Arbitration Process Issues

COURT BINDS INSURER TO ARBITRATION AWARD EVEN THOUGH NOT A PARTY TO THE ARBITRATION AND IT HAD NO DUTY TO DEFEND

April 14, 2009 by Carlton Fields

On February 20, 2009, the California Court of Appeals handed down an opinion considering whether an arbitration award and resulting judgment could be considered a “loss” under the terms of an insurance policy. This action arose out of an insurance agreement issued by Executive Risk Indemnity, Inc. (“ERII”) to STARS Holding Company (“STARS”). A former client (“Jones”) of STARS initiated an arbitration proceeding against the firm for faulty investment advice. Though it was aware of the proceedings, ERII chose not to participate in the arbitration. An award was levied against STARS, and the California Court of Appeals determined that ERII was bound by that decision. This appeal arose out of the ensuing coverage action between Jones (to whom STARS assigned its rights under the underlying insurance policy) and ERII.

The court determined that because ERII was bound by the results of the arbitration proceeding between its insured, STARS, and the injured party, Jones, it could not now contest the validity of STARS’s liability to Jones or the amount of damages established by the judgment. The court concluded that “when an insurer (1) is duly notified of the underlying claim against the insured; and (2) is given a full opportunity to protect its interests, the resulting judgment – if obtained without fraud or collusion – is binding against the insurer in any later coverage litigation on the claim involving its insured.” This rule applied despite the fact that ERII had no contractual duty to defend under the indemnity-only policy at issue. Thus, the court reversed and remanded for further proceedings to determine if ERII was required to indemnify STARS. Executive Risk Indem., Inc. v. Jones, Case No. 05-444352 (Cal. Ct. App. Feb. 20, 2009).

This post written by John Black.

SECOND CIRCUIT’S FINDING THAT PLAINTIFF WAIVED THE RIGHT TO ARBITRATE IS BINDING ON THE DISTRICT COURT

April 7, 2009 by Carlton Fields

After Interdigital, Inc. (“Interdigital”) brought two suits against Nokia Corporation (“Nokia”) for patent infringement before the International Trade Commission and in the District of Delaware, Nokia petitioned the Southern District of New York for injunctive and declaratory relief and to compel arbitration pursuant to an arbitration clause contained in two contracts that allegedly licensed the patents to Nokia. The New York district court granted Nokia’s requested injunctive relief prohibiting Interdigital from proceeding against Nokia prior to the completion of arbitration proceedings and issued an order compelling arbitration, but the Second Circuit reversed the injunction and order compelling arbitration, concluding that Nokia waived its right to arbitrate its license claim through prior litigation and remanded the case to the district court. Upon remand, the district court stated that the Second Circuit’s finding that Nokia had waived its right to arbitrate is binding on the court and dismissed with prejudice the counts for injunctive relief and an order to compel arbitration. In regards to the requested declaratory relief that Nokia and its affiliates are licensed to the asserted patents, the court concluded that Nokia’s claim was a compulsory counterclaim and, thus, dismissed the third claim deferring to the earlier-filed action in the District of Delaware for the resolution of the claims. Nokia Corp. v. Interdigital, Inc., Case No. 08-1507 (USDC S.D.N.Y. Mar. 5, 2009).

This post written by Dan Crisp.

ARBITRATION AWARD WITHOUT A HEARING? COURT SAYS: FUNDAMENTALLY UNFAIR

April 1, 2009 by Carlton Fields

A labor arbitration award was recently vacated in an action involving a dispute between Murphy Oil and United Steelworkers AFL-CIO regarding post-Katrina restoration of an oil facility. Because a key Union witness was prevented from attending the hearing due to health concerns, the parties entered into an agreement that if the arbitrator ruled against Murphy’s, the arbitrator would convene an evidentiary hearing. Following the conference and briefing by both parties, the arbitrator issued an award in favor of the Union. Murphy sought to vacate the award, and the Union sought to enforce the award. Noting the extreme deference paid to arbitration rulings, the court determined that the arbitrator’s failure to convene an evidentiary hearing as per the parties’ agreement was fundamentally unfair, vacated the award and remanded the matter to the arbitrator. Murphy then filed a Motion to Amend asking the court to direct the parties to select a new arbitrator, as the original failed to retain and no longer had jurisdiction. The motion is pending. Murphy Oil USA, Inc. v. United Steel Workers AFL-CIO Local 8363, Case No. 08-3899, (USDC E.D. La. Mar. 4, 2009).

This post written by John Black.

SECOND CIRCUIT AFFIRMS ORDER COMPELLING ARBITRATION OF CLASS CLAIM

March 30, 2009 by Carlton Fields

The Second Circuit has affirmed an order compelling arbitration and a judgment confirming a final arbitration award. Plaintiff-appellant appealed the order on the basis that the arbitration agreement required arbitration only of his individual claim, but permitted his class claim to be heard in court. The appellant contended that because claims may not be arbitrated as class actions under the rules of the NYSE and the NASD (incorporated by reference in the Settlement Agreement), the parties must have intended any class claims to be litigated in the courts.

Relying on the Supreme Court’s decision in Green Tree Financial v. Bazzle, the Second Circuit found that whether an arbitration contract forbids class arbitration falls under the domain of arbitrators, and therefore the district court properly compelled arbitration on the question of the arbitrability of class claims under the Settlement Agreement. The Court also rejected appellant’s claim that the arbitration decision should not have been confirmed because the arbitrators: (1) acted with a lack of fundamental rationality; (2) exceeded the scope of their authority; and (3) acted with manifest disregarded of the law. Vaughn v. Leeds, Morelli & Brown, No. 07-5637 (2d Cir. Mar. 16, 2009).

This post written by Lynn Hawkins.

SUPREME COURT “LOOKS THROUGH” FAA § 4 PETITION TO UNDERLYING DISPUTE TO DETERMINE JURISDICTION

March 17, 2009 by Carlton Fields

Last week, in a decision authored by Justice Ginsburg, the Supreme Court announced that a federal court may “look through” a Federal Arbitration Act § 4 petition to determine whether it is predicated on a controversy that arises under federal law. Under the well-pleaded complaint rule, a suit “arises under” federal law when the plaintiff’s statement of the cause of action shows that it is based on federal law. The Court held that the language of § 4 (“save for the arbitration agreement…”) directs federal courts to “look through” the petition itself to determine proper jurisdiction. Justice Ginsburg stated that federal courts should assume the absence of the arbitration agreement and determine jurisdiction based on the parties’ underlying dispute.

With this in mind, the Court held that the underlying controversy between Vaden and Discover Bank did not support federal jurisdiction. The controversy arose from Vaden’s alleged debt and not any federal law or other basis for federal jurisdiction. The Court thus declined federal jurisdiction. Chief Justice Roberts filed an opinion concurring in part and dissenting in part. Vaden v. Discover Bank, No. 07-773, (U.S. Mar. 9, 2009).

This post written by John Black.