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Arbitration / Court Decisions

ELEVENTH CIRCUIT FINDS NO MANIFEST DISREGARD OF THE LAW AND UPHOLDS ORDER CONFIRMING ARBITRATION AWARD IN LICENSING DISPUTE

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The case involved a dispute between the owner of the Cabbage Patch Kids brand and related intellectual property (“CPK”), and licensee JAKKS Pacific, Inc., which had an exclusive license to use the brand and intellectual property between 2012 and 2014. Prior to the end of the license agreement, CPK selected a new licensee, Wicked Cool Toys, to manufacture and sell Cabbage Patch Kids dolls and products beginning in 2015. To that end, CPK and Wicked Cool Toys entered into a deal memorandum on May 30, 2014 whereby CPK permitted Wicked Cool Toys to immediately begin the process of creating and promoting a new line of dolls. Shortly thereafter, JAKKS asserted that CPK had breached its exclusive license and stopped paying royalties due under the agreement. CPK responded by filing suit in a federal court in Georgia seeking an order compelling arbitration and confirmation of any arbitration award.

At issue during arbitration was the meaning of a provision in the license agreement reserving to CPK the right to “engage, during the 365-day period prior to the termination or expiration of [the agreements], in the negotiation, with potential licensees (including competitors of Licensee), of one or more license agreements granting licenses with respect to” the products covered by JAKKS’s exclusive license, “to become effective upon the expiration or earlier termination of [the agreements].” JAKKS argued that, under that provision, CPK could only “negotiate” with potential licensees in 2014, and was prohibited from actually reaching an agreement with a new licensee or doing anything else to make it possible for a new licensee to actually launch a new line of Cabbage Patch Kids products in 2015. The arbitrator concluded that this provision, particularly the word “negotiate,” was ambiguous in light of the circumstances, and that “it was the intention of the parties” that CPK and Wicked Cool Toys “could do what they did in order to transition into the manufacture and launch in 2015 of a new seasonal line of [Cabbage Patch Kids] products, without the de facto creation of a ‘gap’ of about one year.” The arbitrator therefore awarded CPK the royalties withheld by JAKKS and the court confirmed the award.

On appeal, JAKKS moved to vacate the award and argued under both Georgia law and the FAA that the arbitrator manifestly disregarded the law and exceeded his authority. The Eleventh Circuit disagreed and affirmed the district court’s confirmation of the award. The court found that the arbitrator did not manifestly disregard the law by considering the commercial context of the relevant market when determining whether the license agreement provision allowing CPK to engage in the negotiation of a new license agreement in 2014 was ambiguous. In addition, the court held that because “the subject of the arbitration proceeding was the parties’ dispute about the construction, meaning, or enforceability of certain terms” of the license agreement, the arbitrator did not overstep his authority by deciding the meaning of the provision at issue. The court also rejected JAKKS’ argument that the arbitrator violated the FAA and held that the arbitrator was interpreting, rather than modifying, the relevant provision because it was ambiguous on its face. Original Appalachian Artworks, Inc. v. Jakks Pacific, Inc., Case No. 17-11513 (11th Cir. Nov. 17, 2017).

This post written by Gail Jankowski.
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MAGISTRATE JUDGE RECOMMENDS DENYING APPLICATION FOR $305M REINSURANCE JUDGMENT

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A Magistrate Judge in the U.S. District Court for the Southern District of New York has recommended that a default judgment totaling more than $221 million be entered against the Islamic Republic of Iran and in favor of insurers who paid claims to their insureds for property damage, business interruption and other losses arising out of the terrorist attacks on 9/11. In doing so, however, the magistrate also recommended denying the insurers’ application for an additional $305 million reflecting payments made under reinsurance contracts.

The plaintiff-insurers argued that they were entitled to all amounts they were compelled to expend under applicable policies of insurance and reinsurance resulting from 9/11. The court concluded, however, that the insurers were only entitled to recover under the doctrine of subrogation.  The court explained that subrogation allows an insurer to “stand in the shoes” of its insured for purposes of seeking payment from third-parties whose wrongdoing caused the losses for which the insurer was obligated.

While finding that the insurers were subrogated to over $221 million in damages under direct insurance policies, the court recommended denying their application for over $305 million in losses incurred under reinsurance contracts with primary insurers that paid claims relating to 9/11. Noting that reinsurance contracts operate solely between the reinsurer and the reinsured primary insurer, the court stated that there is no contractual privity between a reinsurer and the policyholder who suffered the initial loss.  Because the damaged policyholders have no rights under the reinsurance contracts at issue, the magistrate judge found that plaintiffs, as reinsurers, have no subrogation rights as to the 9/11-related losses sustained by these policyholders.

In re Terrorist Attacks on September 11, 2001, Case No. 04-cv-05970 (USDC S.D.N.Y. Nov. 27, 2017).

