Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

SECOND CIRCUIT VACATES DISTRICT COURT’S CONFIRMATION OF CLASS CERTIFICATION AWARD

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The question presented was whether the arbitrator had the authority to certify a class that included absent class members, i.e., employees other than the named plaintiffs and those who have opted into the class. Finding the district court improperly relied on Jock v. Sterling Jewelers, Inc., 646 F.3d 113, 124 (2d Cir. 2011) (“Jock I”), the law of the case did not conclusively resolve this question. The Court also distinguished Justice Alito’s concurrence in Oxford Health Plans LLC v. Sutter, 133 S.C.t. 2064, 2066 (2013), as the case did not speak to whether an arbitrator has authority to certify a class containing absent class members. The Second Circuit vacated and remanded for further consideration of the issue of whether the arbitrator exceeded her authority in certifying a class that contained absent class members who have not opted in.

Jock et al. v. Sterling Jewelers, Inc., No. 15-3947 (2d Cir. July 24, 2017)

This post written by Nora A. Valenza-Frost.
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LONDON COURT UPHOLDS ARBITRAL AWARD IN CONTRACTOR DISPUTE IN FACE OF CHALLENGE THAT ARBITRAL PANEL FAILED TO CONSIDER COVERAGE DEFENSES

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A court in London recently upheld an arbitral award in the face of claims that the arbitral panel failed to consider several coverage defenses one party asserted during the proceedings. The arbitration arose from a dispute between contractors relating to the construction of a power station in Kabul, Afghanistan.  The prime contractor (“JV”) engaged Symbion Power LLC (“Symbion”), which in turn engaged Venco Imtiaz Construction Co. (“Venco”) as a sub-contractor. JV and Symbion participated in an arbitration in 2012 (“prior arbitration”) which preceded the current arbitration between Venco and Symbion in 2013. The arbitral panel issued an award in Venco’s favor in July 2016.  This opinion arises from Symbion’s challenges to the arbitral award on the grounds that the arbitral panel failed to address two coverage defenses outright, and failed to address all essential parts of two other coverage defenses. The court addressed in turn each of the four defenses Symbion alleges were not adequately addressed by the arbitral panel.

First, Symbion alleged a defense that the court referred to as the “conclusive evidence” defense. Symbion argued Venco’s case was based on invoices and POs it treated as conclusive evidence of the amount due to Venco, but Symbion disputed that these documents were conclusive.  The court concluded this was not actual an issue that arose, and, further, the panel did not treat the invoices and POs as conclusive evidence, so they could not have “failed’ to deal with the defense.

Second, Symbion asserted a defense that Venco failed to meet its burden of proof. However the argument was framed in the arbitration, and the court held the defense was addressed by the panel, which decided against Symbion.

Third, Symbion argued that the panel was bound by the findings in the prior arbitration. The court noted the collateral estoppel issue was not one the panel needed to address because it had fallen away.  But if the issue was still in play, it was not reasonably arguable and there would be no substantial injustice had the panel not dealt with it.

Fourth, Symbion alleged the prior arbitration award was binding or persuasive as to value, and as to proof and evidence. The court found this defense was repetitive of the collateral estoppel defense, and rejected the defense for similar reasons.

Finally, the court admonished one of the arbitrators for inappropriate ex parte conduct with Symbion, the party that appointed him. The Symbion-appointed arbitrator e-mailed Symbion at the outset of the proceedings to complain about the third, neutral arbitrator, with the express condition that Symbion not use the complaint in any of its arbitral submissions.  While the episode was not dispositive to any issues in the court’s review, it sharply criticized such conduct as inappropriate. Symbion Power LLC v. Venco Imtiaz Constr. Co., Case No. HT-2016-000211 (Royal Court of Justice Mar. 10, 2017).

This post written by Thaddeus Ewald .
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PROCEDURAL PROVISION OF FAA INAPPLICABLE IN CALIFORNIA STATE COURT ACTION WHEN ARBITRATION AGREEMENT IS SILENT ON CHOICE OF LAW OR PROCEDURES

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A California appellate court has upheld an order denying a motion to compel arbitration due to the possibility of conflicting rules, finding that, when a contract is silent on choice of law, California procedural rules, not the FAA, apply.

In the lawsuit, plaintiff Los Angeles Unified School District sued its insurer, defendant Safety National Casualty Corporation, based on its refusal to provide coverage in connection with third party claims related to abuse perpetrated by two teachers at Miramonte Elementary School. Plaintiff is simultaneously suing numerous other insurers for denials of coverage related to the Miramonte litigation. Defendant filed a motion to compel arbitration. The court trial court denied this motion under California Code of Civil Procedure section 1281.2(c), under which a court may refuse to enforce an arbitration agreement if it finds that a party to an arbitration agreement is also a party to pending litigation “arising out of the same transaction or series of related transactions” and “there is a possibility of conflicting rulings on a common issue of law or fact.”

On appeal, defendant argued that the FAA’s procedural provisions should apply, because the arbitration agreement said nothing about choice of law. Of particular importance were FAA sections 3 and 4, which require a court to compel arbitration of arbitrable issues regardless of the existence of related ongoing litigation. Defendant also argued that section 1281.2(c) did not apply because the other lawsuits against insurers did not arise out of the “same transaction or series of related transactions,” and there was insufficient evidence of the possibility of inconsistent rulings. The appellate court rejected all of these arguments. First, it found that, when an agreement to arbitrate is silent as to the application of the procedural provisions of the FAA, California procedures apply unless these procedures would defeat the rights granted by or contravene the policy goals of the FAA. The court found that the application of section 1281.2(c) would not do either. Second, the court found that plaintiff’s claims against defendant and against other insurers arose from a series of related transactions—plaintiff’s right to insurance coverage arising out of the Miramonte litigation. Third, the court found that there was a possibility of conflicting rulings on the question, central to coverage under several relevant policies, of whether the Miramonte litigation constituted a single occurrence, which was enough to justify the trial court’s refusal to compel arbitration under section 1281.2(c).

