Reinsurance Focus

Archer & White Sales, Inc. (“Archer”) sued Henry Schein, Inc. (“Schein”) in federal court seeking both monetary and injunctive relief. A contract between the parties required arbitration of all claims arising from the agreement, except those seeking injunctive relief.  Schein moved to compel arbitration based on the request for monetary damages.  Archer objected, pointing to its demand for injunctive relief.  The issue thus became one of arbitrability—who decides whether the dispute is subject to arbitration, the court or an arbitrator?  The contract at issue incorporated the rules of the American Arbitration Association, under which arbitrators are to decide arbitrability issues.  The district court nonetheless decided the issue and denied Schein’s motion, holding it was “wholly groundless” because an arbitrator would inevitably conclude that the dispute is not arbitrable and refer it back to the district court.  The Fifth Circuit affirmed, but the U.S. Supreme Court unanimously vacated the judgment.

Even where a contract expressly delegates the arbitrability question to an arbitrator, the Supreme Court explained that several federal courts “short-circuit” the process and decide the question themselves when they think a request for arbitration is “wholly groundless.” To these courts, this “wholly groundless” exception is a means of blocking “frivolous” attempts to transfer cases out of the court system.  But the Supreme Court found the exception to be inconsistent with the Federal Arbitration Act (“FAA”) and Supreme Court precedent.  The FAA, Justice Kavanaugh wrote, does not contain a “wholly groundless” exception, and the Court must interpret the FAA as written.  The FAA, in turn, requires interpreting the relevant contract as written.  As a result, if a contract delegates the arbitrability issue to an arbitrator, courts have no power to decide the issue, even if they think a particular dispute is not ultimately arbitrable.  The Court held that the wholly groundless exception therefore “confuses the question of who decides arbitrability with the separate question of who prevails on arbitrability.”  And such was the case here, where neither of the lower courts actually decided whether the Archer/Schein contract delegated the arbitrability question to an arbitrator, instead short-circuiting the issue based on the wholly groundless exception.  Having rejected the applicability of such exception, the Court vacated the judgment and remanded for this threshold determination.

Schein v. Archer & White Sales, Inc., No. 17–1272, 586 U. S. ____ (Jan. 8, 2019) (Slip Op.)

This post written by Alex Silverman.
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The background of this case in California federal court is that The Hartford (“Hartford”) issued reinsurance billings to Employers Insurance Company of Wausau (“Wausau”) for settlement payments made to one insured under nineteen different reinsurance treaties between Wausau and three of Hartford’s affiliates, which billings were denied by Wausau. In response, Hartford demanded arbitration and requested that the parties consolidate all the related disputes in a single arbitration. Wausau, in response, proposed that the parties agree to three arbitrations and identified three arbitrators for three separate panels for each of the three Hartford affiliates involved. Hartford refused and identified one arbitrator for a single arbitration and if other arbitrations were necessary, the same arbitrator was identified as arbitrator for such other arbitrations. Wausau’s arbitrators then requested that Hartford’s arbitrator select umpires for three separate arbitrations. In response, Hartford again requested that the parties agree to a methodology to select a single panel to decide how the matter should be consolidated. Wausau then filed four separate petitions in three jurisdictions to compel arbitration: one in California federal court, two in Massachusetts state court and one in Connecticut state court. In the California action, which involved one treaty, Hartford cross-moved to compel a single arbitration in order to adjudicate the parties’ dispute regarding consolidation and, in the alternative, a motion to stay pending arbitration of related proceedings.

As an initial matter, the California federal court noted that the issue of whether arbitrations may be consolidated is a question for the arbitrators and not the court to decide. However, the court noted that the parties remained at an impasse due to Hartford’s insistence of one consolidated arbitration. The court then rejected Hartford’s argument that its three affiliates who had entered into the nineteen treaties could act as a single party for the purpose of seeking reimbursement from Wausau. Noting that it was limited to the terms of the agreements, the court stated that Hartford was only named in two of the nineteen treaties, that the treaties entered into by two of the affiliates required arbitration in Massachusetts and the others required arbitration in Los Angeles. The court also noted that each of the treaties was a separate agreement, with different arbitration clauses. The California federal court then found that the treaty before it contained an arbitration clause which provided a procedure for selecting an umpire, and that once that panel is in place, it can decide the issue of consolidation. Accordingly, the court granted Wausau’s petition to compel appointment of an arbitrator, and denied Hartford’s motions to compel and stay pending arbitration of related proceedings.

Employers Ins. Co. of Wausau v. The Hartford, No. 2:18-cv-07240 (USDC C.D. Cal. Dec. 3, 2018)

This post written by Jeanne Kohler.

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