Arbitration Process Issues

COURT DISTINGUISHES BETWEEN CLAIMS FOR RELIEF AND AFFIRMATIVE DEFENSES IN DENYING REHEARING OF ORDER COMPELLING ARBITRATION

July 27, 2016 by Carlton Fields

On May 11, 2016 we reported on a dispute between certain captive insurance administrative service providers (Capstone) against various defendants concerning the rights to certain intellectual property related to a captive insurance arrangement. Following a mediation and a settlement between the parties of other claims between them (excluding the intellectual property claims), a dispute arose regarding whether the defendants’ affirmative defenses were released in the settlement. To resolve that issue, Capstone sought arbitration pursuant to an engagement letter that was part of the operative administrative services contract they and their attorneys entered into with the defendants as part of the captive insurance arrangement. The defendants opposed arbitration under the engagement letter, arguing that the parties’ claims and affirmative defenses were not arbitrable. The court compelled arbitration, holding that arbitrability was to be decided in arbitration under the terms of the arbitration clause in the engagement letter.

The defendants then filed the instant motion for rehearing, arguing that an order in a related case which denied arbitration under the same engagement letter, precluded arbitration in this case under res judicata. The court rejected that argument and denied rehearing, distinguishing between the claims for relief at issue in the order in the related case, and the affirmative defenses to those claims at issue in this case. While the claims for relief implicate a particular section of the administrative services agreement based on which the related order denied arbitration, the defenses at issue in this case do not directly implicate that section of the agreement. Consequently, the court ruled, the related order denying arbitration “did not decide the issue before the Court,” res judicata did not apply, and the court correctly compelled arbitration to decide arbitrability. Capstone Associated Services, Ltd., et al. v. Organizational Strategies, Inc., et al., No. H-15-3233 (USDC S.D.Tex. May 20, 2016).

This post written by Michael Wolgin.

See our disclaimer.

MASSACHUSETTS FEDERAL COURT REJECTS PRE-AWARD CHALLENGE TO PARTY-APPOINTED ARBITRATOR

July 19, 2016 by Carlton Fields

In a recent reinsurance case, a Massachusetts federal court denied a pre-award petition of a cedent to remove the reinsurer’s party-appointed arbitrator, finding that the Federal Arbitration Act (the “FAA”) did not authorize the court to remove an arbitrator before a final arbitration award has been issued.

With respect to the challenge to the reinsurer’s party-appointed arbitrator, the parties disputed whether the arbitrator qualification requirements of the arbitration clause in the agreement at issue precluded the appointment of an arbitrator that previously worked for entities that once were, but no longer are, affiliates of the cedent. The Massachusetts federal court first analyzed whether the FAA authorized the pre-award removal of an arbitrator. The cedent argued, in support of its pre-award petition for removal of the arbitrator, that the prohibition on judicial intervention is limited to pre-award challenges for arbitrator bias and that there is an exception for pre-award judicial removal of an arbitrator based on the failure to meet the criteria specified in the arbitration clause. The court rejected this argument, finding that “challenges to a party-appointed arbitrator, such as allegations of bias, are properly considered by courts only at the conclusion of the arbitration,” and that the FAA “provides no express authorization for pre-award judicial intervention regardless of the grounds for removal.” The court also rejected the cedent’s argument that permitting a pre-award challenge supports the goals of speed and efficiency that arbitration and the FAA were intended to foster. Thus, the Massachusetts federal court held that it did not have the authority under the FAA to remove the reinsurer’s arbitrator prior to the conclusion of the arbitration and directed the parties to proceed with the arbitration.

John Hancock Life Ins. Co. (U.S.A.) v. Employers Reassurance Corp., No. 15-cv-13626 (USDC D. Mass. Jun. 21, 2016).

This post written by Jeanne Kohler.

See our disclaimer.

