Confirmation / Vacation of Arbitration Awards

The Ninth Circuit Reverses California District Court’s Ruling Vacating Arbitration Award Based on Evident Partiality

January 8, 2019 by Jeanne Kohler

The background of the case can be found here. In sum, in 2009, plaintiffs American Brokerage Network and its owner Cung Thai (collectively, “ABN”) and American General Life and Accident Insurance Company (“AGLA”), a subsidiary of American International Group, Inc. (“AIG”), entered into a master general agent agreement, which was terminated in 2013. In 2015, ABN brought an arbitration under the rules of the American Arbitration Association (the “AAA”) against AGLA, AIG and later American General Life Insurance Company, successor to AGLA (collectively, “American General”), asserting claims of intentional interference with business relationships, breach of contract and breach of the implied covenant of good faith and fair dealing in connection with the agreement. Defendants counterclaimed for breach of contract and contractual indemnity. The sole arbitrator in the case made disclosures of certain relationships of her law firm with defendants and their subsidiaries. ABN asked no questions about her disclosures and she was accepted as arbitrator. In June 2016, the arbitrator dismissed AIG from the case. Thereafter, in September 2016, after ten days of testimony and other evidence, the arbitrator issued a Final Award, denying both sides’ claims for relief. After receiving the Award, ABN learned, through public records, of alleged undisclosed relationships between the arbitrator’s law firm and defendants’ alleged subsidiaries. ABN then moved in the California district court to vacate the Final Award due to the alleged incomplete disclosures. In June 2017, the district court granted the motion to vacate, finding that the arbitrator breached her duties of disclosure and investigation, and that the nondisclosures created a reasonable impression of bias, and that ABN did not waive its right to challenge the arbitrator. Defendants appealed to the Ninth Circuit.

The Ninth Circuit overturned the California district court’s decision, noting that “[g]iven the arbitrator’s disclosure that AIG was a former client of her firm, ABN had some duty to inquire about the nature of that relationship.” But the Ninth Circuit further noted that “ABN asked no questions and proceeded with the hearing.” According to the Court, “the laborious efforts required to discover the undisclosed relationships give credence to the reasonableness of the arbitrator’s investigation.” Finally, the Court held that “the undisclosed relationships, considered in the light of those the arbitrator did disclose, are insufficient to create a ‘[r]easonable impression of partiality.’” Thus, the Ninth Circuit reversed the California district court’s decision and remanded the case to the district court with instructions to enter judgment confirming the arbitration award.

American Brokerage Network and Cung Thai v. American General Life Insurance Co., No. 3:16-cv-06952 (9th Cir. Nov. 30, 2018).

This post written by Jeanne Kohler.

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Court Confirms Arbitration Award Rejecting Insurers’ Allocation of Losses to Multiple Policies for Reinsurance Purposes

January 2, 2019 by Carlton Fields

A federal district court in Massachusetts has confirmed and entered as a judgment of the court an arbitration award in favor of Certain Underwriters at Lloyd’s, London against Century Indemnity Company regarding reinsurance coverage they provided for a set of claims against Boy Scouts of America (BSA) for sexual molestation by individuals associated with BSA in the 1960s and 1970s.

Century had provided insurance to BSA under 8 policies between 1963 and 1971, and the Underwriters had agreed to reinsure those policies. In the late 1990s, BSA submitted dozens of claims regarding BSA’s alleged liability for sexual molestation claims, and Century settled these claims. The dispute with the reinsurer’s at Lloyd’s of London arose out of the manner in which Century, per an agreement with BSA, chose to allocate these settlement payments among the BSA policies, such that all payments to a particular claimant were allocated to the policy of the first year of the alleged conduct against that individual. Century also combined all claims from a particular year into a single loss for reinsurance purposes.
The Underwriters refused to pay Century’s reinsurance claim, arguing that the manner of allocating losses to the first year of the alleged conduct “was counterfactual” and the agreement with BSA to do it that way “was not the product of a reasonable and business-like investigation.” Century took the dispute to arbitration, and the panel issued an award in the Underwriters’ favor.

The Underwriters then moved to have the court confirm the award and enter it as a judgment of the court. Century did not oppose this motion, which the court then granted without comment.

Certain Underwriters at Lloyd’s, London v. Century Indemnity Company, Civil Action No. 18-12041 (D. Mass. Nov. 16, 2018)

California Appellate Court Holds Parties Cannot Contract Around Service Requirements of Hague Service Convention

December 19, 2018 by John Pitblado

Changzhou Sinotype Technology Co., Ltd. (“Changzhou”) is a Chinese company that develops fonts. Changzhou and Los Angeles-based investment firm Rockefeller Technology Investments (Asia) VII (“Rockefeller”), entertained the idea of a joint venture to create a Silicon Valley-based company to develop and market international fonts.

