Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

Federal District Court Declines to Rule on Arbitration Award, Finding No Independent Basis for Jurisdiction

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Following arbitration, the parties filed cross-motions to confirm and vacate the arbitration award. The District Court for the Southern District of California issued an order to show cause why the case should not be dismissed for lack of subject matter jurisdiction because the FAA does not independently confer jurisdiction, and the parties did not adequately plead a jurisdictional basis that would permit the court to rule. Golub, moving that the award be vacated, argued that the court had jurisdiction because (1) she was denied a fair arbitral hearing, and (2) the award was in manifest disregard of federal law. The court rejected both arguments, reasoning that federal question jurisdiction to enforce or vacate an arbitration award exists only when ultimate disposition of the matter by the federal court necessarily depends on resolution of a substantial question of federal law, such as when the petition alleges that the arbitrator manifestly disregarded federal substantive law. The court went on to warn that “even in those cases where the arbitrator manifestly disregarded federal substantive law, courts are reluctant to find jurisdiction.” Last, the court stated that the allegation that the arbitrator denied a party a fair opportunity to present its case by refusing to compel production of documents, does not raise a “substantial question of federal law.” The court was “aware of no case … stating that failure to follow federal procedure in an arbitration can give rise to federal question jurisdiction.” BOFI Fed. Bank v. Golub, Case No. 3:18-cv-00816 (USDC S.D. Cal. Nov. 8, 2018).

This post written by Gail Jankowski.

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$100 Million Arbitration Award Supported by “Even a Barely Colorable Justification” Upheld Under the FAA

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A $100 million arbitration award against NutraSweet was reinstated by a New York state appellate court due to the “emphatic federal policy in favor of arbitral dispute resolution embodied in the FAA, a policy that applies with special force in the field of international commerce.” NutraSweet’s acquisition of a Korean aspartame producer went sour, and the two companies proceeded to arbitration. The arbitration panel ruled against NutraSweet on all of the issues and rendered an award in excess of $100 million to Daeseng Corp. However, when Daeseng petitioned a New York trial court for confirmation of the award, the court reversed and remanded, finding the arbitrators had “manifestly disregarded the law and had misconstrued the procedural record.”

On appeal, the New York appellate court held the reversal to be in error, stating that “ordinary errors” of law are insufficient to constitute the required “manifest disregard of the law” necessary to overturn an arbitration award. The doctrine of manifest disregard of the law is “severely limited” and is a “doctrine of last resort limited to the rare occurrences of apparent egregious impropriety on the part of the arbitrators.” To modify or vacate an award on that ground, a court must find that “the arbitrators knew of a governing legal principle yet refused to apply it or ignored it altogether, and (2) the law ignored by the arbitrators was well defined, explicit, and clearly applicable to the case.”

Under this demanding standard, even if the court held the arbitrators had made a mistake in their application of the law, that would not be sufficient to set the award aside where the issue was “far from obvious and capable of being readily and instantly perceived by the average person qualified to serve as an arbitrator.” The court walked through each of NutraSweet’s arguments, and, without deciding that the arbitrators’ decisions were correct, nevertheless found that there was at least a “barely colorable justification” for each of them, and therefore they must be upheld. In re Daeseng Corp. v. NutraSweet Co., Case No. 2018 NY Slip Op. 06331 (NY. Sup. Ct. App. Div., Sept. 27, 2018).

This post written by Benjamin E. Stearns.

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Ninth Circuit Enforces Arbitral Immunity Following FINRA Arbitration

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Plaintiff Syed Nazim Ali appealed a Northern District of California judgment dismissing Plaintiffs’ diversity action against FINRA alleging state law claims arising from an arbitration proceeding. The Ninth Circuit affirmed the District Court’s decision to dismiss Plaintiffs’ claims on the basis of arbitral immunity “because the claims alleged effectively seek to challenge the decisional acts of an arbitrator or an arbitration panel” contrary to California precedent.

The District Court had previously confirmed the FINRA arbitration award, as previously reported here.

Global Ebusiness Services, Inc. et al. v. FINRA, No. 18-15716 (USCA 9th Cir. Oct. 29, 2018)

This post written by Nora A. Valenza-Frost.

