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Second Circuit Holds That Summons Is Not Required When Seeking Confirmation of Foreign Arbitral Award Against Foreign Instrumentalities

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The Second Circuit Court of Appeals recently held that a summons is not required to initiate proceedings to compel a foreign arbitration award against a foreign instrumentality. The court also confirmed the arbitration award at issue but vacated the district court’s award of additional fees because the losing party’s arguments did not amount to bad faith or vexatious arguments.

CVG Ferrominera Orinoco, C.A. is a Venezuelan company that produces and exports iron ore. Commodities & Minerals Enterprise Ltd. (CME) is a British Virgin Islands company that trades commodities and minerals, including iron ore. CME and Ferrominera executed a contract for a ship named the General Piar to transport Ferrominera-owned iron ore to an offshore transfer station where CME would then ship it onward. The contract specified U.S. law as the choice of law and contained a broad arbitration clause.

CME commenced arbitration for unpaid invoices, lost profits, and attorneys’ fees. The arbitration panel rejected jurisdictional, fraud/corruption, and other defenses from Ferrominera and entered an award in favor of CME. CME moved to confirm that award. The U.S. District Court for the Southern District of New York confirmed the award and awarded costs and fees.

The Second Circuit affirmed, except with respect to the district court’s fee award.

First, the Second Circuit rejected Ferrominera’s argument that the district court lacked personal jurisdiction because CME had not served a summons when it initiated its action to confirm. The Second Circuit held that “a summons is not required to properly effect service when seeking confirmation of a foreign arbitral award against a foreign instrumentality” because the Federal Arbitration Act does not require a summons and the FAA’s references to the Foreign Sovereign Immunities Act, which Ferrominera relied on, were only to fill gaps in the FAA regarding the manner of serving documents.

Second, the Second Circuit disagreed with Ferrominera’s arguments that the agreement was invalid under Venezuelan law because the proper Venezuelan officials had not signed off on it, that, even if valid, the arbitrators had exceeded their authority by refusing to allow Ferrominera to allocate payments between various agreements with CME as it wished, and that the award violated U.S. public policy. The agreement contained a U.S. choice-of-law provision, which rendered Ferrominera’s reliance on Venezuelan law regarding who must approve agreements meritless. The allocation argument was merely a damages argument, and damages were for the arbitrators to determine. Ferrominera’s public policy argument meanwhile relied on a claim that the agreement was obtained through “corruption,” but that did not challenge the award, and the FAA’s narrow public policy exception concerned whether the award offended public policy.

Third, the Second Circuit agreed with Ferrominera that the district court erred by awarding further fees. Although the district court had inherent authority to award fees for bad faith, vexatious, etc., arguments, Ferrominera’s arguments did not meet that standard. The summons issue, for example, was an issue of first impression for the Second Circuit that Ferrominera had prevailed on in other courts. The Second Circuit vacated the additional fees.

Commodities & Minerals Enterprise Ltd. v. CVG Ferrominera Orinoco, C.A., No. 20-4248 (2d Cir. Oct. 3, 2022).

Court Confirms Almost $23M Arbitration Award

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A court recently confirmed an arbitration award totaling nearly $23 million after rejecting the losing party’s arguments that the arbitrator exceeded his authority, improperly calculated damages, and violated an American Arbitration Association rule.

AIDS Healthcare Foundation (AHF) operated a number of pharmacies that supported AIDS patients. AHF contracted with Caremark LLC and Caremark PCS LLC for certain pharmacy benefit management services. Pursuant to the agreement, Caremark took Medicare Part D monies earmarked to pay for prescriptions for people of limited financial means to pay that money to Medicare Part D plan sponsors. AHF claimed that the manner in which Caremark did that violated the agreement between AHF and Caremark. An arbitrator agreed and awarded AHF $22.6 million in damages plus approximately $366,000 in costs and fees.

Caremark moved to vacate the award. The U.S. District Court for the District of Arizona rejected Caremark’s claims and added additional costs, fees, and interest to the award.

Caremark first claimed that the arbitrator exceeded his authority by adjudicating the claims of 51 separate pharmacies collectively. According to Caremark, that violated the arbitration agreement’s provision that “[a]ll disputes are subject to arbitration on an individual basis, not on a class or representative basis, or through any form of consolidated proceedings.” The court concluded that the arbitrator’s interpretation of the anti-class action provision as not being violated by consolidating claims from separate AHF pharmacies was not “completely irrational” or in “manifest disregard of the law” and further noted that the agreement permitted consolidation of claims from any contracts and agreements from participation in Caremark’s networks.

The court similarly rejected Caremark’s argument that the arbitrator’s damages computation was irrational. It agreed with the arbitrator that Caremark first raised that claim in a motion to recalculate the damages and that the argument should have been raised earlier.

Finally, the court found that the arbitrator acted properly in increasing the damages after the deadline set by Rule 50 of the AAA rules had passed. The arbitrator concluded that Rule 50 did not apply because the award he amended was an interim award. The court found that the arbitrator’s interpretation of Rule 50 was plausible and therefore acceptable.