The parties signed what Rockefeller characterized as a memorandum of understanding, and which Rockefeller believed was binding. However, Changzhou characterized the document as a “bei wang lu,” a type of memorandum understood in Chinese to merely record the current state of negotiations, and that the signing of a “bei wang lu” “does not create a binding contract.

After negotiations ultimately broke off, Rockefeller initiated an arbitration, citing the memorandum’s arbitration provision. Changzhou did not respond to the demand for arbitration, nor did it appear or participate in the arbitration Rockefeller filed in California. The arbitrator entered a default award in excess of $414 million against Changzhou.

Rockefeller brought an action to confirm the award in California state court. It effected service on Changzhou in China via mail, as had been “agreed” in the memorandum. Changzhou did not appear in the action, and judgment confirming the award entered in Rockefeller’s favor.

Approximately 15 months later, Changzhou moved to set aside the judgment on the grounds that it had never entered into a binding contract with Rockefeller, had not agreed to contractual arbitration, and had not been served with the summons and petition to confirm the arbitration award in the manner required by the Convention on the Service Abroad of Judicial and Extrajudicial Documents in Civil or Commercial Matters (the “Hague Service Convention”).

The court denied Changzhou’s petition to vacate, finding service was effective in the action to confirm the award, even though it had not complied with the Hague Service Convention, as the parties were free to contract around the Convention, and had done so.

Changzhou appealed and a California intermediate appellate court reversed, finding that parties may not ‘contract around’ the Hague Service Convention. “[T]he Hague Service Convention does not permit Chinese citizens to be served by mail, nor does it allow parties to set their own terms of service by contract. [Changzhou] therefore was never validly served with process.”

The Appellate Court also did not credit the argument that Changzhou waited too long to challenge service, finding that a lack of personal jurisdiction is not curable, and that “[t]here is a wealth of California authority for the proposition that a void judgment is vulnerable to direct or collateral attack ‘at any time.’” (emphasis added).

Rockefeller Technology Investments (Asia) VII v. Changzhou Sinotype Technology Co., Ltd., No. B272170 (Cal. Ct. App. June 1, 2018)

This post written by John Pitblado.

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California District Court Denies Motion to Vacate FINRA Arbitration Award

December 18, 2018 by John Pitblado

A California district court recently denied a motion to vacate an arbitration award which had denied a plaintiff’s claims brought before the Financial Industry Regulatory Authority (“FINRA”).

The background of this case can be found here. In sum, in 2005, plaintiff Winnie Fang delivered certificates for shares of stock in Peet’s Coffee & Tea, Inc. (“Peet’s”) to Merrill Lynch that her deceased husband had previously held. In 2010, Fang was notified that the California Controller had received the Peet’s stock as unclaimed property. Fang then commenced an action against Peet’s and others in California state court for allegedly mishandling her investment, which was resolved by a “partial settlement.” Later, in 2015, Fang brought a FINRA arbitration against Merrill Lynch for breach of fiduciary duties and breach of contract. In February 2018, a FINRA arbitration panel issued an award, denying Fang’s claims in their entirety, and ordered her to pay $6,000 in expert witness fees incurred by Merrill Lynch. In the award, the panel detailed the prior proceedings. Among others, the panel noted that a hearing had been scheduled in October 2016, but that Fang failed to submit pre-hearing materials per an order of the panel. Instead, according to the panel, Fang filed an ex parte motion to continue the hearing on the grounds that Merrill Lynch had not provided certain discovery, and that Fang was planning to file a class action on the same claims, even though Fang had not filed any discovery motion by the deadline in the panel’s scheduling order, and had not filed a class action case. The panel denied Fang’s motion for a continuance. Fang then filed a motion to dismiss her claims without prejudice, and a motion for reconsideration of the denial of the continuance. The panel maintained the October 2016 hearing date, but said that it would take up Fang’s motions at the arbitration hearing. However, just before the hearing, Fang filed an action in California federal court, with a motion for a temporary restraining order to stop the FINRA arbitration for alleged procedural violations. The California district court denied a TRO. Fang then appealed to the Ninth Circuit, which affirmed the district court’s order. While the court proceedings were ongoing, the arbitration also proceeded. Fang and her counsel failed to appear at the October 2016 hearing. Merrill Lynch did appear, and an evidentiary hearing took place under FINRA rules. Merrill Lynch then sent the panel a copy of the Ninth Circuit decision affirming the denial of the TRO, and Fang submitted a “responsive” document that the panel interpreted to be another motion to dismiss without prejudice. The panel then suspended the arbitration until the California district court decided class certification in the case. The California district court, however, had already stayed that case, at the parties’ joint request, to allow for completion of the arbitration. Merrill Lynch then made a motion for the issuance of an award in the arbitration. A hearing took place in January 2018 on that motion and Fang’s new motion to dismiss. At the hearing, Fang’s lawyer said he could not attend the October 2016 hearing because “he had to appear in a matter for the United Nations,” which the panel noted had not been raised in his continuance papers. The panel then denied Fang’s motion to dismiss and issued the February 2018 award. Fang then moved in the California district court to vacate the award. Although she mentioned all four grounds in Section 10(a) of the Federal Arbitration Act (“FAA”) as a basis for overturning the panel’s award, the motion was based mainly on the claims that the award was the product of corruption, fraud and undue means, and exceeded the arbitrators’ authority.

