Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

California Appellate Court Holds U.S. Supreme Court’s Epic Systems Ruling Does Not Authorize Waiver of Class Relief or Arbitration of PAGA Claims Absent Consent From California

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Former employees sued their former employer, alleging wage and hour violations and seeking civil penalties under the California Private Attorneys General Act of 2004 (PAGA). In response, the employer petitioned for arbitration under the parties’ arbitration agreement. The agreement provided that arbitration shall be the exclusive forum for any dispute and prohibited employees from bringing a “representative action.”

The trial court granted the arbitration petition on all causes of action except for the PAGA claim, relying on the California Supreme Court decision in Iskanian v. CLS Transportation Los Angeles LLC, which held that agreements that waived the right to bring PAGA representative actions in any forum were unenforceable. The trial court stayed the PAGA claim pending the conclusion of the arbitration.

On appeal, the employer argued that the court erred because Iskanian is inconsistent with a recent Epic Systems decision by the U.S. Supreme Court. The appellate court rejected this argument, finding that Epic Systems did not address the scenario in Iskanian, which involved a claim under PAGA brought on behalf of the government, and the enforceability of an agreement barring a PAGA representative action in any forum. The court concluded that the trial court properly ruled that the waiver of representative claims in any forum is unenforceable. The appellate court agreed with other California court rulings that held that Iskanian’s view of a PAGA representative action — that a PAGA litigant is an agent of the state — means that this claim cannot be compelled to arbitration based on an employee’s arbitration agreement absent some evidence that the state consented to the waiver of the right to bring the PAGA claim in court. There was no such evidence in this case.

The employer also argued that the parties’ arbitration agreement should be interpreted to mean that if the representative-action waiver is unenforceable, the PAGA claim for statutory penalties remains subject to arbitration. The court rejected this argument on the basis that several California courts of appeal have held that a PAGA arbitration requirement is unenforceable based on Iskanian’s view that the state is the real party in interest in a PAGA claim for penalties.

The court also distinguished federal courts that have reached a different conclusion regarding the arbitrability of a PAGA representative claim, finding that these decisions were unpersuasive because the courts did not fully consider the implications of the qui tam nature of a PAGA claim on the enforceability of an employer-employee arbitration agreement.

Correia v. NB Baker Elec., Inc., No. D073798 (Cal. Ct. App. Feb. 25, 2019).

Discovery Under Section 1782 Denied Based on Finding That Chinese Arbitration Organization Was Not a “Foreign or International Tribunal”

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Section 1782(a) permits a person to seek a court order for the production of documents for use “in a proceeding in a foreign or international tribunal. …” To obtain discovery under the statute, the petitioner must meet three requirements: (1) the person from whom discovery is sought must reside or be found in the district where the application was made; (2) the discovery must be for use in a foreign proceeding before a foreign or international tribunal; and (3) the applicant must be either a foreign tribunal or an interested person.

Here, the court relied on precedent in the Second Circuit holding that when Congress enacted section 1782, “it intended to cover governmental or intergovernmental arbitral tribunals and conventional courts and other state-sponsored adjudicatory bodies,” but did not intend to cover “arbitral bodies established by private parties.” Based on this precedent, the court found that the China International Economic and Trade Arbitration Commission (CIETAC) did not qualify as a foreign tribunal under section 1782(a). While the court acknowledged that CIETAC was originally established in 1954 by the Chinese government, the court explained that: (1) CIETAC’s jurisdiction is derived exclusively from the private agreement of the parties to arbitration proceedings; (2) the parties, not the state, are permitted to choose their own arbitrator; (3) the arbitrator’s decision is final and binding upon both parties; and (4) CIETAC itself emphasizes it is “independent of the administrative organs of the Chinese government, and free from any administrative interference in handling cases.” The court also noted that permitting parties to seek discovery through American courts under section 1782(a) would undermine significant advantages of arbitration, specifically, its efficiency and cost-effectiveness, and thereby conflict with the strong federal policy favoring arbitration. The court therefore held that CIETAC is not a “foreign or international tribunal” within the meaning of section 1782(a).

In re Application of Hanwei Guo, No. 1:18-mc-00561-JMF (S.D.N.Y. Feb. 25, 2019).

“Partial Final” Does Not Mean Final

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Don’t try to confirm an arbitration award when there is still arbitration work to be done. Relying on Seventh Circuit precedent, the Northern District of Illinois concluded that it lacked subject-matter jurisdiction to confirm an arbitration award because the arbitrators’ work was incomplete and the arbitration hearing wasn’t finished.

FCE Benefit Administrators Inc., a third-party benefits administrator, agreed to administer health insurance policies underwritten by Standard Security Life Insurance Co. of New York and Madison National Life Insurance Co. The life insurers terminated the agreement, alleging that FCE had breached it, essentially by doing a bad job. They initiated arbitration and FCE counterclaimed, claiming the insurers wrongfully terminated the agreement.

Before the arbitration, FCE sought a continuance for discovery and to amend its counterclaim. The panel denied the request for a continuance, but granted the request to amend. In addition, the panel explained that FCE’s counterclaims would be presented at a second phase of the arbitration at which FCE would also be required to produce certain documents.

