Arbitration Process Issues

District Court Finds that the Convention on the Recognition and Enforcement of Foreign Arbitral Awards is Not Preempted By State Law Prohibiting Arbitration of Insurance Disputes

November 20, 2018 by Rob DiUbaldo

A district court judge in the U.S. District Court for the Eastern District of Louisiana has issued an order attempting to resolve the apparent tension created by Louisiana law barring compulsory arbitration provisions in insurance contracts, a contract containing both an arbitration provision and a “conformity to statute” clause, the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the Convention), and the McCarran-Ferguson Act.

The matter arose out of the defendant’s refusal to pay claims under an insurance policy covering hail and wind damage. Plaintiffs sued in Louisiana state court, but defendant, which is a citizen of the United Kingdom, removed the matter to federal court pursuant to the Convention. Plaintiff Pannagl then moved to remand on several grounds.

First, plaintiff argued that the removal was untimely, as it was not filed within 30 days after service of the complaint, as is required for removal based on diversity jurisdiction. The court found that the timeliness argument would not apply if the Convention applied, as removal under the Convention may occur at any time before trial. The court further found that the basic requirements for application of the convention— (1) an agreement arising out of a commercial legal relationship, (2) a written agreement to arbitrate in the territory of a Convention signatory, and (3) a party that is not an American citizen—were all met.

Second, plaintiff argued that the Convention only applies to the recognition of arbitral awards, but the court held that the plain language of the statute implementing the Convention requires its application to attempts to enforce covered arbitration agreements.
Third, plaintiff argued that the policy’s “conformity to statute” clause required the policy to be amended to remove the arbitration provision in order to comply with Louisiana law barring compulsory arbitration provisions in insurance contracts. The court held, however, that the Convention preempts state law, such that the policy could not be amended to remove an arbitration provision covered by the Convention.

Finally, plaintiff argued that Louisiana’s prohibition of arbitration in insurance disputes reverse-preempts the Convention under the McCarran-Ferguson Act, as the Convention as applied is contrary to a Louisiana public policy enacted for the purpose of regulating the business of insurance. But the court held that while the McCarran-Ferguson Act applies generally to federal statutes, it does not apply to treaties such as the Convention. As a result, the court denied the motion to remand.

Plaintiff immediately appealed this ruling to the Fifth Circuit Court of Appeals, which denied the appeal on the basis that denial of a motion to remand is interlocutory and not appealable unless the district court certifies the issue, which had not occurred in this case.

Gulledge and Pannagl v. Certain Underwriters at Lloyds, London, Case No. 18-6657 (USDC E.D. La. Sept. 27, 2018)

This post written by Jason Brost.
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Seventh Circuit Joins Five Other Circuits, Holds Availability of Class or Collective Arbitration is a Gateway Issue of Arbitrability to be Decided by Courts, Not Arbitrators

November 19, 2018 by Rob DiUbaldo

A former employee of Waterstone Mortgage Corporation filed a class action against Waterstone in Wisconsin federal court in 2011 alleging wage violations and breach of contract. The District Court for the Western District of Wisconsin compelled arbitration pursuant to an agreement between the plaintiff and Waterstone, but it struck as unlawful a waiver clause that appeared to forbid class or collective arbitration of her claims, reasoning that the plaintiff could not waive her right to bring a class action under the National Labor Relations Act. The arbitrator conducted a collective arbitration over Waterstone’s objection and ultimately awarded more than $10 million in damages and fees to the plaintiff and 174 similarly situated employees. On appeal, the Seventh Circuit was faced with reconciling the district court’s decision with a subsequently-decided U.S. Supreme Court case, Epic Systems Corporation v. Lewis. Specifically, Epic Systems upheld the validity of waiver provisions like the one at issue here, and therefore, if the district court’s imposition of collective arbitration on Waterstone violated that waiver, the Seventh Circuit would be required to instruct the district court to vacate the award.

The primary issue on appeal was whether the district court incorrectly struck the subject waiver from the parties’ arbitration agreement. Because the plaintiff did not concede that collective arbitration violated the waiver, the Seventh Circuit framed the issue as such: “If the availability of class or collective arbitration is a threshold question of arbitrability, the district court has to decide it. Otherwise, it falls to the arbitrator.” Ultimately, the Panel concluded that the availability of class or collective arbitration is a threshold question of arbitrability. In so finding, the court reasoned that “[d]etermining whether [an] agreement reflects the parties’ consent to class or collective arbitration requires the decisionmaker to determine whether the parties agreed to arbitrate those disputes as well. And that is a gateway matter for the court to decide.” In addition, the court reasoned that such “fundamental” questions belong in the “gateway” category in part due to the Supreme Court’s 2010 decision in Stolt-Nielsen S.A. v. AnimalFeeds International Corporation, which found that class arbitration is available only if an arbitration agreement contains evidence that the parties affirmatively consented to that procedure. As such, the court noted that the structural features of class arbitration make it a “fundamental” change from the norm of bilateral arbitration. As such, the Seventh Circuit’s ruling meant that on remand, the district court, rather than the arbitrator, must evaluate the plaintiff’s contract with Waterstone to determine whether it permits class or collective arbitration.

Herrington v. Waterstone Mortgage Corp., No. 17-3609 (7th Cir. Oct. 22, 2018).

This post written by Gail Jankowski.