This post written by Alex Silverman.
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NDNY JURY AWARDS $35M PLUS INTEREST FOR AMOUNTS DUE UNDER REINSURANCE CONTRACTS

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Following a jury trial, Utica Mutual Insurance Company was awarded $35 million, plus interest ($29,092,191.78) on its claims against Fireman’s Fund Insurance Company to enforce the terms of the certificates of reinsurance issued by Fireman’s Fund to Utica. The Court, ruling on Utica’s Motion for Judgment on Partial Findings, dismissed Fireman’s Fund’s counterclaims for intentional and negligent misrepresentation. Post-trial motions are to be filed by December 29, 2017.

Utica Mut. Ins. Co. v. Fireman’s Fund Ins. Co., 6:09-CV-0853 (USDC N.D.N.Y. Dec. 15-16, 2017)

This post written by Nora A. Valenza-Frost.

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VIRGINIA SUPREME COURT CONSIDERS TERMS OF ASSUMPTION REINSURANCE TRANSACTION IN DETERMINING OBLIGATIONS OF INSOLVENT INSURER

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A group of Kentucky hospitals sought reimbursement for legal fees incurred in two lawsuits related to the insolvency of their insurer, Reciprocal of America (“ROA”). In the 1970s and 1980s, the hospitals created two trusts to provide the hospitals with workers’ compensation and employers’ liability coverage. In 1997, the trusts were merged into ROA, and ROA agreed to assume the trusts’ business liabilities and to indemnify the trusts and their member insureds, including the hospitals, “in defending [themselves] against any claim Damages arising from or connection with the Damages.”

In 2003, ROA was placed into receivership and was later found insolvent and ordered liquidated. This led to two judicial proceedings in which the hospitals were involved—one that they joined as claimants seeking to have ROA continue to pay worker’s compensation claims that ROA had assumed from the trusts, and one seeking a declaration that the Kentucky Insurance Guaranty Association (KIGA) was obligated to cover the hospitals’ claims that ROA had assumed but could not pay. After both matters were resolved, the hospitals filed claims with ROA’s Special Deputy Receiver for reimbursement of the legal fees and costs incurred in those matters under ROA’s indemnification obligations. The claim was denied, and the case ended up before the Virginia Supreme Court.

The court affirmed the denial of the hospitals’ claim. The court explained that the plain meaning of the phrase “defending against any claim” and the specific contractual definition of “Damages,” together support the characterization of the agreements as an assumption reinsurance transaction in which ROA stepped into the shoes of the trusts. ROA’s indemnity could rise no higher than the pre-merger obligations of the two trusts — for those were the only liabilities that ROA assumed, and thus the only “Damages” for which it was responsible to indemnify the trusts. This contractual definition of “Damages” necessarily excludes any obligation for ROA to indemnify the trusts and their member insureds for the legal fees and costs incurred in the underlying judicial proceedings. The court rejected the hospitals’ argument that ROA’s duty to pay for the expense of defending against claims covered the expense of asserting claims. While it may have been good legal strategy for the hospitals to proactively assert such claims, this did not turn the assertion of claims into the defense of claims covered by ROA’s indemnification agreement. Appalachian Regional Healthcare v. Cunningham, Case No. 161767 (Va. Nov. 22. 2017).

This post written by Jason Brost.

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FRANCHISEES LOSE BID TO VACATE ARBITRATION AWARD ENFORCING NON-COMPETE CLAUSE DESPITE CLAIM THAT ARBITRATOR MANIFESTLY DISREGARDED THE LAW

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A set of former franchisees are prohibited from violating the terms of a non-compete clause with franchisor Wild Bird Centers of America (“WBCA”) for two years after the Fourth Circuit recently upheld the denial of their petition to vacate an arbitration award imposing the injunction. The franchisees had continued to operate a Wild Bird Center store after their ten-year franchise agreement expired and they chose not to renew it. WBCA submitted the dispute to mandatory arbitration, and the arbitrator issued an injunction prohibiting the franchisees from violating the non-compete.

First, the franchisees argued the arbitrator manifestly disregarded the law, exceeded his powers, and failed to issue an award from the essence of the franchise agreement by applying the non-compete clause. The court rejected these claims as merely alleging the arbitrator misinterpreted the agreement. The non-compete clause’s language suggesting application “after termination” in contrast to a later section’s language suggesting application “[i]n the event of termination or expiration” of the franchise agreement was “at worst ambiguous” and “at best, support[ed] WBCA’s position.” Therefore, the arbitrator’s application “arguably” construed the contract sufficient to warrant confirmation.

Second, the franchisees claimed that, even if the non-compete clause applied, the arbitrator erred by extending the clause’s terms to two years because such an interpretation did not draw from the essence of the agreement. The court rejected these claims based on another case which held it reasonable to enforce compliance with a non-compete to include the total time which the aggrieved party was entitled to under the non-compete clause. Further, the franchisees failed to show the arbitrator acted from personal notions of right and wrong or disregarded the correct legal standards. Specifically, the court noted the limited nature of the injunction term and lack of demonstrated prejudice from the extension because the franchisees had yet to stop operating the competing business. The court affirmed the district court’s order confirming the award. Frye v. Wild Bird Ctrs. of Am., Inc., Case No. 17-1346 (4th Cir. Nov. 27, 2017).

This post written by Thaddeus Ewald .

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