Arbitration Process Issues

Second Circuit Affirms Order Compelling Arbitration, Rejects as Waived Arguments Not Made Before Trial Court

February 13, 2019 by Carlton Fields

The Second Circuit Court of Appeals had no difficulty affirming a district court’s order compelling the executor of an estate to arbitrate his claims based on an arbitration clause contained in an IRA application signed by the deceased.

At oral argument, the executor (an attorney appearing pro se) admitted that he had forfeited any argument that the arbitration provision itself was invalid, and thus was left to rely on the theory that the contract as a whole was invalid. The Second Circuit easily rejected this, noting that the U.S. Supreme Court has held that “unless [a] challenge is to the arbitration clause itself, the issue of the contract’s validity is considered by the arbitrator in the first instance.” Thus, the Court found that the matter should go to arbitration where the arbitrator could decide the question of the contract’s validity.

The executor also argued that the district court erred in even considering the motion to compel due to an “electronic filing error” not specified in the opinion. However, in addition to being waived for not having been raised before the district court, the Court found that this argument lacked all merit because the executor knew about the motion, responded to it, and could not show any prejudice.

Aretakis v. First Financial Equity, Corp., Hilltop Securities, Inc., No. 17-3649 (2d Cir. Dec. 10, 2018)

11th Circuit Compels Arbitration Despite Allegation that Arbitration Agreement was Procedurally and Substantively Unconscionable

February 12, 2019 by Carlton Fields

This case involves a dispute between American Family Life Assurance Company of Columbus (“Aflac”) and a group of independent contractors (“associates”), arising out of alleged misrepresentations by Aflac. Pursuant to their contracts with Aflac, the associates agreed to arbitrate any claims against the company, and after learning of the associates’ plans to file a class action, Aflac filed a motion to compel arbitration in Georgia state court. In response, the associates removed the case to federal court and sought to void the arbitration agreement by arguing that it was procedurally and substantively unconscionable.

Specifically, the associates argued that (1) they did not have a sufficient opportunity to review the arbitration provision before executing the agreement, (2) that the agreement was one-sided because it required the associates to arbitrate claims against Aflac, but did not include the same requirement for Aflac, and (3) the costs and fees to be paid by the associates were so great that it would effectively deny the associates a forum to bring their claims. The district court for the Middle District of Georgia found these arguments unavailing and entered an order compelling arbitration.

The associates moved for reconsideration, but were denied. On appeal, the Eleventh Circuit reviewed the district court’s order to compel arbitration de novo. However, the court’s analysis did not progress past the associates’ failure to produce any evidence in support of their unconscionability claims at the briefing and hearing stage. For some of their arguments, the Eleventh Circuit noted that even if the associates had produced evidence, Georgia law governing mutuality of remedies and confidentiality provisions in arbitration agreements still would not support a finding that the agreement was unconscionable. As such, the panel affirmed the district court’s judgment compelling arbitration and denying the motion for reconsideration.

American Family Life Assurance Co. of Columbus v. Hubbard, et al., No. 18-11869 (11th Cir. Jan. 7, 2019).

Subject Matter Jurisdiction Under Section 7 Of The FAA – The Diversity, “Amount In Controversy,” And “Place Of Sitting” Requirements

February 5, 2019 by Benjamin Stearns

Presented with an argument that the court lacked subject matter jurisdiction, the Southern District of New York clarified the diversity, amount in controversy, and “place of sitting” requirements under Section 7 of the FAA – which relates to compelling the attendance of witnesses at arbitration.

With regard to diversity, the court held that, when presented with a Section 7 petition to enforce arbitration summonses, the court need not “look through” the petition to the citizenship of the parties to the underlying arbitration, but rather, should look to the citizenship of the parties to the instant enforcement action, to determine whether diversity jurisdiction exists. The court distinguished a Section 7 petition from petitions brought under Section 4 and Section 10, where courts may look through the petition to determine federal question jurisdiction, but are not required to do so. The court noted that Section 7 petitions, unlike Section 4 and 10 petitions, involve different parties than those in the underlying arbitration.

As to the “amount in controversy” requirement, the court recited the well-established principle that the amount is measured by “the value of the object of the litigation.” “The amount in controversy is not necessarily the money judgment sought or recovered, but rather the value of the consequences which may result from the litigation.” The petitioner here sought at least $134 million in damages in the underlying arbitration. The court noted that, even if the documents responsive to the summons pertained to only a small fraction of the amount sought in the arbitration, the $75,000 amount in controversy requirement would nevertheless be satisfied.

Finally, regarding Section 7’s requirement that a party petition a United States district court “for the district in which such arbitrators, or a majority of them, are sitting,” the court refused to look to the arbitrators’ individual business addresses to determine the arbitrators’ “place of sitting.” Rather, the court looked to the location the arbitrators had selected for the Section 7 hearing. Furthermore, the court stated that the arbitrators are not restricted to a single location. Here, the arbitrators had summoned nonparties to appear for hearings in both New York and Philadelphia. Therefore, the court held that the Southern District of New York and the Eastern District of Pennsylvania were the arbitrators’ “place of sitting” for any contest of the respective Section 7 summonses.