Los Angeles Unified School District v. Safety National Casualty Corporation, B275597 (Cal. Ct. App. 2017)

This post written by Jason Brost.

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UBER CUSTOMER ARBITRATION AGREEMENT ENFORCEABLE UNDER CALIFORNIA LAW, SAYS SECOND CIRCUIT

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The Second Circuit has found that Spencer Meyer, a customer of Uber, was provided “reasonably conspicuous” notice of Uber’s Terms of Service to which he “unambiguously manifested assent” when he created an Uber account, such that he was contractually bound under California law by an arbitration clause contained in those terms of service.

Meyer filed a putative class action against Uber’s then-CEO Travis Kalanick alleging that the Uber app enabled third-party drivers to engage in illegal price fixing. Kalanick joined Uber as a necessary party, and Uber and Kalanick filed motions to compel arbitration based on an arbitration provision in Uber’s Terms of Service. The district court denied these motions, finding that Meyer did not have reasonably conspicuous notice of the Terms of Service and did not unambiguously manifest assent to those terms, including the arbitration agreement.

The Second Circuit disagreed. In its opinion, the court focused on the particular process that Meyer went through to create his Uber account. This process required Meyer to click a button labeled “Register,” directly below which was stated: “By creating an Uber account, you agree to the TERMS OF SERVICE & PRIVACY POLICY,” with the phrase “TERMS OF SERVICE & PRIVACY POLICY” highlighted in blue, underlined, and containing a hyperlink to the full Terms of Service. The Court found it significant that this link to the Terms of Service was both “spatially coupled” with the Register button, as it was directly below this button on the screen, and “temporally coupled” with the registration process, as it appeared just as the customer was registering. Thus, the Court found that a “reasonably prudent smartphone user would understand that the terms were connected to the creation of a user account,” and that a reasonable user would know that he was agreeing to these terms by clicking the Register button. Thus, the court found that the requirements of reasonably conspicuous notice and unambiguous assent were satisfied for Meyer to be bound by the arbitration provision. However, the Court remanded the matter so that the district court could consider an issue not decided by the district court: whether Uber and Kalanick waived their right to arbitrate by actively participating in the litigation prior to filing their motion to compel.

Meyer v. Uber Technologies, Inc., et al., Nos. 16-2750-cv and 16-2752-cv (2d Cir. Aug. 17, 2017)

This post written by Jason Brost.

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FOLLOWING SERIES OF PROCEDURAL BATTLES, BANKRUPTCY COURT SENDS MF GLOBAL HOLDINGS DISPUTE TO ARBITRATION IN BERMUDA

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In the latest opinion arising from a coverage dispute following MF Global Holdings’s bankruptcy, the Bankruptcy Court in the Southern District of New York sent the dispute to arbitration in Bermuda pursuant to the underlying E&O insurance policy’s binding arbitration provision. To begin, the court laid out the four step process by which bankruptcy courts decide motions to compel arbitration: (1) whether the parties agreed to arbitrate; (2) how broad the arbitration agreement is; (3) if federal statutory claims are involved, did Congress intend those claims to be non-arbitrable; and (4) if not all claims are arbitrable, should the balance of proceedings be stayed pending arbitration?

First, the court interpreted the E&O policy as requiring the parties to arbitrate the coverage dispute in Bermuda. Second, the court read the arbitration clause broadly, covering “any and all” disputes arising under the policy.  Third, the court undertook a comprehensive analysis to conclude that Congress did not intend to exclude the dispute from arbitration.  In determining whether the policy presumption in favor of arbitration was outweighed by federal interests embodied in the Bankruptcy Code, the court considered whether the disputed issue was “core” or “non-core” to the bankruptcy proceeding.  “Core” issues are those arising under the Bankruptcy Code or arising in bankruptcy cases, while “non-core” issues are those merely related to bankruptcy cases.  Core issues can override the arbitration presumption, but non-core issues do not and the Bankruptcy Court must refer the claims to arbitration.  For core issues, courts should enforce arbitration provisions unless doing so would seriously jeopardize the objectives of the Bankruptcy Code.

Here, the court found the coverage dispute at issue was non-core. Recovery under the E&O policy is not the most important asset of the estate, nor is it the sole source of recovery, and there is no pay-first provision at issue.  And, contrary to the plaintiff’s assertions, resolution of the dispute does not require interpretation of the court’s previous orders and thus does not impact the arbitral panel’s ability to accurately decide the issues.  Furthermore, arbitration does not conflict with the Bankruptcy Code’s objectives or overarching policy; the dispute relates to the parties’ pre-petition relationship and does not depend on rights created under the Code.  Thus, the court found the strong federal policy in favor of arbitration outweighs the federal interests in the Bankruptcy Code.

Finally, the court stayed the proceedings pending the arbitration. Because the insurer has posted a required $15 million bond, the court found plaintiff’s ability to recover against that bond mandates a stay of proceedings rather than dismissal pending the arbitral outcome.  In re: MF Global Holdings Ltd., Case No. 11-15059 (Bankr. S.D.N.Y. Aug. 24, 2017).

This post written by Thaddeus Ewald .
See our disclaimer.