The court also awarded costs, fees, and interest related to Caremark’s motion to vacate.

Caremark LLC v. AIDS Healthcare Foundation, No. 2:21-cv-01913 (D. Ariz. Sept. 15, 2022).

Third Circuit Reverses Judgment Enjoining Arbitration Proceeding, Remands to District Court for Further Consideration

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In Field Intelligence Inc. v. Xylem Dewatering Solutions Inc., the Third Circuit Court of Appeals agreed with the district court’s determination that the court, not the arbitrator, was required to determine whether the parties’ first agreement, which included an arbitration agreement, was superseded by a second agreement, which did not contain an arbitration provision. However, the court then reversed the district court’s judgment, which determined that the agreement containing the arbitration provision had been superseded, and remanded the matter for further consideration of the defendant’s motion to stay the federal court litigation while arbitration is pending.

Defendant Xylem Dewatering Solutions manufactures and sells large-capacity water pumps. Xylem entered into two agreements with plaintiff Field Intelligence Inc. to develop a solution to allow Xylem customers to better monitor the water pumps. The first agreement, in 2013, was a “non-disclosure agreement” that included an arbitration provision requiring that any “dispute, controversy or claim arising out of or in connection with this Agreement, or the breach, termination or invalidity thereof,” be “settled by arbitration in accordance with the Rules of the American Arbitration Association.” The second agreement, in 2017, was a “software subscription service agreement” and did not include an arbitration provision, instead requiring any “action under or concerning” that agreement to be litigated in a state or federal court in New Jersey. A dispute arose between the parties and Field Intelligence filed an action in the district court for breach of the 2017 agreement. After engaging in some early discovery, Xylem then filed an arbitration demand with the AAA seeking various relief, including a determination that it did not breach the 2013 agreement. Xylem moved to stay Field Intelligence’s federal court action pending resolution of the arbitration. Field Intelligence opposed the motion to stay and cross-moved to enjoin the arbitration. The district court held it had the authority, rather than the arbitrator, to decide whether the second contract (without an arbitration provision) superseded the first, and then found the later agreement did in fact supersede the first agreement. The district court enjoined the arbitration that Xylem had filed and denied as moot Xylem’s motion to stay the federal litigation.

The Third Circuit agreed that the district court was authorized to determine whether the second contract superseded the first, holding that “the parties’ supersession dispute is for a court, not an arbitrator, to decide” and “before sending parties to an arbitrator, a court must decide whether they agreed to resolve their dispute in that forum.” However, the Third Circuit found that since there was no indication in the 2017 agreement that the parties intended to replace the 2013 agreement, “the 2013 contract’s arbitration provision is still in effect, and Xylem was entitled to arbitrate claims tied to that agreement.” The court further held that “Xylem did not waive its right to pursue arbitration for claims arising under the 2013 contract merely by engaging in this litigation.” The court then reversed the district court’s judgment enjoining the arbitration proceeding, vacated the judgment denying Xylem’s motion to stay the federal litigation while arbitration is pending, and remanded that issue to the district court “to consider the merits of that motion in light of our opinion.”

Field Intelligence Inc. v. Xylem Dewatering Solutions, Inc., No. 21-2087 (3d Cir. Sept. 13, 2022).

Second Circuit Affirms Decision That Insurer Is Entitled to Reinsurance Coverage for an Allocated Portion of Settlement

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In Fireman’s Fund Insurance Co. v. OneBeacon Insurance Co., the Second Circuit Court of Appeals affirmed a district court order granting summary judgment to plaintiff Fireman’s Fund, holding that defendant OneBeacon is obligated under a reinsurance policy’s “follow-the-settlements” clause to provide coverage for a settlement paid by Fireman’s Fund to its insured.

The case involved a reinsurance policy that OneBeacon’s predecessor-in-interest (General Accident) issued to Fireman’s Fund. The policy reinsured one of three excess insurance policies that Fireman’s Fund had issued to its insured, ASARCO, for two policy years in the early 1980s. All three excess policies issued by Fireman’s Fund to ASARCO provided coverage for $20 million in losses “but applied to varying policy years and had different attachment points (that is, points at which excess coverage was triggered)”. Faced with significant potential liability from asbestos-related claims, ASARCO sought coverage for those claims from Fireman’s Fund under all of the excess policies. After 10 years of litigation, Fireman’s Fund agreed to pay ASARCO $35 million in settlement of ASARCO’s claims under the three excess policies. To pursue reinsurance for the settlement it paid to ASARCO, Fireman’s Fund allocated the settlement amount among the three excess policies “in proportion to its calculation of the policies’ likely respective exposures,” which resulted in an allocation of $8.1 million to the OneBeacon policy. Fireman’s Fund then sought reinsurance coverage from OneBeacon for a percentage of that amount. The OneBeacon reinsurance policy included a “follow-the-settlements” clause, which provided “[a]ll claims involving this reinsurance, when settled by [Fireman’s Fund], shall be binding on the Reinsurer, who shall be bound to pay its proportion of such settlements.” However, OneBeacon denied the claim, asserting that the underlying policies were not exhausted and “Fireman’s Fund should have allocated the entire settlement amount to the other two excess policies.” The district court granted summary judgment in favor of Fireman’s Fund, concluding that OneBeacon had no basis for challenging Fireman Fund’s allocation of a portion of the settlement amount to the third policy.

