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Michael Wolgin

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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FRANCHISEES LOSE BID TO VACATE ARBITRATION AWARD ENFORCING NON-COMPETE CLAUSE DESPITE CLAIM THAT ARBITRATOR MANIFESTLY DISREGARDED THE LAW

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A set of former franchisees are prohibited from violating the terms of a non-compete clause with franchisor Wild Bird Centers of America (“WBCA”) for two years after the Fourth Circuit recently upheld the denial of their petition to vacate an arbitration award imposing the injunction. The franchisees had continued to operate a Wild Bird Center store after their ten-year franchise agreement expired and they chose not to renew it. WBCA submitted the dispute to mandatory arbitration, and the arbitrator issued an injunction prohibiting the franchisees from violating the non-compete.

First, the franchisees argued the arbitrator manifestly disregarded the law, exceeded his powers, and failed to issue an award from the essence of the franchise agreement by applying the non-compete clause. The court rejected these claims as merely alleging the arbitrator misinterpreted the agreement. The non-compete clause’s language suggesting application “after termination” in contrast to a later section’s language suggesting application “[i]n the event of termination or expiration” of the franchise agreement was “at worst ambiguous” and “at best, support[ed] WBCA’s position.” Therefore, the arbitrator’s application “arguably” construed the contract sufficient to warrant confirmation.

Second, the franchisees claimed that, even if the non-compete clause applied, the arbitrator erred by extending the clause’s terms to two years because such an interpretation did not draw from the essence of the agreement. The court rejected these claims based on another case which held it reasonable to enforce compliance with a non-compete to include the total time which the aggrieved party was entitled to under the non-compete clause. Further, the franchisees failed to show the arbitrator acted from personal notions of right and wrong or disregarded the correct legal standards. Specifically, the court noted the limited nature of the injunction term and lack of demonstrated prejudice from the extension because the franchisees had yet to stop operating the competing business. The court affirmed the district court’s order confirming the award. Frye v. Wild Bird Ctrs. of Am., Inc., Case No. 17-1346 (4th Cir. Nov. 27, 2017).

This post written by Thaddeus Ewald .

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COURT FINDS STATE LAW BARRING INSURANCE ARBITRATIONS REVERSE-PREEMPTS FEDERAL ARBITRATION ACT

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The case involved a dispute between the parties to a Reinsurance Participation Agreement (RPA). Defendants moved to compel arbitration, citing the Federal Arbitration Act and a provision in the RPA agreeing to resolve “[a]ll disputes arising with respect to any provision of this Agreement” in arbitration. However, the RPA also contained a choice of law provision providing that “[t]his Agreement shall be exclusively governed by and construed in accordance with the laws of Nebraska.” Plaintiffs argued that the Nebraska Uniform Arbitration Act (NUAA), which prohibits enforcement of an arbitration clause in any “agreement concerning or relating to an insurance policy,” made the arbitration provision unenforceable.

In most cases, the FAA would preempt a state law regarding arbitration, but the McCarran-Ferguson Act allows state laws “regulating the business of insurance” to preempt any federal statute that is not specifically related to the business of insurance and impairs a state insurance law. Defendants argued that the FAA preempts the NUAA and that the RPA requires all questions concerning construction or enforceability of the arbitration clause, including the applicability of the NUAA, to be decided by the arbitrator.

The court rejected defendants’ arguments, finding first that the question of whether the FAA preempts the NUAA is not a question of arbitrability that an arbitrator can decide. The court then determined that the FAA does not regulate the business of insurance, that the relevant portion of the NUAA was “enacted for the purpose of regulating the business of insurance,” and that application of the FAA would operate to impair the NUAA. Thus, all of the conditions set by the McCarran Ferguson Act for a state law to preempt the FAA were met. As a result, the court found that the NUAA rendered the arbitration clause in the RPA unenforceable and denied plaintiffs’ motion to compel arbitration. Citizens of Humanity v. Applied Underwriters, Inc., Case No. B276601 (Cal. Ct. App. Nov. 22, 2017).

This post written by Jason Brost.

