Arbitration Process Issues

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.
See our disclaimer.

In Dispute Over Consolidation, California Federal Court Grants Petition to Compel Appointment of an Arbitrator in One of the Actions, and Denies Other Party’s Motion to Compel the Appointment of a Single Panel to Decide Consolidation Issue

January 28, 2019 by Jeanne Kohler

The background of this case in California federal court is that The Hartford (“Hartford”) issued reinsurance billings to Employers Insurance Company of Wausau (“Wausau”) for settlement payments made to one insured under nineteen different reinsurance treaties between Wausau and three of Hartford’s affiliates, which billings were denied by Wausau. In response, Hartford demanded arbitration and requested that the parties consolidate all the related disputes in a single arbitration. Wausau, in response, proposed that the parties agree to three arbitrations and identified three arbitrators for three separate panels for each of the three Hartford affiliates involved. Hartford refused and identified one arbitrator for a single arbitration and if other arbitrations were necessary, the same arbitrator was identified as arbitrator for such other arbitrations. Wausau’s arbitrators then requested that Hartford’s arbitrator select umpires for three separate arbitrations. In response, Hartford again requested that the parties agree to a methodology to select a single panel to decide how the matter should be consolidated. Wausau then filed four separate petitions in three jurisdictions to compel arbitration: one in California federal court, two in Massachusetts state court and one in Connecticut state court. In the California action, which involved one treaty, Hartford cross-moved to compel a single arbitration in order to adjudicate the parties’ dispute regarding consolidation and, in the alternative, a motion to stay pending arbitration of related proceedings.

As an initial matter, the California federal court noted that the issue of whether arbitrations may be consolidated is a question for the arbitrators and not the court to decide. However, the court noted that the parties remained at an impasse due to Hartford’s insistence of one consolidated arbitration. The court then rejected Hartford’s argument that its three affiliates who had entered into the nineteen treaties could act as a single party for the purpose of seeking reimbursement from Wausau. Noting that it was limited to the terms of the agreements, the court stated that Hartford was only named in two of the nineteen treaties, that the treaties entered into by two of the affiliates required arbitration in Massachusetts and the others required arbitration in Los Angeles. The court also noted that each of the treaties was a separate agreement, with different arbitration clauses. The California federal court then found that the treaty before it contained an arbitration clause which provided a procedure for selecting an umpire, and that once that panel is in place, it can decide the issue of consolidation. Accordingly, the court granted Wausau’s petition to compel appointment of an arbitrator, and denied Hartford’s motions to compel and stay pending arbitration of related proceedings.

Employers Ins. Co. of Wausau v. The Hartford, No. 2:18-cv-07240 (USDC C.D. Cal. Dec. 3, 2018)

This post written by Jeanne Kohler.

See our disclaimer.

California Appellate Court Holds Arbitration Agreement and Delegation Clause Unenforceable for Failure to File with State Regulators

January 23, 2019 by Carlton Fields

The California Court of Appeals became the latest court to determine that a common arbitration agreement related to the EquityComp workers’ compensation insurance program and accompanying reinsurance agreements is unenforceable because it was not filed with appropriate state regulatory authorities. This dispute arose from Luxor Cabs’s lawsuit over its workers’ compensation insurance, and the reinsurers’ motion to compel arbitration thereof pursuant to a reinsurance agreement it entered into with Luxor. Luxor challenged the enforceability of the arbitration agreement and delegation clause, and the trial court ultimately agreed and denied the motion to compel arbitration.

This case follows on the heels of a California insurance administrative decision declaring the EquityComp program violated state insurance laws and a reinsurance agreement (and arbitration clause) between the same reinsurers in this case and another insured were void and a case “essentially identical to this one” regarding arbitrability under a reinsurance agreement. On appeal, the court agreed with those recent precedents and the lower court, holding the arbitration clause was unenforceable.

First, the court upheld the trial court’s determination that the arbitration clause was unenforceable against claims that the arbitrability of the dispute should have been decided by the arbitrator pursuant to a delegation clause. The reinsurers argued that Luxor failed to “specifically and directly” challenge the delegation clause as required by the Supreme Court’s decision in Rent-A-Center, West, Inc. v. Jackson . The court dismissed that contention, finding Luxor sufficiently challenged the clause when it argued that the delegation clause was unfiled and unapproved by state regulators and that Nebraska law prohibited arbitration of insurance policy disputes. It likewise rejected the argument that Luxor’s challenge was insufficiently targeted at the delegation clause where Luxor made the same arguments against the delegation clause as against the arbitration clause more generally.

