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S.D.N.Y. DISMISSES INSURER’S CLAIMS AGAINST REINSURANCE BROKER UNDER ECONOMIC LOSS DOCTRINE, FINDS NO SPECIAL RELATIONSHIP

February 6, 2018 by John Pitblado

A New York federal court has dismissed a ceding insurer’s counterclaims against its reinsurance broker, finding the insurer’s claims for negligence and breach of fiduciary were barred by New York’s economic loss doctrine, and that there was no special relationship between the parties.

Sawgrass Mutual Insurance Company (Sawgrass) alleged that Holborn Corporation (Holborn) breached a fiduciary duty by failing to recommend that Sawgrass purchase a specific reinsurance product that Sawgrass claimed would have saved it hundreds of thousands of dollars. Holborn moved to dismiss the claims under the economic loss doctrine, which bars tort-based actions premised on purely economic injury that resulted from a breach of contract. Arguing that the law of the state in which the tort occurred should apply, Sawgrass contended that New York’s version of the economic loss doctrine was inapplicable because Florida law governed the dispute. But the court rejected this argument, holding that New York has the greatest interest in the litigation since it is the only state in which the wrongful conduct allegedly took place. The court also rejected Sawgrass’ argument that the “special relationship” exception to the economic loss doctrine applied. The court noted that, under New York law, brokers “have no continuing duty to advise, guide or direct a client to obtain additional coverage.” Therefore, absent allegations that the parties engaged in conversations regarding the specific reinsurance product at issue, general discussions between them about “the most advantageous” coverage for Sawgrass were insufficient to create a special relationship.

Holborn Corp. v. Sawgrass Mutual Insurance Co., No. 16-09147 (USDC S.D.N.Y. Jan. 17, 2018)

This post written by Alex Silverman.

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NINTH CIRCUIT FINDS ARBITRATION CLAUSE SHOWED CLEAR AND UNMISTAKABLE INTENT TO RESOLVE ARBITRABILITY QUESTIONS BY ARBITRATION

February 5, 2018 by Carlton Fields

Finding Montana law was inapplicable to the subject insurance policy under both federal maritime choice-of-law principles and the policy language, the Ninth Circuit Court of Appeals determined that an arbitration clause was not unenforceable, and remanded the matter to the Montana District Court with instructions to grant a motion to compel arbitration in its entirety.

As the insurance policy at issue concerned marine insurance, and the FAA specifically applies to “maritime transactions,” Montana state law did not govern the validity of the agreement’s arbitration provision. Nor was federal maritime law precluded by Montana law under the McCarran-Ferguson Act, as Montana’s insurance law is not invalidated, impaired or superseded by the application of federal maritime law. The same result was reached by applying maritime choice-of-law principles to the policy’s choice-of-law provisions.

Lastly, looking at the policy’s arbitration provision, in which the parties agreed “that any and all disputes arising under [the] policy shall be resolved exclusively by binding arbitration … conducted pursuant to the Rules” of the AAA, the Court found the parties “clearly and unmistakably indicated their intent to submit arbitrability questions to an arbitrator.” The AAA rules provide that “[t]he arbitrator shall have the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope or validity of the arbitration agreement or to the arbitrability of any claim or counterclaim.”

Galilea, LLC v. AGCS Marine Ins. Co., No. 16-35474 (9th Cir. Jan. 16, 2018).

This post written by Nora A. Valenza-Frost.
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NINTH CIRCUIT CONSIDERS JURISDICTION TO HEAR APPEAL OF DECISION VACATING ARBITRATION AWARD AND REMANDING FOR A NEW ARBITRATION

January 30, 2018 by Carlton Fields

The Ninth Circuit has found that it had jurisdiction to hear an appeal of a district court decision vacating an arbitration award and remanding the case for a new arbitration.

The appeal arose out of a FINRA arbitration involving claims that a securities broker had mismanaged a client’s investment portfolio. The petitioner claimed damages of $100,000 in his complaint. Because FINRA rules only provide for three arbitrator panels for claims over $100,000, the case was assigned to a single arbitrator.

Shortly before the arbitration hearing, the petitioner filed a brief in which he claimed his damages were $125,500, but he did not amend his complaint. The respondent objected to proceeding with a single arbitrator, but the arbitrator considered and rejected this objection, proceeded to hear the case alone, and awarded petitioner $75,000. The respondent asked a district court to vacate this award on several grounds, which the court did on the basis that the arbitrator exceeded his powers by proceeding as a single arbitrator despite the increased damages claim. The district court then remanded the case for a new arbitration before a three arbitrator panel.

On appeal, the court considered two issues: (1) whether the district court’s decision remanding the case for a new arbitration meant that the appellate court lacked jurisdiction over the case; and (2) if jurisdiction was present, whether the arbitrator had exceeded his authority.

