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New reinsurance-related and arbitration developments from Carlton Fields

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Michael Wolgin

Employment Discrimination Claim Compelled to Arbitration Despite Arguments That “Clickwrap” Stock Incentive Agreement and Discovery Limitations Were Unconscionable

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The court granted Aetna’s motion to compel arbitration of a former employee’s age and disability wrongful termination claims that alleged violations of the Age Discrimination in Employment Act, the Americans with Disabilities Act, and the New Jersey Law Against Discrimination. The plaintiff argued that the arbitration provision in a stock option web-based clickwrap agreement to which he agreed was invalid on the grounds of both procedural and substantive unconscionability. The court, however, found that clickwrap agreements are valid and enforceable under applicable New Jersey law and that Aetna provided sufficient evidence illustrating that acceptance of the terms of the stock agreement through the website was a necessary precondition to the plaintiff’s receipt of stock options in each year. The court held that the contract was not procedurally unconscionable because even assuming the stock agreement was presented on a “take-it-or-leave-it basis,” the plaintiff was free to decline it and would not have suffered negative consequences.

The court also rejected the plaintiff’s argument that the contract was substantively unconscionable. The court disagreed with the plaintiff’s contention that the arbitration provision mandated submission of the plaintiff’s claims to an “inherently unfair and biased arbitral forum,” noting that the U.S. Supreme Court has repeatedly rejected this idea. Additionally, the court rejected the plaintiff’s argument that a contract provision limiting discovery during arbitration was substantively unconscionable. The court determined that the discovery provision was “less severe” than the provisions found by other New Jersey courts to be unconscionable. The discovery provision was not overly restrictive because it authorized the arbitrator to permit further discovery, which was not tied to an “impossibly high burden.” The court further noted that the plaintiff did not demonstrate how the discovery provision impaired his ability to litigate his case fairly. The plaintiff merely stated that “discovery is particularly important in the employment discrimination context.” Such contentions, however, are insufficient.

Falk v. Aetna Life Ins. Co., No. 3:19-cv-00434 (D.N.J. Aug. 31, 2019).

After Reviewing the Arbitration Record, Court Enters Default Judgment Confirming Default Arbitration Award

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Plaintiff Choice Hotels International Inc. filed an application to confirm arbitration award and a motion for default judgment against a fanchisee company and its owner in connection with an arbitration initiated before the AAA as a result of the franchisees’ failure to pay royalties and fees under the governing franchise agreement. Choice Hotels alleged that it sent notices of the arbitration to the defendants “by regular mail, certified mail and/or overnight FedEx delivery,” but “Defendants failed to appear or participate during any proceeding.” The arbitrator noted that the defendants had “failed to respond” and “failed to submit documents after due notice by mail in accordance with the Rules.” The arbitrator awarded $83,726.63 in damages, and $2,750 for reimbursement of fees.

The court found that Choice Hotels was entitled to a default judgment because it met its obligation under the FAA to show that it was entitled to confirmation of the award as a matter of law. The court explained that Choice Hotels’ claims were properly before the AAA pursuant to the arbitration clause in the parties’ franchise agreement and that Choice Hotels was authorized under the AAA’s rules to present its evidence by supporting documentation and the submission of an affidavit. The court found that, after “having fully reviewed and considered” this evidence, the arbitrator entered its award, and there was “no reason in the record” to question its validity. The court therefore ruled that the confirmation of the award was proper and granted the default judgment in favor of Choice Hotels.

Choice Hotels Int’l, Inc. v. Laxmee, Inc., No. 8:18-cv-01818 (D. Md. Aug. 9, 2019).

Applied Underwriters Overcomes Bid for Renewed Motion for Class Certification in Workers’ Compensation Reinsurance Dispute

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We have been tracking certain class actions filed against Applied Underwriters Inc. and Applied Risk Services Inc. alleging that the companies fraudulently marketed and sold workers’ compensation insurance programs to California employers in violation of state and federal law. The case involves a disputed reinsurance participation agreement used to control workers’ compensation rates. As we previously reported, on January 29, 2019, the court denied class certification, holding that the plaintiffs failed to demonstrate that a class action would be “superior” to individual actions, as required by Federal Rule of Civil Procedure 23(b)(3).

Subsequent to that ruling, the plaintiffs requested a status conference, which the court granted. The conference addressed a number of issues, including whether one of the plaintiffs could file a renewed motion for class certification based on a more limited proposed class, whether plaintiffs could communicate with putative class members, and whether the court would set a settlement conference. The new proposed class “would consist of all California participants in defendants’ insurance programs that paid more under defendants’ Reinsurance Participation Agreement than they would have under guaranteed cost workers’ compensation insurance policies issued by California Insurance Company.” Class certification would be sought only on the plaintiff’s claim “under the unlawful prong of California’s Unfair Competition Law.”