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Court Upholds Decision Rendering Insurance Arbitration Provision and Delegation Clause Unenforceable for Failure to File Them with the State Insurance Commissioner

November 15, 2018 by Michael Wolgin

In a dispute between Low Desert Empire Pizza (Desert Pizza) and its insurers over alleged mismanagement of claims and unjustifiable cost increases related to a workers’ compensation insurance program, a California appellate court recently upheld the denial of the insurers’ motion to compel arbitration. The insurers had moved to compel based on arbitration provisions contained, not in the underlying insurance policy, but in side agreements modifying the policy’s terms. Desert Pizza opposed arbitration, claiming the arbitration provisions were unenforceable because the insurers did not file the side agreements containing them with the California Insurance Commissioner—they only filed the underlying insurance policy with the state. The lower court agreed and the appellate court affirmed.

First, the court held that it was entitled to decide the enforceability of the delegation and arbitration provisions—not the arbitrator. It rejected the insurers’ argument based on Rent-A-Center, West, Inc. v. Jackson that Desert Pizza did not directly challenge the arbitration agreement’s delegation clause. The court found Desert Pizza sufficiently argued the arbitration and delegation clauses were voided by the insurers’ failure to file them with the state as required by the insurance statutes, heavily citing another recent California appellate court’s decision. The court found that accepting such an argument would undermine the FAA by treating delegation clauses differently than other contractual provisions.

Second, the court rejected the insurers’ challenge to the lower court’s finding that provisions were unenforceable based on the failure to file them with the state. It reasoned that it would defeat the statutory purpose of the filing requirement if insurers could file an insurance policy with the state, gain approval, and then modify the terms with unfiled side agreements. The plain statutory language required the insurers to file the delegation clause and arbitration provisions because they constituted endorsements, or alternatively, collateral or ancillary agreements that materially altered underlying insurance policy. Furthermore, the court cited subsequent 2016 amendments to the implementing regulations which make clear that the filing requirements apply to dispute resolution agreements.

Finally, the court concluded the proper remedy for noncompliance was voiding the arbitration provisions. It found that the statute’s lack of an express grant of authority to void unfiled agreement does not restrict the court’s power to do so. The court declined the insurers’ invitation to review the legislative history given the clear and unambiguous filing requirement, but noted that even if the history were relevant, it would support the court’s conclusion. Low Desert Empire Pizza, Inc. v. Applied Underwriters, Inc., Case No. PSC1602331 (Cal. Ct. App. Oct. 19, 2018).

This post written by Thaddeus Ewald .

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Ninth Circuit Recognizes That Class Action Waivers in Arbitration Agreements are Valid Under Epic Systems

November 14, 2018 by Michael Wolgin

Citing the recent United States Supreme Court decision in Epic Systems Corp. v. Lewis, a panel of the Ninth Circuit Court of Appeals rejected the argument that an arbitration agreement was invalid because it included a prohibition on class or representative actions. The panel also rejected the argument that the arbitration agreement was invalid based on a so-called “blow provision” in the agreement, which mandated that the arbitration agreement be deemed null and void if a court held the prohibition on class or representative actions was invalid. No court had held the class waiver to be invalid, and so the “blow provision” did not operate to invalidate the rest of the agreement. The appellant also sought to argue that arbitration of the parties’ dispute would abridge its “right” to file a third-party complaint under Federal Rule of Civil Procedure 14(a). However, because the appellant failed to raise that argument in the trial court, the panel refused to consider it. Krogstad v. Loan Payment Administration LLC, Case No. 17-15964 (9th Cir. Oct. 22, 2018).

This post written by Benjamin E. Stearns.

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Court Invalidates Modified Arbitration Award Because it Exceeded Panel’s Authority Under the Functus Officio Doctrine

November 13, 2018 by Michael Wolgin

An insured and its insurer were fighting over whether the insured’s settlement payment in separate litigation was a covered loss and whether there was a duty to defend in the separate litigation. During arbitration, the parties agreed the panel would issue an immediate decision on the insurer’s liability under the policies and subsequently determine the amount of defense costs. The panel issued a “partial final award” finding the insured was entitled to defense and indemnification on the claims at issue in the separate litigation, but also finding the settlement payment itself was not a covered loss; thus, the panel ordered an evidentiary hearing on the calculation of defense costs. The insured requested reconsideration of the partial final award and the panel issued a “corrected partial final award.” The insurer sought relief in court to vacate the corrected award and confirm the original award, and while that proceeding was pending the panel issued a “final” award calculating the appropriate defense costs. The court denied the insurer’s motion to vacate.

On appeal of the lower court’s denial of the motion to vacate, the appellate court vacated the corrected and purported final awards and confirmed the original award because the panel exceeded its authority in reconsidering the “partial final award.” Specifically, the court relied upon the common law doctrine of functus officio that prevents arbitrators from changing a previously-rendered, final award except in limited technical circumstances. During the arbitration, the parties agreed the panel would make an immediate and final determination as to liability before proceeding to a second evidentiary hearing on the calculation of defense costs. Once the panel exercised its authority to make a final decision on liability and issued the “partial final award,” its authority ended and it could not revisit the issue of liability. The court dismissed the panel’s statement in the corrected awards that the “partial final award” was not in fact “final” because that would eviscerate the purpose of functus officio to allow a panel to regain authority by stating its prior award was not final. Am. Int’l Specialty Lines Ins. Co. v. Allied Capital Corp., Case No. 656341/16 (N.Y. App. Div. Oct. 25, 2018).

This post written by Thaddeus Ewald .

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