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New reinsurance-related and arbitration developments from Carlton Fields

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FOURTH CIRCUIT FINDS INCORPORATION OF JAMS RULES CONSTITUTES PARTIES’ INTENT TO DELEGATE QUESTION OF ARBITRABILITY TO ARBITRATOR

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The Fourth Circuit, noting that expansive general arbitration clauses will not suffice to force the arbitration of arbitrability disputes, looked at whether the parties’ express incorporation of JAMS Rules constituted “clear and unmistakable evidence of the parties’ intent to delegate to the arbitrator questions of arbitrability.”

Though not previously addressed by the Fourth Circuit, both the Tenth and Fifth Circuits have concluded that the incorporation of JAMS Rules constitutes “clear and unmistakable” evidence of intent to delegate arbitrability to the arbitrator. Other circuits – the First, Second, Eighth, Ninth, Eleventh, D.C. and Federal circuits – “have concluded that the incorporation of arbitral rules substantively identical to those found in JAMS Rule 11(b) constitutes clear and unmistakable evidence of the parties’ intent to arbitrate arbitrability.”

Adopting its sister circuit courts’ reasoning, the Fourth Circuit similarly held that “the explicit incorporation of JAMS Rules serves as ‘clear and unmistakable’ evidence of the parties’ intent to arbitrate arbitrability. Because the JAMS Rules expressly delegate arbitrability questions to the arbitrator,” the matter should have been referred to the arbitrator on that basis.

Simply Wireless, Inc. v. T-Mobile US, Inc., No. 16-1123 (4th Cir. Dec. 13, 2017)

This post written by Nora A. Valenza-Frost.

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SECOND CIRCUIT REBUFFS ATTEMPT TO ADDRESS IN FEDERAL COURT ACTION RELIEF PREVIOUSLY DENIED IN STATE COURT SUIT

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The Second Circuit has held that a federal district court reached the correct result but for the wrong reason when it dismissed a complaint seeking a declaratory judgment that the plaintiff was not subject to a contract containing an arbitration clause.

The complaint, filed by KIPP Academy Charter School, arose out of a dispute between KIPP and the United Federation of Teachers (UFT) regarding whether KIPP teachers were represented by the UFT. In an attempt to settle this dispute, UFT served KIPP with a demand for arbitration under the provisions of the UFT’s collective bargaining agreement (CBA) with the New York City Department of Education. KIPP filed a complaint in New York state court seeking a stay of arbitration on the basis that it was not subject to the CBA, and the court dismissed that complaint. KIPP then filed a complaint in federal district court in which it sought a declaratory judgment that it was not subject to the CBA. The UFT moved to dismiss on the basis that the action was barred by res judicata and by the Rooker-Feldman doctrine, which, broadly speaking, prevents parties from using federal suits to reverse state court judgments. The district court dismissed KIPP’s complaint based on the Rooker-Feldman doctrine without deciding whether res judicata would also bar the suit.

On appeal, the Second Circuit explained that the Rooker-Feldman doctrine applies only when “(1) the plaintiff lost in state court; (2) the plaintiff complains of injuries caused by the state court judgment; (3) the plaintiff invites district court review of that judgment; and (4) the state court judgment was entered before the plaintiff’s federal suit commenced.” The court found that the second factor was not satisfied, because KIPP’s alleged injury was caused by the UFT’s arbitration demand, not by the state court judgment, which merely ratified the UFT’s allegedly injurious conduct. However, the court found that the suit was barred by res judicata. While KIPP argued that its claim for declaratory relief was unique to the federal court action, the Second Circuit found that the state court action was a final judgment on the merits by a court of competent jurisdiction involving the same parties and the same cause of action, while the claim for declaratory relief was “unique in name only,” based on substantially identical facts, and thus duplicative for res judicata purposes.

KIPP Acad. Charter Sch. v. United Fed’n of Teachers, AFT NYSUT, AFL-CIO, 17-1905-CV (2d Cir. Jan. 30, 2018)

This post written by Jason Brost.

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GENTLEMEN’S CLUB CANNOT COMPEL ARBITRATION WHERE IT ACTIVELY LITIGATED MERITS OF DISPUTE

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The Fourth Circuit upheld a district court’s decision refusing to compel arbitration in a labor dispute between a gentlemen’s club (“Crazy Horse”) and a putative class of entertainers because of Crazy Horse’s extensive merits-based litigation conduct. Plaintiff Degidio, an entertainer at Crazy Horse, sued the club under the FLSA and South Carolina labor laws for allegedly misclassifying entertainers as independent contractors rather than employees.

Crazy Horse answered the complaint, participated in discovery, filed several merits-based motions for summary judgment, opposed Degidio’s motions for certification of class and collective actions, and repeatedly moved to certify state law questions to the South Carolina Supreme Court. In the midst of this conduct and without informing the court, Crazy Horse began entering into arbitration agreements with its new entertainers. Three years after the litigation had commenced, Crazy Horse moved to compel arbitration against a handful of plaintiffs who had recently joined the suit. The district court declined to enforce the arbitral agreements.

