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Discovery

District of Illinois Directs Insurer to Supplement Record to Support Privilege Based on “Common Interest Doctrine”

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In Ansur America Insurance Co. v. Borland, the U.S. District Court for the Southern District of Illinois addressed a discovery dispute involving claims brought by Ansur America Insurance Co. against the law firm Ansur retained to defend an insured in an underlying product liability action. Ansur alleged that the defendants failed to defend the case in a reasonable manner, which resulted in Ansur having to settle the case at a substantially increased amount. The defendants sought the production of several categories of documents from Ansur regarding its handling of the underlying claim. Ansur withheld or redacted numerous documents asserting the attorney-client and work product privileges. The defendants filed a motion to compel production disputing Ansur’s privilege assertions.

The court first addressed whether certain claims department and corporate officers listed on Ansur’s privilege log were control group members, which would support the application of the privileges to their communications. The court found Ansur established that some of the individuals were in fact members of the control group and that their communications were privileged. With regard to the other individuals who were not within the control group, the court directed Ansur to produce their communications.

The court then addressed the defendants’ arguments that Ansur should be required to produce documents Ansur shared with its reinsurers regarding the underlying product liability claim. Ansur opposed production, contending the common interest doctrine provides a basis for withholding the production of the reinsurance-related documents at issue. The common interest doctrine “extends a preexisting privilege to communications made in the presence of third parties for the purpose of coordinating a defense strategy or pooling information for common legal purpose.” Ansur argued the doctrine applied because it “shared an identical interest with its reinsurers and therefore, the privilege was not lost by their sharing of documents.” The court concluded that, based on the motion papers, it was unable to determine whether the common interest doctrine was applicable. The court noted it must first examine the communications at issue to determine whether the underlying privileges exist. Recognizing Ansur and its reinsurers do share a common legal interest, and that the common interest doctrine could apply to certain communications and documents, the court directed Ansur to review the documents and determine if they were “made in connection with the provision of legal services and was not just discussing the availability of reinsurance,” after which the court would conduct an in camera review of the documents.

Ansur America Insurance Co. v. Borland, No. 3:21-cv-00059 (S.D. Ill. Oct. 23, 2023).

Schwab Wins Battle Over Confirmation of FINRA Arbitration Award Predicated on Alleged Discovery Abuses

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Charles Schwab & Co. successfully petitioned the Southern District of New York for confirmation of a FINRA arbitration award against one of its account holders, fending off challenges predicated on Schwab’s alleged discovery abuses in the process.

The Evan K. Halperin Revocable Living Trust initiated arbitration against Schwab through FINRA’s dispute resolution office. The trust alleged that certain security features of the schwab.com trading platform caused the trust to be logged out of its schwab.com account without explanation while attempting to execute various options trades. The trust alleged that these unexplained interruptions in service caused approximately $1.5 million in losses for which Schwab was liable. The “key dispute” in the arbitration was whether the trust was logged out due to certain malfunctions or security features internal to schwab.com or whether it occurred due to the computer and systems used by the trust.

The discovery process during the arbitration proceeding was highly contentious. The trust repeatedly filed motions alleging that Schwab was engaging in discovery abuses and refusing to produce certain materials that it alleged were key to its case, chiefly in the form of certain electronically stored information (ESI) that Schwab purportedly maintained related to a “fraud detection system.” Schwab repeatedly denied that it was withholding discovery, going so far as to file a declaration from its director of client authentication stating that no such “fraud detection system” existed. In addition, Schwab produced substantial amounts of other ESI related to a user’s activity and log-on/log-off records. The FINRA arbitration panel ruled in Schwab’s favor and, pursuant to the parties’ arbitration agreement, ordered the trust to pay Schwab’s attorneys’ fees and costs totaling $142,750.

The trust petitioned the district court for vacatur based on its view that the arbitrators had exhibited “evident partiality or corruption” or had engaged in misconduct. Its arguments were principally based on the FINRA panel’s refusal to compel Schwab to produce the ESI that the trust alleged pertained to the fraud detection system maintained by Schwab.

The court found that the FINRA panel did not refuse to hear evidence by not compelling Schwab to produce the ESI sought by the trust, information that did not exist per Schwab’s representation in a declaration executed under penalty of perjury. The court noted that “[t]he Trust provides no evidence beyond the Panel’s denial of several of its motions and Schwab’s ultimate success in the Arbitration to support its claim of the Panel’s ‘evident partiality’ in favor of Schwab.” The court stated that “bias” of an arbitration panel is “not even established by showing that an arbitrator consistently agrees with the arguments of one side and repeatedly finds in their favor. … Fundamental fairness does not mean that a party must win a minimum percentage of motions.”

