Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

First Circuit Holds Online Mandatory Arbitration Agreement is Unenforceable

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The First Circuit recently held that an arbitration clause contained in the online contract of the ride sharing app, Uber Technologies, Inc., is unenforceable under Massachusetts law.

In this case, plaintiffs, Uber riders, filed a class action in Massachusetts state court, challenging certain fees and surcharges they were charged in addition to the ride-sharing costs to which they agreed as violations of state consumer protection laws. Uber removed the case to Massachusetts federal court and filed a motion to compel arbitration based on a mandatory arbitration clause included in Uber’s Terms of Service. In order to use the Uber app, the customers had been required to register for an Uber account and to agree to the company’s Terms of Service & Privacy Policy. The Terms of Service included an arbitration clause which required customers to resolve any disputes with Uber through binding arbitration and also contained a class action waiver. The Massachusetts district court granted Uber’s motion to compel arbitration and dismissed the lawsuit. The plaintiffs then filed an appeal to the First Circuit.

At the outset, the First Circuit acknowledged that federal policy favors arbitration under the Federal Arbitration Act (“FAA”). Despite this, the court stated a valid agreement to arbitrate must exist before the FAA applies. The Court then analyzed whether Uber’s mandatory arbitration clause was enforceable under Massachusetts law, and concluded that an online contract is enforceable only if it is reasonably communicated to the plaintiff, and accepted by the plaintiff. The First Circuit then found that Uber had not reasonably communicated its Terms of Service, including the mandatory arbitration clause, to its customers because the link to the Terms was not sufficiently conspicuous. The Court noted that Uber did not use a common method of conspicuously informing online app users of its terms by requiring users to click a box stating that they agree to the terms before continuing to the next screen. Instead, Uber displayed, on an enrollment screen, a rectangular box with the language “Terms of Service,” which customers were not required to click in order to review the contract. The Court noted that Uber’s terms were not conspicuously disclosed to its users because the link was not designed in a way that most users associate with hyperlinks and thus did not have the appearance of a hyperlink. Further, the hyperlink box was not sufficiently distinct from the rest of the screen, which had other links in bold with similarly sized font that were “more noticeable.” The First Circuit noted: “if everything on the screen is written with conspicuous features, then nothing is conspicuous.” Thus, the First Circuit found that the arbitration clause is unenforceable, and reversed the Massachusetts federal court decision and remanded the case.

Cullinane v. Uber Technologies, Inc., No. 16-2023 (1st Cir. June 25, 2018).

This post written by Jeanne Kohler.

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New York Federal Court Finds Section 1782 Petition Can Reach Documents Abroad

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In a petition brought under 28 U.S.C § 1782, petitioner sought discovery of documents outside the United States. Recognizing the Second Circuit had not ruled on whether such discovery was authorized by Section 1782, the Court looked to precedent from the Eleventh Circuit, which had previously allowed such discovery abroad. “Section 1782 imposes no geographical limit on the production of documents” and to the extent courts have done so, it was “for reasons of legislative history and policy.” The Court found that the factors discussed by the Eleventh Circuit favored petitioner’s application with respect to documents relating to a criminal proceeding in Monaco, and permitted some – but not all – of petitioner’s discovery requests.

The petition also sought discovery in aid of criminal proceedings in Switzerland. Finding the petitioner satisfied the statutory requirements with respect to the Monaco proceedings, the Court found Section 1782 did not require the petitioner to “satisfy the statutory requirements for each foreign proceeding for which he or she wishes to use the requested discovery.”

In re Application of Accent Delight Int’l Ltd and Xitrans Finance Ltd., 16-MC-125 (USDC S.D.N.Y. June 11, 2018)

This post written by Nora A. Valenza-Frost.

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Texas High Court Declines to Enforce Compel Arbitration Against Non-Signatory

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In a recent dispute involving a crop insurance policy, the Texas Supreme Court held that an independent insurance agency could not compel arbitration of certain claims brought against it in state court by an insured (JJ Farms) where the agency was not a signatory to the operative arbitration agreement in the subject policy.

The dispositive issue the Texas Supreme Court addressed was the question of arbitrability, on which the court decided the trial court was charged with determining whether a valid arbitration agreement existed because there was no clear and unmistakable evidence that JJ Farms agreed to arbitrate arbitrability with non-signatories such as the agency. Therefore, the Texas Supreme Court reviewed the decision on arbitrability de novo.

On de novo review, the court assessed under a myriad of legal theories whether the underlying arbitration agreement between the insurer (R&H) and JJ Farms allowed for arbitration of disputes with non-signatories. First, the court concluded the insurance policy’s arbitration agreement did not require arbitration with non-signatories because the plain terms limited disagreements to be arbitrated to only those between the insured and insurer. Second, the court rejected an agency theory of arbitrability because R&H did not exercise control over the agency. Third, the court declined to confer third-party beneficiary status upon the agency because the insurance contract did not facially benefit it, nor did any language in the federal statute governing crop insurance grant third-party beneficiary status to insurance agents. Fourth, the court considered and ultimately discarded both direct-benefits estoppel, because the insurance policy did not impose duties or obligations on the agency, and alternative estoppel, because even though JJ Farms’s claims were intertwined with the insurance policy the relationship between R&H and the agency was insufficiently close to infer consent by JJ Farms to arbitrate the dispute.