The California district court, in denying the motion to vacate the award, noted that “courts may vacate an arbitrator’s decision ‘only in very unusual circumstances’” and that the party seeking to vacate the award bears a high “burden of establishing that one of the grounds . . . justifies vacating the award.” The court noted that Fang chose not to litigate the arbitration she had voluntarily commenced, and that there was no evidence indicating that the arbitrators were corrupt or partial to Merrill Lynch or that there was an actual bias against her, nor were there any facts that might create a reasonable impression of bias or otherwise indicate “evident corruption.” The court also held that Fang’s argument that the arbitrators exceeded their powers was also unavailing. In this regard, Fang argued that the panel misapplied FINRA rules to proceed with the arbitration. However, the court noted that interpretation of the FINRA rules is up to the arbitrators to decide. The court also found that Fang failed to show that the arbitrators somehow exceeded the bounds of the agreement that empowered them to hear Fang’s arbitration demand, and that Fang did not identify a FINRA rule stating that the arbitration should have been terminated after she expressed a desire to file a class action lawsuit, or any case that supports that proposition. The court noted that Fang was perfectly free to withdraw her claims at any time under FINRA rules, but the consequence would have been a withdrawal with prejudice, “which apparently did not suit Fang’s litigation plans.” Finally, the court held that Fang had also not shown that the arbitrators were “completely irrational” or guilty of “a manifest disregard of law.”

Fang v. Merrill Lynch, Pierce, Fenner & Smith, Inc., No. 16-cv-06071 (N.D. Ca. Nov. 23, 2018).

This post written by Jeanne Kohler.

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Florida Court Finds that Arbitration Agreement Broadening Judicial Review Violates Florida Public Policy

December 10, 2018 by Rob DiUbaldo

In a lawsuit brought by a contractor against a subcontractor and its insurer, Florida’s Fourth District Court of Appeals found a provision in an arbitration agreement allowing for a broad ranging review of any arbitration award to be void as a matter of law and policy.

The subcontractor and insurer moved to compel arbitration under an agreement providing that on review of any award issued pursuant to that agreement, “the court shall be empowered to address on review any failure by the arbitrator(s) to properly apply Florida law to the dispute. To the extent the arbitrator(s) or the court fail to apply the law properly, the Award of the arbitrator(s) is subject to further review through the Florida appellate process.” This is, of course, a much broader judicial review than is normally permitted with respect to arbitration awards, and thus the contractor argued that the provision was void and that the entire arbitration agreement should be discarded.

The trial court granted the motion to compel arbitration, but the appellate court reversed, finding that the subject provision violated public policy as expressed in the Florida Arbitration Code. The Code limits a courts’ ability to vacate an arbitration award to a fairly narrow set of circumstances, such as when an arbitration award is “procured by corruption, fraud, or other undue means,” when there is “evident partiality,” corruption, or misconduct on the part of the arbitrator, or when the arbitrator exceeds the authority provided by the parties’ agreement. The Code also prohibits parties from waiving or agreeing to vary their right to seek judicial confirmation of awards or the grounds for vacating or modifying an arbitration award.
The court found that the Code clearly prohibited expansions of the scope of judicial review of arbitration awards and thus made the contested provision in the arbitration agreement unenforceable. Rather than finding that the arbitration agreement was unenforceable as a whole, however, the court remanded the matter to the trial court to determine whether this provision was severable, such that the arbitration agreement could be enforced with that provision removed.

National Millwork, Inc. v. ANF Group, Inc. and Liberty Mutual Insurance Company, No. 4D18-545 (4th DCA, Sep. 25, 2018)

This post written by Jason Brost.

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