The trust’s “dissatisfaction with the Panel’s rulings and the Award” did not render the arbitration fundamentally unfair. The court denied the trust’s petition for vacatur and granted Schwab’s cross-petition for confirmation, including the award of fees and costs, and awarded Schwab prejudgment interest at the rate of 9% per annum, based on the presumption in favor of the award of prejudgment interest on a motion to confirm an arbitration award.

Evan K. Halperin Revocable Living Trust v. Charles Schwab & Co., No. 1:21-cv-08098 (S.D.N.Y. Sept. 19, 2022).

District Court Orders Limited Trial to Address Party’s Authority to Sign Arbitration Agreement

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Relying on the Federal Arbitration Act and recognizing that “this case presents one of the rare instances in which a defendant opposing arbitration survives the initial stage of an FAA proceeding,” the U.S. District Court for the Eastern District of Kentucky denied the defendant’s motion to dismiss the plaintiff’s action to compel arbitration and ordered the matter to proceed to trial on the limited issues concerning the validity and enforceability of the arbitration agreement.

In August 2010, Opal Wells executed an unlimited power of attorney providing her son Leonard Wells as her attorney-in-fact and agent. Opal was admitted to the Boyd Nursing and Rehabilitation Center in 2013. In 2019, when new owners took over Boyd, they took steps to obtain signatures on paperwork regarding Opal, which included an arbitration agreement. The arbitration agreement was part of a larger document but had its own signature block, which Leonard signed as his mother’s “responsible party.” Opal passed away in September 2020 and Leonard filed a state court action on behalf of her estate and wrongful death beneficiaries. Boyd then filed an action in the district court to compel arbitration of the state court claims, asserting that the power of attorney “provided Leonard with the authority to sign the Arbitration Agreement on Opal’s behalf.” Leonard filed a motion to dismiss Boyd’s action on several grounds, including lack of subject matter jurisdiction, failure to join an indispensable party, and the Colorado River abstention doctrine. The district court rejected each of those arguments. Leonard also raised arguments regarding the validity and enforceability of the arbitration agreement, asserting that the arbitration agreement was unconscionable because it was “part of a mass-produced, boiler-plate, pre-printed document” and that “an obviously gross disparity of bargaining power” supports a finding of unconscionability. The court rejected those arguments as well, noting that the court has “previously found that nursing home arbitration agreements with similar characteristics fall short of the high bar for procedural unconscionability despite their ‘boilerplate’ language” and that the claim of unequal bargaining power was unsupported.

Finally, Leonard argued that the authority he maintained as Opal’s power of attorney expired when she became incapacitated, rendering him incapable of signing the arbitration agreement on her behalf. With regard to this issue, the court concluded that “the making of the agreement is in issue” such that “this matter must proceed to trial” on limited issues regarding whether “Opal was incapacitated prior to the signing of the Arbitration Agreement” and, if necessary, “whether Leonard lacked actual knowledge of Opal’s incapacitation such that he could in good faith validly bind her and her successors in interest.” The court noted that the “Sixth Circuit has stated that ‘parties may seek targeted discovery on … disputed contract-formation questions’ under the FAA, provided that ‘any discovery must comport with § 4, which calls for a summary trial — not death by discovery.’” The court ordered the matter to proceed to trial on the limited issues addressed in the opinion and permitted limited discovery on the triable issues.

Boyd Nursing & Rehabilitation, LLC v. Wells, No. 0:22-cv-00011 (E.D. Ky. Aug. 30, 2022).

Court Grants Nigeria’s Second § 1782 Application for Discovery in Foreign Proceeding in Dispute Over $10B Arbitration Award Related to Gas Supply Agreement

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The U.S. District Court for the Southern District of New York granted the 28 U.S.C. § 1782 application of the Federal Republic of Nigeria to issue subpoenas on four U.S. entities and two individuals, the respondents, in aid of an upcoming fraud trial against Process and Industrial Developments Ltd. (P&ID) before the English High Court of Justice in London, England. In that proceeding, Nigeria seeks to set aside a $10 billion arbitral award, which arose from a gas supply and processing agreement between P&ID and Nigeria that Nigeria claims was fraudulently procured. According to Nigeria, P&ID is a “shell entity whose only asset” is the arbitration award. Nigeria sought to issue a subpoena to each respondent concerning the acquisition of P&ID, financial records, P&ID’s business operations relating to the agreement and the arbitral award, and other issues.

Under section 1782(a), the “district court in which a person resides or is found may order him to give his testimony or statement or to produce a document or other thing for use in a proceeding in a foreign or international tribunal.” “The order may be made … upon the application of any interested person and may direct that the testimony or statement be given, or the document or other thing be produced, before a person appointed by the court.”

The court found that it had jurisdiction to grant an application under section 1782 because the respondents reside or are found within the Southern District of New York, the discovery is for use in the proceeding before a foreign tribunal, and the application was made by an interested person.

