Week's Best Posts

NINTH CIRCUIT REVERSES CONFIRMATION OF ARBITRATION AWARD, REQUIRES EVIDENCE AS TO CONTRACT INTERPRETATION

November 7, 2016 by Michael Wolgin

The hotel management agreement (HMA) between hotel manager Four Seasons and hotel owner Burton Way provided that Four Seasons could not license any of the “Four Seasons Operational Benefits” within 14 miles of the Four Seasons Los Angeles, but provided an exception permitting Four Seasons to “manage or operate” the Regent Beverly Wilshire hotel. A dispute arose as to whether Four Seasons’ provision of Four Seasons Operational Benefits to the Regent Beverly Wilshire was permitted under the “manage or operate” exception. Both parties at arbitration presented extrinsic evidence as to the interpretation of the exception, and the panel made determinations as to the credibility of both interpretations.

On appeal of the district court’s order confirming the arbitration award, the Ninth Circuit reversed, holding that such fact-finding at summary judgment by the panel was legal error and required an evidentiary hearing. The court also reversed the confirmation of the panel’s determination of sanctions against Four Seasons for spoliation of evidence, remanding for purposes of re-determining the question of prejudice to Burton Way. The Ninth Circuit affirmed, however, on the issues of fiduciary duty and fraudulent inducement. On the issue of fiduciary duty, the court held that it was not legal error for the panel to conclude that negotiations between the two parties over the terms of their management agreement fell outside the scope of the principal-agent relationship. Regarding the inducement claim, the court held that it was not legal error for the panel to conclude that Burton Way waived its fraudulent inducement claim where, despite the fact that it included a clause reserving its claims, it signed a later agreement continuing the relationship. Burton Way Hotels, Ltd. V. Four Seasons Hotels Ltd., Case No. 14-56846 (9th Cir. Oct. 18, 2016).

This post written by Gail Jankowski, a law clerk at Carlton Fields in Washington, DC.

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FIO ANNUAL REPORT ON THE INSURANCE INDUSTRY

November 1, 2016 by John Pitblado

In September, the Federal Insurance Office (“FIO”) issued its Annual Report on the Insurance Industry for 2015, including its “outlook” for 2016 based upon results reported through June 30, 2016.

For 2015, the U.S. insurance industry, both life and health and property and casualty “reported another year in a run of solid financial performance, and, in the aggregate, remained in sound financial condition.” FIO notes the continued effects of low interest rates are exacerbated as life insurers are challenged in constructing investment portfolios that properly match liabilities and a decline in the sale of annuity products.

State insurance regulators have improved standards applicable to life insurers ceding to captive reinsurers, “but additional work is needed to develop a consistent oversight regime aimed at improving the transparency and solvency of captive life reinsurers.” In January 2016, state insurance regulators adopted amendments to the Credit for Reinsurance Model Law “that would provide states with the authority to implement regulations relating to a captive framework, as well as regulations applicable to reinsurance captives outside the scope of the captive framework.”

By 2016, a total of 42 state legislatures have enacted a new reserving methodology called “Principles Based Reserving” (PBR), which relies upon an insurer’s individualized risk modeling and analysis techniques. The three-year implementation period of PBR will begin on January 1, 2017.

The report also discusses cybersecurity issues relevant to the insurance sector, including the Cybersecurity Information Sharing Act, as well as the current state of the cyber risk insurance market and common products offered by a number of insurers.

On April 1, 2016, the U.S. Department of Treasury issued a notice of proposed rulemaking to implement changes to the Terrorism Risk Insurance Program (“TRIP”) required by the TRIP Reauthorization Act, and FIO continues to consider comments received in developing a final rule. Per the report, “TRIP remains an important mechanism in ensuring that terrorism risk insurance remains available and generally affordable in the United States.”

Lastly, FIO notes its continued work at the International Association of Insurance Supervisors with other member jurisdictions, spanning nearly 140 countries, in the development of international standards for the supervision of insurance.

For the full text of the report, click here.

Annual Report on the Insurance Industry, Federal Insurance Office, U.S. Department of the Treasury (Sept. 2016)

This post written by Nora A. Valenza-Frost.

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STRUCTURE OF CFPB FOUND TO BE UNCONSTITUTIONAL BUT AGENCY SURVIVES WITH CUT TO DIRECTOR’S POWER

October 31, 2016 by John Pitblado

The DC Circuit Court of Appeals recently held that the single-director structure of the Consumer Financial Protection Bureau (“CFPB”) was unconstitutional, and gave the President the authority to fire the director at will in order to provide a check on the CFPB’s expansive power.

The background of the case can be found here. PHH, a mortgage lender, was the subject of a CFPB enforcement action regarding allegations that it referred consumers to mortgage insurers who then purchased reinsurance from a PHH subsidiary. The captive reinsurance agreements, according to the CFPB, were an illegal kickback scheme and violated the Real Estate Settlement Procedures Act (“RESPA”) that resulted in a $109 million order against PHH. PHH sought to vacate the order. In its appeal, PHH argued that the CFPB, an independent agency headed by a single Director, violates Article II of the Constitution.

The D.C. Circuit agreed with PHH that the single-director structure given to the CFPB by Congress in the 2010 Dodd-Frank Act left the CFPB’s top official without any check on its authority as the director could only be fired by the President for cause. However, rather than dismantling the CFPB, the Court determined that giving the President the authority to fire the director at will would address the question of accountability at the CFPB. In this regard, the Court stated: “The president is a check on and accountable for the actions of those executive agencies, and the President now will be a check on and accountable for the actions of the CFPB as well.”

