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Arbitration / Court Decisions

First Circuit Affirms Confirmation of FINRA Award Over Claim That Arbitration Panel Should Have Held Investment Firm Liable Under Doctrine of Respondeat Superior

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The First Circuit has affirmed the confirmation of a FINRA award over an appellant’s claim that the arbitrators erred by, among other things, not holding an investment firm liable under the doctrine of respondeat superior. The court held that the evidence supported the arbitrators’ finding and that the appellant had not come close to satisfying the “manifest disregard” standard.

Kenneth Ebbe invested his pension and 401(k) with Richard Cody. Cody told Ebbe that the distributions Ebbe was receiving were interest only and that his account’s balance remained around $500,000. The distributions were actually significantly reducing Ebbe’s principal.

FINRA’s appeals panel suspended Cody. Cody therefore transferred Ebbe’s account to his wife, who worked as an investment adviser at Concorde Investment Services LLC. Cody nevertheless continued to meet with Ebbe regarding his account. Ebbe received monthly statements that accurately reflected that his account balance was declining, but Cody told Ebbe that those statements did not include all of Ebbe’s investments. After his suspension ended, Cody joined Concorde as an investor. Both he and his wife were eventually terminated after Concorde discovered that Cody had contacted customers during his suspension.

Ebbe eventually discovered that his account had no value and filed for arbitration with FINRA against the Codys, Concorde, and others. The Codys did not appear. During the four-day hearing, Ebbe’s expert testified that Cody committed defalcations and that Concorde had a duty to reasonably supervise the Codys, but did not opine that Concorde had violated that duty and admitted there was no evidence that Cody’s wife had made any misrepresentation to Ebbe.

Concorde presented evidence that it had hired Cody’s wife after a diligent background check, that it supervised her, and that it had complied with all industry rules.

The arbitration panel found that the Codys were jointly and severally liable for $286,000 in damages but denied Ebbe’s remaining claims, including the claims against Concorde.

Ebbe moved to confirm in part and vacate in part the award. Concorde and another defendant moved to confirm it. The district court confirmed the award and Ebbe appealed.

The First Circuit rejected Ebbe’s claims, including his principal claim that the panel had committed manifest disregard for the law and that Concorde should be liable as well under the doctrine of respondeat superior. The court noted that arbitrators are not required to explain their awards and that a party is hard pressed to satisfy the demanding standard for manifest disregard. The court also noted that the evidence supported the arbitrator’s finding in favor of Concorde and that the award against the Codys could have been nothing more than a default judgment.

Ebbe v. Concorde Investment Services, LLC, No. 19-1819 (1st Cir. Mar. 24, 2020).

Fourth Circuit Determines Arbitral Panel in UK Is Foreign Tribunal for Purposes of Section 1782

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Where the parties to a private arbitration in the United Kingdom disagreed as to whether the arbitration panel is a “foreign or international tribunal” for purposes of obtaining testimony from residents in South Carolina pursuant to 28 U.S.C. § 1782, the Fourth Circuit determined that the panel was a “foreign tribunal” for purposes of the statute.

The district court denied the appellant’s application for the issuance of subpoenas to three South Carolina residents, relying on case law that held that private arbitral bodies were not “tribunals” as used in section 1782(a). The circuit court disagreed, reasoning that “even if we were to apply the more restrictive definition of ‘foreign or international tribunal’… – that the term refers only to ‘entities acting with the authority of the State’ – we would conclude that the UK arbitral panel charged with resolving the dispute between” the parties meets that definition.

The matter was remanded to the district court to conduct further proceedings on the appellant’s section 1782 application.

Servotronics, Inc. v. Boeing Co., No. 18-2454 (4th Cir. Mar. 30, 2020).

Hawaii Supreme Court Finds Arbitration Clause Not Applicable Where Defendants Fail to Comply With Statutory Arbitration Notice Requirements and Claims Did Not Fall Within Scope of Arbitration Clause

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The Supreme Court of Hawaii vacated the decisions of the intermediate appellate court and the circuit court, which found that the plaintiff’s claims against her former law firm and law partner were subject to the arbitration clause in the partnership agreement, remanding the case to the circuit court for further proceedings consistent with its opinion.

In Yamamoto v. Chee, the plaintiff, a former law firm partner, brought an action against the law firm and another partner after they refused to return personal funds that the plaintiff had tendered to repay a retirement account loan, which had already been repaid from the plaintiff’s partnership capital account. The circuit court granted the defendants’ motion to compel arbitration. The plaintiff appealed, and the intermediate appellate court affirmed. The Supreme Court granted certiorari review.

On certiorari, the Supreme Court of Hawaii found that the intermediate appellate court erred when it concluded that (1) the plaintiff’s claims were “in connection with” the partnership agreement; and (2) compliance with Hawaii Revised Statutes section 658A-9’s notice requirements was not required to initiate arbitration.

First, the Supreme Court held that the plaintiff’s conversion claims were not subject to the arbitration provision in the partnership agreement. The court noted that the partnership agreement by its own terms limited the scope of its provisions, including the arbitration clause, to “the conduct of the partnership business,” which was “solely for the purpose of rendering legal services and services ancillary thereto.” Because the “partnership business” was not to lend money or administer 401(k) plans, the arrangement fell outside the “partnership business.” As such, the Supreme Court found that any claims arising from the arrangement did not comprise a dispute “in connection” with the partnership agreement and were therefore not subject to the arbitration clause.

