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Pennsylvania Federal Court Transfers Suit Against Applied Underwriters Per Forum-Selection Clause in Unfiled Reinsurance Agreement

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The Eastern District of Pennsylvania has transferred a lawsuit filed against Applied Underwriters Inc. and its subsidiaries to the District of Nebraska. The dispute involved a workers’ compensation insurance program issued by an Applied Underwriters subsidiary to Coyle Trucking Inc. Coyle alleged that the defendant companies misled it into believing that it had purchased a guaranteed cost policy when it had actually been sold a retrospective rating plan.

As part of the scheme, Coyle alleged that Applied’s subsidiary had “intentionally circumvented” Pennsylvania supervisory regulations by filing a guaranteed cost policy with the Pennsylvania insurance commissioner but then using two unfiled agreements to effectively convert the policy into a retrospective rating plan. According to Coyle, these unfiled agreements were a reinsurance treaty between one Applied subsidiary and another, and a reinsurance participation agreement. The agreement, which Coyle had entered into with one of the subsidiaries, included a forum-selection clause that required any dispute relating to the agreement to be brought in the District of Nebraska.

Coyle argued that the forum-selection clause was void because it was contained in an agreement pertaining to an insurance policy, and Pennsylvania law required such agreements to be filed and approved. Although the court noted that it “appears the [reinsurance participation agreement] should have been filed,” Coyle cited no Pennsylvania case that held that such a failure rendered the contract void. Coye cited several California cases that had so held, but those cases did not bind the Pennsylvania federal court. As such, the court found the forum-selection clause was valid and binding on the parties to the agreement. The court then applied the Third Circuit’s four-step test to determine whether to transfer the case because not all parties to the case were bound by the reinsurance participation agreement and the forum-selection clause. The court concluded that the case should be transferred to the District of Nebraska.

Coyle Trucking, Inc. v. Applied Underwriters, Inc., No. 2:19-cv-03164 (E.D. Pa. May 20, 2022).

Eighth Circuit Finds Contract Formation Challenges to Be Decided by the Court, Affirms Order Denying Motion to Compel Arbitration

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Defendant Litong Capital LLC appealed from an order of the U.S. District Court for the Western District of Missouri. The district court denied Litong’s motion to compel arbitration of claims asserted by GP3 II LLC, having determined there was never a valid contract between them. The Eighth Circuit affirmed.

Litong argued initially that disputes involving the entirety of a contract containing an arbitration clause are to be decided by the arbitrator, not the court, in the first instance, citing Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440 (2006). As the Eighth Circuit explained, however, the Supreme Court in Buckeye distinguished “validity of the contract as a whole” disputes from those involving contract formation. In Buckeye, the Supreme Court noted that its ruling “does not speak to the issue … [of] whether the signor lacked authority to commit the alleged principal.” In a later decision, the Supreme Court reaffirmed that disputes involving contract formation, such as the GP3/Litong dispute, are “generally for courts to decide.”

The Eighth Circuit also agreed with the district court that Litong failed to establish, under Missouri law, that the person who purportedly signed the contract for GP3 had apparent authority to do so. Because Litong already conceded that the purported signor did not have actual authority to bind GP3, the court affirmed the district court order denying Litong’s motion to compel.

GP3 II, LLC v. Litong Capital, LLC, No. 21-1443 (8th Cir. June 3, 2022).

Eighth Circuit Finds “Entire Contract” Challenge Must Be Decided by Arbitrator, Reverses Order Denying Motion to Compel Arbitration

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The Eighth Circuit Court of Appeals reversed and remanded a decision by the U.S. District Court for the District of Minnesota denying defendant SUNZ Insurance Co.’s motion to compel arbitration of crossclaims asserted by Payday Inc. The district court held without further analysis that it was “not convinced” whether Payday’s crossclaims fell within the scope of a valid arbitration clause. On appeal, the Eighth Circuit explained that Payday did not oppose SUNZ’s motion to compel on the ground that the arbitration clause itself was invalid; rather, it contended the contract containing the arbitration clause was superseded by a subsequent contract, thus purportedly voiding the arbitration clause. Citing the U.S. Supreme Court’s decision in Buckeye Check Cashing Inc. v. Cardegna, 546 U.S. 440 (2006), the Eighth Circuit held that a challenge to the validity of an entire contract is to be decided by an arbitrator in the first instance, whereas a challenge to the validity of an arbitration clause is to be decided by the court. Because Payday’s challenge was to the contract as a whole, not to the arbitration clause, the Eighth Circuit found the district court erred in denying SUNZ’s motion to compel arbitration.

Benchmark Insurance Co. v. SUNZ Insurance Co., No. 21-1679 (8th Cir. June 6, 2022).

U.S. Supreme Court: FAA Preempts California Labor Law to Extent It Prevented Enforcement of Individual Arbitration Agreement

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California’s Labor Code Private Attorneys General Act of 2004 (PAGA) authorizes “aggrieved employees” to sue their employer on behalf of themselves “and other current or former employees” to obtain civil penalties that previously could only have been recovered through an action brought by the state of California. As interpreted by California courts, the statute effectively provides a rule of claim joinder, permitting a party to unite multiple claims against a defendant in a single action.

