Arbitration Process Issues

GENTLEMEN’S CLUB CANNOT COMPEL ARBITRATION WHERE IT ACTIVELY LITIGATED MERITS OF DISPUTE

February 19, 2018 by Rob DiUbaldo

The Fourth Circuit upheld a district court’s decision refusing to compel arbitration in a labor dispute between a gentlemen’s club (“Crazy Horse”) and a putative class of entertainers because of Crazy Horse’s extensive merits-based litigation conduct. Plaintiff Degidio, an entertainer at Crazy Horse, sued the club under the FLSA and South Carolina labor laws for allegedly misclassifying entertainers as independent contractors rather than employees.

Crazy Horse answered the complaint, participated in discovery, filed several merits-based motions for summary judgment, opposed Degidio’s motions for certification of class and collective actions, and repeatedly moved to certify state law questions to the South Carolina Supreme Court. In the midst of this conduct and without informing the court, Crazy Horse began entering into arbitration agreements with its new entertainers. Three years after the litigation had commenced, Crazy Horse moved to compel arbitration against a handful of plaintiffs who had recently joined the suit. The district court declined to enforce the arbitral agreements.

On appeal, the Fourth Circuit affirmed. Under the Federal Arbitration Act (“FAA”), a party waives its right to compel arbitration when it has “so substantially utilized the litigation machinery that to subsequently permit arbitration would prejudice the party opposing the stay.” The court emphasized that Crazy Horse engaged in substantive litigation maneuvers for over three years, including extensive and substantive motions practice that indicated it was hoping for a favorable ruling on the merits. More, those same issues Crazy Horse pursued in court would need to be reargued before an arbitrator if the court were to compel arbitration. Thus, the court concluded the “only possible purpose” of the arbitration agreements was to grant Crazy Horse another “bite at the apple” if it lost on the merits in court.

Crazy Horse argued it could not have moved for arbitration earlier because the entertainers with whom it had entered arbitration agreements had only recently joined the case. The court rejected this argument because Crazy Horse failed to notify the court of the agreements as they occurred, thereby avoiding court supervision, and because compelling arbitration here would give perverse incentives to parties to delay the motion to compel arbitration as long as possible. The court also denounced Crazy Horse’s conduct in entering the arbitration agreements because they gave false impressions and the secretive manner in which Crazy Horse implied it sought to avoid the court’s supervisory role.

Degidio v. Crazy Horse Saloon & Rest. Inc., No. 17-1145 (4th Cir. Jan. 18, 2018).

This post written by Thaddeus Ewald .

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INSURANCE RECEIVER’S PREEMPTION ARGUMENT UNDER MCCARRAN-FERGUSON FAILS TO AVOID ARBITRATION OF REINSURANCE DISPUTE

February 12, 2018 by Michael Wolgin

The receiver for Gramercy Insurance Company sought to avoid arbitration of a reinsurance dispute with Contractor’s Bonding, Ltd., by arguing the FAA was reverse preempted under the McCarran-Ferguson Act. The receiver argued the federal court should abstain from exercising jurisdiction and remand the case to state court under Burford v. Sun Oil Co. The court noted, however, that Burford abstention is appropriate only when the district court has discretion to grant or deny relief. CBL argued the court lacked discretion regarding whether to compel arbitration under the FAA. The receiver argued the FAA was inapplicable because it was reverse preempted by the McCarran-Ferguson Act.

A state law may only reverse preempt a federal statute where, among other things, the “federal statute operates to invalidate, impair, or supersede the state law.” The FAA did not impair or supersede the relevant state statute because the statute expressly provided that it did not “deprive[] a party of any contractual right to pursue arbitration.” As such, the court denied the receiver’s motion to remand and enforced the forum selection clause contained within the party’s agreement by transferring the case pursuant to CBL’s motion. Gramercy Ins. Co. v. Contractor’s Bonding, Ltd. No. AU-17-CA-00723-SS (USDC W.D. Tex. Jan. 19, 2018).

This post written by Benjamin E. Stearns.
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CALIFORNIA COURT OF APPEAL REMANDS MATTER FOR SUPERIOR COURT TO DECIDE ISSUE OF ARBITRABILITY AND WHETHER DELEGATION CLAUSE WAS UNCONSCIONABLE

February 7, 2018 by Carlton Fields

Plaintiff argued both the delegation clause and the arbitration provision of the agreement at issue were unconscionable, requiring the trial court to resolve the merits of the challenge, which it did not. “If the party’s challenge is directed to the agreement as a whole – even if it applies equally to the delegation clause – the delegation clause is severed out and enforced; thus, the arbitrator, not the court, will determine whether the agreement is enforceable. By contrast, if the party is making a specific challenge to the delegation clause, the court must determine whether the delegation clause itself may be enforced (and can only delegate the general issue of enforceability to the arbitrator if it first determines the delegation clause is enforceable).”