On appeal, the Fourth Circuit affirmed. Under the Federal Arbitration Act (“FAA”), a party waives its right to compel arbitration when it has “so substantially utilized the litigation machinery that to subsequently permit arbitration would prejudice the party opposing the stay.” The court emphasized that Crazy Horse engaged in substantive litigation maneuvers for over three years, including extensive and substantive motions practice that indicated it was hoping for a favorable ruling on the merits. More, those same issues Crazy Horse pursued in court would need to be reargued before an arbitrator if the court were to compel arbitration. Thus, the court concluded the “only possible purpose” of the arbitration agreements was to grant Crazy Horse another “bite at the apple” if it lost on the merits in court.

Crazy Horse argued it could not have moved for arbitration earlier because the entertainers with whom it had entered arbitration agreements had only recently joined the case. The court rejected this argument because Crazy Horse failed to notify the court of the agreements as they occurred, thereby avoiding court supervision, and because compelling arbitration here would give perverse incentives to parties to delay the motion to compel arbitration as long as possible. The court also denounced Crazy Horse’s conduct in entering the arbitration agreements because they gave false impressions and the secretive manner in which Crazy Horse implied it sought to avoid the court’s supervisory role.

Degidio v. Crazy Horse Saloon & Rest. Inc., No. 17-1145 (4th Cir. Jan. 18, 2018).

This post written by Thaddeus Ewald .

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FOLLOWING CUNNINGHAM, PENNSYLVANIA DISTRICT COURT FINDS CAPTIVE REINSURANCE PUTATIVE CLASS ACTION CLAIMS ARE TIME-BARRED

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In this putative class action, plaintiffs alleged unlawful practices related to mortgage insurance practices, including a violation of the Real Estate Settlement Procedures Act of 1974 (“RESPA”). This case was stayed pending ultimate resolution of a factually-similar case, Cunningham v. MT&T, on appeal in the Third Circuit. In both cases, the plaintiffs purchased primary mortgage insurance (“PMI”) from specific insurers, which in turn purchased reinsurance from their respective mortgagees’ captive reinsurance subsidiaries. Plaintiffs in both suits alleged that this scheme (between the mortgagee and the PMI insurer) violated RESPA’s anti-kickback and anti-fee splitting provisions between the mortgagee and the PMI insurer.

As we previously reported here, in 2016, the Third Circuit affirmed summary judgment in favor of the defendants in Cunningham, upholding its finding that plaintiffs’ claims were time-barred and that plaintiffs could not equitably toll the limitations period because they had not exercised reasonable diligence in investigating any potential RESPA claims within the statute of limitations.

The District Court for the Western District of Pennsylvania, like the Third Circuit in Cunningham, found significant that the homeowners were made aware of the captive reinsurance program through disclosures at the time of closing and did not elect to opt out, did not ask questions of the challenged scheme at or prior to closing, and did not investigate their mortgage until they were solicited by their current counsel. Moreover, the Court rejected the plaintiffs’ attempts to differentiate their case from Cunningham, which was decided at the summary judgment phase after limited discovery, and not, as in this case, on a motion for judgment on the pleadings. The Court went on to state, “[u]nfortunately for Plaintiffs, there are no answers to be had from discovery because there are no questions to ask. The similarities between this case and Cunningham cannot be overstated… Just like the plaintiffs in Cunningham, Plaintiffs had all the facts at the time of closing to allege their claim under RESPA, but their inaction during the limitations period bars the application of equitable tolling under a theory of fraudulent concealment.” The court therefore found the above claims to be time-barred, and also precluded the remaining claims under the filed-rate doctrine, which provides that a rate, such as that for PMI, filed with and approved by a governing regulatory agency is unassailable in judicial proceedings brought by ratepayers. The District Court granted defendants’ motion for judgment on the pleadings. Menichino v. Citibank, N.A., Case No. 2:12-cv-00058 (USDC W.D. Pa. Jan. 19, 2018).

This post written by Gail Jankowski.
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INSURANCE RECEIVER’S PREEMPTION ARGUMENT UNDER MCCARRAN-FERGUSON FAILS TO AVOID ARBITRATION OF REINSURANCE DISPUTE

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The receiver for Gramercy Insurance Company sought to avoid arbitration of a reinsurance dispute with Contractor’s Bonding, Ltd., by arguing the FAA was reverse preempted under the McCarran-Ferguson Act. The receiver argued the federal court should abstain from exercising jurisdiction and remand the case to state court under Burford v. Sun Oil Co. The court noted, however, that Burford abstention is appropriate only when the district court has discretion to grant or deny relief. CBL argued the court lacked discretion regarding whether to compel arbitration under the FAA. The receiver argued the FAA was inapplicable because it was reverse preempted by the McCarran-Ferguson Act.

A state law may only reverse preempt a federal statute where, among other things, the “federal statute operates to invalidate, impair, or supersede the state law.” The FAA did not impair or supersede the relevant state statute because the statute expressly provided that it did not “deprive[] a party of any contractual right to pursue arbitration.” As such, the court denied the receiver’s motion to remand and enforced the forum selection clause contained within the party’s agreement by transferring the case pursuant to CBL’s motion. Gramercy Ins. Co. v. Contractor’s Bonding, Ltd. No. AU-17-CA-00723-SS (USDC W.D. Tex. Jan. 19, 2018).

This post written by Benjamin E. Stearns.
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