Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

You are here: Home / Archives for Nora Valenza-Frost

Nora Valenza-Frost

California Court Finds Arbitration Agreement Invalid and Unenforceable as a Result of Economic Duress and Undue Influence

by

The plaintiff, an agricultural laborer, brought suit against his employer who, in turn, moved to compel arbitration based on the arbitration agreement in the parties’ employment contract. The plaintiff opposed, successfully arguing that the arbitration agreement should not be enforced because of economic duress and undue influence.

The court found that all the elements of economic duress were met: (1) a sufficiently coercive wrongful act on the part of the defendant (the arbitration agreement was provided to the plaintiff after he had arrived in California and living in employer-controlled housing); (2) no reasonable alternative on the part of the plaintiff (the plaintiff was in possession of an H-2A visa obtained with the help of the defendants, believed he was only permitted to work for the defendants and had already begun working for the defendants); (3) knowledge of the plaintiff’s economic vulnerability (the defendants acknowledged that employees like the plaintiff often were the sole financial earners in their families); and (4) actual inducement to contract (the plaintiff was in a challenging financial situation with very few financial resources available to him, and no reasonable worker in his shoes could have refused to sign the arbitration agreement).

The court also found that a number of factors suggestive of undue influence were present. Such factors include: (1) discussion of the transaction at an unusual or inappropriate time; (2) consummation of the transaction in an unusual place; (3) insistent demand that the business be finished at once; (4) extreme emphasis on untoward consequences of delay; (5) the use of multiple persuaders by the dominant side against a single servient party; (6) absence of third-party advisers to the servient party; or (7) statements that there is no time to consult financial advisers or attorneys. Here, the plaintiff was presented with the arbitration agreement during a new-hire orientation in a hotel parking lot, at the end of the workday, where he was given no place to sit. Further, evidence was presented that the defendants made insistent demands that the signing of the contracts be completed rapidly, without time to review them, and repeatedly emphasized the negative consequences of failing to comply with the rules. Accordingly, the arbitration agreement was found to be invalid and unenforceable, and the defendants’ motion to compel arbitration was denied.

Martinez-Gonzalez v. Elkhorn Packing Co., No. 3:18-cv-05226 (N.D. Cal. Oct. 29, 2019).

Texas Magistrate Denies Motion for Attorneys’ Fees Incurred in Seeking Confirmation of Arbitration Award

by

The plaintiff successfully confirmed an arbitration award concerning certain franchise agreements and then sought attorneys’ fees and costs incurred in connection with its confirmation action based on the attorneys’ fees provision in the franchise agreements. The defendants opposed because the arbitrator had already issued a final award awarding attorneys’ fees and costs in the arbitration.

The franchise agreement provided that if either party instituted arbitration and prevailed against the other party based entirely or in part on the terms of the franchise agreement, the prevailing party shall be entitled to recover from the losing party, in addition to any judgment, reasonable attorneys’ fees and arbitration costs. The magistrate judge found that, by its plain terms, the fee provision did not expressly authorize the court to award attorneys’ fees for enforcing an arbitration award.

Furthermore, where an arbitration award includes an award of attorneys’ fees – which it did here – a trial court may not award additional attorneys’ fees for enforcing or appealing the confirmation of the award unless the arbitration agreement provides otherwise.

Stockade Franchising, LP v. Kelly Rest. Grp., LLC, No. 1:18-cv-00918 (W.D. Tex. Oct. 24, 2019).

Oklahoma Supreme Court Reverses Course: Finds Arbitration Clause Printed on Shingles’ Wrapping Did Not Bind Homeowner to Arbitrate

by

 A third-party contractor installed the defendant’s shingles on the plaintiffs’ roof. Subsequently, the plaintiffs filed suit for damages allegedly caused by the defendant’s faulty shingles and replacement of their roof. The defendant successfully moved to stay the proceeding and compel arbitration pursuant to an arbitration agreement found on the wrapping of each bundle of shingles.

The Oklahoma Supreme Court reversed the decision on appeal, finding that the plaintiffs were not bound to the arbitration agreement; the plaintiffs could not have had actual knowledge of the arbitration agreement and therefore could not consent to arbitration. Further, the contractors lacked the authority to enter into an arbitration agreement on the plaintiffs’ behalf without ratification, and there were no facts suggesting that the plaintiffs knew of the arbitration clause, so the plaintiffs “could not ratify the arbitration provision.”

