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New reinsurance-related and arbitration developments from Carlton Fields

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Michael Wolgin

THE FEDERAL ARBITRATION ACT DOES NOT GRANT ARBITRATORS THE POWER TO COMPEL PRE-HEARING PRODUCTION OF DOCUMENTS FROM NON-PARTIES

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While the FAA grants arbitrators authority to compel non-parties to appear before them and produce documents at a hearing, it does not authorize them to compel pre-hearing production. The Ninth Circuit Court of Appeals joined the Second, Third and Fourth Circuits in so holding. The Eighth Circuit, however, disagrees, having ruled previously that “implicit in an arbitration panel’s power to subpoena relevant documents for production at a hearing is the power to order the production of relevant documents for review by a party prior to the hearing.” It is also worth noting, as the Ninth Circuit did, that “because arbitration is a creation of contract, arbitration agreements may provide arbitrators greater discovery powers with respect to the parties bound by such agreements.” CVS Health Corp. v. Vividus, LLC, Case No. 16-16187 (9th Cir. Dec. 21, 2017).

This post written by Benjamin E. Stearns.

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INSURER’S ATTEMPT TO SHIELD DOCUMENTS FROM DISCOVERY THROUGH ASSERTION OF THE MEDIATION PRIVILEGE AND A RELEVANCY OBJECTION IS UNAVAILING

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In a breach of contract and bad faith case emanating from an insurer’s refusal to settle an underlying case within policy limits, the insurer was unsuccessful in its attempt to protect documents from discovery by assertion of a “mediation privilege” and another set of documents related to reinsurance information via a relevancy objection. The court ruled that the documents did not qualify as “mediation documents” because the insurer was not a party to the underlying litigation, which was a “requirement under the plain meaning of the definition of ‘mediation document.’” The documents also did not qualify as “mediation communications” because they involved statements “made by a person present at the mediation outside the mediation session.” As such, in order to qualify, the communications must have either been made by the mediator, or to the mediator. They were not. Another set of documents containing statements “which were made by a person who may have been present at the mediation session to someone (not the mediator) outside the mediation session” also did not qualify for protection.

With regard to the reinsurance documents, the court stated that there is “no absolute exclusion of reinsurance information.” Rather, discovery of such information may be allowed in the context of claims for bad faith involving an insurer’s failure to settle in order to “equalize the knowledge of both parties and give the plaintiff ‘assurance that there can be recovery in the event of a favorable verdict to justify the time, effort and expense of preparing for trial.’” The fact that such information may be discoverable, however, does not guarantee that it will be admissible at trial.

Subsequent to the ruling described above, the court denied a motion for reconsideration, finding that it had not committed an error of law. The court “reiterate[d] that it considers the mediation privilege a very important privilege in jurisprudence; however, for the Court to stretch the mediation privilege beyond its plain meaning and ambit of protection, in fact, would undercut the privilege itself and exceed this Court’s power and authority.” Golon, Inc. v. Selective Ins. Co. of the Southeast, Case No. 17-cv-0819 (W.D. Pa. Dec. 7, 2017 and Dec. 14, 2017).

This post written by Benjamin E. Stearns.
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NINTH CIRCUIT: UNCONSCIONABILITY ARGUMENTS DIRECTED SOLELY AT CLASS ACTION WAIVER PROVISIONS IN ARBITRATION AGREEMENTS ARE FORECLOSED BY CONCEPCION

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Utilizing a “sweeping reading of Concepcion,” as characterized by the concurring opinion, the Ninth Circuit has ruled that arguments that “a class action waiver, by itself, is unconscionable under state law or that an arbitration agreement is unconscionable solely because it contains a class action waiver” are expressly foreclosed by AT&T Mobility, LLC v. Concepcion, 563 U.S. 333 (2011). The plaintiff did not challenge the district court’s decision to compel arbitration, but rather the decision to compel arbitration on an individual basis, arguing that the relevant agreement’s class action waiver provision was unconscionable under Nevada law.

The majority stated that, while Concepcion foreclosed the plaintiff’s unconscionability argument because it was directed only at the class action waiver provision, Concepcion “does not foreclose application of state unconscionability doctrines to arbitration agreements generally.” Were the plaintiff to contend that “the entire arbitration agreement – or any aspect of it other than the class action waiver – is unconscionable,” then his argument would be viable. However, such was not the case here. Carter v. Rent-A-Center, Inc., Case No. 16-15835 (9th Cir. Dec. 12, 2017).

This post written by Benjamin E. Stearns.
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ELEVENTH CIRCUIT FINDS NO MANIFEST DISREGARD OF THE LAW AND UPHOLDS ORDER CONFIRMING ARBITRATION AWARD IN LICENSING DISPUTE

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The case involved a dispute between the owner of the Cabbage Patch Kids brand and related intellectual property (“CPK”), and licensee JAKKS Pacific, Inc., which had an exclusive license to use the brand and intellectual property between 2012 and 2014. Prior to the end of the license agreement, CPK selected a new licensee, Wicked Cool Toys, to manufacture and sell Cabbage Patch Kids dolls and products beginning in 2015. To that end, CPK and Wicked Cool Toys entered into a deal memorandum on May 30, 2014 whereby CPK permitted Wicked Cool Toys to immediately begin the process of creating and promoting a new line of dolls. Shortly thereafter, JAKKS asserted that CPK had breached its exclusive license and stopped paying royalties due under the agreement. CPK responded by filing suit in a federal court in Georgia seeking an order compelling arbitration and confirmation of any arbitration award.