In answer to the first question, the court found that while the FAA does not directly address the circumstance of a case that has been remanded for a new arbitration, the fact that the district court had vacated an award was enough under the statute to create appellate jurisdiction. In doing so, the court followed the lead of every circuit to have considered this issue, including the First, Second, Third, Fifth, and Seventh Circuits.

Having found that it had jurisdiction, the court found that the arbitrator had not exceeded his authority. The court emphasized that in order to overturn an arbitral award on the basis that the arbitrator exceeded his powers, the objecting party must show not simply that the arbitrator erred in his interpretation of the law or the agreement to arbitrate, but also that the arbitrator’s decision was “completely irrational” or showed a “manifest disregard of the law.” Finding that the arbitrator’s interpretation of FINRA’s rules on when to use a three arbitrator panel, while arguably incorrect, was neither irrational nor showed a manifest disregard for the law, the court remanded the case so that the district court could consider the respondent’s other arguments in favor of vacating the arbitrator’s award.

Sanchez v. Elizondo, No. 16-17345 (9th Cir. Dec. 4, 2017).

This post written by Jason Brost.
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THIRD CIRCUIT REFUSES TO COMPEL ARBITRATION IN LIGHT OF ALLEGED FRAUDULENT INDUCEMENT TO SIGN ARBITRATION AGREEMENT

January 29, 2018 by Carlton Fields

The Third Circuit recently affirmed a lower court’s decision refusing car dealership defendants’ motion to compel arbitration pursuant to an arbitration agreement the plaintiffs were allegedly induced to sign. First, the court rejected the dealerships’ argument that the plaintiffs agreed to arbitrate because they signed the arbitration agreement. It noted that a signed arbitration agreement does not necessarily demonstrate intent to be bound in all circumstances, nor did it negate plaintiffs’ argument they were induced to sign the agreement. More importantly, the court held plaintiffs responded to the motion to compel with sufficient additional facts and evidence to place the arbitration agreement into dispute so as to warrant discovery whether the plaintiffs intended to be bound to arbitration. Second, the court dismissed the dealerships’ claim that plaintiffs failed to specifically allege fraudulent inducement in signing the arbitration agreement rather than the contracts in whole, therefore requiring arbitration of the issue of arbitrability. The court found plaintiffs specifically alleged the defense of fraud-in-the-inducement regarding the arbitration agreement, which, if proven, would be grounds to invalidate the arbitration agreement. Therefore, the court affirmed and declined to compel arbitration.

Corchado v. Foulke Mgmt. Corp., No. 17-1433 (3d Cir. Dec. 21, 2017).

This post written by Thaddeus Ewald .
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NINTH CIRCUIT AFFIRMS ORDER REJECTING FIRST AMENDMENT CHALLENGE TO MOTION TO COMPEL ARBITRATION

January 23, 2018 by Michael Wolgin

Consumers filed a putative class action alleging statutory and common law consumer protection and false advertising claims under California and Alabama law, specifically alleging that AT&T falsely advertised their mobile service plans as “unlimited” when in fact it intentionally slowed data at certain usage levels. AT&T moved to compel arbitration pursuant the arbitration agreements included in their wireless data service plans and in light of the Supreme Court’s 2011 ruling in AT&T Mobility LLC v. Concepcion, which held that the Federal Arbitration Act preempts state law deeming AT&T’s arbitration provision to be unconscionable.

Plaintiffs opposed the motion on First Amendment grounds, arguing that an order forcing arbitration would violate the Petition Clause because they “did not knowingly and voluntarily give up their right to have a court adjudicate their claims” and could not “bring their claims in small claims court.” The district court granted AT&T’s motion to compel arbitration, finding that there was no state action in this case to bring the dispute within the ambit of the First Amendment. After denying reconsideration, the district court granted plaintiffs’ motion to certify the order compelling arbitration for immediate interlocutory appeal, finding that there was substantial ground for difference of opinion as to whether state action existed under (1) Denver Area Edu. Telecom. Consortium, Inc. v. FCC or (2) the “encouragement” test. The Ninth Circuit granted permission to appeal.

On appeal, the Ninth Circuit read Denver Area narrowly, reasoning that the case “did not broadly rule that the government is the relevant state actor whenever there is a direct constitutional challenge to a “permissive” statute. The court also found unpersuasive plaintiffs’ argument that the Federal Arbitration Act, including judicial interpretations thereof, “encourages” arbitration such that AT&T’s actions are attributable to the state. The panel concluded, “[p]ermission of a private choice cannot support a finding of state action,” and “private parties [do not] face constitutional litigation whenever they seek to rely on some [statute] governing their interactions with the community surrounding them.” The Ninth Circuit affirmed the district court’s ruling. Roberts v. AT&T Mobility, Case No. 16-16915 (9th Cir. Dec. 11, 2017).

This post written by Gail Jankowski.

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