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Arbitration / Court Decisions

Second Circuit Declines to Vacate Foreign Arbitral Award Under New York Convention Absent Valid Reason

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In this case, plaintiff Rodrigo Pagaduan was injured while serving as a motorman on a Carnival Cruise Line ship. The Second Circuit previously affirmed the Eastern District of New York’s order compelling arbitration, and the case was ordered to be arbitrated in the Philippines. The Philippine labor arbiter’s decision granted Pagaduan $5,100 in “sickness allowance,” plus attorneys’ fees of 10% of the award, but declined to provide other relief. Pagaduan filed a motion seeking nonenforcement and/or vacatur of the award, which was denied by the district court.

Pagaduan appealed the district court’s denial, invoking the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention), which provides that a court “shall confirm [a foreign arbitral] award unless it finds one of the grounds for refusal or deferral of recognition or enforcement of the award specified in the said Convention.” Pagaduan argued that the award should not be confirmed based on two grounds of the New York Convention.

First, Pagaduan argued that article V(1)(b) of the New York Convention applied, which allows for nonenforcement where “[t]he party against whom the award is invoked was not given proper notice of the appointment of the arbitrator or of the arbitration proceedings or was otherwise unable to present his case.” Pagaduan argued that he had not been given proper notice of the proceedings and was unable to present his case. The Second Circuit rejected Pagaduan’s argument, finding that Pagaduan submitted multiple lengthy briefs, medical records, and affidavits before the labor arbiter, but chose to focus his arguments almost entirely on whether the arbiter had jurisdiction over the case, which left him limited room to argue the merits of his case (such as how the Jones Act or Philippine law would provide a greater recovery). Although Pagaduan pointed to errors in the arbitration proceedings, the Second Circuit found that none of them suggested that he was denied the opportunity to be heard in a meaningful time or manner. Therefore, the Second Circuit did not believe that the first ground applied.

Second, Pagaduan argued that article V(2)(b) of the New York Convention applied, which allows for nonenforcement where “[t]he recognition of enforcement of the award would be contrary to the public policy of that country.” Pagaduan argued that the lesser remedies available under Philippine law contravene U.S. policy to provide special solicitude to seamen under the Jones Act. The Second Circuit again rejected Pagaduan’s argument, finding the fact that the award was arguably smaller than Pagaduan might have recovered under the Jones Act was not so contrary to public policy as to “violate our most basic notions of morality and justice.” As federal public policy is not violated “merely because foreign law would provide a lesser or different remedy in a particular area of the law,” the Second Circuit declined to set aside the award and affirmed the order of the district court.

Pagaduan v. Carnival Corp., No. 19-3400 (2d Cir. Nov. 25, 2020).

Federal Court Refuses To Compel Arbitration or Appoint Arbitrators Where No Party Had Refused To Arbitrate and Both Parties Were Working on Selecting Arbitrators

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A federal court recently refused to compel arbitration after it concluded that there had been no refusal to arbitrate. The court also refused to appoint arbitrators for the parties.

Linda L. Allen claimed Horter Investment Management, LLC’s “representatives sold fraudulent and unregistered investments.” She claimed those claims were subject to arbitration pursuant to a clause in a client agreement that provided that “[c]lient and [a]dvisor both agree that all controversies which may arise between them concerning any transaction or construction, performance or breach of this agreement that cannot be settled, be submitted to binding arbitration.”

Allen and her fellow plaintiffs moved to compel arbitration or, in the alternative, for the appointment of arbitrators. Horter responded that the plaintiffs lacked standing because it had not refused to arbitrate and was participating in the selection of arbitrators.

The United States District Court for the Southern District of Ohio (Western Division) agreed with Horter. Although the plaintiffs “initiated arbitration with the AAA, but the AAA declined to administer the clams because of [Horter’s] past actions,” the court did “not find that [Horter’s] acts amount to an unequivocal refusal to arbitrate. Instead, Defendant has expressly acknowledged the agreement to arbitrate. The parties have been working together in the Bruns case and this case to reach an agreement regarding the selection of arbitrators. The Court notes that some of the delay in this process is attributable to Plaintiffs’ change in position regarding consolidated arbitration.” The court also declined to appoint arbitrators because “[b]oth parties are amenable to private arbitration and the names of specific arbitrators have been exchanged.”

Linda L. Allen, et al. v. Horter Investment Management, LLC (S.D. Oh. Sept. 30 2020).

Southern District of New York Rejects Reinsurer’s Claim that Exhaustion Provision Was Not Met; Concludes Indemnification Was Required Under Follow-the-Settlement Clause

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The United States District Court for the Southern District of New York rejected a reinsurer’s denial of a claim. The court disagreed with the reinsurer’s position than exhaustion language had not been satisfied, and found the exhaustion language ambiguous and concluded that payment was required under a “follow-the-settlement” clause in the reinsurance certificate.

