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Arbitration / Court Decisions

Federal Court Dismisses Policyholder’s Third-Party Action Against Reinsurers

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A Puerto Rico district court dismissed a third-party action by defendant-policyholder Puma Energy Caribe LLC against the reinsurers of an insurance policy issued by plaintiff Integrand Assurance Co. Puma claimed that the reinsurers breached the reinsurance agreements with Integrand, prejudiced Puma’s rights as a third-party beneficiary of those agreements, and negligently handled reinsurance claims that Integrand submitted in connection with a claim Puma had made under the Integrand policy. The reinsurers sought dismissal based on lack of privity, lack of standing, arbitration clauses in the reinsurance treaties with Integrand, and on the ground that Puma improperly sought to implead them under Federal Rule of Civil Procedure 14(a), which allows a party to implead a nonparty “who is or may be liable to it for all or part of the claim against it.”

While recognizing the reinsurers’ arguments were “powerful,” the court dismissed Puma’s third-party claims on procedural grounds. Because Puma was not seeking “indemnity” from the reinsurers, the court found that Rule 14(a) was not the proper vehicle for obtaining the relief Puma had requested. The court also considered other procedural mechanisms, including Federal Rules of Civil Procedure 13(h), 19, and 20, but found each was inappropriate here as well. The court declined to award the reinsurers’ attorneys’ fees, although it agreed that Puma’s filings “come close to obstinance or frivolity.”

Integrand Assurance Co. v. Puma Energy Caribe, LLC, No. 3:19-cv-01195 (D.P.R. Dec. 27, 2019).

Court Denies Petition to Vacate Arbitration Award Based on Judicial Estoppel

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This case arises out of plaintiff John B. Napoleone’s failure to repay a sign-on bonus of $100,000 to his former employer, defendant S2K Financial LLC, under the terms of his employment agreement. S2K commenced an arbitration to recover the sign-on bonus by filing a statement of claim with FINRA. FINRA informed the parties that the case would be decided by a single arbitrator, unless all parties agreed in writing to three arbitrators, pursuant to FINRA’s Code of Arbitration Procedure for Industry Disputes. S2K filed a motion to expand the panel to three arbitrators, to which Napoleone opposed, arguing that S2K participated in selecting the single arbitrator and, therefore, waived its right to amend the number of arbitrators. In two instances thereafter, Napoleone advanced his position that the arbitration panel should not be expanded. The sole arbitrator issued an award finding that Napoleone was liable for breach of contract and granted S2K $100,000 in compensatory damages plus interest.

Thereafter, Napoleone filed a petition to vacate the arbitration award arguing that the arbitrator exceeded his power and acted in manifest disregard for the law by rendering an award without amending the panel to three arbitrators. S2K moved to confirm the arbitration award arguing that Napoleone was judicially estopped from asserting this basis for vacatur.

The court denied Napoleone’s petition to vacate the arbitration award and granted S2K’s petition to affirm the arbitration award. The court explained that “judicial estoppel protects the sanctity of the oath and integrity of the judicial process by preventing a party from asserting a factual position in a legal proceeding that is contrary to a position previously taken by that party in a prior legal proceeding.” A party invoking judicial estoppel must show that: “(1) the party against whom the estoppel is asserted took an inconsistent position in a prior proceeding and (2) that position was adopted by the first tribunal in some manner, such as by rendering a favorable judgment.” The court reasoned that Napoleone opposed a three-member arbitration panel in three separate instances in the underlying arbitration. This inconsistent position was adopted by the arbitrator twice. As such, the court ruled that Napoleone was judicially estopped from asserting this basis for vacatur, and denied his petition to vacate the arbitration award.

Napoleone v. S2K Financial, LLC, No. 1:18-cv-03124 (S.D.N.Y. Dec. 6, 2019).

Third Circuit Affirms Order Declining to Consolidate Reinsurance Dispute, but Vacates Order Denying Motion to Unseal

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Everest Reinsurance Co. appealed from two district court orders. It claimed that this dispute with Pennsylvania National Mutual Casualty Insurance Co. was the same as a prior dispute that Penn National had arbitrated with two other reinsurers. It, therefore, sought to have this matter consolidated with and heard by the same panel as the prior dispute. The parties agreed that whether this dispute and the prior dispute were actually the same was to be decided by the arbitrators, not the court. The issue was which arbitrators: a new panel, or the panel that heard the prior dispute. The district court ordered that the question goes to a new panel, and the Third Circuit agreed, citing language in the Everest/Penn National arbitration agreement stating that consolidation is only permitted “[i]f more than one reinsurer is involved in the same dispute.” By sending the present dispute to the same panel as the prior dispute at this juncture, the Third Circuit held, Everest was essentially asking the court to prejudge the question of whether the two disputes were “the same,” and thus disregard the express language of the agreement.