The court also determined that Nigeria met the Supreme Court’s four-factor test in exercising its discretion to grant the application (the Intel factors): (1) whether the person from whom the discovery is sought is a participant in the foreign proceeding (they are not); (2) the nature of the foreign tribunal, the character of the proceedings underway abroad, and the receptivity of the foreign government or the court or agency abroad to U.S. federal-court judicial assistance (English courts are receptive to section 1782 assistance); (3) whether the section 1782 request conceals an attempt to circumvent foreign proof-gathering restrictions or other policies of a foreign country or the United States (it did not); and (4) whether the section 1782 application contains unduly intrusive or burdensome discovery requests (it did not).

Regarding the fourth Intel factor, the court rejected the respondents’ argument that, because Nigeria previously filed a different section 1782 application arising out of a separate criminal case, seeking similar discovery from the same respondents, Nigeria should not be permitted to proceed simultaneously on the two section 1782 applications. The court held that there was no legal basis for the respondents’ contention that successive section 1782 applications related to two different foreign proceedings should be prohibited.

In re Petition of Federal Republic of Nigeria, No. 1:21-mc-00007 (S.D.N.Y. Sept. 14, 2022).

Third Circuit Reverses Order Confirming Arbitration Award, Concluding Award Was Procured by Fraud

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Recognizing that it’s “a steep climb to vacate an arbitration award” and that “[c]ourts will disturb an arbitration award only in limited circumstances,” the Third Circuit Court of Appeals reversed a district court’s order confirming an arbitration award, finding that the award was procured by fraud.

The parties, Todd France and Jason Bernstein, are “agents” registered with the National Football League Players Association (NFLPA). Bernstein’s clients included Kenny Golladay, a well-known NFL wide receiver. Golladay terminated his relationship with Bernstein and his company, Clarity Sports International, on January 29, 2019. Three days before the termination, Golladay participated in an autograph signing event in Chicago that Bernstein did not arrange, even though the event was the type of opportunity that Bernstein and Clarity were hired to do for Golladay. Once Golladay’s agreement with Bernstein was terminated, he signed agreements with France. Bernstein then filed a written grievance against France pursuant to the dispute resolution process set forth in the NFLPA regulations. Bernstein alleged that France arranged the autograph signing event for Golladay and induced him to terminate his relationship with Bernstein. The dispute was referred to arbitration pursuant to the NFLPA regulations.

Bernstein sought discovery from France in the arbitration proceeding. France produced some discovery but denied having any documents responsive to key requests about Golladay’s appearance at the autograph signing event. Bernstein also obtained authorization from the arbitrator to issue subpoenas to nonparties for relevant documents; however, Bernstein received no information in response to the subpoenas and did not enforce the subpoenas in federal court. During the hearing, France repeatedly denied that he had anything to do with the autograph signing event, and the arbitrator ruled in favor of France concluding that Bernstein had not met his burden of proving that France had violated NFLPA regulations. France then filed a petition and motion to confirm the arbitrator’s award in the U.S. District Court for the Eastern District of Virginia. Bernstein cross-moved to vacate the award, arguing that France had procured the arbitration award by fraud, relying on evidence that came to light after the arbitration in another lawsuit showing that France was indeed involved in arranging the autograph signing event.

The matter was transferred to the U.S. District Court for the Middle District of Pennsylvania, which granted France’s motion to confirm the award and denied Bernstein’s motion to vacate it. The district court noted the narrow circumstances in which a court may vacate an arbitration award, and then concluded that Bernstein had not offered a satisfactory reason for why evidence of France’s involvement in the signing event was not discovered before or during the arbitration hearing. The district court specifically noted that Bernstein had not sought judicial enforcement of the discovery subpoenas he had issued pursuant to 9 U.S.C. § 7, which the court saw as a lack of diligence further supporting its decision to deny the motion to vacate the award.

Observing that the case was “like something out of the film Jerry Maguire,” the Third Circuit noted that a party making a claim like Bernstein — i.e., that the arbitration award was procured by fraud because of non-production of responsive documents and false testimony — must make a three-part showing: “first, that there was a fraud in the arbitration, which must be proven with clear and convincing evidence; second, that the fraud was not discoverable through reasonable diligence before or during the arbitration; and third, that the fraud was materially related to an issue in the arbitration.” The court closely examined all three factors and concluded that Bernstein had established that there was fraud in the arbitration that was not discoverable through reasonable diligence and that the fraud was material to the case. The court ruled in favor of Bernstein, reversed the district court’s decision, and remanded the case for entry of an order vacating the arbitration award.

France v. Bernstein, No. 20-3425 (3d Cir. Aug. 9, 2022).