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New reinsurance-related and arbitration developments from Carlton Fields

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Michael Wolgin

EIGHTH CIRCUIT UPHOLDS ARBITRAL IMMUNITY IN CHALLENGE TO AAA’S REMOVAL OF ARBITRATOR

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Owens, a terminated CEO, engaged in a AAA arbitration with his former company before a three-member panel. In the course of the proceeding, the company sought to remove an arbitrator for making an incomplete disclosure regarding conflicts of interest. The AAA removed the conflicted arbitrator without holding a hearing or consulting the panel, and the remaining two arbitrators ultimately awarded Owens $3 million. The company then successfully moved for dismissal of the award in the district court. Following dismissal, Owens sued the AAA for breach of contract, unjust enrichment, and tortious interference, but his claims were dismissed by the court based on arbitral immunity. On appeal, the Eighth Circuit affirmed, explaining that the reason courts extend immunity to arbitrators is to protect them and the arbitration process from undue influence and attacks from dissatisfied litigants. The Court concluded that “the removal of arbitrators is similarly protected by arbitral immunity because it is just as much a part of the arbitration process as the appointment of arbitrators.” Owens v. American Arbitration Association, Inc., Case No. 16-1055 (8th Cir. Nov. 18, 2016).

This post written by Gail Jankowski.

See our disclaimer.

COURT UPHOLDS PRIOR RULING THAT UNFILED RATES CHARGED UNDER REINSURANCE AGREEMENT WERE NOT VOID

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On July 21, 2016, we reported on a putative class action filed in a California U.S. district court by Shasta Linen Company against Applied Underwriters, Inc. and its affiliate entities, alleging that the “EquityComp” workers’ compensation insurance program marketed and sold by Applied Underwriters violated California insurance law and regulations. Shasta asserted that the defendants unlawfully used a Reinsurance Participation Agreement (RPA) to control workers’ compensation rates (and thus, charge higher rates) without first having the RPA filed and approved by the department of insurance as required by law. The court dismissed Shasta Linen’s claims to the extent that they sought to invalidate the RPA’s rates on the theory that the RPA was an unfiled plan pursuant to section 11735 of the California Insurance Code. The court reasoned that the use of a rate that has not been filed is not an unlawful rate unless and until the commissioner conducts a hearing and disapproves the rate.

Subsequent to the court’s ruling, the California Commissioner issued an order in an administrative proceeding, finding that the RPA was void because it had not been filed and approved by the department. Shasta Linen then sought reconsideration of the court’s prior dismissal, arguing that the Commissioner’s Order was a “change in controlling authority meriting reconsideration” by the court. On October 17, 2016, the court held that the Commissioner’s order misinterpreted the law, and was not “controlling.” The court denied reconsideration, but it did so “without prejudice as to attempts by plaintiff to invalidate the [RPA] on grounds other than the theory that defendants violated” section 11735. Shasta Linen Supply, Inc. v. Applied Underwriters, Inc., Case No. 2:16-cv-00158 (USDC E.D. Cal. Oct. 17, 2016).

This post written by Michael Wolgin.

See our disclaimer.

COURT GRANTS DEFAULT JUDGMENT CONFIRMING ARBITRATION AWARD, WITH A LESSON ON JURISDICTION

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Choice Hotels filed an application to confirm an arbitration award of over $247,000 for the alleged breach of a franchise agreement by two defendants, which failed to timely commence construction of a hotel. The defendants had not participated in or submitted any written materials for arbitration. However, the court denied Choice Hotels’ first motion for a default judgment because it failed to adequately establish subject matter jurisdiction and jurisdiction under the FAA. The Court explained that the FAA is not an independent source of jurisdiction, and further held that Choice Hotels’ failed to plead the requirements of diversity jurisdiction. Additionally, because there was no record in the application or the arbitration award itself that the arbitration occurred in Maryland, which was required by the arbitration agreement, the court could not determine that jurisdiction existed under the FAA. Choice Hotels filed a second motion for default judgment, which successfully alleged diversity jurisdiction and established that the case was within the scope of the FAA. The Court then granted the motion for default judgment and confirmed the award. Choice Hotels Int’l, Inc. v. HSL Inv., Inc., Case No. TDC-15-2386 (USDC D. Md. Oct. 20, 2016).

This post written by Gail Jankowski, a law clerk at Carlton Fields in Washington, DC.

See our disclaimer.

THIRD CIRCUIT REVERSES ORDER DENYING ARBITRATION, RULING THAT STATE LAW PROHIBITING ARBITRATION OF INSURANCE MATTERS CHALLENGED REINSURANCE CONTRACT AS A WHOLE

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Applied Underwriters Captive Risk Assurance Company appealed from the denial of its motion to compel arbitration in a dispute related to a reinsurance participation contract with South Jersey Sanitation Company. The trial court denied the motion because it held that Nebraska law: (1) governed the dispute, (2) prohibits arbitration provisions that relate to insurance policies, as the relevant provision here purportedly does (according to South Jersey), and (3) preempted the FAA under the McCarran-Ferguson Act. The Third Circuit reversed, holding that it was for the arbitrator to determine the precise nature of the reinsurance participation contract, and whether it fell under an exception to the Nebraska law. Similarly, the Third Circuit held that South Jersey’s contention that the contract was procured based on fraud, implicated the contract “as a whole,” rather than specifically the arbitration provisions. “Therefore,” the court ruled, “the question of whether the [contract’s] arbitration provision is enforceable under Nebraska law is a question for the arbitrator,” and not the court. The court vacated the judgment and remanded to the trial court. Because the default location set forth in the contract was not within the district in which the petition to compel arbitration was filed, as is required by the FAA, the trial court was directed to determine the proper forum for arbitration, and “how to proceed” if the trial court is not able “to compel arbitration in the default location provided for in the contract.” South Jersey Sanitation Co. v. Applied Underwriters Captive Risk Assurance Co., Case No. 14-4010 (3d Cir. Oct. 25, 2016).

This post written by Michael Wolgin.

See our disclaimer.

APPLYING KENTUCKY LAW, SIXTH CIRCUIT FINDS CONTINUED EMPLOYMENT CONSTITUTES ASSENT TO ARBITRATION AGREEMENT

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During the time Plaintiffs Aldrich and Nolan worked as recruiters for the University of Phoenix, they allegedly signed an electronic form acknowledging their understanding of updated terms to the employee handbook. The acknowledgment form included an arbitration clause, and the updated employee handbook contained a class action waiver. Thereafter, both Aldrich and Nolan continued to work for the University of Phoenix for almost two years and were eventually let go. They later brought claims for wrongful termination on account of their refusal to engage in allegedly unfair, deceptive, and fraudulent practices related to recruiting veterans and service members. The trial court granted the University of Phoenix’s motion to dismiss and compel arbitration. Although Aldrich and Nolan asserted that they never received or signed the acknowledgement form, the court reasoned that under Kentucky law, continued employment constituted assent to the terms of the agreement. Moreover, the court held that there was no dispute of material fact entitling plaintiffs to a jury trial on the issue of whether they in fact signed, and because the arbitration agreement was valid, the waiver provision was valid as well.

On appeal, Sixth Circuit affirmed, reiterating Kentucky law holding that “an employee can be bound by an arbitration agreement, even without a signature, when he or she demonstrates acceptance of the agreement by continuing to work for the employer.” Aldrich v. University of Phoenix, Inc., Case No. 16-5276 (6th Cir. Oct. 24, 2016).

This post written by Gail Jankowski, a law clerk at Carlton Fields in Washington, DC.

See our disclaimer.