In the case before the court, a former employee filed a PAGA action against Viking River Cruises, alleging it had violated California’s Labor Code by failing to provide her final wages within 72 hours of her termination. Her complaint also asserted a wide array of other Labor Code violations allegedly suffered by other Viking employees, including violations relating to minimum wage payments, overtime, rest periods, and meal periods.

The plaintiff’s employment contract with Viking included an agreement to arbitrate any dispute arising out of her employment and a “class action waiver” providing that, in any arbitral proceeding, the parties could not bring any dispute as a class, collective, or representative PAGA action. The employment agreement also included a severability clause stating that in the event the class action waiver was held to be invalid, any “portion” of the waiver that remained valid would be “enforced in arbitration.”

Relying on the arbitration agreement, Viking moved to compel arbitration of the employee’s “individual” PAGA claim, i.e., the claim she asserted she had suffered, and to dismiss the “class” PAGA claims asserted on behalf of other employees. The trial court denied the motion, and the California Court of Appeal affirmed, holding that categorical waivers of PAGA standing are contrary to state policy and that PAGA claims cannot be severed into arbitrable individual claims and nonarbitrable class claims. Viking petitioned for, and the U.S. Supreme Court granted, certiorari. And the Supreme Court has now reversed.

The court grappled with California case law, including Iskanian v. CLS Transportation Los Angeles LLC. After considering FAA jurisprudence, the court overruled California law only to the extent it held that arbitration agreements may not selectively apply to “individual PAGA claims” but not “class” claims. The court determined that the application of Iskanian forced the contracting parties in this case into an unacceptable choice: either accept “class action arbitration” of all claims, including those of employees not a party to the arbitration agreement, or forego arbitration altogether. But the court recognized that arbitration procedures are “poorly suited to the higher stakes of massive-scale disputes” involved in class actions due in part to the absence of “multilayered review” making it more likely that errors will go uncorrected, and the fact that the “vast number of claims entail the same risk of ‘in terrorem’ settlements that class actions entail.” As a result, Iskanian’s “indivisibility rule effectively coerces parties to opt for a judicial forum” to resolve their dispute rather than the arbitral procedure they had contractually agreed upon to settle disputes between themselves. This was incompatible with the FAA, and the court reversed on this ground.

The court further held that, given that the parties must arbitrate the individual PAGA claim, the employee’s non-individual PAGA claims must be dismissed because PAGA does not provide an employee standing to assert non-individual claims in the absence of an individual claim in the same action.

Viking River Cruises, Inc. v. Moriana, No. 20-1573 (U.S. June 15, 2022).

D.C. Circuit Affirms Dismissal of Claims Against Reinsurers

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The D.C. Circuit recently affirmed a judgment in favor of reinsurers in a suit brought by an insured after concluding that the insured could not assert breach of contract and related claims against the reinsurers because the insured had no direct relationship with the reinsurers.

Vantage Commodities Financial Services I LLC hired Equifin Risk Solutions LLC to create a captive insurance entity (Assured Risk Transfer PCC LLC (ART)) to manage risk associated with its business of financing retail energy companies. Equifin found several reinsurers to reinsure ART. One of the companies to which Vantage loaned money (Glacial Energy Holdings) defaulted. Vantage submitted a claim to ART. An arbitrator ruled in Vantage’s favor, but ART could not cover the loss. The reinsurers then informed ART that any claim would be denied because ART had failed to notify them of Vantage’s claims or provide proof of Vantage’s losses within the time limit required in the reinsurance agreements.

Vantage then filed suit against ART, the reinsurers, and companies involved with the formation and management of ART (“Willis Defendants”). Vantage asserted claims for breach of contract and sought a declaratory judgment regarding the reinsurers’ duties and further asserted claims for breach of implied contract, promissory estoppel, and unjust enrichment.

The district court dismissed Vantage’s breach of contract claim and request for declaratory relief against the reinsurers and then granted summary judgment to the reinsurers on the remaining claims.

The D.C. Circuit affirmed. With respect to Vantage’s breach of contract and declaratory judgment claims, the court held that “Vantage failed to plead facts sufficient to show a contractual relationship with the Reinsurers.” The court noted that reinsurers generally do “not have a direct contractual relationship with the original insured unless the terms of the reinsurance agreement create such a relationship,” and the agreements in this case created no such relationship. There were “no allegations that the Reinsurers dealt directly with Vantage or otherwise treated Vantage as if it were directly insured by them.” Turning to Vantage’s remaining claims, the court explained that there was “no record evidence of any consideration to support [Vantage’s] alleged implied contract with the Reinsurers.” The consideration had been between ART and the reinsurers. Vantage’s promissory estoppel and unjust enrichment claims meanwhile suffered “from the absence of any evidentiary support.” The claims “depend[ed] on the existence of an agency relationship between the Reinsurers and either ART or the Willis Defendants,” but “Vantage point[ed] to no evidence of statements or conduct by the Reinsurers that authorized ART or the Willis Defendants to act on their behalf.” The reinsurance binders meanwhile “merely disclose[d] the existence and terms of a reinsurance agreement between ART and the Reinsurers.” Finally, Vantage’s claims against the Willis Defendants for negligence were barred by the “economic loss doctrine” because Vantage sought “to recover purely economic losses” and no exception applied.

Vantage Commodities Financial Services I, LLC v. Assured Risk Transfer PCC, LLC, No. 21-7033 (D.C. Cir. Apr. 22, 2022).