CALIFORNIA COURT REVERSES ORDER COMPELLING ARBITRATION RELATING TO LEGAL MALPRACTICE

July 14, 2016 by Carlton Fields

Last month, a California appellate court reversed an order compelling legal malpractice claims to arbitration under an arbitration provision found in a business operating agreement. The dispute arose after an attorney and existing clients decided to go into business together. Some time later, it came to light that the attorney continued to bill his own company for the legal services that he was rendering through his law firm, and his business partners brought suit against him. Under the business’s operating agreement, the parties agreed that “any controversy between the parties arising out of this Agreement” shall be submitted to arbitration. Following a full arbitration, the attorney appealed whether the claims should have been arbitrated in the first place.

Originally, the lower court compelled all of the claims between the parties to arbitration, including claims for legal malpractice, breach of fiduciary duty, and rescission of the legal fees paid. However, the appellate court found that the arbitration language was meant to be narrow – in the same operating agreement where the choice of law provision stated that it applied to “any action on a claim arising out of, under or in connection with this Agreement or the transactions contemplated by this Agreement.” The court reasoned that the legal malpractice, breach of fiduciary duty, and rescission claims preexisted the operating agreement and did not arise from it. The lower court erred in compelling these claims to arbitration. Rice v. Downs, No. B261860 & B264964 (Cal. Ct. App. June 1, 2016).

This post written by Zach Ludens.

See our disclaimer.

COURT UPHOLDS ANNULMENT OF FOREIGN ARBITRATION AWARD BASED ON FOREIGN COURT’S FINDING THAT TRIBUNAL VIOLATED RULE ON FEES

July 6, 2016 by Carlton Fields

A U.S. District Court refused to confirm the award that had been entered by an arbitration tribunal in favor of Getma International against the Republic of Guinea. The award had been annulled by the Common Court of Justice and Arbitration (CCJA) when Guinea complained that the tribunal violated the CCJA Arbitration rules in repeatedly seeking increased arbitrators’ fees from the parties. The CCJA granted the annulment, despite the fact that it had previously advised the tribunal on one occasion to consult with the parties regarding increased fees, because only the CCJA had the ultimate authority to order increased fees, not the parties or the tribunal themselves. Undeterred, Getma attempted to confirm the award in the U.S. District Court, contending that the annulment ran contrary to public policy, citing the New York Convention. The court, however, rejected Getma’s argument, finding that the CCJA was within its authority to annul the award and that the annulment was within the CCJA’s discretion. Getma Int’l v. Republic of Guinea, No. 1:14-cv-01616 (USDC D.D.C. June 9, 2016).

This post written by Joshua S. Wirth.

See our disclaimer.

EIGHTH CIRCUIT RULES THAT NLRB ERRED BY INVALIDATING EMPLOYMENT AGREEMENTS REQUIRING INDIVIDUAL ARBITRATION

July 5, 2016 by Carlton Fields

We previously reported on a federal circuit split that has developed over the enforceability of arbitration provisions waiving class actions in employment agreements. Compare December 19, 2013 (D. R. Horton) and November 9, 2015 (Murphy Oil) with June 6, 2016 (Lewis). The Eighth Circuit recently fortified its position on the side of holding that such class waivers are enforceable. Specifically, the Eighth Circuit analyzed whether the NLRB erred by finding that a mandatory individual arbitration clause in an employment agreement violated sections 7 and 8(a)(1) of the National Labor Relations Act by (1) requiring the employee to arbitrate “[a]ll claims, disputes, or controversies” related to employment; (2) waiving the employee’s right to maintain a class action; and (3) allegedly leading employees to believe that they could not file a grievance with the National Labor Relations Board.

Following a prior ruling of the Eighth Circuit as well as rulings by the Fifth Circuit in D.R. Horton and Murphy Oil, the court held that the employer “did not violate section 8(a)(1) by requiring its employees to enter into an arbitration agreement that included a waiver of class or collective actions in all forums to resolve employment-related disputes.” The Court did find, however, that NLRB properly ruled that the language of the arbitration clause, which included a broad requirement that “[a]ll claims, disputes, or controversies arising out of, or in relation to” employment with the company “shall be decided by arbitration,” was overly broad and should have contained language informing the employee that they retained the rights to file charges with the NLRB. Cellular Sales of Missouri, LLC v. National Labor Relations Board, No. 15-1620 (8th Cir. June 2, 2016).

This post written by Barry Weissman.
See our disclaimer.