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Arbitration / Court Decisions

Court Permits Munich Re to Expand Its Counterclaims Against Cedent AMIC, Following Dismissal of AMIC’s Bad Faith Claims

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On April 13, 2021, we reported on a decision by the U.S. District Court for the Middle District of Alabama that dismissed a portion of a complaint brought by cedent Alabama Municipal Insurance Corp. (AMIC) for bad faith against its reinsurer Munich Reinsurance America Inc., based on the court’s prediction that the Alabama Supreme Court would refuse to recognize bad faith claims in the context of reinsurance disputes.

The district court has now granted Munich Re’s motion for leave to file a second amended answer and add two counts for declaratory relief to its counterclaim regarding the parties’ rights under the relevant reinsurance treaties, including AMIC’s alleged litigation management and reporting responsibilities. The court rejected AMIC’s arguments that the request to amend was unduly delayed, or that the discovery plan would be inadequate if the amendments were permitted.

Alabama Municipal Insurance Corp. v. Munich Reinsurance America Inc., No. 2:20-cv-00300 (Sept. 8, 2021).

Fifth Circuit Holds Prior Waiver of Right to Arbitrate State Law Claims Does Not Waive Right to Compel Arbitration of Newly Asserted Federal Claims

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In protracted litigation springing from the sale of “free” credit reports that “were not really free,” the Fifth Circuit Court of Appeals held that a party’s waiver of its right to arbitrate state law claims did not result in a waiver of its right to compel arbitration of newly asserted federal law claims. In a purported class action, the plaintiff originally asserted several claims under Illinois law against One Technologies, L.P. One Tech removed to federal court and filed a motion to dismiss. After that motion was partially denied, One Tech moved to compel arbitration, which was granted by the district court but reversed on appeal, with the Fifth Circuit holding that filing of the motion to dismiss waived the right to arbitrate the state law claims.

On remand, the plaintiff filed an amended complaint asserting, for the first time, claims under the Credit Repair Organizations Act, a federal consumer protection statute that regulates the practices of such organizations. One Tech moved to compel arbitration, arguing in part that it “could not possibly have waived its right to arbitrate” the new claims because they were not raised until after the previous waiver occurred through the filing of the motion to dismiss. The district court denied the motion, but the Fifth Circuit reversed again on appeal.

In so holding, the Fifth Circuit stressed that waiver of arbitral rights is claim-specific. A party waives arbitration by “substantially invoking the judicial process to the detriment or prejudice of the other party.” For waiver purposes, “a party only invokes the judicial process to the extent it litigates a specific claim it subsequently seeks to arbitrate.” One Tech could not have waived its right to arbitrate the CROA claims at issue because they had not even been asserted by the plaintiff when One Tech previously moved to dismiss the state law claims. Because One Tech moved to compel arbitration of the newly asserted federal law claims without first waiving its right to do so, the Fifth Circuit reversed and remanded.

Forby v. One Technologies, L.P., No. 20-10088 (5th Cir. Sept. 14, 2021).

Second Circuit Affirms Denial of Motions to Compel Arbitration in Suit Against Trump Corp. and Trump Family

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The Second Circuit recently affirmed the denial of motions to compel arbitration filed by, inter alia, the Trump Corp. and a nonparty from whom the plaintiffs sought discovery.

Several anonymous plaintiffs filed a putative class action against the Trump Corp., former President Donald J. Trump, and members of his family asserting federal and state claims alleging that the defendants had fraudulently induced them to enter into business relationships with nonparty ACN Opportunity LLC. More specifically, the plaintiffs claimed that the defendants publicly represented that they were independent of ACN when they were actually allegedly accepting large payments from ACN. When the plaintiffs entered their business relationships with ACN, they signed arbitration agreements agreeing to arbitrate disputes.

When the plaintiffs filed suit, the defendants moved to dismiss the plaintiffs’ complaint and then the plaintiffs’ amended complaint. The defendants also filed a motion to compel arbitration pursuant to the arbitration clauses in the agreements between the plaintiffs and ACN.

The plaintiffs subsequently served ACN with a subpoena seeking various documents. In response, ACN objected and sought to compel arbitration of the discovery dispute.

The district court denied the motions to compel arbitration by the defendants and ACN, both of whom then appealed to the Second Circuit Court of Appeals.

The Second Circuit affirmed the denial of the motions to compel arbitration.

On appeal, the defendants primarily argued that arbitrability should have been decided by the arbitrator, not the district court, and that they were entitled to compel arbitration under equitable estoppel principles. ACN meanwhile principally argued that the district court had erred when the court concluded that it lacked jurisdiction to entertain ACN’s motion to compel.

With respect to the defendants, the Second Circuit first concluded that the defendants “did not adequately raise before the district court their argument that, under Contec [Corp. v. Remote Solution Co., 398 F.3d 205 (2d Cir. 2005)], the issue of arbitrability was for the arbitrator to determine or, more broadly, that the questions of equitable estoppel and waiver should have been determined by an arbitrator.” The Second Circuit noted that the defendants had asked the district court to resolve those questions and had only included a “casual citation,” “without further explanation or argument” on this issue.

On the merits, the Second Circuit held that the defendants were not entitled to compel arbitration under principles of equitable estoppel. To invoke equitable estoppel, the court explained that “there must be a close relationship among the signatories and non-signatories such that it can reasonably be inferred that the signatories had knowledge of, and consented to, the extension of their agreement to arbitrate to the non-signatories.” That standard was not met here. “There was no corporate relationship between the defendants and ACN of which the plaintiffs had knowledge, the defendants [did] not own or control ACN, and the defendants [were] not named in the [] agreements between ACN and the plaintiffs.” Indeed, the plaintiffs had alleged that the defendants had concealed their relationship with ACN and held themselves out as independent.

