Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

Seventh Circuit Joins Five Other Circuits, Holds Availability of Class or Collective Arbitration is a Gateway Issue of Arbitrability to be Decided by Courts, Not Arbitrators

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A former employee of Waterstone Mortgage Corporation filed a class action against Waterstone in Wisconsin federal court in 2011 alleging wage violations and breach of contract. The District Court for the Western District of Wisconsin compelled arbitration pursuant to an agreement between the plaintiff and Waterstone, but it struck as unlawful a waiver clause that appeared to forbid class or collective arbitration of her claims, reasoning that the plaintiff could not waive her right to bring a class action under the National Labor Relations Act. The arbitrator conducted a collective arbitration over Waterstone’s objection and ultimately awarded more than $10 million in damages and fees to the plaintiff and 174 similarly situated employees. On appeal, the Seventh Circuit was faced with reconciling the district court’s decision with a subsequently-decided U.S. Supreme Court case, Epic Systems Corporation v. Lewis. Specifically, Epic Systems upheld the validity of waiver provisions like the one at issue here, and therefore, if the district court’s imposition of collective arbitration on Waterstone violated that waiver, the Seventh Circuit would be required to instruct the district court to vacate the award.

The primary issue on appeal was whether the district court incorrectly struck the subject waiver from the parties’ arbitration agreement. Because the plaintiff did not concede that collective arbitration violated the waiver, the Seventh Circuit framed the issue as such: “If the availability of class or collective arbitration is a threshold question of arbitrability, the district court has to decide it. Otherwise, it falls to the arbitrator.” Ultimately, the Panel concluded that the availability of class or collective arbitration is a threshold question of arbitrability. In so finding, the court reasoned that “[d]etermining whether [an] agreement reflects the parties’ consent to class or collective arbitration requires the decisionmaker to determine whether the parties agreed to arbitrate those disputes as well. And that is a gateway matter for the court to decide.” In addition, the court reasoned that such “fundamental” questions belong in the “gateway” category in part due to the Supreme Court’s 2010 decision in Stolt-Nielsen S.A. v. AnimalFeeds International Corporation, which found that class arbitration is available only if an arbitration agreement contains evidence that the parties affirmatively consented to that procedure. As such, the court noted that the structural features of class arbitration make it a “fundamental” change from the norm of bilateral arbitration. As such, the Seventh Circuit’s ruling meant that on remand, the district court, rather than the arbitrator, must evaluate the plaintiff’s contract with Waterstone to determine whether it permits class or collective arbitration.

Herrington v. Waterstone Mortgage Corp., No. 17-3609 (7th Cir. Oct. 22, 2018).

This post written by Gail Jankowski.

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Court Upholds Decision Rendering Insurance Arbitration Provision and Delegation Clause Unenforceable for Failure to File Them with the State Insurance Commissioner

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In a dispute between Low Desert Empire Pizza (Desert Pizza) and its insurers over alleged mismanagement of claims and unjustifiable cost increases related to a workers’ compensation insurance program, a California appellate court recently upheld the denial of the insurers’ motion to compel arbitration. The insurers had moved to compel based on arbitration provisions contained, not in the underlying insurance policy, but in side agreements modifying the policy’s terms. Desert Pizza opposed arbitration, claiming the arbitration provisions were unenforceable because the insurers did not file the side agreements containing them with the California Insurance Commissioner—they only filed the underlying insurance policy with the state. The lower court agreed and the appellate court affirmed.

First, the court held that it was entitled to decide the enforceability of the delegation and arbitration provisions—not the arbitrator. It rejected the insurers’ argument based on Rent-A-Center, West, Inc. v. Jackson that Desert Pizza did not directly challenge the arbitration agreement’s delegation clause. The court found Desert Pizza sufficiently argued the arbitration and delegation clauses were voided by the insurers’ failure to file them with the state as required by the insurance statutes, heavily citing another recent California appellate court’s decision. The court found that accepting such an argument would undermine the FAA by treating delegation clauses differently than other contractual provisions.

Second, the court rejected the insurers’ challenge to the lower court’s finding that provisions were unenforceable based on the failure to file them with the state. It reasoned that it would defeat the statutory purpose of the filing requirement if insurers could file an insurance policy with the state, gain approval, and then modify the terms with unfiled side agreements. The plain statutory language required the insurers to file the delegation clause and arbitration provisions because they constituted endorsements, or alternatively, collateral or ancillary agreements that materially altered underlying insurance policy. Furthermore, the court cited subsequent 2016 amendments to the implementing regulations which make clear that the filing requirements apply to dispute resolution agreements.

Finally, the court concluded the proper remedy for noncompliance was voiding the arbitration provisions. It found that the statute’s lack of an express grant of authority to void unfiled agreement does not restrict the court’s power to do so. The court declined the insurers’ invitation to review the legislative history given the clear and unambiguous filing requirement, but noted that even if the history were relevant, it would support the court’s conclusion. Low Desert Empire Pizza, Inc. v. Applied Underwriters, Inc., Case No. PSC1602331 (Cal. Ct. App. Oct. 19, 2018).

This post written by Thaddeus Ewald .