The Court also found that the CFPB violated PHH’s due process rights by applying a retroactive penalty against PHH, finding that its captive reinsurance agreements violated RESPA. First, the Court noted that the CFPB had reinterpreted RESPA, a rule it inherited from the U.S. Department of Housing and Urban Development (“HUD”), in a way that invalidated HUD’s previous interpretation. HUD’s interpretation was that captive reinsurance arrangements were lawful “as long as the mortgage insurer paid no more than reasonable market value to the reinsurer for reinsurance actually furnished.” According to the Court, “[r]etroactivity — in particular, a new agency interpretation that is retroactively applied to proscribe past conduct — contravenes the bedrock due process principle that the people should have fair notice of what conduct is prohibited.” The D.C. Circuit also found that the CFPB was wrong in asserting that it could bring an administrative case beyond the three-year statute of limitations provided under RESPA. Noting that the CFPB could theoretically bring an action for a violation that occurred a century ago, the Court noted that “[w]e need not wait for an enforcement action 100 years after the fact. This court looks askance now at the idea that the CFPB is free to pursue an administrative enforcement action for an indefinite period of time after the relevant conduct took place.”

Thus, the D.C. Circuit vacated the CFPB’s order and remanded for the CFPB to determine whether consistent with RESPA’s three year statute of limitations, the mortgage insurers paid more than reasonable market value for the reinsurance to PHH’s captive reinsurer. PHH Corp. v. Consumer Financial Protection Bureau, No. 15-1177, (D.C. Cir. Oct. 11, 2016).

This post written by Jeanne Kohler.

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NORTH CAROLINA FEDERAL COURT HOLDS THAT ARBITRATION CLAUSE REQUIRING PANEL TO RENDER A DECISION WITHIN 30 DAYS IS NOT UNCONSCIONABLE

October 25, 2016 by Rob DiUbaldo

In July, a federal court in North Carolina held that an arbitration provision which required the arbitration panel to reach a decision within thirty days of their selection was not unconscionable. Arising out of a dispute regarding a construction contract, the court said that the defendant’s argument failed to consider the thirty day limitation in the full context of the arbitration provision. While acknowledging that “allowing an arbitration panel only 30 days to sort out the liability for the post-construction, partial collapse of two parking garages would be a Herculean feat, if not utterly impossible,” the court noted that “during any significant construction project, billing claims and disputes often arise which require immediate attention and resolution lest the project grind to a halt.” Thus, the court pointed to the panel’s power to extend the date for final disposition under the Commercial Arbitration Rules of the AAA, to find that the thirty day limitation was not unconscionable.

In late September, the same court compelled a second lawsuit between the parties to arbitration, over the objection of a defendant that the thirty day limitation was absolute and jurisdictional, depriving the panel of continued jurisdiction over the first lawsuit. The court held that such a challenge would constitute an argument that the panel “exceeded its powers,” which was not ripe nor before the court at the time.

Tribal Casino Gaming Enter. v. W.G. Yates & Sons Const. Co., Case No. 1:16-cv-00030-MR (W.D.N.C. July 1, 2016) and Case No. 1:16-cv-00132-MR (W.D.N.C. Sept. 26, 2016).

This post written by Zach Ludens.

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THIRD CIRCUIT REJECTS CONTRACTOR’S CHALLENGE TO ARBITRAL JURISDICTION BASED ON FAILURE TO COMPLY WITH AGREEMENT’S PROCEDURAL REQUIREMENTS

October 24, 2016 by Rob DiUbaldo

The Third Circuit affirmed a lower court’s ruling against a contractor challenging an arbitrator’s authority in ordering payment of delinquent contributions to employee benefit funds. Plaintiff (“Nolt”) signed a Project Labor Agreement (“PLA”) for a construction project that required it to hire union employees, but permitted it to hire non-union employees in certain circumstances. The PLA also required Nolt to contribute to employee benefit funds “on behalf of all employees covered by” it. The PLA contained a provision with an exclusive grievance and arbitration procedure for disputes between the parties, which included certain pre-arbitration “meet and confer” requirements and time limits, the failure to comply with which rendered any grievances null and void.

In a dispute over whether Nolt was required to contribute to union employee benefit funds on behalf of its non-union employees, who would not benefit from the funds, an arbitrator interpreted the plain language of the PLA to require contributions for “all employees covered” by the PLA and ordered payment of $492,000 in delinquent contributions. Nolt moved to vacate the arbitration award on the grounds that the arbitrator lacked jurisdiction and that the award violated public policy and other relevant wage laws.

The Third Circuit, noting the limited role of courts in reviewing arbitration awards, affirmed the award based on a finding of arbitral jurisdiction and lack of sufficient conflict with a cognizable public policy. The court found that Nolt’s argument claiming the union failed to comply with the PLA’s procedural requirements was a question of “procedural arbitrability” that was appropriately left to the arbitrator, rather than one of “substantive arbitrability” that would be appropriate for judicial resolution. The court also rejected Nolt’s claim that the award conflicted with public policy by forcing it to essentially pay twice, first to the union employee benefit fund and second via its obligations under applicable wage laws. Nolt failed to identify any “explicit conflict with other ‘laws and legal precedents’,” and, instead, relied on a non-cognizable “general interest in fairness and equal treatment” between union and non-union employers. The court deferred to the arbitrator’s interpretation of the PLA as contract interpretation within his authority and affirmed despite recognizing Nolt’s persuasive arguments that the award forced Nolt to pay an unfair price for its non-union employees.

D.A. Nolt, Inc. v. Local Union No. 30 United Union of Roofers, Waterproofers & Allied Workers, No. 15-3697 (3d Cir. Sept. 23, 2016).

This post written by Thaddeus Ewald, a law clerk at Carlton Fields in Washington, DC .

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