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New reinsurance-related and arbitration developments from Carlton Fields

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Week's Best Posts

Fourth Circuit Finds Employer Cannot Compel Arbitration of Former Employee’s Discrimination Claims

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The U.S. Court of Appeals for the Fourth Circuit recently ruled that two employment-related arbitration clauses did not “clearly and unmistakably” govern a former employee’s discrimination claims, and that the arbitrability of those claims is rightfully decided by the court, rather than an arbitrator.

Plaintiff signed two arbitration agreements with Rent-A-Center (RAC), his former employer, one when he was initially hired in 2002, and a second when he applied for a new position in 2012. Plaintiff was ultimately hired for a different position in 2013, but did not sign a new arbitration agreement with RAC at that time. Plaintiff later filed this action against RAC for discrimination arising out of his 2013 employment. RAC moved for summary judgment and to compel arbitration, arguing Plaintiff’s claims were subject to the 2002 and 2012 arbitration agreements. The district court denied the motion, however, and the Fourth Circuit affirmed.

Citing seminal arbitrability decisions by the U.S. Supreme Court, including one involving RAC, the Fourth Circuit found the parties did not “clearly and unmistakably” intend to arbitrate claims relating to Plaintiff’s 2013 employment. To the contrary, the court found a reasonable juror could conclude from the parties’ actions that they agreed to modify the arbitration agreements to exclude any disputes relating to Plaintiff’s 2013 employment. Given this uncertainty, the court held that the district court, not an arbitrator, had the authority to decide questions of arbitrability (i.e., whether Plaintiff’s claims were subject to arbitration pursuant to the 2002 and 2012 arbitration agreements). For the same reason, the court also affirmed the district court’s denial of summary judgment, finding a genuine issue material fact as to the parties’ intent to arbitrate these particular claims.

Kabba v. Rent-A-Center, Inc., No. 17-1595 (4th Cir. April 13, 2018)

This post written by Alex Silverman.

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New York Federal Court Largely Denies Motions for Summary Judgment on Issues in Breach of Facultative Reinsurance Certificate Dispute But Grants Dismissal of Quasi-Contract Claims

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Defendant, Munich Re, moved for summary judgment relating to defense costs and allocation and Plaintiff, Utica, moved for summary judgment as to Munich Re’s claim for reimbursement. The Court denied the motions with the exception of Utica’s motion for summary judgment with respect to Munich Re’s quasi contract claims.

Munich Re argued Utica’s breach of contract claim should be dismissed because Utica allegedly never notified Munich Re it had added a defense endorsement to an umbrella policy issued to Goulds Pumps Inc. Utica asserted that the follow-the-fortunes doctrine prohibited Munich Re’s argument, and that even if it didn’t, notice would not have been required because issuance of the defense endorsement was an immaterial change that did not prejudice Munich Re. Finding no follow-the-fortunes clause in the reinsurance certificate, the Court looked at the parties’ contract modification argument, finding there to be a question of fact as to whether Munich Re reinsured the defense endorsement.

Munich Re moved for summary judgment regarding defense costs, arguing it had no duty to indemnify Utica for defense costs Utica paid in addition to the umbrella’s limits. Utica opposed the motion and moved for summary judgment on the allocation of defense expenses, arguing that Munich Re had “no valid defense to payment as a matter of law.” The Court found that questions of material fact precluded summary judgment, ruling that the insurance certificates language concerning the payment of expenses and their connection to the umbrella policies was “sufficient to render the Certificate ambiguous.”

Utica argued that, even assuming that reinsurance is unavailable unless the umbrellas themselves provide for defense costs in addition to the limits, Utica was still entitled to summary judgment on the defense costs because the umbrellas provide such coverage and follow-the-fortunes would require Munich Re to pay its share. Munich Re opposed, stating the certificates did not contain a follow-the-fortunes provision and even if they did, “Utica would not be entitled to defense under follow the fortunes because its payment of defense costs in addition to the limits was clearly beyond the scope of the Umbrellas and not in good faith.” After much discussion on the law on follow the fortunes/follow the settlements, the Court declined to imply such a clause into the reinsurance certificates at issue and denied the requests for summary judgment.

Utica also moved for summary judgment dismissing Munich Re’s quasi-contract claims. Munich Re argued there was a basis for finding that the reinsurance certificate did not encompass the events at issue because they did not have any provision providing for reimbursement. The Court disagreed, finding that the claims at issue, including Munich Re’s obligation to pay defense expenses, are governed by the terms of the reinsurance certificate, dismissing Munich Re’ quasi-contract claims.

Additional arguments on various issues raised in the summary judgment motions can be read in the Court’s order.

Utica Mut. Ins. Co. v. Munich Reinsurance Am., Inc., 6:13-cv-00743 (NDNY Mar. 20, 2018)

This post written by Nora A. Valenza-Frost.

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Arbitrator’s Decision Not Based On Manifest Disregard Of The Law, But Challenge To That Decision Was Not So Meritless As To Warrant Sanctions

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Jonathan Kessler brought a claim in arbitration against his former employer, Kent Building Services, after he was fired from his job as Kent’s president, asserting that he had not been fired for cause and was thus owed severance. The arbitrator determined that Kent breached Kessler’s contract by firing him without cause, a decision the arbitrator found was arbitrary and irrational and thus a breach of the implied covenant of good faith and fair dealing, and thus awarded him six month’s severance pay.

