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New reinsurance-related and arbitration developments from Carlton Fields

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Michael Wolgin

COURT FINDS THAT REINSURANCE TRANSACTION DID NOT BREACH INVESTMENT CONTRACT UNDERLYING AN ERISA PLAN

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MetLife acquired the rights to a fixed investment option contract with Midco, a trust established to administer a retirement plan for the employees of Midco International, Inc. Midco plan participants received interest each year pursuant to a “declared rate” which would be determined at MetLife’s discretion “from time to time.” Several years later, MetLife sold its 401(k) administration business to Great-West Life & Annuity Insurance Company in the form of a 100% indemnity reinsurance transaction, whereby the Midco assets backing the Midco contract were transferred to Great-West, and MetLife delegated responsibility for setting the declared rate to Great-West. MetLife informed Midco that its business had been transferred to Great-West and that Great-West would provide “recordkeeping and administrative services” going forward, but did not disclose that Midco’s assets would be transferred to Great-West and that Great-West would be delegated the responsibility to set the declared rate. The declared rate selected by Great-West in the subsequent years continually decreased, falling from 6.7% in 2007 to 1.2% in 2016. Later, upon learning that Midco’s assets were no longer with MetLife, Midco filed suit, alleging that Great-West’s control over the declared rate amounted to a breach of MetLife’s obligation to set the rate in good faith.

MetLife moved for summary judgment, which the court granted. The Court found significant that Midco provided no evidence that the parties expected that MetLife would not transfer assets or rate-setting responsibility to a third party. The court rejected Midco’s claim that MetLife’s lack of full disclosure about Great-West’s role in investment decisions violated the contract, stating, “as long as MetLife exercised its discretion in good faith, its failure to disclose how it exercised its discretion is not a breach of the implied covenant.” The Court also noted that Midco failed to provide evidence of industry custom to “show that delegating assets and responsibility to a third party without policyholder consent was an unusual act for an insurance company….” Midco Int’l, Inc. Employees Profit Sharing Trust v. Metro. Life Ins. Co., Case No. 14-9470 (USDC N.D. Ill. July 5, 2017).

This post written by Gail Jankowski.

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ELEVENTH CIRCUIT DEFERS TO ARBITRATOR’S INTERPRETATION OF FORUM SELECTION CLAUSE IN INTERNATIONAL DISPUTE AND AFFIRMS AWARD

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Questions of arbitral venue, even in international arbitration, are presumptively for the arbitrator to decide. The court so ruled despite arguments from an Israeli company that the arbitrator’s interpretation of an arbitration agreement with an American company violated Article V of the New York Convention and Section 10(a)(4) of the Federal Arbitration Act. The court’s decision was guided by a set of presumptions regarding the intent of the arbitrating parties. On the one hand, courts presume the parties intend courts to determine issues of “arbitrability” (i.e., whether the parties are bound by an arbitration clause or whether an arbitration clause applies to a particular controversy), but on the other, arbitrators are presumed to be the intended deciders regarding the “meaning and application of particular procedural preconditions for the use of arbitration.”

The court held that disputes over the interpretation of forum selection clauses presumptively fall into the latter category, because they are disputes over where an arbitration is conducted, not whether it is conducted. Therefore, when an arbitrator “even arguably” engages with the language of the venue provision in making his determination, the court must defer to that determination, “however good, bad, or ugly.” The court noted, however, that if the parties do not want the arbitrator determining the arbitral venue, they may limit the issues they choose to arbitrate. Bamberger Rosenheim 11th Cir 7.17.17, Case No. 16-16163 (11th Cir. July 17, 2017).

This post written by Benjamin E. Stearns.

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NEW YORK APPELLATE COURT SIDES AGAINST THE SECOND CIRCUIT AND HOLDS CLASS ACTION WAIVERS VIOLATE THE NLRA

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Plaintiffs, former insurance agents for defendants New York Life Insurance Company and its related companies, brought a putative class action seeking recovery for allegedly illegal wage deductions and violations of overtime and minimum wage laws. The main issue on appeal, and an issue of first impression for New York state courts, was the validity of an arbitration provision in one plaintiff’s agent contract that waived any right to a jury trial and agreed that no claim could be brought or maintained “on a class action, collective action or representative action basis either in court or arbitration.” The court held that arbitration provisions which prohibit class, collective, or representative claims violate the National Labor Relations Act (NLRA) and are therefore unenforceable. In addition, the Court agreed with the Seventh Circuit’s reasoning that arbitration provisions like the one at issue here fail to meet the criteria of the FAA’s Saving Clause for nonenforcement because the provision is unlawful under the NLRA. In holding that class waivers violated the NLRA, the court aligned itself with the Seventh and Ninth Federal Circuits and disagreed with the Second, Fifth, and Eighth Circuits. The Court noted that the Supreme Court would soon address this circuit split. Gold v. New York Life Ins. Co., Case No. 653923/12 (N.Y. App. Div. July 18, 2017).