Washington National Insurance Co. v. Obex Group, LLC, Case No. 18-CV-9693 (USDC S.D.N.Y. Jan. 18, 2019).

Fourth Circuit Holds Reinsurance Participation Agreement Is Insurance Contract Under Virginia Statute, Effectively Voiding Its Arbitration Clause

February 4, 2019 by Carlton Fields

On September 14, 2017, we reported on the Fourth Circuit’s reversal of a district court’s denial of a motion to compel arbitration, which found that a party was judicially estopped from arguing that a Reinsurance Participation Agreement (“RPA”) was not an insurance contract. (If the RPA is an insurance contract, its arbitration provision becomes invalid under state law.) Subsequent to that ruling, on remand, the district court held that the RPA is indeed an insurance contract and that the RPA’s arbitration clause is void.

The Fourth Circuit has now affirmed the district court. The circuit court explained that the RPA was part of a workers’ compensation insurance program that Appellee Minnieland Private Day School purchased from Appellant Applied Underwriters Captive Risk Assurance Company, Inc. (AUCRA) and its affiliated entities. Under this “EquityComp” program, the pooled companies provide workers’ compensation insurance coverage to employers and also mutually reinsure each other’s insurance business. A layer of reinsurance is also provided by AUCRA. AUCRA in turn enters into RPAs with EquityComp customers, under the terms of which each customer pays into a segregated “cell” or account that is then used to fund AUCRA’s liabilities. In this fashion, EquityComp customers participate in underwriting the risk of their own workers’ compensation insurance policies. Minneland sued AUCRA alleging that AUCRA was not authorized or licensed to act as an insurance company under Virginia law; that the RPA was an “insurance contract” and not a “reinsurance” agreement; and that AUCRA misrepresented the EquityComp program, and the RPA specifically, to circumvent Virginia insurance and workers’ compensation laws.

In affirming the denial of arbitration, the Fourth Circuit rejected AUCRA’s argument that the RPA was a standalone contract. Instead, the panel determined that the RPA was but one component of an integrated insurance sale because the documents, including the RPA, were intended to provide Minnieland with workers’ compensation insurance coverage.

Minnieland Private Day School v. Applied Underwriters Captive Risk Assurance Co. Inc., Case No. 17-2385 (4th Cir. Jan. 14, 2019).

U.S. Supreme Court Holds Arbitrability Questions Not Subject to A “Wholly Groundless” Exception

January 29, 2019 by Alex Silverman

Archer & White Sales, Inc. (“Archer”) sued Henry Schein, Inc. (“Schein”) in federal court seeking both monetary and injunctive relief. A contract between the parties required arbitration of all claims arising from the agreement, except those seeking injunctive relief. Schein moved to compel arbitration based on the request for monetary damages. Archer objected, pointing to its demand for injunctive relief. The issue thus became one of arbitrability—who decides whether the dispute is subject to arbitration, the court or an arbitrator? The contract at issue incorporated the rules of the American Arbitration Association, under which arbitrators are to decide arbitrability issues. The district court nonetheless decided the issue and denied Schein’s motion, holding it was “wholly groundless” because an arbitrator would inevitably conclude that the dispute is not arbitrable and refer it back to the district court. The Fifth Circuit affirmed, but the U.S. Supreme Court unanimously vacated the judgment.

Even where a contract expressly delegates the arbitrability question to an arbitrator, the Supreme Court explained that several federal courts “short-circuit” the process and decide the question themselves when they think a request for arbitration is “wholly groundless.” To these courts, this “wholly groundless” exception is a means of blocking “frivolous” attempts to transfer cases out of the court system. But the Supreme Court found the exception to be inconsistent with the Federal Arbitration Act (“FAA”) and Supreme Court precedent. The FAA, Justice Kavanaugh wrote, does not contain a “wholly groundless” exception, and the Court must interpret the FAA as written. The FAA, in turn, requires interpreting the relevant contract as written. As a result, if a contract delegates the arbitrability issue to an arbitrator, courts have no power to decide the issue, even if they think a particular dispute is not ultimately arbitrable. The Court held that the wholly groundless exception therefore “confuses the question of who decides arbitrability with the separate question of who prevails on arbitrability.” And such was the case here, where neither of the lower courts actually decided whether the Archer/Schein contract delegated the arbitrability question to an arbitrator, instead short-circuiting the issue based on the wholly groundless exception. Having rejected the applicability of such exception, the Court vacated the judgment and remanded for this threshold determination.

Schein v. Archer & White Sales, Inc., No. 17–1272, 586 U. S. ____ (Jan. 8, 2019) (Slip Op.)

This post written by Alex Silverman.
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