The court denied the requests for a renewed motion for class certification and for leave to communicate with putative class members. The court noted that the relevant plaintiff failed to provide “the court with any explanation for why it could not have pursued this narrowed class definition in the initial motion for class certification.” The court observed that the plaintiffs were seeking certification of essentially the same class in a separate New York proceeding. The court also held that the proposed narrower class still would “not resolve the court’s concerns identified in the prior order denying class certification.” The court did decide to consolidate for trial the related cases before the court, and further ordered the cases to the court’s Voluntary Dispute Resolution Program.

Shasta Linen Supply, Inc. v. Applied Underwriters, Inc., No. 2:16-cv-01211 (E.D. Cal. Apr. 17, 2019).

Odyssey Reinsurance Obtains Summary Judgment in Fraudulent Transfer Case Against Owners of Agency Involved in Reinsurance Arrangement

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We have been tracking an ongoing reinsurance matter in which Odyssey Reinsurance Co. obtained a $3.2 million default judgment against Cal-Regent Insurance Services Corp. and Pacific Brokers Insurance Services (PBIS) as a result of fraudulent transfers made between the two companies and the owner/officers of both companies, Richard and Diane Nagby. As we previously reported, Odyssey obtained a judgment against Cal-Regent in 2015 for $3.2 million to recover the amount of return commissions it was owed. The Nagbys, however, had previously formed PBIS and caused Cal-Regent to transfer substantially all of its assets to PBIS. Three months before judgment was entered in Odyssey’s initial action against Cal-Regent, the Nagbys caused PBIS to sell substantially all of its assets to AmTrust for $5 million, which the Nagbys agreed to divide among themselves.

Odyssey filed the present action on March 21, 2017, alleging liability under California’s Uniform Fraudulent Transfer Act (UFTA) and alter ego and successor liability law. The court previously granted default judgments as well as preliminary injunctions against the Nagbys enjoining them from disposing the AmTrust proceeds. On October 27, 2017, the court entered a judgment as to Cal-Regent and PBIS, including a monetary award against PBIS of $3,219,482.68, the amount owing on the District of Connecticut judgment against Cal-Regent. On March 5, 2018, the court certified the judgment as final, and no appeal was taken.

The court has now granted Odyssey’s motion for summary judgment seeking to recover from the Nagbys the money transferred to them from the sale of PBIS to AmTrust. Odyssey’s theory of liability under the UFTA was based on constructive fraud, which does not require a showing of fraudulent intent by the Nagbys. The court found that the Nagbys were liable because: (1) Cal-Regent transferred its assets to PBIS (Cal-Regent transferred at least 75% of its relationships with insurance brokerage firms) and was rendered insolvent; (2) PBIS then sold all of its assets to AmTrust; (3) the initial proceeds of the sale and a subsequent payment by AmTrust were distributed to the Nagbys; and (4) these distributions rendered Cal-Regent and PBIS insolvent in that they were left unable to pay off their debt owed to Odyssey.

The court further found that Odyssey demonstrated that it was a creditor of PBIS under California’s standard for successor liability, finding that Odyssey showed that there was no adequate consideration given by PBIS for Cal-Regent’s assets, that Cal-Regent’s debts were left unpaid, and that Mr. Nagby owned both Cal-Regent and PBIS. Finally, the court also found that Odyssey could recover the full amount owing on the District of Connecticut judgment from Mr. Nagby under Nevada corporate law because Mr. Nagby’s authorization for the unlawful distributions left PBIS unable “to pay its debts as they became due in the usual course of business” and left PBIS with assets “less than the sum of its total liabilities.”

Odyssey Reinsurance Co. v. Nagby, No. 3:16-cv-03038 (S.D. Cal. July 2, 2019).

Ninth Circuit Affirms Order Denying Arbitration, Applying Precedent That State Law Does Not Overcome the New York Convention’s Signatory Requirement to Compel Arbitration

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In a trademark dispute, Shrinivas Sugandhalaya LLP (SS LLP), an incense manufacturing company based in Mumbai, appealed the denial of its motion to compel arbitration against Balkrishna Setty and his company Shrinivas Sugandhalaya (BNG) LLP, located in Bangalore. SS LLP sought to compel arbitration under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (also known as the New York Convention), by invoking the arbitration clause in a partnership agreement to which SS LLP was not a signatory. The Ninth Circuit affirmed the denial of arbitration, relying on the requirement under the New York Convention that the party seeking to compel arbitration be a party to the arbitration agreement. The court explained that to the extent the FAA would permit a nonsignatory to invoke arbitration through certain state contract or equitable laws, the Convention’s bar of arbitration would control over the FAA. The court also rejected other arguments of SS LLP, finding that they were not raised before the district court.

Setty v. Shrinivas Sugandhalaya LLP, No. 18-35573 (9th Cir. June 6, 2019).