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Ninth Circuit Recognizes That Class Action Waivers in Arbitration Agreements are Valid Under Epic Systems

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Citing the recent United States Supreme Court decision in Epic Systems Corp. v. Lewis, a panel of the Ninth Circuit Court of Appeals rejected the argument that an arbitration agreement was invalid because it included a prohibition on class or representative actions. The panel also rejected the argument that the arbitration agreement was invalid based on a so-called “blow provision” in the agreement, which mandated that the arbitration agreement be deemed null and void if a court held the prohibition on class or representative actions was invalid. No court had held the class waiver to be invalid, and so the “blow provision” did not operate to invalidate the rest of the agreement. The appellant also sought to argue that arbitration of the parties’ dispute would abridge its “right” to file a third-party complaint under Federal Rule of Civil Procedure 14(a). However, because the appellant failed to raise that argument in the trial court, the panel refused to consider it. Krogstad v. Loan Payment Administration LLC, Case No. 17-15964 (9th Cir. Oct. 22, 2018).

This post written by Benjamin E. Stearns.

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Court Invalidates Modified Arbitration Award Because it Exceeded Panel’s Authority Under the Functus Officio Doctrine

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An insured and its insurer were fighting over whether the insured’s settlement payment in separate litigation was a covered loss and whether there was a duty to defend in the separate litigation. During arbitration, the parties agreed the panel would issue an immediate decision on the insurer’s liability under the policies and subsequently determine the amount of defense costs. The panel issued a “partial final award” finding the insured was entitled to defense and indemnification on the claims at issue in the separate litigation, but also finding the settlement payment itself was not a covered loss; thus, the panel ordered an evidentiary hearing on the calculation of defense costs. The insured requested reconsideration of the partial final award and the panel issued a “corrected partial final award.” The insurer sought relief in court to vacate the corrected award and confirm the original award, and while that proceeding was pending the panel issued a “final” award calculating the appropriate defense costs. The court denied the insurer’s motion to vacate.

On appeal of the lower court’s denial of the motion to vacate, the appellate court vacated the corrected and purported final awards and confirmed the original award because the panel exceeded its authority in reconsidering the “partial final award.” Specifically, the court relied upon the common law doctrine of functus officio that prevents arbitrators from changing a previously-rendered, final award except in limited technical circumstances. During the arbitration, the parties agreed the panel would make an immediate and final determination as to liability before proceeding to a second evidentiary hearing on the calculation of defense costs. Once the panel exercised its authority to make a final decision on liability and issued the “partial final award,” its authority ended and it could not revisit the issue of liability. The court dismissed the panel’s statement in the corrected awards that the “partial final award” was not in fact “final” because that would eviscerate the purpose of functus officio to allow a panel to regain authority by stating its prior award was not final. Am. Int’l Specialty Lines Ins. Co. v. Allied Capital Corp., Case No. 656341/16 (N.Y. App. Div. Oct. 25, 2018).

This post written by Thaddeus Ewald .

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Court Refuses to Confirm “Interim Decision” Arbitration Award Under the New York Convention

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An “Interim Decision” issued by three Rabbinical Court arbitrators based in New York was not “final” and therefore could not be confirmed in federal court pursuant to the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention”). Under the New York Convention, an award is “final” if it “resolves the rights and obligations of the parties definitively enough to preclude the need for further adjudication with respect to the issue submitted to arbitration. Thus, an award that finally and conclusively disposes of a ‘separate and independent claim’ may be confirmed even if it does not dispose of all the claims that were submitted to arbitration.”

In this case, the Interim Decision issued by the Rabbinical Court was not confirmable because, although the award finally determined liability as to some of the issues presented, it did not finally determine the amount of damages flowing from that liability, but rather left open the possibility that the amount of damages awarded could change depending on evidence yet to be presented. Although there is some authority stating that the parties can agree to treat an arbitration panel’s partial final determination as to certain issues as “final” for purposes of confirmation, those cases involved “express bifurcation of issues,” which did not exist in this case. Instead, the parties had “merely consented to the issuance of such intermediate decisions.” Their agreement was silent as to whether those intermediate decisions were to be treated as “final” with regard to the issues therein.

The court also found that the Interim Decision’s statement that certain issues were not susceptible to adjudication by the panel was not capable of being confirmed by the court because it was not even an “award,” let alone a “final award,” as it did not “in any way resolve any issue submitted to arbitration.” With regard to certain “other claims” that were summarily denied via the Interim Decision, the court could not confirm them on the present record because there was no indication in the award “as to what the other claims … are” and as a result the court was “without a basis to determine whether any justification exist[ed] for confirmation of the Interim Decision.”
In addition, the court denied the petitioner’s motion to enforce an arbitration subpoena under section 7 of the FAA because section 7 “explicitly confers authority only upon arbitrators” to issue subpoenas, and the subpoena in this case was issued by the petitioner himself, albeit purportedly “in the name of” the arbitration panel. The court held that a party may not invoke the authority of section 7 by issuing a subpoena “in the name of” the arbitrators; rather, the arbitrators themselves must issue the subpoena. Sharbat v. Muskat, Case No. 17-CV-4776 (USDC E.D.N.Y. Sept. 27, 2018).

This post written by Benjamin E. Stearns.

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