This post written by Gail Jankowski.

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EIGHTH CIRCUIT AFFIRMS ORDER COMPELLING ARBITRATION, REJECTING CONTRACT DEFENSES OF UNCONSCIONABILITY AND LACK OF CONSIDERATION

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The Eighth Circuit affirmed an order compelling arbitration in a case filed by a volunteer concession worker against an operator of concessions at a sports stadium in St. Louis. The concession worker had volunteered to work at the stadium to raise funds for Washington University. The worker sued in state court claiming that the amount of the donation made by the concession operator violated the federal and state minimum wage, and that the operator committed fraud. The operator moved to compel arbitration based on a release the volunteer signed that included an agreement to submit any dispute arising from the volunteer activities to arbitration. The trial court compelled arbitration and the volunteer appealed to the Eighth Circuit, arguing that the arbitration agreement was unconscionable and lacked consideration. The Eighth Circuit rejected both arguments. The agreement was not unconscionable because it was “easy to understand, with no evidence that it [was] non-negotiable,” and the agreement did not contain onerous provisions. And the agreement was supported by consideration, namely, the volunteer’s release of his right to sue the operator in exchange for the opportunity to volunteer at the sports stadium and procure a donation to Washington University. The Eighth Circuit also found that the arbitration agreement, which encompassed “any dispute arising from the [volunteer] Activity,” is broad and encompassed the volunteer’s claim that he was defrauded from the alleged insufficient wage. The claim depended on whether the plaintiff was “a volunteer or an employee, and the underlying factual allegations touch matters covered by the arbitration provision.” Leonard v. Delaware North Companies Sport Service, Inc.a>, Case No. 16-3246 (8th Circuit June 27, 2017).

This post written by Michael Wolgin.

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COURT FINDS NO EXCEEDING OF POWERS OR MANIFEST DISREGARD OF THE LAW IN CONFIRMING ALLEGEDLY SPECULATIVE ARBITRATION AWARD

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This case concerned an agreement by which Clos La Chance Wines, Inc., a wine producer, appointed AV Brands, Inc., a wine importer and wholesaler, as the exclusive brand agent and distributor of its wine products for the United States and Puerto Rico for a five year period. Pursuant to the agreement, AV Brands was required to use “best efforts” and “commercially reasonable efforts” in staffing the account and selling product, and was subject to yearly goals dictating the number of wine cases it was required to purchase. Several years into the arrangement and pursuant to the agreement’s dispute resolution provision, Clos La Chance Wines filed a demand for arbitration alleging that AV Brands breached the agreement by failing to meet those marketing requirements.

In a final arbitration award, Retired Judge William J. Cahill found, among other things, that Clos La Chance Wines was entitled to damages in the amount of $1,739,681, which included $200,000 to compensate it for future time and costs associated with recapturing its market position. Clos La Chance Wines then sought confirmation of the award and this decision followed.

AV Brands challenged Judge Cahill’s $200,000 award for lost market share, primarily arguing that in doing so, Judge Cahill (1) exceeded his powers, since contracts generally permit only the recovery of foreseeable damages, and (2) manifestly disregarded California law prohibiting breach of contract damages based on speculative evidence. With regard to the first ground, the court rejected AV Brands’ argument, likening it to a claim that Judge Cahill misunderstood the applicable law, which the Court stated is not a valid reason for vacatur. Regarding the latter ground, the Court found that AV Brands overlooked Judge Cahill’s finding that while much of the testimony regarding market share damages was speculative, some was not speculative and thus persuasive. Therefore, the Court refused to “re-weigh the evidence” and confirmed the award. Clos La Chance Wines, Inc. v. AV Brands, Inc., Case No. 5:16-cv-04047 (USDC N.D. Cal. June 23, 2017).

This post written by Gail Jankowski.
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