Second, the Supreme Court held that the defendants’ failure to comply strictly with the statutory arbitration notice requirements precluded granting the motion to compel. Relying on the guiding principles in Ueoka v. Szymanski, which mandate strict compliance with section 658A-9’s notice requirements, the Supreme Court found that the requirements of section 658A-9 must be met before a party files a motion to compel arbitration under section 658A-7. The Supreme Court noted that at the time the defendants filed their motion to compel, no letter had been issued by certified mail, no return receipt had been obtained, and therefore any allegations in the motion that the plaintiff had refused to arbitrate were baseless as a matter of law because a party “cannot be found to have refused to arbitrate” until the formal requirements for initiating an arbitration are met.

Accordingly, the Supreme Court vacated the intermediate appellate court’s judgment on appeal and the circuit court’s order compelling arbitration, and remanded to the circuit court for further proceedings consistent with its opinion.

Yamamoto v. Chee, No. SCWC-16-0000260 (Haw. Mar. 2, 2020).

Seventh Circuit Agrees Defendant Expressly Waived Right to Arbitrate by Withdrawing Arbitration Argument From Motion to Dismiss

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The Seventh Circuit affirmed a district court order that the defendant waived its right to arbitrate by withdrawing a venue-based arbitration argument from its motion to dismiss. The arbitration clause in a joint venture agreement between the parties stated that “[a]ny matter in dispute, and which is not provided for in this agreement, shall be submitted to arbitration.” The plaintiff filed suit after a dispute arose, and the defendant moved to dismiss on various grounds, although it did not assert the arbitration provision. The district court ultimately granted the motion on jurisdictional grounds that were later cured. The defendant then moved to dismiss again, this time asserting improper venue based on the arbitration provision. Plaintiff’s counsel then wrote to defendant’s counsel demanding that the arbitration argument be withdrawn on the ground that it was waived, having not been asserted in the defendant’s first motion to dismiss. The argument was withdrawn the same day. One month later, the defendant moved to compel arbitration, claiming its earlier arbitration argument was not decided.

The district court denied the motion to compel based on express waiver and found no grounds to allow the defendant to rescind that waiver under these circumstances. The Seventh Circuit agreed, finding that withdrawing the arbitration argument was a litigation choice “inconsistent with the right to arbitrate.” The court was sure to note that a party does not automatically waive the right to file a motion to compel arbitration by failing to do so immediately. Here, however, “[h]aving put the arbitration card on the table and then taken it back,” the court held that the defendant “was not permitted to play that card again later.”

Brickstructures, Inc. v. Coaster Dynamix, Inc., No. 19-2187 (7th Cir. Mar. 11, 2020).

Ninth Circuit Finds LRRA Preempts Washington Anti-Arbitration Statutes as It Applies to Risk Retention Groups Chartered in Other States

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Affirming the Central District of California’s order compelling arbitration, the Ninth Circuit Court of Appeals held that the Washington anti-arbitration statute, RCW § 48.18.200(1)(b), which has been held to prohibit binding arbitration agreements in insurance contracts in Washington, was preempted by the federal Liability Risk Retention Act of 1986 (LRRA) as it applied to risk retention groups chartered in another state. The LRRA broadly preempts the authority of nonchartering states to regulate the operation of risk retention groups within their borders.

Plaintiff Allied Professionals Insurance Co. is a risk retention group, a liability insurance company owned by its insured members, chartered in Arizona and doing business in Washington. Allied previously insured Dr. Michael Anglesey, a chiropractor in Washington. In December 2012, Dr. Anglesey provided chiropractic treatment to Eliseo Gutierrez, which allegedly resulted in Gutierrez suffering a stroke. A few months later, Dr. Anglesey renewed his coverage with Allied but, in doing so, did not inform the company of the potential malpractice claim against him by Gutierrez and his wife. When Dr. Anglesey later notified Allied of this potential claim, the company advised him that it was denying coverage and rescinding his 2012 and 2013 insurance policies.

A year later, Dr. Anglesey informed Allied that he was planning to execute a consent judgment in favor of the Gutierrezes and to assign his rights against Allied to them. They had agreed to seek satisfaction on the judgment from Allied and not from Dr. Anglesey. Allied responded by demanding that all claims against Allied be sent to arbitration, pursuant to the arbitration clause in the underlying policies. Dr. Anglesey refused, and Allied filed suit against both Dr. Anglesey and the Gutierrezes, moving to compel arbitration.

The district court initially held that Allied did not have standing to bring the underlying action to compel the defendants to arbitrate. Allied appealed that decision to the Ninth Circuit. The Ninth Circuit ruled that Allied had standing to bring the action against Dr. Anglesey to seek rescission of the policy and declaratory relief and had standing against all defendants to compel arbitration of those claims. On remand, the district court granted Allied’s motion to compel arbitration, granted the motion to stay proceedings pending arbitration, denied the defendants’ motion to transfer venue to the Eastern District of Washington, and certified a controlling interlocutory question of law to the Ninth Circuit. The Ninth Circuit granted permission to appeal.

The question certified by the district court was “whether the Liability Risk Retention Act preempts Wash. Rev. Code. § 48.18.200(1)(b) as applied to risk retention groups.” The Ninth Circuit held that the LRRA does preempt Washington’s anti-arbitration statute, RCW § 48.18.200(1)(b), as it applies to risk retention groups chartered in other states. In reaching that conclusion, the court found that the federal McCarran-Ferguson Act, which generally protects state regulation of insurance, did not reverse preempt the LRRA. The court also found that Washington’s anti-arbitration statute offended the LRRA’s preemption language and that no exception applied to save the law. The court therefore concluded that the Washington statute was preempted by the LRRA as it applied to a risk retention group charted in Arizona but doing business in Washington.

Allied Professionals Insurance Co. v. Anglesey, No. 18-56513 (9th Cir. Mar. 12, 2020).