Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

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 .
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FIFTH CIRCUIT CONTINUES TO APPROVE CLASS ACTION ARBITRATION WAIVERS OVER NLRB OBJECTIONS

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The opening case of the United States Supreme Court’s October 2017 term is a consolidation of three cases that present a Circuit conflict on the issue of whether the collective-bargaining provisions of the National Labor Relations Act (“NLRA”) prohibit the enforcement under the Federal Arbitration Act of an agreement requiring an employee to arbitrate claims against an employer on an individual, rather than collective, basis.  Several opinions from the Fifth Circuit, including D. R. Horton and Murphy Oil, provide part of the foundation for the Circuit conflict.  The Fifth Circuit recently published two additional opinions siding with the camp holding that such waivers are enforceable, and do not violate the NLRA.  Logisticare Solutions, Inc. v. NLRB, No. 16-60029 (5th Cir. Aug. 9, 2017) and Convergys Corp. v. NLRB, No. 15-60860 (5th Cir. Aug. 7, 2017).  These two new cases arguably are a bit different, because the class action waivers are stand-alone waivers of the right to be part of a class action, and are not contained in arbitration agreements.  The Fifth Circuit followed its prior precedent and held that the waivers did not violate the NLRA.

This post written by Rollie Goss.
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SECOND CIRCUIT UPHOLDS ARBITRATION AWARD OVER CHARGES OF FRAUD AND PERJURY IN THE ARBITRATION PROCEEDINGS

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A former bond trader for Odeon Capital Group obtained an arbitration award against Odeon for $1,102,193.00 on a claim for unpaid wages.  Odeon then brought a petition to vacate the award on the ground of fraud, contending that the bond trader committed perjury at arbitration by falsely stating that no FINRA investigations into his business were then ongoing.  The trial court denied vacatur ruling that Odeon failed to demonstrate that the alleged perjury was material to the award of unpaid wages.  The court explained that in order for fraud to be material within the meaning of Section 10(a)(1) of the FAA, a petitioner must demonstrate a nexus between the alleged fraud and the decision made by the arbitrators (although a petitioner need not demonstrate that the arbitrators would have reached a different result).  On appeal, the Second Circuit agreed that the trader failed to demonstrate materiality.  The Second Circuit also reversed the lower court’s denial of the bond trader’s motion for attorneys’ fees incurred litigating the petition to vacate the award.  The lower court had erred by denying the fees as a matter of discretion under its equitable powers; the fees were mandatory under New York Labor Law.  Odeon Capital Group LLC v. Ackerman, Case No. 16‐1545‐cv (2d Cir. July 21, 2017).

This post written by Gail Jankowski.
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