Arbitration Process Issues

This case involves a class action filed in a Virginia district court against Delbert Services Corporation, the servicing agent of certain loans, for which the plaintiffs claimed that Delbert’s unfair debt collection practices violated federal law. The lender was Western Sky Financial, LLC, an online lender owned by a member of the Cheyenne River Sioux Tribe and located on the Cheyenne River Indian Reservation in South Dakota. Delbert sought to compel arbitration in response to the plaintiffs’ claims.

The loan agreements at issue required resolution of all disputes through arbitration, but stated that the agreement was “subject solely to the exclusive laws and jurisdiction of the Cheyenne River Sioux Tribe” and that “[n]either this Agreement nor Lender is subject to the laws of any state of the United States of America”.

The Virginia district court upheld the arbitration clause in the loan agreements. However, although recognizing that the FAA establishes a liberal policy favoring arbitration agreements, the Fourth Circuit reversed the district court’s ruling, holding that the arbitration clause was unenforceable. The Court noted that “[t]he agreement purportedly fashions a system of alternative dispute resolution while simultaneously rendering that system all but impotent through a categorical rejection of the requirements of state and federal law. The FAA does not protect the sort of arbitration agreement that unambiguously forbids an arbitrator from even applying the applicable law.” The Fourth Circuit further noted that parties are free within bounds to select a choice of law clause, but that Delbert was seeking to use the arbitration process to avoid state and federal law.

Hayes v. Delbert Services Corp., No. 15-1170 (9th Cir. Feb. 2, 2016).

This post written by Jeanne Kohler.

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The Court of Appeals of Georgia recently affirmed a trial court’s ruling compelling arbitration in a malpractice coverage dispute. McLarens Young International Inc. (McLarens) and American Safety Casualty Insurance Company (ASCIC) shared a claims handling agreement (CHA) that required McLarens to provide the insurer with claims management and adjustment services for ASCIC policies issued under a Lawyers Professional Liability Program. Under one of those policies, ASCIC was required to pay the $2 million policy limits to satisfy a malpractice settlement. ASCIC then sought reimbursement from its reinsurer, Excalibur Reinsurance Corp. (Excalibur), and the reinsurer paid.

Both McLarens and Excalibur filed a demand for arbitration against McLarens for a claim of negligent oversight of the underlying claim. McLarens countered in the trial court that the arbitration demand was outside the scope of the CHA’s arbitration provision. Both the trial court and the appellate court disagreed, holding that “the dispute pertains solely to whether McLarens is required to indemnify ASCIC under the terms of the CHA, and there is no greater or lesser right to indemnification because Excalibur has been inserted into the proceedings.” Because of the Reinsurance Agreement with ASCIC, Excalibur is merely subrogated to any right to indemnification that ASCIC may have against McLarens under the CHA due to the negligent handling of the claim. The appellate court held that the scope of the suit remains the same as if it were only between McLarens and ASCIC and, thus, is within the scope of the arbitration clause.

McLarens Young International, Inc. v. American Safety Casualty Insurance Co., et al., No. A15A0932 (Ga. App., 4th Div. Nov. 20, 2015).

This post written by Whitney Fore, a law clerk at Carlton Fields in Washington, DC.

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Earlier this month, the Third Circuit Court of Appeals reaffirmed its holding that the availability of class arbitration constitutes a question of arbitrability to be decided by courts unless the arbitration agreement “clearly and unmistakably” provides otherwise and expanded this holding to encompass situations in which the alleged delegation occurs through incorporation of American Arbitration Association (AAA) rules. The case arose out of a dispute regarding leases over oil and gas with landowners in Pennsylvania.

The lease agreements contained an arbitration provision that said that “all such disputes shall be determined by arbitration in accordance with the rules of the” AAA. The AAA rules included various subparts which, among other things, allow an arbitrator to determine if an arbitration should go forward on a class basis.  A lessee filed an arbitration demand with the AAA on behalf of itself and other similarly situated, and the lessor countered by filing a declaratory judgment action seeking a declaration that a court must determine class arbitrability and that the leases at issue did not allow for this.

The trial court granted summary judgment to the lessor and vacated the arbitrators’ decision regarding class arbitrability. The Third Circuit has set out a two part test to determine whether an arbitrator may determine class arbitrability: 1) does the agreement provide that class-wide arbitration is a question of arbitrability; and, if so 2) does the agreement clearly and unmistakably provide for the arbitrator to make this determination.  The Third Circuit has set this standard as an “onerous” one that simply could not be done in a case such as this where the agreement of the parties purported to incorporate rules which have various subparts, some of which allowed for an arbitrator to make this determination.  For this reason, the Third Circuit affirmed the lower court’s determination. Chesapeake Appalachia, LLC v. Scout Petroleum, LLC, No. 15-1275 (3d Cir. Jan. 5, 2016).

This post written by Zach Ludens.
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