Fireman’s Fund Insurance Company issued three excess liability policies to Asarco. The third policy (“Policy 3”) provided “coverage of $20 million for losses in excess of $75 million in excess of a $3 million self-insured retention for the period March 15, 1983 to March 15, 1984.”

General Accident Insurance Company reinsured Policy 3 under a facultative reinsurance contract in which it assumed “15% . . . of the risk assumed in Policy 3.”  OneBeacon Insurance Company subsequently became the successor-in-interest to General Accident.

Asarco filed an action against Fireman’s seeking coverage for asbestos exposure. Fireman’s estimated its exposure at $50.3 million. It settled with Asarco for $35 million and allocated a portion of that settlement to Policy 3 in accordance with its exposure analysis.

Fireman’s then billed OneBeacon pursuant to the reinsurance agreement. OneBeacon denied Fireman’s claim, asserting that the policies underlying Policy 3 had not been exhausted.

The court granted summary judgment to Fireman’s. In short, the court explained that the reinsurance certificate contained a “follow-the-settlements” provision that required OneBeacon to make payments in accordance with Fireman’s good-faith settlement, which was reasonable. That clause was not trumped by any exhaustion clause in Fireman’s policies because the term exhaustion was ambiguous within the meaning of Fireman’s policies.

Fireman’s Fund Ins. Co. v. OneBeacon Ins. Co., No. 14-civ-4718 (PGG) (Oct. 19, 2020).

Ninth Circuit: Website Visit Four Years After Assent To a Contract Containing a Change-of-Terms Provision Does Not Bind Parties To New Contract Terms Addressing Arbitration

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The Ninth Circuit affirmed the district court’s order compelling arbitration in a case brought under the Fair Credit Reporting Act (FCRA) and state law, based on the plaintiff’s purchase of Experian’s Credit Score subscription service in 2014. The plaintiff agreed in 2014 to Experian’s terms of use, which included an arbitration provision and a “change-of-terms” provision, specifying that she would be bound to future versions of the contract by continuing to access Experian’s website. In 2018, on the day before the plaintiff filed her lawsuit, the plaintiff accessed Experian’s website, and subsequently argued that she became subject to new contract terms exempting FCRA claims from arbitration.

The Ninth Circuit held that the plaintiff’s claims were arbitrable under the 2014 terms of the contract, and that the 2018 terms did not apply. In order to bind parties to new terms pursuant to a change-of-terms provision, both parties must have notice that the terms have changed and an opportunity to review the changes. The plaintiff did not allege facts sufficient to conclude that this occurred. The court observed that “the opposite rule would lead to absurd results: contract drafters who included a change-of-terms provision would be permitted to bind individuals daily, or even hourly, to subsequent changes in the terms.”

The Ninth Circuit also held that there was no concern that the 2014 contract required parties to waive their rights to seek public injunctive relief, which would have rendered the agreement unenforceable under California law (the “McGill rule”). Because the 2014 arbitration agreement subjected to arbitration “all disputes to the fullest extent allowed by law,” the court found that the arbitration agreement did not prohibit a plaintiff seeking public injunctive relief in court. The court also found that the McGill rule was inapplicable because the plaintiff failed to allege Article III standing to bring public injunctive relief.

Stover v. Experian Holdings, Inc., Case No. 19-55204 (9th Cir. Oct. 21, 2020).

Parsing the Sometimes Fine Distinction Between a Broad and a Narrow Arbitration Clause

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In an employment dispute, the District Court of Connecticut dissected an arbitration clause to determine whether its scope was “broad,” resulting in a presumption of arbitrability of collateral issues, or “narrow,” in which case collateral issues would generally not be subject to arbitration.  The court ultimately found the clause at issue to be “broad,” but the question was close, as demonstrated by the court’s recognition that “reasonably similar” clauses had been deemed “narrow” by other courts within the Second Circuit.

The clause at issue provided for arbitration of “any controversy or claim arising under federal, state and local statutory or common or contract law … involving the construction or application of any of the terms, provisions or conditions of the Agreement….” The fact that the agreement provided for arbitration of controversies “arising under” essentially any law, as opposed to controversies “arising under” solely the agreement itself, weighed in favor of characterizing the agreement as broad.

The next phrase in the arbitration agreement (“and involving the construction or application of any of the terms, provision, or conditions of the agreement”), “somewhat” limited the disputes subject to arbitration, but the court found it to be very similar to “a classically broad arbitration clause.” The court analogized the clause to another that addressed “claims arising out of or relating to” the construction or application of terms, as opposed to this clause, which pertained to claims “arising under law and involving” the construction or application of terms. Since the arbitration clause at issue was broad, the court applied a presumption in favor of arbitration. The plaintiff failed to rebut this presumption, and therefore the court referred the parties to arbitration.

Tahirou v. New Horizon Enterprises, LLC, Case No. 3:20-cv-00281 (USDC D. Conn. Oct. 29, 2020).