Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

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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Tenth Circuit Confirms Arbitration Award Against Non-Party Surety

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Sujit Ghosh, President of Open Orbit Corporation, entered into a Personal Guaranty for the “full and timely performance of and by” Open Orbit under a Retailer Agreement with DISH Network, LLC. The Personal Guaranty included a final and binding arbitration clause of “any and all disputes, controversies or claims arising out of or in connection with this Personal Guaranty.” A dispute arose, and arbitration commenced. Ghosh requested the arbitrator remove him from the arbitration which was denied, as the arbitrator required a written agreement signed by DISH releasing Ghosh from the Personal Guaranty. DISH prevailed and obtained a $220,000 arbitration award (plus post-award interest).

The District Court confirmed the award, and the Tenth Circuit affirmed, noting “Ghosh elected to appear in the existing arbitration, where he professed faith in the arbitrator, claimed to have provided all the evidence relevant to his request to nullify or cancel his liability under the Personal Guaranty, and acknowledged that the arbitrator’s decision would be final and binding.” There were no allegations of arbitrator misconduct.

The Tenth Circuit also rejected Ghosh’s argument that, because he was not a party to the arbitration, issue preclusion is not applicable, as Ghosh “raised and actually litigated the validity of his personal guaranty in the arbitration even though he was not a party to the arbitration itself.” Furthermore, exceptions to the rule again nonparty preclusion were present.

DISH Network, LLC v. Ghosh, No. 18-1131 (10th Cir. Oct. 11, 2018)

This post written by Nora A. Valenza-Frost.

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Seventh Circuit Affirms Ruling Denying Motion to Compel Arbitration, Holding That Company Waived Right to Arbitrate

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GC Services Limited Partnership (“GC Services”), a debt collector hired by a bank to collect an allegedly unpaid balance on a credit card, advised plaintiff Francina Smith (“Smith”) that it would commence a collection proceeding unless she disputed the debt in writing.  In July 2016, Smith filed a class action suit in Indiana federal court against GC Services, alleging violations of the Fair Debt Collections Practices Act.  The credit agreement between the creditor and Smith contained an arbitration clause and a class waiver for all disputes.  In August 2016, GC Services filed a motion to dismiss the suit on several grounds but did not mention the arbitration clause in the agreement.  Plaintiff then amended her complaint, to which GC Services responded and filed a second motion to dismiss that also did not mention the arbitration agreement.  In March 2017, while several discovery disputes were ongoing, GC Services notified Smith of the arbitration agreement and demanded arbitration.  In response, Smith refused to arbitrate.  In April 2017, GC Services filed an answer to the complaint that again did not mention the arbitration agreement.  In June 2017, the Indiana district court denied GC Services’ motion to dismiss.  Thereafter, in August 2017, GC Services then filed its motion to compel arbitration.  The Indiana district court denied the motion to compel arbitration on two grounds: 1) as a non-signatory, GC Services could not enforce the arbitration agreement; and 2) GC Services waived its right to arbitrate “by not diligently asserting that right.”  GC Services appealed.

The Seventh Circuit initially noted that it did not need to address the issue of whether GC Services, a non-signatory to the underlying agreement, can compel arbitration if the district court was correct that the right to arbitrate was waived.  Thus, the Seventh Circuit first analyzed whether GC Services waived the right to arbitrate.  In analyzing the issue, the Court first found that “GC Services acted inconsistently with the right to arbitrate.”  It noted that GC Services did not demand arbitration until eight months after suit was brought and then waited another five months thereafter before moving to compel arbitration.  The Seventh Circuit also noted that GC Services, a sophisticated debt collection agency, would be aware that credit card agreements usually include arbitration clauses and it could have found the agreement at issue by simply searching the internet.  The Court also noted that even after GC Services discovered the existence of the arbitration agreement, it made no mention of it in its answer filed in court nor did it request to supplement its briefing on the pending motions to dismiss and for class certification.  The Seventh Circuit found that such actions were “unjustified and manifestly inconsistent with an intention to arbitrate” and held that the district court’s conclusion that GC Services waived its right to arbitrate was not erroneous.  The Seventh Circuit also noted that Smith would be prejudiced if the case were to go to arbitration at that time because GC Services waited to move to compel arbitration until after it received the decisions on the motion to dismiss and class certification against it, which the Court noted was an attempt to “play heads I win, tails you lose.”  The Seventh Circuit affirmed the district court’s decision that GC Services waived its right to compel arbitration.

Smith v. GC Services Limited Partnership, No. 18-1361 (7th Cir. Oct. 22, 2018).

This post written by Jeanne Kohler.
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