Arbitration Process Issues

THIRD CIRCUIT: FEDERAL COURT SHOULD DECIDE WHETHER AN ARBITRATION CLAUSE AUTHORIZES CLASSWIDE ARBITRATION – NOT THE ARBITRATOR

September 17, 2014 by Carlton Fields

The Third Circuit recently was presented with the question of whether, in the context of an otherwise silent contract, the availability of classwide arbitration is to be decided by a court rather than an arbitrator. The underlying dispute involved a putative class action brought under the Fair Labor Standards Act concerning an employer’s classification of its workers as overtime-exempt employees. The two named plaintiffs each had signed an employment agreement requiring that any dispute relating to their employment be submitted to arbitration, but the agreements did not mention classwide arbitration. A New Jersey federal court granted the employer’s motion to compel arbitration, but held that the arbitrator would have to decide whether the arbitration could include classwide claims. The arbitrator issued a partial award, and addressed the “who decides” issue, ruling that the employment agreements permitted classwide arbitration. The employer then returned to federal court and filed a motion to vacate the arbitrator’s award, and the district court denied the motion. On appeal, the Third Circuit reversed, concluding that the issue of the availability of classwide arbitration should be decided by a court, not an arbitrator.

In reaching its conclusion, the Third Circuit noted that “questions of arbitrability,” such as whether the parties are bound by a given arbitration clause or whether an arbitration clause in a concededly binding contract applies to a particular type of controversy – are “gateway issues” to be resolved by a court. This is in contrast to “procedural” questions that are resolved by arbitrators. The Third Circuit ruled that the permissibility of classwide arbitration is not solely a question of procedure or contract interpretation (which would be decided by an arbitrator) but rather involves a “substantive gateway dispute qualitatively separate from deciding an individual quarrel” (which would be decided by a court). In reaching this conclusion, the Third Circuit followed the Sixth Circuit holding in Reed Elsevier, Inc. v. Crockett, 734 F.3d 594 (6th Cir. 2013), which is the only other circuit court opinion to have squarely addressed the “who decides” issue.

David Opalinski v. Robert Half Int’l Inc., No. 12-4444 (3rd Cir. July 30, 2014).

This post written by Catherine Acree.

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MISSOURI COURT DENIES RECONSIDERATION OF ORDER QUASHING SUBPOENA OF UN-ISSUED ARBITRATION AWARD

September 4, 2014 by Carlton Fields

Lincoln Memorial Insurance Company and Hannover Life Reinsurance Company of America became engaged in a long-running reinsurance dispute, arising from an allegedly fraudulent scheme by Lincoln and others in the sale of pre-need funeral service contracts. Hannover reinsured some of those contracts. The matter was arbitrated, and Lincoln claim that Hannover wrongfully accused Lincoln of fraud and intentional misconduct during the court of that arbitration.

Ultimately, Lincoln became insolvent and entered into receivership in Texas. Lincoln asserted that Hannover’s conduct in the arbitration was a factor in driving it to insolvency. The Texas Department of Insurance appointed a receiver and issued a permanent injunction, which, among other things, enjoined further arbitration against Lincoln, before the arbitrator ever issued an award.

The Special Deputy Receiver, Jo Ann Howard & Associates, thereafter brought claims in federal court against several entities alleging, among other things, RICO, breach of fiduciary duty, and gross negligence, which purportedly caused or contributed to Lincoln’s insolvency.

As we previously reported, one of the defendants in the action brought by the receiver, National City Bank, subpoenaed the arbitrator in the Hannover Re arbitration, seeking his un-issued award. National City also asserted several special defenses to the receiver’s suit, including failure to mitigate damages. The receiver moved to quash the subpoena and to strike National City’s failure to mitigate affirmative defense. The court granted both motions.

National City thereafter moved for reconsideration and clarification of the Court’s order. Construing the motion as a Rule 60(b) motion to amend, the Court held that National City was not entitled to the “extraordinary relief” available under that rule, as it had not met the high burden of demonstrating “exceptional circumstances” warranting the correction of any error, even if a substantial error had been made, which, the Court duly noted, was not the case. Jo Ann Howard & Associates, P.C. v. Cassity (USDC E.D. Mo. July 15, 2014).

This post written by John Pitblado.

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COURT LACKS JURISDICTION TO HEAR MOTION TO VACATE ARBITRATION DECISION THAT DENIED WITHDRAWAL OF ARBITRABLE CLAIM

August 20, 2014 by Carlton Fields

A federal district court has dismissed a motion to vacate an arbitration decision denying a party’s request to unilaterally withdraw a claim that was subject to a pending arbitration. Finding the arbitration decision was not final, and did not fall within any exception to the finality requirement, the court held it lacked jurisdiction to consider the motion to vacate it. The court also rejected application of the collateral order doctrine which, if applicable, would justify the court’s jurisdiction to hear the motion. That doctrine is reserved for only a few substantial interests, such as defenses of presidential immunity and double jeopardy. No such substantial interest was shown by the argument that consideration of the order could avoid unnecessary legal expenses. Bailey Shipping Ltd. v. American Bureau of Shipping, et al., Case No. 12-CV-5959 (USDC S.D.N.Y. Mar. 28, 2014).

This post written by Renee Schimkat.

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COURT DENIES PETITION TO APPOINT ARBITRATION UMPIRE IN RETROCESSION DISPUTE

August 19, 2014 by Carlton Fields

Odyssey Reinsurance Co. petitioned the court to appoint an umpire to serve in arbitration with its retrocessionaries, certain Lloyd’s underwriters and Reliastar Reinsurance Group, over a disputed reinsurance claim. Odyssey argued that arbitration had been unduly delayed due to what it contended were poorly qualified candidates proposed by the retrocessionaires. The court held that Odyssey’s arguments were insufficient to obtain relief from the court at that time, and that in its view, there had “not been a breakdown in the process that justifies court intervention.” The court directed the parties “to proceed to the next stage of arbitrator selection” as described in the agreements between them. Odyssey Reinsurance Co. v. Certain Underwriters at Lloyd’s London Syndicate 53, et al., Case No. 1:13-cv-09014 (USDC S.D.N.Y. June 30, 2014) (Opinion & Order and Judgment).

This post written by Michael Wolgin.

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FIFTH CIRCUIT HOLDS ORDER REMANDING CASE BACK TO ARBITRATORS FOR CLARIFICATION IS NON-FINAL AND NON-APPEALABLE

August 18, 2014 by Carlton Fields

The appeal arose from a lawsuit to clarify an arbitration award concerning an alleged breach of a corporate merger agreement containing a binding arbitration clause. The federal district court found the arbitration panel had exceeded its authority under that arbitration clause by failing to provide sufficient findings of fact and conclusions of law regarding a damages claim. The district court therefore remanded the case back to the panel for consideration of that issue and clarification of the award. On appeal, the Fifth Circuit held that because the district court neither confirmed nor vacated the award, the order was not final, a point on which the dissent strongly disagreed, and it therefore did not have appellate jurisdiction over the order. The court further reasoned that it was necessary to decline jurisdiction to avoid generating piecemeal appeals and in light of the court’s deferential standard of review of arbitration awards. Murchison Capital Partners, L.P., et al. v. Nuance Communications, Inc., No. 13-10852 (5th Cir. July 25, 2014).

This post written by Renee Schimkat.

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