Arbitration Process Issues

NEW YORK COURT REJECTS BID TO COMPEL ARBITRATION OF REINSURANCE DISPUTE

August 14, 2014 by Carlton Fields

A New York federal district court denied Transatlantic Reinsurance Company’s petition to compel National Indemnity Company (“NICO”) to submit to arbitration. While the court’s order does not provide the basis for its ruling and only refers to the reasons set forth on the record, the issues were extensively analyzed in the parties’ briefing. The core issue was whether NICO, which was not a signatory to the reinsurance agreements between Transatlantic and AIG, should be compelled to arbitrate under those agreements’ arbitration provisions. Transatlantic argued that NICO was bound by the reinsurance agreements because it substituted itself for AIG by virtue of the Loss Portfolio Transfer wherein AIG to transferred NICO its asbestos-related liabilities which Transatlantic reinsured. According to Transatlantic, the principles of “direct benefits estoppel” required NICO to arbitrate under the reinsurance agreements in light of the benefits enjoyed by NICO as a result of those agreements.

The court rejected these arguments, evidently agreeing with NICO, which had challenged Transatlantic’s characterization of the Loss Portfolio Transfer and the reinsurance agreements. NICO argued it never agreed to arbitrate. Further, NICO maintained it was a third-party administrator acting on AIG’s behalf and did not substitute for AIG under the Loss Portfolio Transfer or any other agreement. NICO claimed it also did not receive any direct benefits under the reinsurance agreements, so the “direct benefits estoppel” theory was inapplicable. Finally, NICO pointed out that it was not a necessary party to the arbitration because Transatlantic could obtain complete relief without NICO being a party. Transatlantic Reinsurance Co. v. National Indemnity Co., Case No. 14 Civ. 2109 (ER) (USDC S.D.N.Y. July 22, 2014).

This post written by Leonor Lagomasino.

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CALIFORNIA APPELLATE COURT UPHOLDS DELEGATION CLAUSE IN ARBITRATION AGREEMENT

August 7, 2014 by Carlton Fields

The issue before the California Appellate Court was whether the trial court erred in enforcing a delegation clause in an arbitration agreement governed by the Federal Arbitration Act (“FAA”), and granting the defendant’s motion to compel arbitration.

Plaintiff/Petitioner brought a wage and hour action against her former employer. The defendant former employer moved to compel arbitration, pursuant to a clause contained in its employee handbook. The delegation clause provided, “The arbitrator has exclusive authority to resolve any dispute relating to the interpretation, applicability, or enforceability of this binding arbitration agreement.” Plaintiff opposed arbitration asserting that the arbitration agreement was unconscionable. Defendant, in turn, asserted that arbitration agreement contained a delegation clause providing that issues relating to the enforceability of the arbitration agreement were themselves delegated to the arbitrator for resolution. The dispute then turned to whether the delegation clause itself was unconscionable.

The appellate court upheld the trial court’s decision. The appellate court concluded a portion of the rationale underlying Murphy v. Check ‘N Go of California, Inc. (2007) 156 Cal.App.4th 138 (Murphy); Bruni v. Didion (2008) 160 Cal.App.4th 1272 (Bruni); and Ontiveros v. DHL Express (USA), Inc. (2008) 164 Cal.App.4th 494 (Ontiveros) was no longer viable under California law. Murphy, Bruni, and Ontiveros relied on three factors to conclude that the delegation clauses at issue were substantively unconscionable: (1) they were outside the reasonable expectations of the parties; (2) they were not bilateral; and (3) they provided for decisionmaking by arbitrators who would be biased by their financial self-interest. The appellate court found that the first two factors did not apply to the delegation clause at issue and that the third factor was preempted by the Federal Arbitration Act (“FAA”). Malone v. Superior Court, B253891 (Cal. Ct. App. June 17, 2014).

This post written by Kelly A. Cruz-Brown.

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NEW YORK FEDERAL COURT RULES IT CANNOT COMPEL ARBITRATION IN GEORGIA

August 6, 2014 by Carlton Fields

A New York federal court recently was presented with a motion to compel arbitration in Georgia. The district court first concluded that the arbitration provision was enforceable and then proceeded to the question of whether it had the authority to compel arbitration in a district other than its own. The court described what it deemed an “internal conflict” within the Federal Arbitration Act because the Act provides both that (1) courts must enforce an arbitration agreement in accordance with its terms, and (2) arbitration must take place “within the district in which the petition for an order directing such arbitration is filed.” The court also noted an unresolved split in the Second Circuit on how a New York district court should proceed when a suit pending before it involves an arbitration agreement that specifies that arbitration should take place outside the court’s district. Ultimately, the court ruled that it had no authority to compel arbitration outside its district, but nevertheless wished to enforce the valid forum selection clause contained in the agreement. Accordingly, the district court elected to stay the action, pending arbitration of the plaintiff’s claims against the defendant in Georgia. This approach left the parties free to pursue their contractual rights and remedies in the appropriate venue without running afoul of the FAA. Klein v. ATP Flight School, No. 14-CV-1522 (USDC E.D. N.Y. July 3, 2014).