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South Carolina Federal Court Denies Motion to Stay and Orders Insurer to Produce Documents

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The background of this case is as follows. In 2014, ContraVest Inc., ContraVest Construction Co., and Plantation Point Horizontal Property Regime Owners Association Inc. (collectively, “Plaintiffs”) brought suit in South Carolina state court against Mt. Hawley Insurance Company (“Mt. Hawley”) for declaratory judgment, bad faith, breach of contract and unjust enrichment based on the insurer’s refusal to provide benefits allegedly owed under excess commercial liability insurance policies with respect to an allegedly defective construction project. The case was removed to South Carolina federal court. In March 2017, the South Carolina district court granted a motion to compel filed by Plaintiffs. In April 2018, Mt. Hawley moved to stay the case pending resolution of a mandamus petition to the Fourth Circuit and a motion to certify a question of attorney-client privilege waiver in bad faith insurance claims to the South Carolina Supreme Court. It also submitted to the court a privilege log and various documents for in camera review. The privilege log had four main categories of documents at issue: attorney-client privilege documents, work-product documents, reinsurance documents and reserves documents.

The South Carolina district court denied Mt. Hawley’s motion without prejudice and ordered that it produce all documents except those claiming attorney-client privilege in light of the mandamus petition. It declined to conduct an in camera review of the work-product documents and ordered production of those documents. The court also held that it would not consider whether an in camera review is necessary to determine if the reinsurance and reserves documents are relevant or privileged, and also ordered production of those documents. Mt. Hawley also took the position that it had not waived its objection regarding documents referencing mediation. However, the court noted that Mt. Hawley cited no South Carolina case law discussing a mediation privilege and the court noted that its own research did not reveal any such case law. It also noted that if Mt. Hawley meant to reference attorney-client privilege, “it does not appear that Mt. Hawley believes these documents to be attorney-client privileged as the privilege log does not identify them as such.” Thus, the court found that “[i]f Mt. Hawley means to reference general confidentiality rules about mediation, those rules are not applicable to the current issue” because “producing a document during discovery is not the same as introducing a document in a proceeding.” Thus, the court ordered that Mt. Hawley produce the mediation documents.

As for Mt. Hawley’s request to stay the case pending resolution of its petition for mandamus in the Fourth Circuit, the South Carolina district court noted that Mt. Hawley’s petition relates only to the attorney-client privilege issue, and that the Fourth Circuit already “stay[ed] any district court discovery that implicates the attorney-client issue pending further order of [the Fourth Circuit].” Thus, the court declined to stay the entire case “due to this discrete issue when there are other pending discovery issues unrelated to the attorney-client privilege issue,” and denied Mt. Hawley’s motion without prejudice.

ContraVest Inc., et al. v. Mt. Hawley Insurance Co., No.15-00304 (USDC D.S.C., Oct. 24, 2018).

This post written by Jeanne Kohler.

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Tenth Circuit Strikes Offending Arbitration Provision Clause in Au Pair Agreements

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Plaintiffs had entered into various au pair agreements which contained arbitration provisions, which defendants sought to enforce when a class action was filed. The District Court of Colorado denied the defendants’ motion to compel arbitration, finding the au pair agreements “were contracts of adhesion and procedurally unconscionable because the au pairs were relatively young at the time they signed the contracts, were foreigners, spoke English as a second language, and had no experience with contracts or contract law.”

The Circuit Court agreed that the arbitration provision was unconscionable, but reached “that conclusion for reasons more limited than those found by the district court.” The Court found the agreements were procedurally unconscionable “to a moderate degree,” as contracts of adhesion. As to substantive unconscionability, the Court analyzed three clauses: (1) allowing AuPairCar, Inc. to select unilaterally the arbitration provider has a high degree of substantive unconscionability; (2) a California forum selection clause was not unconscionable; and (3) bilateral fee shifting was not unconscionable. “Because the au pair agreements have moderate procedural unconscionability and significant substantive unconscionability due to the arbitration provider selection clause, the au pair agree is unconscionable and unenforceable as written.”

The Circuit Court ordered the District Court to sever the provision allowing AuPairCar, Inc. to unilaterally select the arbitration provider, as both California and federal law provide a default method for appointing an arbitrator, and, consistent with its opinion, to further compel the parties to arbitrate.

Beltran v. Interexchange, Inc., No. 17-1359 (USCA 10th Cir. Oct. 30, 2018)

This post written by Nora A. Valenza-Frost.

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