Second, the court agreed with the lower court that the reinsurance agreement (containing the arbitration and delegation clauses) should have been filed with state regulators and, because they weren’t, were unenforceable. The specifics of the agreement, and the arbitration and delegation clauses in particular, made clear that they were “collateral agreement[s]” that modified the underlying insurance policy’s dispute resolution procedures and therefore which required regulatory approval. In so concluding, the court referenced the recent precedents and how both reached similar conclusions with respect to “the specific RPA at issue in this case.”

Finally, the court concluded that the application of Nebraska substantive law provided an additional basis to hold the arbitration agreement unenforceable. Nebraska law, the law designated in the reinsurance agreement, explicitly prohibits arbitration of insurance policy disputes. Even though the lower court punted this issue, the court held that the Nebraska law reverse preempted the Federal Arbitration Act under McCarran-Ferguson.

Luxor Cabs, Inc. v. Applied Underwriters Captive Risk Assurance, Co., A147962 (Cal. Ct. App. Dec. 4, 2018).

Sixth Circuit Compels Arbitration in Putative Class Action between Shell Oil and Ohio Landowners

January 21, 2019 by Carlton Fields

Plaintiff entered into a lease agreement with Defendants (Shell Oil entities) governing extraction of oil and gas from his five-acre property located in Guernsey County, Ohio. The agreement provided a signing bonus to Plaintiff of $5,000 per acre, contingent upon Shell’s timely verification that he possessed good title to the property. The lease also contained a broad arbitration clause providing that any dispute under the lease was to be resolved by binding arbitration. Plaintiff brought suit, individually and on behalf of other landowners having similar contracts with Shell, for breach of contract after Shell allegedly failed to pay the signing bonus. The District Court for the Southern District of Ohio subsequently denied Shell’s motion to compel arbitration, and Shell appealed.

The Sixth Circuit reversed and remanded, compelling arbitration and a directing the district court to decide whether the lease allowed for class-wide arbitration. The panel found that the district court failed to address the threshold issue of who decides arbitrability and further reasoned that Plaintiff did not attack the enforceability of the “specific arbitration clause” but rather “argued that much of the contract, which happens to include the arbitration clause, is unenforceable.” In so finding, the panel determined that the arbitration clause was triggered at signing, leading to the applicability of the severability doctrine and the determination that an arbitrator must consider the issue first. As to the class-wide arbitration question, the Panel reasoned that because the parties did not identify a provision in the contract that clearly and unmistakably gave the arbitrator the power to decide the matter, and in light of “the importance of this issue to the case, given that the class could include hundreds of Ohio landowners,” that question would be for the district court to decide upon remand. In a dissenting opinion, Judge Moore opined that the district court was the proper body to decide whether the dispute should be arbitrated in light of the lease agreement’s two distinct triggering events – the signing of the agreement and the payment of the bonus. As such, Judge Moore opined that only after payment of the bonus would the arbitration clause apply.

Rogers v. Swepi LP, No. 18-3229 (6th Cir. Dec. 10, 2018).

This post written by Gail Jankowski.

See our disclaimer.

Missouri Supreme Court Upholds Denial of Petition to Compel Arbitration Where Agreement Designated an Arbitration Forum that Later Became Defunct

January 17, 2019 by Carlton Fields

After a loan company sued a customer in default and the customer asserted counterclaims on a class-wide basis, the company sought to compel arbitration. However, the particular arbitral forum designated in the arbitration agreement had stopped providing arbitration services after entering a consent decree following another state’s fraud and unfair practices investigation. The lower courts declined the company’s request to designate a new arbitrator and ultimately denied its request to compel arbitration.

On appeal, the Missouri high court found no error in the lower court’s refusal to compel arbitration. Channeling the principle that arbitration is a matter of contract, the court evaluated the arbitration agreement to determine whether the parties agreed to arbitrate regardless of the named arbitrator’s availability or whether they agreed to arbitrate “before – but only before” the named arbitrator. Based on the plain language of the agreement, the court concluded the latter – the parties agreed to arbitrate only before the defunct arbitrator. It noted that the company drafted the agreement, which specified a particular arbitrator, and could not now avoid that specific choice because the arbitrator is unavailable. Moreover, the court was unable to reconcile other parts of the agreement with the idea that the designated arbitrator was not exclusive. The agreement provided that arbitration was to proceed under the designated arbitrator’s procedures, and that arbitration claims must be filed at the designated arbitrator’s home office only. The court emphasized that an agreement’s designation of a specific arbitrator does not always demand this result when the arbitrator later becomes unavailable; rather, the language of this particular agreement required the conclusion that the agreement to arbitrate was limited to the defunct arbitrator only. Thus, the court affirmed. A-1 Premium Acceptance, Inc. v. Hunter, Case No. SC96672 (Mo. Oct. 16, 2018).