Everest separately appealed an order denying its motion to unseal records from the prior dispute. The Third Circuit agreed with Everest that the district did not apply the “more rigorous common law right of access” standard. It therefore vacated and remanded for the district court to apply the legal standard articulated by the Third Circuit in Avandia Marketing.

Pa. Nat’l Mut. Cas. Ins. Co. v. New England Reinsurance Corp., No. 19-1805 (3d Cir. Dec. 6, 2019).

Court Finds No Manifest Disregard of the Law or Exceeding of Powers in Upholding Arbitration Award Related to Dispute Over Earn-Out Payment

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Markmidco S.àr.l., a Luxembourg company, sold to Zeta Interactive Corp. its interest in a customer relationship management business consisting of several companies that provided to retailers email and text message marketing, database management, and related services. The parties’ agreement called for several earn-out payments to be made upon the determination that the CRM business had surpassed certain revenue thresholds laid out in the contract. Zeta refused to make the first earn-out payment of $4 million, claiming the revenue threshold had not been reached as of the deadline. Markmidco disagreed and referred the parties’ dispute to an arbitrator. The arbitrator agreed with Markmidco and awarded it the earn-out payment.

The parties’ dispute then moved to federal court where Markmidco’s award was confirmed over several arguments from Zeta seeking its vacatur. Zeta argued that the parties’ contract called for a “manifest error” standard of review. However, the court held that the parties “cannot contract for more judicial review than the FAA and Convention grant them.” Zeta next argued that the award should be vacated due to the arbitrator’s manifest disregard of the law, but failed to identify any instance of the arbitrator ignoring the applicable law.

The court also denied Zeta’s claim that the arbitrator exceeded his powers, stating that his findings were reasonable interpretations based on analysis of specific provisions of the purchase agreement. When presented with an argument that an arbitrator has exceeded his powers, the “sole question” for the court is “whether the arbitrator (even arguably) interpreted the parties’ contract, not whether he got its meaning right or wrong.” As such, Zeta’s argument failed.

Zeta also argued that the grounds for vacatur stated in the Delaware Uniform Arbitration Act should apply rather than those provided by the Federal Arbitration Act because the parties’ contract included a choice-of-law provision selecting Delaware law. The court held that, under Third Circuit law, state law vacatur standards apply only when the parties express a clear intent to supplant the FAA standards with state law standards. A choice-of-law provision that applied broadly to the parties’ contract was not a sufficiently clear expression of the parties’ intent to opt out of the FAA scheme.

Lastly, Zeta argued that enforcement of the award was premature because other proceedings between the two parties were ongoing. The court held that Zeta’s claims in the collateral proceeding did not overlap with the issues submitted by the parties to the arbitrator. The court also held that issuing a stay or denying enforcement of the award at this time “would transform a summary proceeding into a protracted dispute,” contrary to the “basic purpose” of arbitration. The court ordered enforcement of the arbitration award.

Markdutcho 1 B.V. v. Zeta Interactive Corp., No. 1:17-cv-01420 (D. Del. Nov. 12, 2019).

Eleventh Circuit Clarifies Standard for New York Convention’s Public Policy Defense to Foreign Arbitration Awards

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The dispute involved an arbitration related to alleged medical malpractice by doctors selected by Carnival Cruise Lines to treat a wrist injury of a Serbian employee of Carnival. The employee’s employment agreement with Carnival contained mandatory arbitration and forum selection clauses and a choice-of-law clause designating the governing law as the law of Panama, the law of the flag of the employee’s cruise ship. Notwithstanding the choice of Panamanian law, the employee filed a foreign arbitration asserting a claim under U.S. law, including the Jones Act, for vicarious liability against Carnival. The arbitrator ruled that the employee could not assert the U.S. law claims and that she would not be entitled to relief under Panamanian law. The employee then filed a lawsuit in a federal district court seeking to vacate or deny enforcement of the foreign award under the New York Convention. The district court denied the employee’s petition, rejecting the employee’s arguments that the arbitrator wrongfully deprived her of the opportunity to assert her claim under the Jones Act and that the award was void as against U.S. public policy.

On appeal, the Eleventh Circuit affirmed the district court’s ruling. The Eleventh Circuit rejected the employee’s argument that the court was required to refuse to enforce the award because she was allegedly deprived of a statutory remedy against Carnival. The court ruled that it would not refuse to enforce the award “simply because the remedies available under Panamanian law [were] less favorable” to the employee “than the remedies available under U.S. law.” The court further found that the remedies available under Panamanian law were not “so inadequate that enforcement would be fundamentally unfair.” The court held: “[T]he test for whether a court should refuse to enforce a foreign arbitral award based on public policy is not whether the claimant was provided with all of her statutory rights under U.S. law during arbitration. Rather the public-policy defense ‘applies only when confirmation or enforcement of a foreign arbitration award would violate the forum state’s most basic notions of morality and justice.'” The employee had not made that showing here.

Cvoro v. Carnival Corp., No. 18-11815 (11th Cir. Oct. 17, 2019).