Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

You are here: Home / Archives for Arbitration / Court Decisions / Arbitration Process Issues

Arbitration Process Issues

New York State Court Denies Motion To Enjoin Arbitration By Non-Party To Arbitration

by

In this case, Royal Wine Corporation (“Royal”) moved for a preliminary injunction in a New York state court action to enjoin an arbitration filed by Cognac Ferrand SAS (“Cognac”), against Mystique Brands, LLC (“Mystique”) until the court has resolved the issues raised in Royal’s complaint filed against Cognac and Mystique, which seeks a declaratory judgment that Royal is not the alter ego of Mystique, and a permanent injunction barring Cognac from maintaining an arbitration against Mystique.

The background of the dispute is as follows. In 2008, Cognac and Mystique entered into a five-year contract (the “Agreement”), which granted Mystique the exclusive right to import certain of Cognac’s products to the North American market. Prior to its expiration, Cognac terminated the Agreement due to Mystique’s insolvency. Royal demanded that Cognac pay a $238,000 termination fee. Mystique then initiated an arbitration to obtain the termination fee, and Cognac filed counterclaims for fraud and breach of contract in that matter (the “First Arbitration”). The arbitrator dismissed the claims of Mystique and granted Cognac’s counterclaims, leaving only the issue of damages to be determined. Prior to a resolution as to Cognac’s damages, Mystique filed for bankruptcy, and the First Arbitration was stayed. According to the Bankruptcy Trustee’s Complaint, Royal funded Mystique’s unsuccessful First Arbitration and filed Mystique’s bankruptcy proceeding. Cognac then moved the Bankruptcy Court to lift the stay to permit Cognac to obtain a judgment for damages against Mystique and to proceed against Mystique’s principals on an alter ego theory of liability, which was denied. After the conclusion of Mystique’s bankruptcy action in 2017, Cognac filed a new arbitration against Mystique (the “Second Arbitration”), in which Cognac raised claims nearly identical to its counterclaims in the First Arbitration and sought to recover over $5 million in damages. Royal then filed the instant action in New York state court.

With respect to its motion for a preliminary injunction, Royal argued that Mystique is a defunct entity, that “serial arbitrations” are prohibited, and that the Second Arbitration is untimely. The New York court denied the motion, finding that Royal has no standing to stay the arbitration and is not entitled to assert Mystique’s defenses to the arbitration because Royal is not a signatory to the arbitration agreement between Cognac and Mystique. It further found that Royal failed to satisfy the elements necessary to obtain injunctive relief. In order to obtain injunctive relief, Royal was required to establish (1) a likelihood of success on the merits of its claim, (2) the danger of irreparable harm in the absence of a preliminary injunction, and (3) the balance of the equities favors it. The New York court found that Royal failed to establish a likelihood of success on the merits because it is not entitled to advance arguments on Mystique’s behalf while denying that it is Mystique’s alter ego. In this regard, the court noted that although “serial arbitrations” may be prohibited, such an argument belongs to Mystique, which had yet to be served with notice of the Second Arbitration. Royal also claimed that it will suffer irreparable harm if it is unable to assert Mystique’s defenses because Mystique is a defunct entity and Royal, the alleged alter ego, faces a potential default judgment for over $5 million. By contrast, Royal argued that Cognac would suffer no harm if the arbitration was delayed while the court determined the issue of Royal’s alter ego status.

The court rejected Royal’s argument, finding that if it denied the motion for preliminary injunction and Royal is later successful in its lawsuit, Royal will establish that it is not Mystique’s alter ego and will moot the issue of whether Royal may raise Mystique’s defenses. Accordingly, the court declined to find that extraordinary irreparable harm compensates for Royal’s deficiencies as to the applicable factors for obtaining a preliminary injunction. Thus, the court denied Royal’s motion to stay the Second Arbitration.

Royal Wine Corp. v. Cognac Ferrand SAS, No. 650249/2018 (N.Y. Sup. Ct. Feb. 26, 2018).

This post written by Jeanne Kohler.
See our disclaimer.

Fourth Circuit Finds Employer Cannot Compel Arbitration of Former Employee’s Discrimination Claims

by

The U.S. Court of Appeals for the Fourth Circuit recently ruled that two employment-related arbitration clauses did not “clearly and unmistakably” govern a former employee’s discrimination claims, and that the arbitrability of those claims is rightfully decided by the court, rather than an arbitrator.

Plaintiff signed two arbitration agreements with Rent-A-Center (RAC), his former employer, one when he was initially hired in 2002, and a second when he applied for a new position in 2012. Plaintiff was ultimately hired for a different position in 2013, but did not sign a new arbitration agreement with RAC at that time. Plaintiff later filed this action against RAC for discrimination arising out of his 2013 employment. RAC moved for summary judgment and to compel arbitration, arguing Plaintiff’s claims were subject to the 2002 and 2012 arbitration agreements. The district court denied the motion, however, and the Fourth Circuit affirmed.

Citing seminal arbitrability decisions by the U.S. Supreme Court, including one involving RAC, the Fourth Circuit found the parties did not “clearly and unmistakably” intend to arbitrate claims relating to Plaintiff’s 2013 employment. To the contrary, the court found a reasonable juror could conclude from the parties’ actions that they agreed to modify the arbitration agreements to exclude any disputes relating to Plaintiff’s 2013 employment. Given this uncertainty, the court held that the district court, not an arbitrator, had the authority to decide questions of arbitrability (i.e., whether Plaintiff’s claims were subject to arbitration pursuant to the 2002 and 2012 arbitration agreements). For the same reason, the court also affirmed the district court’s denial of summary judgment, finding a genuine issue material fact as to the parties’ intent to arbitrate these particular claims.