The Supreme Court was not persuaded by the defendant’s argument that the plaintiffs sought to enforce their rights under the limited warranty provision, which contained the arbitration agreement, and could not now disclaim the arbitration agreement provision of that contract. The Supreme Court stated that the plaintiffs were “not seeking to enforce their rights under the limited warranty contract. Their claims arise in tort law not contract law.” Nor did the Supreme Court find that the plaintiffs could be estopped from challenging the arbitration agreement, lacking actual or constructive knowledge of the arbitration agreement until after they filed an initial warranty claim.

Williams v. TAMKO Bldg. Prods., Inc., No. 117190 (Okla. Oct. 1, 2019).

Court of Federal Claims Finds HHS Offset Invalid Under Colorado’s Insurance Liquidating Priority Scheme

by

The U.S. Department of Health and Human Services’ Centers for Medicare and Medicaid Services (HHS) operates the reinsurance and risk-adjustments program for Colorado, including the application of the “netting rule” — a method by which it would aggregate and offset money owed by or to different insurers under various Affordable Care Act (ACA) payment programs. Colorado Health Insurance Cooperative Inc. ran into financial difficulties and was put into liquidation. According to the liquidator, the HHS would offset $20,255,084 of the amount the HHS owed Colorado Health under the risk-adjustment program against $21,775,432 that Colorado Health owed the HHS under the risk-adjustment program. Ultimately, the liquidator sent the HHS a claims-determination letter, disallowing the HHS’ claims and requesting a return of all unauthorized offsets. The HHS did not timely object under Colorado law and, upon the liquidator’s motion, a Colorado court affirmed the liquidator’s claim determination.

The liquidator then sued the HHS, alleging that (1) the HHS failed to make obligatory payments under the reinsurance program; and (2) the HHS’ offset of payments it owed to Colorado Health violated Colorado law and was therefore invalid.

As a threshold matter, the court held that the ACA does not prohibit offset otherwise allowed under federal common law or state law, and dismissed the first cause of action as it did not provide an independent basis for relief. As to the second cause of action, the court held that the HHS’ offset was invalid under Colorado’s insurance liquidation priority scheme. “Because neither the ACA nor another statute authorizes the Netting Rule’s application in the insurance liquidation context, HHS must have taken its offset in its capacity as a creditor. Although federal law governs HHS’s rights as a creditor in implementing the nationwide reinsurance and risk-adjustment programs, its interest in uniformity is insufficient to warrant this Court creating a federal common law rule to displace Colorado’s insurance liquidating priority scheme.”

Conway v. United States, No. 18-1623 (Fed. Cl. Oct. 3, 2019).

District of Idaho Rejects Challenges to Arbitration Award

by

The defendant sought to vacate an arbitration award on the basis of arbitrator misconduct and manifest disregard of the law or, in the alternative, modification of the award.

The defendant argued that the arbitrator committed misconduct by denying its motions to compel, failing to postpone or extend the hearing, excluding testimony from its non-retained experts, and disregarding the defendant’s evidence. The court rejected this argument, stating, “Unless a discovery mandate is found in a statute, contract provision, or the adopted rules, a party to arbitration has no legal right to prehearing discovery.” Pursuant to the parties’ agreements, limited discovery was permitted, but the defendant faulted the arbitrator for failing to compel supplemental discovery when the plaintiff’s discovery responses and 30(b)(6) deponent “purportedly fell short.” Moreover, a denial of discovery is not a basis for vacatur under the Federal Arbitration Act. The court dismissed the remainder of the defendant’s arguments because the arbitrator had acted in accordance with the parties’ agreement and Idaho law.

The defendant next argued that the arbitration award was “so fundamentally flawed in its manifest disregard of the law that it cannot be construed as final, mutual and definite.” The court did not find, nor did the defendant point to, any evidence in the record or the arbitration award to suggest that the arbitrator was “aware of the law and intentionally disregarded it” or that the arbitrator exceeded her powers in how she determined to award attorneys’ fees.

The defendant, in the alternative to vacatur, argued that the arbitration award should be remanded for clarification and modification pursuant to 9 U.S.C. § 11 because it was “incomplete, ambiguous and contradictory.” The court stated that while it certainly understood the defendant’s “desire for a more thorough opinion,” the defendant had not demonstrated that a remand for clarification or modification was warranted. The arbitration award was confirmed.

Twin Falls NSC, LLC v. S. Idaho Ambulatory Surgery Ctr., LLC, No. 1:19-cv-00009 (D. Idaho Sept. 23, 2019).