Reinsurance Focus

The First Circuit Court of Appeals has held that the New York Convention applies to an insurance arbitration dispute between a Puerto Rican company and Lloyd’s of London and that the convention preempts a Puerto Rican law seemingly banning arbitration in insurance coverage disputes.

Green Enterprises LLC, a Puerto Rican recycling company, submitted a claim to its insurer, Lloyd’s of London, after a fire destroyed one of its plants. Lloyd’s denied Green’s claim and Green filed suit. Lloyd’s moved to compel arbitration. The district court granted Lloyd’s motion and Green appealed to the First Circuit, which affirmed.

Green argued that arbitration was improper under a Puerto Rican law prohibiting provisions that deprive an insured of access to the courts and that the Federal Arbitration Act did not preempt that law because the McCarran-Ferguson Act allows state law to supersede federal law when it comes to insurance matters. Lloyd’s responded that the New York Convention applied to the dispute, trumped the Puerto Rican law, and was not subject to the McCarran-Ferguson Act because the New York Convention is a multinational treaty, not an act of Congress.

The First Circuit agreed with Lloyd’s. It rejected Green’s arguments that the New York Convention was not “self-executing” such that it required an act of Congress governed by the McCarran-Ferguson Act to implement, meaning that the McCarran-Ferguson Act’s reverse preemption provision applied to the New York Convention. The First Circuit concluded:

[N]one of Green’s arguments can overcome the self-executing nature of the plain text of Article II(3) [of the New York Convention]. That article, which is not an act of Congress, has the force of law and applies directly to preempt Puerto Rico law.

Green Enterprises, LLC v. Hiscox Syndicates Ltd. at Lloyd’s of London, No. 21-1542 (1st Cir. May 19, 2023).

The First Circuit Court of Appeals has followed up on its recent jurisprudence outlining the standards for the Federal Arbitration Act’s “transportation worker exception,” as we previously posted, by applying its recently delineated standards to hold that individuals who purportedly spent at least 50 hours a week driving goods within a single state were within the scope of the exception.

Margarito Canales and Benjamin Bardzik contracted with a subsidiary of Flowers Foods Inc. Under that contract, Canales and Bardzik owned the rights to three routes in Massachusetts along which they delivered baked goods to stores.

Canales and Bardzik claimed that they were improperly classified as independent contractors and thereby wrongly denied wages and overtime. Flowers Foods and its subsidiaries sought to compel arbitration under the FAA in response to Canales’ and Bardzik’s claims. The district court held that Canales and Bardzik were within the transportation worker exception and thus declined to compel arbitration. Flowers Foods appealed.

The First Circuit affirmed. It rejected the arguments that (1) Canales and Bardzik could not invoke the exception because they were not in the transportation industry and (2) the facts established that Canales and Bardzik were business owners. The court concluded that both arguments were precluded by its recent decision in Fraga v. Premium Retail Services Inc., which noted that the inquiry for determining whether the exception applies is focused on what the worker does, not in which industry the worker is engaged, and recognized that workers who frequently engage in transportation activities can fall within the scope of the exception even if they perform other responsibilities. In this case, the record established that Canales and Bardzik spent a minimum of 50 hours per week driving their delivery routes to deliver goods. They were therefore within the scope of the exception and arbitration could not be compelled under the FAA.

Canales v. CK Sales Co., No. 22-1268 (1st Cir. May 5, 2023).

The Second Circuit Court of Appeals recently clarified its process for determining whether a court can apply a presumption of arbitrability. The court noted that its traditional process for making that determination does not comport with the U.S. Supreme Court’s 2010 decision in Granite Rock Co. v. International Brotherhood of Teamsters and thus outlined a new process.

Niagara Mohawk Power Corp., doing business as National Grid, entered into a collective bargaining agreement with a local electrical workers union. The agreement required arbitration for any dispute regarding the meaning, application, or operation of the agreement.

The union’s business representative initiated the grievance and arbitration process on behalf of the union. He claimed that National Grid violated the agreement by requiring retired members to pay higher health insurance premiums than active employees. National Grid declined to process the grievance, claiming that it was not arbitrable under the agreement.

The union filed a complaint in district court and moved to compel arbitration. The district court granted the union’s motion and National Grid appealed.

The Second Circuit affirmed but held that the district court reached the correct conclusion through the wrong analysis because the district court applied the Second Circuit’s pre-Granite Rock precedent even though that precedent was inconsistent with Granite Rock.

The Second Circuit explained that the U.S. Supreme Court’s decision in Granite Rock establishes that courts may invoke a presumption of arbitrability only where the parties’ dispute concerns a valid and enforceable agreement to arbitrate that is ambiguous as to its scope.

In contrast, the Second Circuit’s pre-Granite Rock case law, which the district court applied, directed courts to first classify the particular arbitration clause as either broad or narrow and then apply a presumption of arbitrability to broad clauses. The Second Circuit explained that that process was inconsistent with Granite Rock to the extent it directs courts to prioritize deciding whether a presumption of arbitrability applies before determining whether, under ordinary principles of contract interpretation, a particular dispute is covered by the language to which the parties agreed. The district court’s utilization of that process was improper because, rather than finding that the agreement’s arbitration clause was ambiguous in scope before applying the presumption of arbitrability, as dictated by Granite Rock, the district court started by characterizing the arbitration clause itself and held that the presumption of arbitrability applied, without determining whether the agreement covered the parties’ dispute.

Nevertheless, the Second Circuit concluded that the district court’s decision that the dispute was subject to arbitration was correct under the proper standard. The Second Circuit held that the agreement unambiguously covered the grievance. Two conditions had to be met for the grievance to be covered by the arbitration clause: (1) the union had to claim that a dispute had arisen; and (2) the dispute had to concern a provision of the agreement. Both of those provisions were met, as the union raised the grievance, which concerned a clause in the agreement.

Local Union 97, International Brotherhood of Electrical Workers, AFL-CIO v. Niagara Mohawk Power Corp., No. 21-2443 (May 3, 2023).