Turning to ACN’s motion, the court explained that there was “no actual case or controversy between the plaintiffs and ACN . . . and therefore no subject-matter jurisdiction.” The only “controversy” was a discovery dispute, which was insufficient to compel arbitration.

The Second Circuit also rejected ACN’s alternative argument that it was entitled to invoke arbitration under principles of equitable estoppel, explaining that ACN had not properly raised that argument before the district court and that ACN had therefore forfeited it.

Doe v. Trump Corp., Nos. 20-1228 & 20-1278 (2d Cir. July 28, 2021).

 

West Virginia Federal Court Refuses to Force Non-Signatory to Participate in Arbitration

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Mountain Valley Pipeline LLC (MVP) contracted with U.S. Trinity Energy Services LLC for the construction and installation of the Mountain Valley Pipeline across property in Greenbrier County, West Virginia. Trinity subcontracted with M.T. Bores LLC to furnish equipment to excavate a tunnel in connection with the installation of the pipeline. But before the installation was completed, MVP terminated the project.

M.T. Bores claimed that it was not paid in full for the excavation equipment and thereafter placed a mechanic’s lien against the property for the balance due. M.T. Bores then instituted an action in the Greenbrier County Circuit Court seeking enforcement of the mechanic’s lien against MVP’s real property. The case was removed to the U.S. District Court for the Southern District of West Virginia, and Trinity thereafter moved to compel arbitration under the arbitration clause in the subcontract between M.T. Bores and Trinity. M.T. Bores did not dispute that it was required to arbitrate its claims but rather sought to compel MVP to participate in the arbitration.

Although recognizing that MVP was not a party to the subcontract, M.T. Bores sought to compel MVP’s participation based on the doctrine of equitable estoppel and third-party beneficiary theory. M.T. Bores argued that MVP should be estopped from refusing to arbitrate because it directly benefitted from the subcontract since the equipment contributed to MVP’s pipeline. The district court declined to apply the doctrine of equitable estoppel where MVP had not asserted any claim against M.T. Bores arising from the subcontract but rather was only defending claims brought against it by M.T. Bores. The district court similarly rejected M.T. Bores’ argument that MVP was a third-party beneficiary of the subcontract insofar as it was the owner of the property that was the site of M.T. Bores’ performance under the subcontract, finding that there was no evidence that the subcontract was created for MVP’s sole benefit. The district court noted that “[a] project owner will doubtless receive incidental benefits from its contractor’s subcontracts; but those benefits alone will not render the owner a third-party beneficiary.”

M.T. Bores also argued that MVP should be compelled to arbitrate in the interest of judicial economy since the claims against MVP and Trinity were inextricably intertwined. Although the district court agreed that M.T. Bores’ claims against MVP and Trinity involved some overlapping legal and factual issues, the court found the claims were not so “inextricably intertwined” to justify requiring MVP to participate in an arbitration absent its consent.

The district court similarly found no merit to M.T. Bores’ argument that MVP was an essential party to the arbitration since Trinity’s payment obligations to M.T. Bores under the subcontract were linked to, and may have been contingent on, MVP’s payment to Trinity.

Even so, the district court noted that an express provision in the subcontract deprived M.T. Bores of the ability to compel MVP to arbitrate absent Trinity’s consent. The district court accordingly denied M.T. Bores’ motion to compel MVP to participate in the arbitration between Trinity and M.T. Bores.

M.T. Bores, LLC v. Mountain Valley Pipeline, LLC, No. 5:20-cv-00602 (S.D. W. Va. Aug. 2, 2021).

Federal Court Declines to Vacate Arbitration Award Absent Public Policy Against Requiring Reinstatement of Terminated Employee

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The plaintiff, ITT Engineered Valves LLC, sought to vacate an arbitration award finding it had improperly terminated its employee, Douglas Wood, and ordering that Wood be reinstated. While recognizing the general presumption in favor of enforcing arbitration awards, ITT claimed an exception to that rule applied here: “well-defined and dominant” public policies would be violated if the award were to be enforced. Specifically, it pointed to public policies against (1) racial/national origin harassment and discrimination and (2) threats of workplace violence. Wood’s labor union, the defendant in the action, argued that the so-called public policy exception is exceedingly narrow and did not warrant vacatur. The court agreed with the union.

The court explained that applying the public policy exception requires a two-step analysis. First, can a “well-defined and dominant” public policy be identified? If so, would enforcing the award violate that policy? The court noted that the exception is available only when the award creates an “explicit conflict with an explicit public policy.” Even assuming the public policies identified by ITT were “well-defined and dominant,” the court found enforcing the award would not thwart the purpose of either policy. As an initial matter, the court found ITT failed to demonstrate that any public policies required the discharge of an employee who engaged in discrimination or harassment and/or made threats of violence. The court also accepted the arbitrator’s conclusion that Wood’s conduct was neither discriminatory nor harassing and did not constitute a threat of violence in the first instance. Thus, while sympathizing with ITT’s desire to maintain a safe workplace, the court denied its motion for summary judgment and granted the union’s cross-motion.

ITT Engineered Valves, LLC v. United Steel, Paper & Forestry, Rubber, Mfg., Energy, Allied Indus. & Serv. Workers Int’l Union, No. 5:21-cv-00205 (E.D. Pa. Aug. 3, 2021).