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ESTATE AVOIDS ARBITRATION IN WRONGFUL DEATH MARITIME SUIT BECAUSE DEFENDANT WAS NOT A SIGNATORY OR PARTY TO CONTRACT WITH ARBITRATION CLAUSE

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The Ninth Circuit refused last month to disturb a district court order denying a defendant’s motion to compel arbitration against a sailor in a maritime action pursuant to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“Convention Act”) where the defendant company was not a signatory or a party to an employment agreement with an arbitration clause. The sailor (“Yang”) entered into an employment agreement with the vessel’s owner (“Majestic”) that contained an arbitration clause. While defendant Dongwon Industries Co. was responsible for the vessel’s repairs, maintenance, and supplies, it was neither a signatory nor party to Yang and Majestic’s agreement. After Yang died when the ship sank due to inadequate repairs, Yang’s wife sued Majestic and Dongwon for wrongful death. The district court compelled arbitration of her claims against Majestic based on the employment agreement, but denied Dongwon’s motion to compel arbitration.

First, the Ninth Circuit affirmed because the Convention Act does not allow non-signatories or non-parties to compel arbitration. Dongwon attempted to argue that the language in the Convention Treaty limiting arbitration to signatories applied only to a phrase addressing arbitration agreements, but not the phrase addressing arbitration clauses in other contracts. The court relied heavily on a Second Circuit case Kahn Lucas Lancaster, Inc. v. Lark International Ltd., which held that the signatory requirement language applied to both arbitration agreements and clauses in other contracts. Kahn Lucas relied on the last-antecedent rule, the grammar of the Treaty’s foreign texts, and the Treaty’s legislative history. In relying on Kahn Lucas, the court explicitly recognized the punctuation canon, under which a phrase applies to “all antecedents instead of only to the immediately preceding one” when the phrase is separated from the antecedents by a comma. The court also noted that every circuit considering Kahn Lucas’s logic has followed it. Lastly, the court found Dongwon failed to demonstrate that it was a party to the agreement containing the arbitration clause, a foundational requirement to compel under the Convention Treaty.

Second, the court rejected Dongwon’s argument that a non-party may invoke arbitration under the Federal Arbitration Act (“FAA”) if the relevant state contract law allows such a litigant to enforce the agreement. Initially the court noted FAA arbitration was unavailable to Dongwon because it specifically exempts “contracts of employment of seamen.” The court dismissed the argument as a “doctrinal sleight of hand” because arbitrations under the Convention Act require additional prerequisites than those required for arbitrations under the FAA, a conflict which prevents application of the FAA. Furthermore, even if the court were to ignore the additional Convention Act requirements, Dongwon would not be entitled to arbitration because its theories under the applicable state law—California—do not provide a basis to compel arbitration. To conclude, the court noted there was “no reason to depart from the general rule” that the contractual right to compel arbitration may not be asserted by a non-party to the agreement that does not otherwise possess the right to compel arbitration. Yang v. Majestic Blue Fisheries, LLC, Case No. 15-16881 (9th Cir. Nov. 30, 2017).

This post written by Thaddeus Ewald .

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THE ALLEGATION OF NON-ARBITRABLE PRIVATE ATTORNEY GENERAL CLAIMS DOES NOT PREVENT ARBITRATION OF INDIVIDUAL CLAIMS RAISED SIMULTANEOUSLY

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A contractual arbitration clause may not be avoided by the allegation of “private attorney general” claims that are not arbitrable on public policy grounds in conjunction with claims raised on an individual basis that would otherwise clearly be subject to arbitration. A plaintiff claiming to have suffered harm as a result of misclassification as an independent contractor rather than as an employee raised a “smorgasbord of claims … in a mix of capacities,” including as an individual, a putative class representative, and a private attorney general under California’s Private Attorneys General Act (“PAGA”).

The contract between the plaintiff and his employer provided that arbitration will occur on only an individual basis and expressly waived claims as a representative. However, California law prohibits PAGA claims from being waived in such a manner. The plaintiff argued that because the PAGA claims could not be submitted to arbitration, his related individual and class representative claims should not be arbitrated either. The Ninth Circuit disagreed. The court simply restricted the contractual arbitration provision from applying to the PAGA claims and ruled that arbitration should be compelled on the other claims. Furthermore, the court held that the PAGA claims should be stayed until the arbitration of the plaintiff’s individual claims made a critical determination. Depending on the outcome of that determination, the plaintiff may be allowed to pursue his PAGA claims in district court. Aviles v. Quik Pick Express, LLC, Case No. 15-56951 (9th Cir. Nov. 24, 2017).

This post written by Benjamin E. Stearns.

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