Jody James Farms, JV v. The Altman Grp., Inc., No. 17-0062 (Tex. May 11, 2018).

This post written by Thaddeus Ewald .

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Northern District Of New York Allows Evidence That Follow The Fortunes Or Follow The Settlements Provision Could Be Implied In Facultative Reinsurance Certificates

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Munich Reinsurance America, Inc. and Utica Mutual Insurance are headed to a bench trial in the United States District Court for the Northern District of New York in a case regarding two facultative reinsurance certificates issued by Munich to Utica in 1973 and 1977, and the court has ruled on certain motions in limine filed by both parties.

In an earlier ruling on cross motions for summary judgment, the court noted that neither the 1973 nor the 1977 certificates contained a follow the fortunes or follow the settlements provision and declined to find this such a clause was implied in the contracts based on the record before it. Munich filed a motion in limine asking the court to preclude Utica from presenting evidence in support of the existence of a follow the fortunes/settlements provision. The court denied this motion, however, holding that Utica would be allowed to present evidence that “the doctrines of follow the fortunes or follow the settlements were, at the time the parties agreed to the Certificates, so ‘fixed and invariable’ in the reinsurance industry as to be part of the Certificates.” In doing so, however, the court emphasized that it would be Utica’s burden to show that such custom and practice was “fixed and invariable,” and not merely generally understood within the (re)insurance industry during the relevant time period.

The court also considered Munich’s motion to preclude certain testimony by Utica’s expert witnesses regarding trade usage and custom and practice in the reinsurance industry. The court declined to exclude such testimony, doing so largely on the basis that such decisions could better be made in the context of trial and that such exclusions are less necessary in a bench trial “[w]here the gatekeeper and the factfinder are one in the same—that is, the judge . . . .” However, the court granted Munich’s motion to preclude testimony on withdrawn claims and defenses as well as its motion to preclude evidence of decisions from certain other matters, which the court held was hearsay.

Utica was similarly unsuccessful in most of its motions in limine. The court rejected Utica’s request that Munich not be allowed to make certain arguments about the meaning of the 1973 and 1977 certificates on the basis of collateral estoppel. The court found that this interpretation was an issue of law, and “collateral estoppel does not operate to bar relitigation of pure issues of law.” However, the court granted Utica’s motion to preclude the use of a privilege log it produced in the litigation, which Munich argued was admissible to show when Utica considered certain issues, finding that there was no relevant, nonspeculative inference that could be drawn from that log.

Utica Mutual Insurance Company v. Munich Reinsurance America, Inc., 6:13-cv-00196(BKS/ATB) (N.D.N.Y. June 27, 2018)

This post written by Jason Brost.

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Second Circuit Joins Sister Circuits in Holding Party-Appointed Arbitrators Not Subject to Same Disclosure Requirements as Neutral Arbitrators

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The Second Circuit recently held that parties seeking to vacate awards under Federal Arbitration Act Section 10(a)(2) must satisfy a higher burden in showing evident partiality by a party-appointed arbitrator. The parties arbitrated a workers compensation reinsurance dispute and the losing party (Lloyds) moved to vacate the ultimate arbitral award on the ground that the prevailing party (ICA)’s selected arbitrator displayed evident partiality by failing to fully disclose his connections to ICA. The lower court vacated the award, finding that ICA’s appointed arbitrator’s undisclosed relationships were “more significant, more numerous, and involve[d] more financial entanglements” than would be acceptable, particularly in light of the “apparent willfulness” of the non-disclosure.

On appeal, the Second Circuit addressed as an issue of first impression what the appropriate standard is for a Section 10(a)(2) evident partiality challenge to a party-appointed arbitrator. The court disagreed with the lower court and instead followed the approach of other circuits in distinguishing between a heightened burden standard for party-appointed arbitrators and a reasonable person standard for neutral arbitrators. Despite the heightened burden, party-appointed arbitrators are subject to certain “baseline limits to partiality.” First, undisclosed relationships are material—and therefore warrant vacatur—if they violate the arbitration agreement. Here, the court noted, the only limitation in the arbitration agreement was that arbitrators be “disinterested,” in terms of financial and personal stake in the outcome. Second, undisclosed relationships are material if the complaining party can demonstrate the partiality had a prejudicial effect on the award.

As a result of this new framework, the Second Circuit remanded to the trial court to determine whether ICA’s arbitrator’s undisclosed relationships betrayed his disinterest or had a prejudicial effect on the arbitral award.

Certain Underwriting Members of Lloyds of London v. Ins. Co. of Am., No. 17-1137 (2d Cir. June 7, 2018).

This post written by Thaddeus Ewald .

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