Kent challenged this award in federal court, arguing that the arbitrator’s decision on good faith and fair dealing demonstrated a manifest disregard of New York contract law. Kent based this argument on a New York trial court decision holding that termination of employment only breaches the implied covenant of good faith and fair dealing if it results from a “constitutionally impermissible purpose or [violates] statutory or decisional law,” something not shown during the arbitration. The court rejected this argument, finding that other case law makes it clear that unconstitutionality or illegality are “sufficient but not necessary” to support a claim based on the breach of the implied covenant of good faith and fair dealing. Further, the court found that the arbitrator applied the correct law in finding that Kent had discretion regarding whether to fire Kessler and that the irrational exercise of this discretion could support a breach of the implied covenant of good faith and fair dealing. The court therefore found that the arbitrator had not acted in manifest disregard of the law.

However, the court rejected Kessler’s motion for sanctions under 28 U.S.C. § 1927 for filing a meritless petition to vacate. While the court disagreed with Kent’s argument regarding the requirements of good faith and fair dealing claims under New York law, it found that making argument was not unreasonable. Kessler had also argued that Kent had acted in bad faith when it included in its petition allegations of numerous failures by Kessler in his job performance while failing to mention that the arbitrator had specifically found that these failures were not the basis for Kent’s decision to fire Kessler. The court found that this should be interpreted as simply an attempt by Kent “to provide greater context for the parties’ employment dispute,” rather than a bad faith attempt to mislead the court. Finding no frivolous argument and no bad faith, the court declined to award sanctions.

Kent Building Services, LLC v. Kessler, 17-CV-3509 (JPO) (S.D.N.Y. Mar. 14, 2018)

This post written by Jason Brost.

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Minor Not Bound—Directly Or Indirectly—By Arbitration Agreement In Mother’s Credit Card Agreement

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Last month the Seventh Circuit reversed a lower court order enforcing an arbitration agreement contained in cardholder agreement as applied against the minor daughter (“A.D.”) of the cardholder, rejecting the bank’s attempt to compel arbitration of the daughter’s Telephone Consumer Protection Act (“TCPA”) putative class action lawsuit. The trial court ruled A.D. was bound by the arbitration agreement as an “authorized user” of the card—where she, on at least one occasion, used the credit card to make a purchase as instructed by her mother—and was bound under the direct benefits estoppel theory.

First, the Seventh Circuit held A.D. was not bound by the cardholder agreement and its arbitration clause. The court emphasized the specific procedures in the cardholder agreement for designating authorized users which the parties did not follow: A.D.’s mother never notified the bank or paid an annual fee, the bank never issued a new card, and A.D. was not even old enough at the time to qualify as an authorized user. The court also found A.D. never manifested consent to be bound by the arbitration agreement, did not have legal capacity as a minor to enter into a contract, and actively disaffirmed consent by filing a lawsuit.

Second, the court concluded equitable estoppel was inapplicable and did not bind A.D. to the cardholder agreement. Any benefit A.D. received was derived from her relationship with her mother, not any relationship with the bank. Nor, the court held, did A.D.’s lawsuit center on rights or benefits under the cardholder agreement. The court rejected the bank’s argument that its affirmative defense based on A.D.’s mother’s consent qualified the case as one “relying” on the agreement because the bank, not A.D., bore the burden of establishing that defense. Simply put, A.D.’s lawsuit asserted rights under the TCPA and was therefore not premised on the cardholder agreement.

Because A.D. was not bound to the cardholder agreement directly as a signatory nor indirectly through estoppel, the court reversed and refused to compel arbitration.

A.D. v. Credit One Bank, N.A., No. 17-1486 (7th Cir. Mar. 22, 2018).

This post written by Thaddeus Ewald .

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Fourth Circuit Dismisses Appeal Of Order Compelling Arbitration In Voluntarily Dismissed Class Action

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This case arose from a putative class action alleging claims against Groupon on the basis of its reimbursement policies. After the trial court ordered the parties to arbitrate pursuant to an arbitration clause in the parties’ agreement, the plaintiff moved to amend the arbitration order, requesting that the district court dismiss her complaint with prejudice, advising the court that she would not pursue arbitration due to its costs outweighing her potential recovery. After the court dismissed the case, the plaintiff appealed the arbitration ruling, contending that the Fourth Circuit had jurisdiction over her appeal under 28 U.S.C. § 1291, which gives appellate courts jurisdiction of appeals from “final decisions” of district courts.

The plaintiff’s appeal was stayed pending a decision by the U.S. Supreme Court in Microsoft Corp. v. Baker as to whether a voluntarily dismissed action is final for purposes of 28 U.S.C. § 1291. Following the Supreme Court’s ruling that a voluntary dismissal does not qualify as a final decision, the Fourth Circuit followed the high court’s precedent and dismissed the appeal. Keena v. Groupon, Inc., Case No. 16-1973 (4th Cir. Mar. 27, 2018).

This post written by Gail Jankowski.

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