Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

An Agreement to Arbitrate Is Not a Contract Defense Under Montana Law

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The Ninth Circuit reversed the District of Montana’s denial of a motion to compel arbitration on the grounds that “the insurer was estopped from asserting contract defenses as a result of its breach of its duty to defend.” The Ninth Circuit held that neither the 2014 Montana Supreme Court decision Tidyman’s Management Services, Inc. v. Davis, 330 P.3d 1139, nor any other Montana case, treats an agreement to arbitrate as a contract defense that an insurer is estopped from asserting as a result of its breach of its duty to defend. Rather, such agreement “establishes how the parties choose to resolve disputes arising out of the contract.” A party successfully compelling arbitration “may nevertheless have any insurance contract defenses arising out of its policy resolved against it by the arbitrator.”

Am. Trucking & Transp. Ins. Co., v. Nelson, No. 18-35414 (9th Cir. June 4, 2019)

Second Circuit Affirms Ruling Rejecting Lack of Notice Defense Under New York Convention Article

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Affirming the confirmation of a Chinese arbitral award under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, the Second Circuit held that notice mailed directly to an entity is sufficient to afford it due process pursuant to American standards. The China International Economic and Trade Arbitration Commission sent notice and arbitration materials to the respondent at the address listed in the parties’ contract. When some of these materials were returned, the items were mailed to the respondent’s address on file with the New York Department of State as well as a third address. The documents sent to the latter two addresses were not returned, and service was assumed.

Although the respondent argued it never received notice of the arbitration, which is a defense under Article V(1)(b) of the New York Convention, and submitted a declaration to that effect, the declaration did “not satisfy the ‘heavy’ burden imposed on a party asserting a defense under” the Convention.

Tianjin Port Free Trade Zone Int’l Trade Serv. Co. v. Tiancheng Chempharm, Inc. USA, No. 18-1918 (2d Cir. June 4, 2019)

Ninth Circuit Denies Mandamus After District Court Compels Arbitration Based on Allegedly Inconspicuous Arbitration Provision

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The Ninth Circuit recently denied a petition for a writ of mandamus seeking to overturn a district court’s decision compelling arbitration. The petition principally argued the arbitration clause was inconspicuous because it was only found in a document that users had to: (1) click a link to access; and (2) then find another document incorporated in the first document on UPS’ website.

Randall Holl filed a putative class action alleging that UPS overcharged him for a package he shipped. UPS responded by moving to compel arbitration. It claimed Holl had enrolled in the UPS My Choice program. In so doing, he clicked a box stating he agreed to, inter alia, the UPS My Choice Service Terms, which could be accessed by clicking a hyperlink next to the checkbox. That hyperlink brought users to a short document that incorporated several other documents but did not mention arbitration. The other documents were not hyperlinked to that page, but could be accessed on UPS’ website. One of the documents incorporated was the UPS Tariff/Terms and Conditions of Service, which was 32 pages in length and contained a mandatory arbitration clause. Holl claimed, inter alia, that these multiple levels of incorporation made the arbitration clause inconspicuous.

The district court disagreed, and Holl petitioned the Ninth Circuit for a writ of mandamus. The court noted that this case “test[ed] the outer limits of what constitutes a ‘reasonably conspicuous'” arbitration provision. The Ninth Circuit nevertheless denied Holl’s petition because the district court’s decision was not clearly erroneous as a matter of law, which was required for Holl to prevail under the strict requirements of a mandamus. Applying California contract law, the court noted that “California courts have deemed analogous incorporations by reference valid.”

The court also noted that UPS had since changed its arbitration disclosure to make it more conspicuous. That was probably wise. While UPS prevailed in this case, the Ninth Circuit noted that the facts stretched the limits of what is conspicuous, and the court’s holding was based on the extraordinary requirements of a writ of mandamus. It is not clear that UPS would have prevailed but for the strict standard of review, and other courts might well disagree with the district court. UPS seems to have recognized as much when it changed its disclosure.

In re Holl, No. 18-70568 (9th Cir. May 30, 2019).

Alabama District Court Enforces Arbitration Clause Related to Disability Policy Over Unconscionability Claim

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The U.S. District Court for the Northern District of Alabama has compelled arbitration despite a former employee’s claim that the arbitration clause in the policy at issue was unconscionable under the circumstances related to her disability claim.

Laura A. Thompson claimed to be disabled and sought benefits under a policy issued by Generali Worldwide Insurance Co. Limited. The policy was issued to the retirement plan trustee of a nongovernmental association. Thompson indirectly worked for the association as an employee of one of the association’s subsidiaries. Generali sought to compel arbitration. Thompson claimed the policy’s arbitration clause was unconscionable and therefore unenforceable. The basis of her claim was that she had no meaningful choice whether to accept or reject the clause and it would be cost prohibitive for her to travel to London to arbitrate her claim in accordance with the clause.

The court disagreed. First, it noted that Thompson was not a party to the policy; the policy was between Generali and the retirement plan trustee. Nothing suggested that the trustee was forced to accept the arbitration clause or that the trustee had unequal bargaining power. The court also noted that nothing prohibited Thompson from purchasing her own long-term disability policy. Second, Thompson’s claim that it would be prohibitively expensive for her to arbitrate her claim was disproven by her own complaint, which alleged that she was entitled to more than $1.3 million. Moreover, the arbitration rules allowed examination through telecommunication and the issue on the merits (whether Thompson was covered despite the fact that she was no longer employed by the covered employer) would not require much evidence.

As is the case in most jurisdictions, the standard for unconscionability under Alabama law is very high. The facts of this case did not meet that high standard. The court therefore granted Generali’s motion to compel arbitration with respect to Thompson’s dispute.

Thompson v. Generali Worldwide Ins. Co., No. 3:18-cv-011260 (N.D. Ala. June 7, 2019).

Court of Appeals Finds District Court Did Not Err in Lifting Stay Ordered to Refer Case to Arbitration

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Lawren Freeman entered into a contract with SmartPay Leasing LLC to lease a smartphone. The contract included an arbitration clause. Freeman filed suit in the federal district court against SmartPay. Shortly after, the parties filed a joint motion to stay to refer the case to arbitration, which was granted on July 12, 2017. After that referral, a dispute arose between SmartPay and the arbitrator regarding the parties’ respective obligations to pay the arbitration fee. On October 19, the arbitrator closed the arbitration file due to nonpayment of the fee. In November 2017, Freeman filed a motion in the district court to lift the stay in the civil action due to SmartPay’s nonpayment of the fee. In January 2018, the district court granted an order lifting the stay. SmartPay filed an appeal of the district court’s order. As an initial matter, the court of appeals held that it had jurisdiction over the appeal pursuant to the Federal Arbitration Act (FAA). Section 16 of the FAA governs appeals as of right from the district court’s arbitration decision, and it permits immediate appeal from an order “refusing a stay.” On the merits, the court of appeals held that SmartPay acted inconsistently with its contractual right to arbitrate when it refused to pay the initial fee as expressly required by the arbitration agreement and, therefore, it waived its right to arbitration. Further, the court of appeals held that any alleged conflict between the arbitration agreement and the JAMS’s Consumer Minimum Standards was reconcilable, and therefore when SmartPay would not comply with the JAMS’s Consumer Minimum Standards it waived its right to arbitration. Lastly, the court of appeals found that it was appropriate to lift the stay on the civil action because the arbitration underlying the stay had been in accordance with the terms of the agreement, and SmartPay was in default by failing to pay the fee.

Freeman v. SmartPay Leasing, LLC, No. 18-10380 (11th Cir. May 3, 2019)