At issue during arbitration was the meaning of a provision in the license agreement reserving to CPK the right to “engage, during the 365-day period prior to the termination or expiration of [the agreements], in the negotiation, with potential licensees (including competitors of Licensee), of one or more license agreements granting licenses with respect to” the products covered by JAKKS’s exclusive license, “to become effective upon the expiration or earlier termination of [the agreements].” JAKKS argued that, under that provision, CPK could only “negotiate” with potential licensees in 2014, and was prohibited from actually reaching an agreement with a new licensee or doing anything else to make it possible for a new licensee to actually launch a new line of Cabbage Patch Kids products in 2015. The arbitrator concluded that this provision, particularly the word “negotiate,” was ambiguous in light of the circumstances, and that “it was the intention of the parties” that CPK and Wicked Cool Toys “could do what they did in order to transition into the manufacture and launch in 2015 of a new seasonal line of [Cabbage Patch Kids] products, without the de facto creation of a ‘gap’ of about one year.” The arbitrator therefore awarded CPK the royalties withheld by JAKKS and the court confirmed the award.

On appeal, JAKKS moved to vacate the award and argued under both Georgia law and the FAA that the arbitrator manifestly disregarded the law and exceeded his authority. The Eleventh Circuit disagreed and affirmed the district court’s confirmation of the award. The court found that the arbitrator did not manifestly disregard the law by considering the commercial context of the relevant market when determining whether the license agreement provision allowing CPK to engage in the negotiation of a new license agreement in 2014 was ambiguous. In addition, the court held that because “the subject of the arbitration proceeding was the parties’ dispute about the construction, meaning, or enforceability of certain terms” of the license agreement, the arbitrator did not overstep his authority by deciding the meaning of the provision at issue. The court also rejected JAKKS’ argument that the arbitrator violated the FAA and held that the arbitrator was interpreting, rather than modifying, the relevant provision because it was ambiguous on its face. Original Appalachian Artworks, Inc. v. Jakks Pacific, Inc., Case No. 17-11513 (11th Cir. Nov. 17, 2017).

This post written by Gail Jankowski.
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VIRGINIA SUPREME COURT CONSIDERS TERMS OF ASSUMPTION REINSURANCE TRANSACTION IN DETERMINING OBLIGATIONS OF INSOLVENT INSURER

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A group of Kentucky hospitals sought reimbursement for legal fees incurred in two lawsuits related to the insolvency of their insurer, Reciprocal of America (“ROA”). In the 1970s and 1980s, the hospitals created two trusts to provide the hospitals with workers’ compensation and employers’ liability coverage. In 1997, the trusts were merged into ROA, and ROA agreed to assume the trusts’ business liabilities and to indemnify the trusts and their member insureds, including the hospitals, “in defending [themselves] against any claim Damages arising from or connection with the Damages.”

In 2003, ROA was placed into receivership and was later found insolvent and ordered liquidated. This led to two judicial proceedings in which the hospitals were involved—one that they joined as claimants seeking to have ROA continue to pay worker’s compensation claims that ROA had assumed from the trusts, and one seeking a declaration that the Kentucky Insurance Guaranty Association (KIGA) was obligated to cover the hospitals’ claims that ROA had assumed but could not pay. After both matters were resolved, the hospitals filed claims with ROA’s Special Deputy Receiver for reimbursement of the legal fees and costs incurred in those matters under ROA’s indemnification obligations. The claim was denied, and the case ended up before the Virginia Supreme Court.

The court affirmed the denial of the hospitals’ claim. The court explained that the plain meaning of the phrase “defending against any claim” and the specific contractual definition of “Damages,” together support the characterization of the agreements as an assumption reinsurance transaction in which ROA stepped into the shoes of the trusts. ROA’s indemnity could rise no higher than the pre-merger obligations of the two trusts — for those were the only liabilities that ROA assumed, and thus the only “Damages” for which it was responsible to indemnify the trusts. This contractual definition of “Damages” necessarily excludes any obligation for ROA to indemnify the trusts and their member insureds for the legal fees and costs incurred in the underlying judicial proceedings. The court rejected the hospitals’ argument that ROA’s duty to pay for the expense of defending against claims covered the expense of asserting claims. While it may have been good legal strategy for the hospitals to proactively assert such claims, this did not turn the assertion of claims into the defense of claims covered by ROA’s indemnification agreement. Appalachian Regional Healthcare v. Cunningham, Case No. 161767 (Va. Nov. 22. 2017).

This post written by Jason Brost.

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