This post written by Catherine Acree.

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NINTH CIRCUIT FINDS REVISIONS TO ARBITRATION POLICY IN EMPLOYEE HANDBOOK EFFECTIVE AND ENFORCEABLE

August 5, 2014 by Carlton Fields

The Ninth Circuit recently reversed a district court’s denial of a motion to compel arbitration of an employee’s claims that were brought as a putative class action against her employer, Nordstrom. The basis for the motion to compel was an arbitration provision contained in Nordstrom’s employee handbook. The arbitration provision had been modified to preclude employees from bringing class action lawsuits after the employee received the handbook.

The employee argued that she did not have reasonable notice of the change based on a provision in the employee handbook that required Nordstrom to provide employees with 30 days written notice of any substantive changes to the arbitration provision. The handbook provided that the notice provision was included to “allow employees time to consider the changes and decide whether or not to continue employment subject to the changes.” To comply with the notice provision, Nordstrom sent letters to employees in June 2011 informing them of the change in the arbitration policy. Nordstrom did not seek to enforce the new arbitration provision during the 30-day notice period, but the letter was silent in that regard and stated that the revised arbitration provision was the “current version.” Applying California law, the Ninth Circuit ruled that Nordstrom had satisfied the minimal requirements for providing employees with reasonable notice of a change to its employee handbook by sending the letter to the employees informing them of the modification, and by not seeking to enforce the arbitration provision during the 30-day notice period. The Ninth Circuit also held that Nordstrom was not bound to inform the employee that her continued employment after receiving the letter constituted acceptance of new terms of employment. Davis v. Nordstrom, Inc., No. 12-17403 (9th Cir. June 23, 2014).

This post written by Catherine Acree.

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TEXAS SUPREME COURT VACATES $26 MILLION ARBITRATION AWARD AND REVERSES COURT OF APPEAL’S DECISION IMPOSING REQUIREMENT FOR SELECTION OF ARBITRATORS

July 29, 2014 by Carlton Fields

Nearly ten years after arbitration proceedings commenced involving a claim arising from the purchase and sale of various insurance companies, the Texas Supreme Court vacated the $26 million arbitration award entered against Americo Life, Inc. et. al. (“Americo”) in favor of Robert L. Myer and Strider Marketing Group, Inc. (“Myer”) and reversed the Court of Appeal’s judgment, finding that the arbitration panel exceeded its authority because the panel was formed contrary to the express terms of the arbitration agreement. The arbitration clause contained in the agreement between Americo and Myers provided for a tripartite arbitration, where each party appointed an arbitrator and the two arbitrators would select a third. Each arbitrator was to be a “knowledgeable, independent business person or professional.” The arbitration clause also provided that the arbitration proceedings “shall be conducted in accordance with the commercial arbitration rules of the American Arbitration Association (“AAA”). At the time the agreement was executed, AAA rules did not require arbitrator impartiality, but by the time the arbitration was invoked, AAA rules required by default that any arbitrator shall be “impartial and independent…”

The issue in this case centered around the AAA striking the arbitrator selected by Americo on the basis the arbitrator was not impartial. America moved to vacate the award and argued that in disqualifying the arbitrator, the AAA failed to follow the arbitrator-selection process specified in the parties’ agreement because the parties never agreed that the arbitrators must be “impartial.” The Texas Supreme Court agreed.

First, the Texas Supreme Court rejected Myer’s argument that the term “independent”, which was contained in the parties’ agreement, was the same as the term “impartial.” The Court then turned to the question of whether the incorporation by reference of the AAA Rules also incorporated the impartiality requirement even though the requirement did not exist at the time the agreement was signed. The Americo Court held the impartiality requirement was not incorporated because it conflicted with the terms of the parties’ agreement. The parties agreed to arbitrators who were “knowledgeable” and “independent,” but not impartial. Thus, because the AAA impartiality rules conflicted with the parties’ agreement, the agreement controls over the AAA rules. Therefore, the AAA should not have disqualified Americo’s arbitrator on the grounds of impartiality and the arbitration panel exceeded its authority, requiring that the award be vacated. Americo Life, Inc. v. Myer, No. 12-0739 (Texas June 20, 2014).

This post written by Leonor Lagomasino.

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