Kabba v. Rent-A-Center, Inc., No. 17-1595 (4th Cir. April 13, 2018)

This post written by Alex Silverman.

See our disclaimer.

Minor Not Bound—Directly Or Indirectly—By Arbitration Agreement In Mother’s Credit Card Agreement

by

Last month the Seventh Circuit reversed a lower court order enforcing an arbitration agreement contained in cardholder agreement as applied against the minor daughter (“A.D.”) of the cardholder, rejecting the bank’s attempt to compel arbitration of the daughter’s Telephone Consumer Protection Act (“TCPA”) putative class action lawsuit. The trial court ruled A.D. was bound by the arbitration agreement as an “authorized user” of the card—where she, on at least one occasion, used the credit card to make a purchase as instructed by her mother—and was bound under the direct benefits estoppel theory.

First, the Seventh Circuit held A.D. was not bound by the cardholder agreement and its arbitration clause. The court emphasized the specific procedures in the cardholder agreement for designating authorized users which the parties did not follow: A.D.’s mother never notified the bank or paid an annual fee, the bank never issued a new card, and A.D. was not even old enough at the time to qualify as an authorized user. The court also found A.D. never manifested consent to be bound by the arbitration agreement, did not have legal capacity as a minor to enter into a contract, and actively disaffirmed consent by filing a lawsuit.

Second, the court concluded equitable estoppel was inapplicable and did not bind A.D. to the cardholder agreement. Any benefit A.D. received was derived from her relationship with her mother, not any relationship with the bank. Nor, the court held, did A.D.’s lawsuit center on rights or benefits under the cardholder agreement. The court rejected the bank’s argument that its affirmative defense based on A.D.’s mother’s consent qualified the case as one “relying” on the agreement because the bank, not A.D., bore the burden of establishing that defense. Simply put, A.D.’s lawsuit asserted rights under the TCPA and was therefore not premised on the cardholder agreement.

Because A.D. was not bound to the cardholder agreement directly as a signatory nor indirectly through estoppel, the court reversed and refused to compel arbitration.

A.D. v. Credit One Bank, N.A., No. 17-1486 (7th Cir. Mar. 22, 2018).

This post written by Thaddeus Ewald .

See our disclaimer.

Fourth Circuit Dismisses Appeal Of Order Compelling Arbitration In Voluntarily Dismissed Class Action

by

This case arose from a putative class action alleging claims against Groupon on the basis of its reimbursement policies. After the trial court ordered the parties to arbitrate pursuant to an arbitration clause in the parties’ agreement, the plaintiff moved to amend the arbitration order, requesting that the district court dismiss her complaint with prejudice, advising the court that she would not pursue arbitration due to its costs outweighing her potential recovery. After the court dismissed the case, the plaintiff appealed the arbitration ruling, contending that the Fourth Circuit had jurisdiction over her appeal under 28 U.S.C. § 1291, which gives appellate courts jurisdiction of appeals from “final decisions” of district courts.

The plaintiff’s appeal was stayed pending a decision by the U.S. Supreme Court in Microsoft Corp. v. Baker as to whether a voluntarily dismissed action is final for purposes of 28 U.S.C. § 1291. Following the Supreme Court’s ruling that a voluntary dismissal does not qualify as a final decision, the Fourth Circuit followed the high court’s precedent and dismissed the appeal. Keena v. Groupon, Inc., Case No. 16-1973 (4th Cir. Mar. 27, 2018).

This post written by Gail Jankowski.

See our disclaimer.

Court Applies The “Intertwined-Ness Test” To Find That A Non-Signatory Could Invoke Equitable Estoppel To Compel Arbitration

by

The court applied a two-part “intertwined-ness test” to determine whether an arbitration agreement allowed a non-signatory to invoke equitable estoppel to compel arbitration. The first prong of the test examines whether the claims advanced by the signatory to the arbitration agreement arise under the same subject matter of the agreement. The second prong asks whether the non-signatory has a “close relationship” to a signatory of the agreement.

The first prong is heavily fact dependent. Here, the court held it was met because the “bulk of Plaintiffs’ claims … [arose] from the formation, execution, and existence of the Reinsurance Agreements,” which contained the arbitration agreement. The court was also influenced by the fact that the plaintiffs simultaneously filed a complaint in court and a demand for arbitration, both of which provided nearly identical factual allegations, alleged injuries, and theories of the case.

The second prong “is centered on the role of the non-signatory defendants when the misconduct occurred.” The court noted that an agency relationship between the non-signatory and a signatory may be sufficient to permit the non-signatory to compel arbitration. The fact that the plaintiffs also connected the non-signatory defendants to a signatory through conspiracy allegations clinched the matter for the court. The defendants had the requisite “close relationship” with a signatory to allow them to compel arbitration. Bankers Conseco Life Insurance Company v. Feuer, Case No. 16-Civ-7646 (USDC S.D.N.Y. Mar. 15, 2018).

This post written by Benjamin E. Stearns.

See our disclaimer.