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COURT FINDS CONFIDENTIALITY PROVISION IN ARBITRATION AGREEMENT UNCONSCIONABLE, COMPELS CONSUMER ARBITRATION

December 4, 2017 by Carlton Fields

The Eleventh Circuit has determined that a confidentiality provision in an arbitration clause was substantively unconscionable. The case involved a putative class action by David Johnson alleging that KeyBank National Association (“KeyBank”) altered the order of debit card transactions to maximize their collection of overdraft fees. Johnson opened the account at issue in 2001 by signing an agreement stating that “all accounts opened under this Plan are subject to [KeyBank’s] Deposit Account Agreement” (the “2001 Agreement”). The Deposit Account Agreement was a 1997 agreement with the arbitration clause at issue (the “1997 Agreement”).

KeyBank moved to compel arbitration of Johnson’s claims, arguing that Johnson agreed to be bound by the arbitration provision in the 1997 Agreement. The district court denied the motion, however, finding the arbitration clause to be unconscionable.

On appeal, the Eleventh Circuit first concluded that Johnson agreed to arbitrate because the 2001 Agreement expressly stated that the 2001 account was “subject to” the terms of the 1997 Agreement, including the arbitration clause. The phrase “subject to” was deemed sufficient to incorporate the 1997 Agreement into the 2001 Agreement by reference. By executing the 2001 Agreement, the court found that Johnson agreed to be bound by the arbitration provision.

The court then reversed the district court’s determination that the arbitration provision was unconscionable. First, the court held that it was not procedurally unconscionable because it was not made without “meaningful choice;” that it was a contract of adhesion did not make it unconscionable per se. Second, while it was not substantively unconscionable as a whole, the court held that a confidentiality clause in the provision was unconscionable in that it required the parties to “keep confidential any decision of an arbitrator.” The court agreed that by keeping the outcomes of prior arbitrations concealed, it put KeyBank, a repeat participant in the arbitration process, at an “obvious informational advantage” at the outset of a dispute. Moreover, prospective claimants would have little context in which to assess the value of their cases, which may discourage those individuals from pursuing valid claims. As such, the court severed the confidentiality clause and enforced the remainder of the arbitration provision with instructions on remand. Larsen v. Citibank FSB, No. 15-10779 (871 F.3d 1295) (11th Cir. Sept. 26, 2017).

This post written by Alex Silverman.
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TREASURY RELEASES REPORT ON ASSET MANAGEMENT AND INSURANCE

November 28, 2017 by Michael Wolgin

The U.S. Department of the Treasury has released a report entitled “A Financial System that Creates Economic Opportunities: Asset Management and Insurance,” the third of four reports to be issued by the Department in response to Executive Order 13772 of February 3, 2017, in which President Trump set forth a set of “Core Principles” to be applied by his administration in the regulation of the financial system. The report includes numerous recommendations, including:

moving away from entity-based system risk evaluations of insurance companies and towards an activities-based approach that would identify business activities that have higher systemic risk characteristics;
harmonizing the group capital initiative of the NAIC, the states, and the Federal Reserve to reduce the existence of duplicative regulatory burdens for insurers;
recommending that the International Association of Insurance Supervisors, in developing its Insurance Capital Standard, “recognize the diverse approaches to solvency” by various regulators to ensure that the business model of U.S. insurance companies and the state-based insurance regulatory system of the U.S. are accommodated;
clarifying, through legislative action, the “business of insurance” exception of Dodd-Frank to ensure that the CFPB is not overseeing activities already regulated by state insurance regulators;
taking steps to encourage private insurers to participate in the market for terrorism insurance;
recommending that states adopt the NAIC Insurance Data Security Model Law and, if uniform requirements are not adopted in five years, passing federal legislation setting forth data breach notification standards specific to insurers;
encouraging the sharing of information within the insurance industry regarding issues related to cybersecurity;
encouraging the consultation of and participation by state governments when the business of insurance is impacted by the decisions of federal agencies and regulators;
directing the Federal Insurance Office to advocate for the U.S. state-based insurance regulatory system before the International Association of Insurance Supervisors and recommending that the FIO have a permanent, voting membership on the IAIS Executive Committee.

