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Arbitration Process Issues

FEDERAL DISTRICT COURT ISSUES ORDER COMPELLING ARBITRATION AGAINST A NON-SIGNATORY TO AN ARBITRATION AGREEMENT

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The plaintiff, Birmingham, along with a group of investors, entered into a funding agreement with defendant’s subsidiary, ALVE, which served as a holding company for intellectual property of the defendant, Abbott. The funding agreement related to the development of a stent product and contemplated successor stent product, and contained a broad arbitration provision. Pursuant to the funding agreement, ALVE and Abbott were to use commercially reasonable efforts to obtain regulatory approval of these products. Concurrent with the funding agreement, Abbott entered into a “keep well” agreement with ALVE obligating Abbott to guarantee ALVE’s performance under the funding agreement. The keep well agreement identifies Birmingham and the investors as its intended beneficiaries, and incorporated by reference provisions of the funding agreement. The keep well agreement did not contain an arbitration provision. Subsequently, Abbott decided not to pursue development of the stent product. Birmingham believed that the termination of the development was improper, and that the stent had significant commercial potential. It filed a lawsuit alleging that Abbott abandoned the stent because it wished to focus on a different stent, thereby breaching the keep well agreement. Abbott moved to compel arbitration pursuant to the funding agreement’s arbitration provision.

The court granted the motion to compel arbitration, citing the strong federal policy favoring arbitration and the estoppel doctrine, under which a non-signatory may compel arbitration where: (1) there is a close relationship between the parties and controversies and (2) the signatory’s claims against the non-signatory are intimately founded in and intertwined with the underlying agreement containing the arbitration provision. The court initially found that there was a close relationship between Abbott and ALVE and the controversy at issue because of those parties’ parent-subsidiary relationship. The second prong was also satisfied because the dispute between Birmingham and Abbott in the lawsuit was directly related to the terms of the funding agreement. Birmingham Associates Ltd. v. Abbott Laboratories, Case No. 07 Civ. 11332 (USDC S.D.N.Y. Apr. 14, 2008).

This post written by Brian Perryman.

COURT VACATES ARBITRATION AWARDS AGAINST FEDERAL CROP INSURANCE CORPORATION

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The plaintiff farmers brought an action in federal district court to enforce two arbitration awards against the Federal Crop Insurance Corporation (“FCIC”), a division of the United States Department of Agriculture. FCIC is a reinsurer of crop insurance policies issued by private insurance companies. It issues cooperative financial agreements with the private insurers that are referred to as “standard reinsurance agreements.” Plaintiffs purchased policies with American Growers Insurance Company (“AGIC”). In turn, AGIC entered into standard reinsurance agreements with FCIC. Plaintiffs filed arbitration demands against AGIC, but in 2005, the State of Nebraska liquidated AGIC. On the order of liquidation, FCIC notified plaintiffs that it would review their claims. The arbitration proceeded, however, over FCIC’s objections that it was not a party to the arbitration agreement, and that it would not submit to the arbitrator’s jurisdiction. Eventually, the arbitrator granted awards against FCIC.

When plaintiffs sought to enforce the awards in the United States District Court for the Eastern District of Washington, the court ruled against them on cross-motions for summary judgment. The court found that FCIC had not agreed to submit to arbitration, being neither a party to the crop insurance policies at issue nor otherwise in privity of contract with plaintiffs. Among other things, FCIC was found to be a reinsurer, not a “substituted insurer,” i.e., an entity that assumes direct liability to the policyholder. Accordingly, the arbitrator lacked jurisdiction to preside over any dispute between FCIC and plaintiffs. The district court, therefore, vacated the awards. Olsen v. United States, Case No. CV-06-5020-FVS (USDC E.D. Wash. Mar. 8, 2008).

This post written by Brian Perryman.

SUPREME COURT RULES THAT PARTIES MAY NOT CONTRACT FOR BASES FOR JUDICIAL REVIEW OF ARBITRATION AWARDS

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The United States Supreme Court has held that the grounds for vacating or modifying arbitration awards set out in the Federal Arbitration Act are the exclusive grounds for such action, and can not be “supplemented” by contractual agreement. This ruling will end the practice of contracting for the judicial review of arbitration awards on grounds similar to those for the appeal of final judgments of courts after trials, in order to avoid the restrictive judicial review provisions of the FAA. In discussing the FAA’s judicial review provisions, the Court mentioned the manifest disregard of law basis for reviewing awards, noting that this theory is not explicitly mentioned in the FAA, but is implied from the FAA’s provisions. Some courts may take this mention as a criticism of the legitimacy of the manifest disregard of law theory, and it will be interesting to see how courts respond to this portion of the opinion. Given the clear trend in court opinions over the past 16 months or so of substantially restricting the scope of the manifest disregard theory, however, this portion of the opinion may have limited impact, no matter how it is interpreted. Hall Street Assoc. LLC v. Mattel, Inc., No. 06-989 (US Mar. 25, 2008).

This post written by Rollie Goss.

CASE UPDATE: UK COURT REJECTS LATEST CHALLENGE TO ENFORCEMENT OF $88 MILLION GAZPROM ARBITRATION AWARD

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On June 14, 2007 and November 27, 2007, we reported on a $88 million arbitration award rendered in Russia involving energy giant Gazprom, and efforts to enforce the award in the United States and the United Kingdon pursuant to the New York Convention, the UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards and the UK’s Arbitration Act of 1996. In a last attempt to avoid the arbitration award, it was contended to the UK Commercial Court that the award should not be enforced because it was contrary to public policy due to fraud in the underlying arbitration proceeding and the underlying reinsurance transactions, which appeared not to transfer any risk. The Commercial Court has rejected the presentation, concluding that the award had been confirmed through the Russian courts and that the alleged irregularities were insufficient to warrant a refusal to enforce the award. Gater Assets Limited v. Nak Naftogaz Ukrainiy [2008] EWHC 237 (Comm. Feb. 15, 2008).

This post written by Rollie Goss.

CALIFORNIA APPELLATE COURT AFFIRMS DECISION TO DISQUALIFY ARBITRATOR in dispute involving lloyd's syndicates

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A California appellate court has affirmed a trial court’s decision to disqualify an arbitrator and vacate an arbitration award based on the arbitrator’s failure to disclose his ties to the plaintiffs’ insurer. Plaintiff, Advantage Medical Services (“AMS”) was insured by two Lloyd’s of London syndicates. The arbitrator and his law firm represented several protection and indemnity clubs that obtained reinsurance through various Lloyd’s of London syndicates.

The court held that disclosure of the arbitrator’s ties to AMS’s insurer “could cause a person aware of the facts to reasonably entertain a doubt that the proposed neutral arbitrator would be able to be impartial.” As such, the court affirmed the trial court’s decision to vacate the arbitrator’s interim award in favor of the plaintiffs. Additionally, the appellate court held that “the statutory right to petition a trial court to vacate an arbitration award based on an arbitrator’s failure to make required disclosure cannot be waived by the [AAA] rule stating its determinations regarding disqualification are conclusive.” Advantage Medical Services v. Hoffman, No. 05CC7459 (Cal. Ct. App. March 3, 2008).

This post written by Lynn Hawkins.