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Arbitration Process Issues

Supreme Court’s Lamp Plus Brings Ambiguity in Classwide Arbitration to Light

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In 2016, a hacker tricked an employee of petitioner Lamps Plus Inc. into disclosing tax information of about 1,300 company employees. After a fraudulent federal income tax return was filed in the name of respondent Frank Varela, a Lamps Plus employee, Varela filed a pu­tative class action against Lamps Plus in federal district court on behalf of employees whose information had been compromised. Rely­ing on the arbitration agreement in Varela’s employment contract, Lamps Plus sought to compel arbitration — on an individual rather than a classwide basis — and to dismiss the suit. The district court rejected the individual arbitration request, but authorized class arbi­tration and dismissed Varela’s claims. Lamps Plus appealed, arguing that the district court erred by compelling class arbitration, but the Ninth Circuit affirmed.

The U.S. Supreme Court granted cert on the issue of whether the Federal Arbitration Act (FAA) bars an order requiring class arbitration when an agreement is not silent, but rather “ambiguous,” about the availability of such arbitration. First, the Court held that it had jurisdiction because an order that both compels arbitra­tion and dismisses the underlying claims qualifies as “a final decision with respect to an arbitration” within the meaning of 9 U.S.C. §16(a)(3). Next, the Court held that under the FAA, an ambiguous agreement cannot provide a contractual basis for concluding that the parties agreed to submit to arbitration. The Court explained that pursuant to the FAA, arbitration is a matter of consent. Previously, the Supreme Court held that “courts may not infer consent to participate in class arbitration absent an affirmative contractual basis for concluding that the party agreed to do so,” and that silence is not enough. The Court explained that this reasoning controlled here and, like silence, ambiguity does not provide a sufficient basis to conclude that parties consented to arbitration.

Lamps Plus, Inc. v. Varela, No. 17-988, 2019 WL 1780275 (2019)

Court Holds That Arbitration Award Was Final and Definite and Arbitrator Did Not Manifestly Disregard the Law

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In Ballinasmalla Holdings Ltd. v. FCStone Merchant Services, LLC, petitioners Ballinasmalla Holdings Ltd. (BHL) and Corrib Oil Biofuels LLC (Corrib Oil) brought an action seeking vacatur of a final arbitration award (“Final Award”) issued in favor of the respondents for approximately $5 million. The respondents, FCStone Merchant Services LLC (FCStone) and INTL FCStone Markets LLC (INTL FCStone), counter-claimed for confirmation of the Final Award and an earlier Partial Final Award.

Corrib Oil is a company that distributes and manufactures oil and petrol products. Corrib Oil entered into a contract with FCStone to purchase soybean oil. BHL agreed to act as a guarantor for Corrib Oil on the contract. BHL also acted as a guarantor on payments owed by Corrib Oil Company Ltd. (Corrib Ltd.), who was not a party to the litigation, to INTL FCStone on swap transactions pursuant to an International Swap Dealers Association (ISDA) agreement. Both contracts had arbitration clauses. FCStone and INTL FCStone demanded arbitration after a dispute over soybean deliveries and payment on the ISDA agreement. INTL FCStone concurrently filed an action in New York state court against Corrib Ltd. seeking to collect on the debt from its ISDA agreement.

The arbitrator granted a partial award on the soybean contract dispute and dismissed the ISDA guaranty claim. FCStone and INTL FCStone asked the arbitrator to reinstate their ISDA guaranty claim and hold a hearing, and the arbitrator agreed. The arbitrator thereafter issued the Final Award, and the petitioners then filed their petition to vacate.

The court denied the petitioners’ motion to vacate the Final Award and granted the respondents’ motion to confirm. The court held that the arbitration award was final and definite. The court explained that for an arbitration award to be final and definite “the arbitrators must have decided not only the issue of liability … but also the issue of damages.” This was true here, despite the related case that was on appeal in the New York state court regarding a separate entity. The court also held that the arbitrator did not manifestly disregard the law governing stays. The court explained that a decision to stay the arbitration is a procedural matter governed under the procedural rules of the arbitration, i.e., the Commercial Rules of the AAA, and BHL did not make an argument that the arbitrator applied the wrong procedural rules or did so intentionally. Further, the court held that the petitioners did not demonstrate that the arbitrator acted in manifest disregard of the law on attorneys’ fees. There was no assertion that the arbitrator knew of a governing legal principle and refused to apply it or intentionally ignored it. Last, the court held that post-award statutory interest, costs, and fees were warranted.