While some of these recommendations are within the direct power of the executive branch, most will require the cooperation of Congress, state regulators, or other bodies outside of the President’s control, making it an open question how successful President Trump will be in implementing the ideas described in the report.

This post written by Jason Brost.
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COURT DENIES MF GLOBAL HOLDINGS’ BID TO APPEAL BANKRUPTCY COURT ORDER COMPELLING ARBITRATION

November 27, 2017 by Rob DiUbaldo

On October 30, 2017 the Southern District of New York rejected MF Global Holdings’ (“MF Global”) latest attempt to avoid a bankruptcy court order compelling it to submit to arbitration in Bermuda in its coverage dispute with Allied World Assurance Company (“Allied World”) regarding MF Global’s bankruptcy. The court denied MF Global’s motion seeking leave to appeal the bankruptcy court’s arbitration order and for a stay of the arbitration pending that appeal.

Allied World argued that 9 U.S.C. § 16(b) prohibits interlocutory appeals for orders compelling arbitration, and that the exception to the statute was not satisfied in this case. The listed exception, 28 U.S.C. § 1292(b), provides for district court certification of interlocutory orders for appeal to circuit courts but does not apply to appeals from bankruptcy courts to district courts under § 158(a). The court declined to accept that interpretation, instead concluding that § 16(b) was not intended to cover, and did not apply to, decisions of bankruptcy courts. Additionally, the court noted that accepting Allied World’s argument would lead to like cases being treated differently because cases in bankruptcy court could never obtain an interlocutory appeal while cases in which a district court declines to refer the matter to the bankruptcy court could obtain interlocutory appeal. Therefore, the court held, § 16(b) did not bar MF Global’s attempted appeal.

Nevertheless, the court found there were no “exceptional circumstances” justifying an interlocutory appeal of the bankruptcy court’s order. The proposed issue on appeal was whether a bankruptcy plan provision retaining jurisdiction over future and related disputes supersedes pre-bankruptcy arbitration rights, absent an express provision to that effect and when the adversary proceeding began after confirmation of the bankruptcy plan. The court found this issue to be a controlling question of law, even though a resolution on it would not terminate the case, because it would offer helpful guidance for future parties encountering the issue. It also found there was “substantial ground for difference of opinion” based on cases from other courts reaching conclusions contrary to that of the bankruptcy court. Interlocutory appeal was inappropriate, however, because reversal of the bankruptcy court on this issue would not, by itself, “materially advance the ultimate termination of the litigation” where the defendant made several independent arguments for why the jurisdiction provision should not be enforced that would each need to be addressed.

Because the court denied MF Global’s motion for leave to appeal, it also denied the motion to stay as moot.

In re: MF Global Holdings Ltd., Case No. 17-7332 (S.D.N.Y. Oct. 30, 2017).

This post written by Thaddeus Ewald .

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LONG-TIME REINSURANCE ATTORNEY RULED NOT QUALIFIED TO ARBITRATE 9/11 WORLD TRADE CENTER REINSURANCE DISPUTE

November 22, 2017 by Michael Wolgin

An attorney with “considerably more than ten years’ experience of insurance and reinsurance law” has been deemed unqualified to arbitrate a reinsurance dispute stemming from the September 11, 2001 terrorist attack on the World Trade Center. The arbitration agreement called for an arbitration tribunal consisting of “persons with not less than ten years’ experience of insurance or reinsurance.” The High Court of Justice, Business and Property Courts of England and Wales, determined that this language required appointment of an individual with more than ten years’ experience in the business of insurance or reinsurance, rather than the law of insurance or reinsurance.

The court’s determination was largely dictated by a 2000 decision in which the judge held that the parties to an arbitration agreement utilizing the same language intended a “trade arbitration” meaning “the tribunal was to consist of persons from the trade or business of insurance or reinsurance.” Although the court acknowledged the strength of the argument that the “ordinary and natural meaning” of “experience of insurance or reinsurance included experience acquired not only from working within the insurance and reinsurance industry but also from working with or on behalf of that industry,” the court nevertheless held that the previous decision was not so “obviously wrong” that the precedential decision (Company X v. Company Y date July 17, 2000), should be departed from.

