Reinsurance Focus

The Fifth Circuit has affirmed a district court’s ruling vacating an arbitrator’s decision reforming a contract for mutual mistake, finding that reformation was outside the authority provided to the arbitrator by the parties’ agreement.

The dispute arose from the sale of a business, which included the assets, customer lists, and customer contracts of the business. The agreement provided for the buyer to make future payments contingent upon the buyer achieving certain levels of ongoing revenue from the seller’s former customers. The seller would receive $7 million if an agreed upon threshold amount of revenue was achieved in the first 9 months after the sale, with this payment reduced proportionately to the extent the revenue was under the threshold and reaching $0 if the revenue was less than 90% of the threshold. At the end of nine months, the parties disagreed regarding whether revenues from two customers should be counted toward meeting the threshold amount, such that the seller claimed that it was owed a payment while the buyer asserted that seller was owed nothing.

The parties submitted the matter arbitration, and the arbitrator adopted the seller’s position that revenues from both excluded customers should be counted toward the threshold. However, the arbitrator also decided that the parties had made a mutual mistake in their initial calculation of the threshold amount. He then reformed the agreement to fix that mistake, leading to a new calculation under which the buyer was owed no payment.

The buyer challenged arbitration award in court, and by the time the matter got before the Fifth Circuit. the only issue was whether the arbitrator had exceeded his authority by deciding the issue of mutual mistake and reforming the contract. The court noted that the parties went to arbitration under the authority of a provision saying that, in the case of a dispute over the revenue calculation, the parties would “select [an arbitrator] to resolve any remaining dispute over the Seller’s proposed adjustments . . . .” This, the court held, only allowed the arbitrator to resolve disputes over the question of “Seller’s proposed adjustments,” and not to decide whether the parties had erred in calculating the threshold amount. In reaching this conclusion, the court noted that the arbitration provision was only one of four separate arbitration provisions in the agreement, each of which was dedicated to different types of disputes, with the agreement further providing that other disputes would be decided by state or federal courts in Texas. Thus, the issue of mutual mistake was outside of the authority given by the parties to the arbitrator, and the court remanded the matter to the district court to decide the issue of mutual mistake.

Hebbronville Lone Star Rentals, L.L.C. et al. v. Sunbelt Rentals Industrial Services, L.L.C., No. 17-50613 (Fifth Cir. Aug. 6, 2018)

This post written by Jason Brost.

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Within one week of each other, United States Courts of Appeals in two circuits have issued opinions holding that arbitration agreements incorporating the American Arbitration Association (AAA)’s arbitration rules itself demonstrates “clear and unmistakable” evidence of the parties’ intent to delegate the question of arbitrability to the arbitrator, even when the arbitration involves class claims.

In Spirit Airlines, Inc. v. Maizes, No. 17-14415 (11th Cir. Aug. 15, 2018), the Eleventh Circuit applied a prior case to mandate an arbitrator decide the arbitrability of a putative class dispute between members of Spirit Airlines’ so-called “$9 Fare Club” and the airline relating to allegedly broken promises related to the club membership. When the class representatives filed a class arbitration claim against Spirit, the airline sued the class representatives in federal court seeking a declaration that the agreement’s arbitration clause does not permit class arbitration claims. The Eleventh Circuit affirmed the district court’s dismissal for lack of jurisdiction. The decision relied heavily upon a prior circuit decision—Terminix Int’l Co. v. Palmer Ranch Ltd. P’ship—which held that parties’ choice of AAA Commercial Arbitration Rules constituted “clear and unmistakable” evidence they intended to submit the question of arbitrability to the arbitrator. Applying that reasoning to the present dispute, the court held the parties’ choice of AAA rules, including the Supplementary Rules for Class Arbitrations, demonstrated “clear and unmistakable” intent to delegate arbitrability.

In doing so the court rejected Spirit’s request for a higher burden where class arbitrability is concerned, as required in the Third, Fourth, Sixth, and Eighth Circuits. The court found those decisions did not align with its reading of Supreme Court precedent, distinguishing questions of whether an agreement allows class arbitration at all as separate and apart from the issue of who decides that question. Additionally, the court declined to read the arbitration clause’s reference to Florida law as creating ambiguity in the agreement, instead reading the clause to mean that Florida law governs the parties’ substantive rights while AAA rules govern arbitration procedures.

In DISH Network L.L.C. v. Ray, No. 17-1013 (10th Cir. Aug. 21, 2018), the Tenth Circuit applied circuit and Colorado law to conclude the question of class arbitrability rested with the arbitrator in a dispute between DISH Network and a former employee over alleged violations of federal and state employment laws and breach of contract. Originally filed as a putative class action in federal court, the former employee voluntarily dismissed his suit and re-filed the same claims in arbitration as a class action. The Tenth Circuit read the broad language in the parties’ arbitration agreement and the inclusion of AAA rules on employment disputes to display clear and unmistakable intent to arbitrate arbitrability. Like the Eleventh Circuit in Spirit Airlines, the court refused to follow other circuits and require more specific language delegating arbitrability when class arbitration is at issue. Because the court concluded that the parties “clearly and unmistakably” evinced intent to delegate the question of arbitrability to the arbitrator, it was able to sidestep the distinction of whether the arbitration clause permits class-wide arbitration is a gateway issue for courts to decide or a procedural issue for the arbitrator to decide.

The Tenth Circuit also rejected DISH’s petition to vacate based on its contention that the arbitrator manifestly disregarded the law in concluding he was authorized to conduct class arbitration. It noted that the arbitrator conducted an in-depth analysis of the arbitration contract and the court’s review is extremely limited even where it may disagree with the arbitrator’s ultimate conclusion.

This post written by Thaddeus Ewald .

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