Ballinasmalla Holdings Ltd. v. FCStone Merch. Servs., LLC, No. 1:18-cv-12254-PKC, 2019 WL 1569802 (S.D.N.Y. Apr. 11, 2019)

Second Circuit Vacates SDNY Order Enforcing Arbitration Award Against Reinsurer

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In the latest iteration of a complex reinsurance dispute, the U.S. Court of Appeals for the Second Circuit vacated a 2018 district court order enforcing an arbitration award against IRB Brasil Resseguros S.A. (IRB). We previously blogged about the district court order here. The arbitration award required IRB to indemnify National Indemnity Co. (NICO) against a claim by Companhia Siderurgica Nacional S.A. (CSN). NICO and CSN settled CSN’s claim in a settlement agreement to which IRB was not a party. The agreement provided that CSN would receive $5 million of the $9 million NICO owed, but that the funds would come from IRB through a lawsuit that NICO would commence against it, i.e., this action.

IRB appealed the 2018 district court order, arguing that the NICO/CSN settlement agreement could not have established its liability. The Second Circuit agreed. It held that IRB cannot be responsible for paying an amount determined by a contract to which it was not a signatory.

IRB next went a step further, arguing that the NICO/CSN settlement extinguished any obligation IRB had to indemnify NICO pursuant to the arbitration award. But the Second Circuit found IRB went too far in this regard. The court held that IRB is still potentially liable for the $5 million based on the arbitration award, which had already been confirmed in 2016, and affirmed in 2017. The court rejected IRB’s suggestion that a private contract between NICO and CSN could override obligations established by the arbitration award. The court strongly implied that a judgment determining NICO’s liability to CSN could trigger IRB’s indemnity obligations to NICO.

Nat’l Indem. Co. v. IRB Brasil Ressegurous S.A., No. 18-534-cv (2d Cir. Apr. 18, 2019)

Ninth Circuit Affirms Order Compelling Class Arbitration in Employment Dispute Involving Two Employment Agreements With Varying Arbitration Provisions

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Oracle America Inc. appealed the trial court’s order compelling class arbitration in an employment dispute in which there were two agreements at issue, one with, and one without, a class action waiver. The Ninth Circuit rejected Oracle’s arguments that the trial court should have selected the former agreement (with the class waiver) over the latter (without the class waiver). First, the court rejected Oracle’s argument that the trial court, as opposed to the arbitrator, should have decided whether there was an enforceable agreement to arbitrate. Here, the Ninth Circuit held, both contracts clearly delegated the issue of arbitrability to the arbitrator. Next, the Ninth Circuit was not persuaded by Oracle’s argument that the trial court should have decided which of the two agreements the arbitrator should enforce, ruling that there was no dispute that the agreement on which the arbitrator relied (the one lacking a class action waiver) was properly entered into by the parties. Finally, the Ninth Circuit rejected Oracle’s argument that the trial court should have considered Oracle’s argument that the second agreement was a novation of the first agreement. The issue of novation was not a defense to the agreement’s validity that should have been decided by the trial court; it was an issue that was to be decided by the arbitrator.

Johnson v. Oracle America, Inc., No. 17-17489 (9th Cir. Mar. 21, 2019).

Court Finds Jurisdiction Over Petition to Confirm Arbitration Award in Dispute Between Liquidator and Foreign Reinsurer

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In the wake of the liquidation of Legion Indemnity Co., the Illinois Director of Insurance, as liquidator of Legion, and Catalina Holdings arbitrated claims originating under reinsurance agreements between Legion and a predecessor of Catalina. After the arbitrators ruled in favor of Catalina, Catalina filed a petition to confirm the award with the Northern District of Illinois. The Director moved to dismiss.

The court found that it had jurisdiction over the petition under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards. The arbitration agreement arose out of a dispute over reinsurance contracts, which are generally considered “commercial” under 9 U.S.C. § 2, and the contracts arose out of a relationship between a citizen of the United States and a citizen of the United Kingdom. Pursuant to 9 U.S.C. § 202, all arbitral awards fall under the Convention unless they arise out of “a relationship which is entirely between citizens of the United States.”

The court ruled against the Director’s argument that the Convention is reverse-preempted by the McCarran-Ferguson Act because the Convention did not “invalidate, impair, or supersede any law enacted by [the] State for the purpose of regulating the business of insurance.” Finally, the court found that Burford abstention would be inappropriate in this case. The Director argued, pursuant to Burford, that the court should “abstain from the exercise of federal review that would be disruptive of state efforts to establish a coherent policy with respect to a matter of substantial public concern.” There are two “essential elements” to this type of Burford abstention: The state must offer a forum where these claims may be litigated, and that forum must “stand in a special relationship of technical oversight or concentrated review to the evaluation of those claims.” The requisite elements were not present in this case and, as a result, the court refused to abstain.

Catalina Holdings (Bermuda) Ltd. v. Hammer, No. 1:18-cv-05642 (N.D. Ill. Mar. 22, 2019).