Louisiana’s version of the UCC adopted in its Civil Code: Article 2601 concerning additional terms in an acceptance of an offer to sell movables (such as demisters); and Article 2602 concerning contracts formed by the conduct of the parties. Applying these provisions, the court found that neither Axiall’s purchase orders nor MECS’ order acknowledgments “were communications that, when read in succession, were sufficient to form contracts under Article 2601.” However, the conduct of MECS’ shipping of the demisters following its sending of the order acknowledgment and Axiall’s accepting delivery, created a contract for “an agreed-upon quantity of demisters delivered at the agreed upon price.” This conduct-based contract, as construed by the court, did not include the arbitration clause as a term. The court rejected MECS’ argument that its order acknowledgments were counteroffers whose terms Axiall accepted by performance. There was no arbitration agreement because the parties never mutually agreed to MECS’ proposed arbitration clauses. The court thus affirmed the district court’s denial of MECS’ motion to compel arbitration.

Axiall Canada, Inc. v. MECS, Inc., No. 21-30105 (5th Cir. June 14, 2023).

Court Grants Nigeria’s Second § 1782 Application for Discovery in Foreign Proceeding in Dispute Over $10B Arbitration Award Related to Gas Supply Agreement

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The U.S. District Court for the Southern District of New York granted the 28 U.S.C. § 1782 application of the Federal Republic of Nigeria to issue subpoenas on four U.S. entities and two individuals, the respondents, in aid of an upcoming fraud trial against Process and Industrial Developments Ltd. (P&ID) before the English High Court of Justice in London, England. In that proceeding, Nigeria seeks to set aside a $10 billion arbitral award, which arose from a gas supply and processing agreement between P&ID and Nigeria that Nigeria claims was fraudulently procured. According to Nigeria, P&ID is a “shell entity whose only asset” is the arbitration award. Nigeria sought to issue a subpoena to each respondent concerning the acquisition of P&ID, financial records, P&ID’s business operations relating to the agreement and the arbitral award, and other issues.

Under section 1782(a), the “district court in which a person resides or is found may order him to give his testimony or statement or to produce a document or other thing for use in a proceeding in a foreign or international tribunal.” “The order may be made … upon the application of any interested person and may direct that the testimony or statement be given, or the document or other thing be produced, before a person appointed by the court.”

The court found that it had jurisdiction to grant an application under section 1782 because the respondents reside or are found within the Southern District of New York, the discovery is for use in the proceeding before a foreign tribunal, and the application was made by an interested person.

The court also determined that Nigeria met the Supreme Court’s four-factor test in exercising its discretion to grant the application (the Intel factors): (1) whether the person from whom the discovery is sought is a participant in the foreign proceeding (they are not); (2) the nature of the foreign tribunal, the character of the proceedings underway abroad, and the receptivity of the foreign government or the court or agency abroad to U.S. federal-court judicial assistance (English courts are receptive to section 1782 assistance); (3) whether the section 1782 request conceals an attempt to circumvent foreign proof-gathering restrictions or other policies of a foreign country or the United States (it did not); and (4) whether the section 1782 application contains unduly intrusive or burdensome discovery requests (it did not).

Regarding the fourth Intel factor, the court rejected the respondents’ argument that, because Nigeria previously filed a different section 1782 application arising out of a separate criminal case, seeking similar discovery from the same respondents, Nigeria should not be permitted to proceed simultaneously on the two section 1782 applications. The court held that there was no legal basis for the respondents’ contention that successive section 1782 applications related to two different foreign proceedings should be prohibited.

In re Petition of Federal Republic of Nigeria, No. 1:21-mc-00007 (S.D.N.Y. Sept. 14, 2022).