The Second Circuit affirmed the district court’s entry of summary judgment, holding that the third policy’s terms “did not unambiguously require exhaustion of the underlying insurance policies through actual payment of the policy limits by the underlying insurers,” and “the underlying policies could be exhausted by a below-limits settlement and the third policy would cover so long as the policyholder’s total covered losses exceeded the policy’s attachment point.” The court then pointed out because ASARCO’s losses exceeded the third policy’s attachment point, “Fireman’s Fund could reasonably allocate a portion of the settlement to that policy.” Finally, the court rejected OneBeacon’s argument that the reinsurance policy required payment of policy limits in full by the underlying primary and excess insurers before any reinsurance coverage would attach, concluding that “[b]ecause Fireman Fund’s allocation was not contrary to the terms of any of the applicable policies, the reinsurance policy’s follow-the-settlements clause binds OneBeacon to honor the allocation.”

Fireman’s Fund Insurance Co. v. OneBeacon Insurance Co., No. 20-4282 (2d Cir. Sept. 15, 2022).

Denial of Motion to Compel Arbitration Vacated by Second Circuit Due to Insufficient Record Evidence of Presentment of “Scrollwrap Agreement” to Users

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Nicole Zachman brought a putative class action against the Hudson Valley Federal Credit Union (HVCU) for breach of contract and violation of the federal Electronic Fund Transfer Act, among other claims, based on HVCU’s alleged practice of collecting overdraft or insufficient funds fees on accounts that were not actually overdrawn. HVCU moved to compel arbitration based on an arbitration provision included in the modified account agreement Zachman signed in 2019 when she opened her online account with HVCU. Zachman countered that the account agreement she signed in 2012, when she originally opened her account with HVCU, did not contain an arbitration agreement and further that she was not bound by the arbitration provision added in 2019 because she was never provided notice of its addition.

In response, HVCU argued that Zachman was on “inquiry notice” of the arbitration provision’s inclusion in the 2019 modified account agreement. Under New York law, an offeree who does not have actual notice of contract terms is nevertheless bound by those terms if he or she is on inquiry notice of them and assents to them through conduct. “In determining whether an offeree is on inquiry notice of contract terms, New York courts look to whether the term was obvious and whether it was called to the offeree’s attention. This often turns on whether the contract terms were presented to the offeree in a clear and conspicuous way.” When applied to web-based contracts, the courts “look to the design and content of the relevant interface” to determine if the contract terms were presented to the offeree in a way that would put him or her on inquiry notice of the terms.

Here, the Second Circuit determined that the record was insufficiently developed to permit a determination as to whether the presentment of the arbitration provision to users like Zachman was sufficiently “clear and conspicuous” to put her and other users on inquiry notice. The record contained evidence that the modified account agreement containing the arbitration provision was published on the HVCU website. HVCU customers could access the agreement by searching the HVCU website using its built-in search bar or clicking through the website’s “resources” tab to the “account disclosures” webpage. Users could also obtain a hard copy of the agreement by requesting it be mailed to them or by visiting a brick-and-mortar branch. However, HVCU did not post a notice of the added provisions in its quarterly newsletters or in members’ electronic statements, nor did it provide notice in any other fashion, such as by posting a “banner” notification on its webpage.

When HVCU established its new online banking system in 2019, it required users to first register their accounts. To register, users had to click through various “clickwrap” or “scrollwrap” agreements, including an “internet banking agreement.” The internet banking agreement incorporated the modified account agreement and provided links to it. The modified account agreement included the mandatory arbitration provision at issue.

The district court ruled that HVCU failed to demonstrate that Zachman’s registration for online banking put her on inquiry notice of the arbitration provisions. The court found that HVCU “provides no visual aid or description of any layout or design of the webpages that a user sees when registering for online banking services.” HVCU provided a copy of the internet banking agreement “but did not provide screenshots of the webpage(s) presenting the Internet Banking Agreement to online banking registrants.” Reviewing the copy of the internet banking agreement that had been provided, the court found that the relevant hyperlink and language “appear to be buried” in the agreement and, therefore, that HVCU had failed to establish Zachman was on inquiry notice. As a result, it denied the motion to compel.

The Second Circuit, however, vacated and remanded for further proceedings. The appellate court noted that HVCU did not submit any evidence of how the internet banking agreement was presented to users. “As a result, the district court could not resolve whether Zachman was on inquiry notice because, as it noted, it was unable to assess whether the relevant language and hyperlink are clear and conspicuous.” The district court could not properly engage in the required analysis based on the copy of the internet banking agreement in the record; rather, it was necessary to know “the design and content of the webpage and how the terms were presented.” Because no such evidence was presented by either party, the Second Circuit vacated and remanded for further proceedings to develop the record on this issue.

Zachman v. Hudson Valley Federal Credit Union, No. 21-999 (2d Cir. Sept. 14, 2022).