The court relied in part on the fact that the 2000 decision was “mentioned in Butler & Merkin’s Reinsurance Law … at paragraph C-0729.” This was accepted as evidence that the decision was “fairly well known in the legal/reinsurance claims community.” Therefore, in light of “the importance of precedent,” if the parties had intended a different meaning than that adopted in the “fairly well known” prior case, they would have used different language. As such, the court ruled that legal insurance or reinsurance experience was not sufficient under the clause and the attorney could not be appointed as an arbitrator. Tonicstar Ltd. v. Allianz Ins. PLC, [2017] EWHC (Comm) 2753.

This post written by Benjamin E. Stearns.

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SECOND CIRCUIT HOLDS SECTION 1782 DISCOVERY IS AVAILABLE FOR USE IN A FOREIGN OR INTERNATIONAL PROCEEDING EVEN WHERE APPLICANT MAKES NO CLAIM FOR MONETARY DAMAGES

November 21, 2017 by Rob DiUbaldo

This case arose out of a dispute between Intervenors-Appellants Yves Bouvier and MEI Invest Ltd. (collectively, “Bouvier”) and Petitioners-Appellees Accent Delight International Ltd. and Xitrans Finance Ltd. (collectively, “Petitioners”) over the sales to Petitioners of thirty-eight works of art, including paintings by Picasso and van Gogh, for a total of approximately $2 billion. Petitioners ultimately initiated criminal and civil proceedings against Bouvier in Monaco, France and Singapore on the grounds of fraud. Petitioners filed a 28 U.S.C. § 1782 application in the District Court for the Southern District of New York claiming that Sotheby’s was involved in relevant acquisitions by Bouvier. Petitioners requested discovery of documents relevant to all thirty-eight artworks involved in the alleged fraud. The district court granted the discovery application with respect to the French proceedings and denied Bouvier’s request for a protective order limiting the discovery to be used in the Monaco proceeding.

On appeal, the first issue was whether discovery was “for use in a proceeding in a foreign or international tribunal” for the purposes Section 1782, where the applicant is a crime victim authorized to submit the discovery to the foreign tribunal, but where the applicant is not making a claim for damages. On this issue, the Court held in the affirmative. The Court rejected Bouvier’s argument that the statute’s “for use” clause was limited to cases where monetary relief was sought. Specifically, the Court reasoned that “Section 1782 explicitly permits district courts to grant discovery in aid of ‘criminal investigations conducted before formal accusation,’ which are among the cases least likely to feature claims by private litigants for money damages notwithstanding the considerable variation in procedural rules across countries (including those involved in this appeal).” As to the second issue on appeal, whether an applicant that lawfully has obtained discovery under Section 1782 as to one foreign proceeding may use that discovery in another foreign proceeding, the Court held that Section 1782 permits such use, absent an order to the contrary by the district court. In so finding, the Court “s[aw] no reason why the number or identity of the foreign proceedings in which a successful applicant may use discovery produced pursuant to the statute would fall outside that discretionary grant” and reasoned that “Section 1782 leaves to the district courts’ discretion both the decision to grant discovery and to ‘prescribe the practice and procedure’ for its production.”

In a related summary order, the Court addressed the remaining issues on appeal. It found that the district court did not abuse its discretion in dismissing Bouvier’s argument that the district court failed to properly consider the third Intel factor, whether the Section 1782(a) request conceals an attempt to circumvent foreign proof-gathering restrictions. In addition, the Court declined to resolved a district court split as to whether Section 1782 permits discovery of documents located outside the United States. The Court affirmed the lower court’s decision in its entirety. Bouvier v. Adelson, Case No. 16-3655 (2d Cir. Aug. 28, 2017) (Opinion at Dkt. 131 & Summary Order at Dkt. 132).

This post written by Gail Jankowski.

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