The parties proceeded to arbitration and the panel issued a “Partial Final Award” in favor of the insurers, concluding that the insurers were within their rights to terminate the agreement. The panel awarded the insurers nearly $5.4 million and determined that “[a]ll other claims for relief by the parties [were] denied.” The insurers sought to confirm the award.

The district court dismissed the insurers’ claim for confirmation for lack of subject-matter jurisdiction. It explained that courts lack jurisdiction to confirm an award when the arbitrators’ work was unfinished. Although the award in this case had resolved the insurers’ claim and denied all other claims, it was “undisputed that the Panel still ha[d] left to adjudicate, at a minimum, FCE’s counterclaim against” the insurers. All parties had contemplated a “Phase II.”

Standard Sec. Life Ins. Co. of New York v. FCE Benefit Adm’rs, Inc., No. 19 CV 64 (N.D. Ill. Mar. 13, 2019).

Court Rejects Attempt to Relitigate Arbitration Award

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The California Court of Appeal (Fourth District) recently rejected a dissatisfied litigant’s attempt to relitigate an arbitration decision that went against it to the tune of more than $18 million.

An employee of American Claims Management Inc. (ACM), a third-party administrator hired by QBE Insurance Corp. (QBE) to manage QBE’s claims, had a major case of the Mondays and apparently neglected to inform QBE about a demand for a $30,000 policy limit following a car accident. As a result of that “oops,” QBE paid $15 million to settle the claim. QBE then sued ACM for breach of contract. The parties arbitrated the dispute. An arbitration panel awarded QBE nearly $18.5 million.

QBE then petitioned a California trial court to confirm the arbitration award. ACM opposed. The court sided with QBE and confirmed the award, noting ACM appeared to be attempting to relitigate the arbitration award because it did not agree with the panel’s decision. ACM appealed. It raised a number of arguments. Specifically, ACM asserted that the arbitration panel had exceeded its powers by, for example, failing to cite California law, creating law that violated California law, awarding way too much money, and ignoring the Federal Arbitration Act. The appellate court didn’t quite see things ACM’s way, however. It noted that its review was exceptionally narrow and that it could only correct an arbitration award when the arbitrators “exceeded their powers but the award may be corrected without affecting the merits of the decision” (i.e., if the decision was “so utterly irrational that it amounts to an arbitrary remaking of the contract between the parties”). While ACM had couched its arguments in terms of exceeding power, the court concluded that ACM’s “claims amount[ed] to nothing more than assertions of legal error.”

The morals of this case: (1) if you’re a claims administrator, promptly report the claims that come in; and (2) don’t be fooled into thinking that claiming an arbitration panel “exceeded its powers” is a magic password to judicial review.

QBE Ins. Corp. v. Am. Claims Mgmt., Inc., No. D073345 (Cal. Ct. App. Feb. 4, 2019), reh’g denied (Feb. 27, 2019).

District Court Declines to Decide Procedural Arbitrability Issue, Separately Seals Docket, Finding “Reasonably Significant Privacy Interest” in Reinsurance Treaties

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Everest Reinsurance Co. reinsured Pennsylvania National Mutual Casualty Insurance Co. under several treaties requiring the parties to arbitrate all disputes. The arbitration clauses in the treaties also contained a “consolidation” provision stating that “[i]f more than one Reinsurer is involved in the same dispute, all such Reinsurers shall constitute and act as one party for the purposes of this Article.” A dispute later arose and Pennsylvania Mutual commenced arbitration, but Everest refused to participate fully, claiming the dispute should have been joined with an earlier arbitration between Pennsylvania Mutual and other reinsurers. While the parties agreed that this threshold “consolidation” issue was for arbitrators to decide, not the court, they disagreed as to which arbitrators. Pennsylvania Mutual wanted a new panel; Everest wanted the prior panel. The court agreed with Pennsylvania Mutual, finding the issue was purely “procedural” and, therefore, not for the court to decide. The court enforced the process set forth in the treaties for selecting a new arbitration panel before whom Everest could raise consolidation as a threshold issue.

Separately, Pennsylvania Mutual moved to seal various documents submitted in support of its motion to compel arbitration, including its arbitration demand to Everest, subsequent correspondence, and the relevant treaties. The court agreed with Pennsylvania Mutual that it had a “reasonably significant privacy interest” in the treaties and the “sensitive and proprietary” information in its correspondence with Everest. Because Pennsylvania Mutual negotiates various agreements with different reinsurers, each of which is likely similar, but not necessarily identical, the court held that “disclosure of the precise terms of any one agreement could reasonably have a significant impact on [Pennsylvania Mutual’s] ability to negotiate other agreements with different reinsurers.” Finding this privacy interest “substantially outweighs” the minimal public interest in disclosure, the court granted Pennsylvania Mutual’s motions.

Pennsylvania Nat’l Mut. Cas. Ins. Co. v. Everest Reinsurance Co., No. 1:18-mc-00653 (M.D. Pa. Mar. 14, 2019).