Under California law, a delegation clause must be clear and unmistakable to be enforceable. The delegation clause at issue stated “[a]ll disputes arising with respect to any provision of this Agreement shall be fully subject to the terms of this arbitration clause” and incorporated the AAA procedures. Relying on this, the Court determined the language of the AAA rules was sufficiently clear and unmistakable, and thus the delegation clause was enforceable unless it was unconscionable. The trial court erred by not deciding the arbitrability of the delegation clause in light of the unconscionability concerns raised by the Plaintiff. The case was remanded.

Ramar Prod. Servs., Inc. v. Applied Underwriters, Inc., D071443 (Cal. Ct. App. Dec. 22, 2017).

This post written by Nora A. Valenza-Frost.
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NINTH CIRCUIT FINDS ARBITRATION CLAUSE SHOWED CLEAR AND UNMISTAKABLE INTENT TO RESOLVE ARBITRABILITY QUESTIONS BY ARBITRATION

February 5, 2018 by Carlton Fields

Finding Montana law was inapplicable to the subject insurance policy under both federal maritime choice-of-law principles and the policy language, the Ninth Circuit Court of Appeals determined that an arbitration clause was not unenforceable, and remanded the matter to the Montana District Court with instructions to grant a motion to compel arbitration in its entirety.

As the insurance policy at issue concerned marine insurance, and the FAA specifically applies to “maritime transactions,” Montana state law did not govern the validity of the agreement’s arbitration provision. Nor was federal maritime law precluded by Montana law under the McCarran-Ferguson Act, as Montana’s insurance law is not invalidated, impaired or superseded by the application of federal maritime law. The same result was reached by applying maritime choice-of-law principles to the policy’s choice-of-law provisions.

Lastly, looking at the policy’s arbitration provision, in which the parties agreed “that any and all disputes arising under [the] policy shall be resolved exclusively by binding arbitration … conducted pursuant to the Rules” of the AAA, the Court found the parties “clearly and unmistakably indicated their intent to submit arbitrability questions to an arbitrator.” The AAA rules provide that “[t]he arbitrator shall have the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope or validity of the arbitration agreement or to the arbitrability of any claim or counterclaim.”

Galilea, LLC v. AGCS Marine Ins. Co., No. 16-35474 (9th Cir. Jan. 16, 2018).

This post written by Nora A. Valenza-Frost.
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CALIFORNIA COURT CONSIDERS ENFORCEABILITY OF ARBITRATION CLAUSE IN REINSURANCE RELATED AGREEMENT APPLYING NEBRASKA LAW

February 1, 2018 by Rob DiUbaldo

In a case involving a reinsurance participation agreement (RPA), a California trial court has examined the interplay between two seemingly irreconcilable contract provisions: one that provided for the arbitration of any disputes thereunder, and another that chose Nebraska law for purposes of construction, pursuant to which agreements to arbitrate disputes implicating certain insurance contracts are invalid.

Plaintiffs were a set of affiliated companies that entered into a series of agreements with defendants, including a set of workers’ compensation insurance policies, a reinsurance treaty, and the RPA. The RPA (1) provided that any disputes would be arbitrated and delegated issues of arbitrability to the arbitrator, and (2) provided that it should be construed in accordance with Nebraska law. Plaintiffs filed suit seeking a declaration that the RPA was void and unenforceable, and defendants moved to compel arbitration. Plaintiffs argued that the arbitration provision was unenforceable under Nebraska Revised Statute § 25-2602.01(f)(4), which prohibits agreements to arbitrate future disputes regarding “any agreement concerning or relating to an insurance policy other than a contract between insurance companies including a reinsurance contract.”

Under the McCarran Ferguson Act, a state law may prohibit arbitration otherwise required by the FAA (known as “reverse preemption”) if that statute “regulates the business of insurance.” The court determined that § 25-2602.01(f)(4) regulates the business of insurance and thus reverse preempts the FAA. The court went on to note that while parties may generally agree to delegate the power to determine issues of arbitrability to the arbitrator, if the very validity of the agreement to arbitrate is challenged, the court must consider this challenge before compelling arbitration. Finding that plaintiffs had made such a challenge, the court found that it was required to determine whether the RPA was the type of agreement covered by § 25-2602.01(f)(4).

Defendants argued that the RPA was an investment contract, not an insurance policy, and thus not covered by § 25-2602.01(f)(4), but the court disagreed, finding that the RPA was sufficiently related to the relevant workers’ compensation policies to merit such coverage. As such, it was the kind of agreement for which § 25-2602.01(f)(4) prohibits arbitration agreements, and the court denied defendants’ motion to compel arbitration. Parties drafting insurance-related contracts containing arbitration provisions would thus be well advised to consider the impact of applicable state laws on the enforceability of such provisions.

Milmar Food Group II, LLC et al. v. Applied Underwriters, Inc. et al., EF003101-2017 (Orange Cty. Sup. Ct. Dec. 5, 2017)

This post written by Jason Brost.

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