Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

EIGHTH CIRCUIT HOLDS THAT QUESTION OF CLASS ARBITRATION IS FOR COURTS, NOT ARBITRATORS, TO DECIDE

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In this case, the question presented was whether a court or an arbitrator should determine whether an arbitration agreement authorizes class arbitration. The U.S. Supreme Court has not yet resolved this issue. Several circuit courts of appeal have considered this issue, but this was the first time it was presented in the Eighth Circuit.

The Eighth Circuit held that courts, not arbitrators, should answer the “who decides” question when the arbitration agreement at issue is silent on the subject, joining the Third, Fourth, and Sixth Circuits. In so holding, the court concluded that the question of “who decides” is a substantive question of arbitrability rather than a preliminary procedural question. Therefore, according to the Eighth Circuit, courts are the proper authority to answer the question, whereas arbitrators decide preliminary procedural questions. The Eighth Circuit noted that courts must play a threshold role to determine whether parties have submitted a particular dispute to arbitration because such issues presumptively lie with the courts. The Eighth Circuit also expressed some concerns about class arbitration, including the loss of confidentiality, due process concerns, and the lack of appellate review. Thus, the Eighth Circuit reversed the district court’s order denying plaintiff-appellant’s motion for summary judgment because the district court erred when concluding that the question of class arbitration was procedural rather than substantive. The court also remanded to the district court to determine whether there was a contractual basis for class arbitration.

Catamaran Corporation v. Towncrest Pharmacy et al., No. 16-3275 (8th Cir. July 28, 2017).

This post written by Jeanne Kohler.

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COURT DECLINES TO DETERMINE WHETHER REINSURANCE SYNDICATE FOR WHICH A COMPANY FRONTED SHOULD BE INVOLVED IN AN ARBITRATION

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The parties in this case presented to a court the issue of whether a reinsurance syndicate for which Federal Insurance acted as “a front” was a real party in interest and should be involved in an arbitration between Federal Insurance and its reinsured. Although the Petitioner and Respondent agreed that the parties’ dispute was governed by an arbitration clause, the parties differed as to whether the reinsurer syndicate would have a role in the arbitration and, if so, the parameters of that role. With respect to that issue, Respondent’s cross-petition requested, in part, that the Court order Petitioner to arbitrate “which entities are the real parties in interest in the arbitration”.

Relying on the Supreme Court’s decision in PacifiCare Health Sys., Inc. v. Book, the Court stated that “[w]hether this issue will ever arise, whether [the syndicate’s] involvement will raise an issue of arbitrability that should be resolved by the Court, and whether the arbitrator will ever rule on it, is entirely speculative at this juncture.” The Court compelled arbitration, and declined to decide whether Respondent’s hypothetical motion would raise an issue of arbitrability. Nat’l Union Fire Ins. Co. of Pittsburgh, PA v. Federal Ins. Co., 1:16-cv-08821 (USDC S.D.N.Y. June 8, 2017)

This post written by Nora A. Valenza-Frost.
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TENTH CIRCUIT DECLINES TO DISTURB ARBITRAL AWARD GRANTING FEES AND COSTS IN WRONGFUL DEATH SUIT AGAINST NURSING HOME

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The Tenth Circuit recently upheld a district court’s confirmation of an arbitral award ordering a nursing home (“THI”) to pay fees and costs associated with the arbitration of a wrongful death claim. A personal representative (“Lovato”) of Guadalupe Duran’s estate prevailed in an arbitration of her wrongful death claim against THI that resulted in nearly a half million dollars in compensatory damages, as well as almost $250,000 in arbitration fees, costs, pre-, and post-judgment interest granted in a post-arbitration motion pursuant to the New Mexico Uniform Arbitration Act (“NMUAA”).

THI argued that the arbitrator exceeded his authority by awarding fees and costs under the NMUAA where the arbitration agreement designated the Federal Arbitration Act (“FAA”)—which does not authorize recovery of costs and interest—as the governing law. Citing the high burden a challenging party faces in attempting to overturn an arbitral award, the Tenth Circuit rejected this argument. First, THI did not establish that the FAA prohibits costs and interests, only that the FAA does not expressly authorize such an award. Second, the FAA displaces conflicting state law (such as the NMUAA) only to the extent the state law actually conflicts with or undermines the goals of the FAA—which the NMUAA costs and interest provision did not. Finally, the court found the arbitration agreement’s terms supported the award of costs and interest by delegating broad authority to the arbitrator and by invoking the National Arbitration Forum Code of Procedure, which allows any legal, equitable, or other remedy or relief to be granted.

The Tenth Circuit swiftly dismissed THI’s second argument that the arbitrator manifestly disregarded the law. In rejecting it, the court assumed without deciding the manifest disregard exception’s continuing validity. Harkening back to its analysis in rejecting THI’s first argument, the court noted the arbitrator did not exceed his authority. Furthermore, there was no evidence he was willfully inattentive to governing law.

THI of N. M. at Vida Encantada, LLC v. Lovato, No. 16-2041 (10th Cir. July 25, 2017).

This post written by Thaddeus Ewald .

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COURT VACATES ARBITRATION AWARD DUE TO EVIDENT PARTIALITY OF PANEL, BUT PARTIES MUST RE-ARBITRATE MATTER BEFORE SAME ARBITRAL FORUM

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In a dispute between the Washington Nationals, the Baltimore Orioles, and affiliated parties regarding the value of broadcasting rights for Nationals games, an appellate court has affirmed a trial court order vacating an arbitration award on the basis of evident partiality by the arbitration panel, while also denying a motion to compel the parties to re-arbitrate the matter in a different arbitral forum.

In 2005, the Montreal Expos moved to Washington, DC, and became the Nationals. This led to an agreement under which the Orioles Television Network, which the Orioles had established with TCR Sports Broadcasting Holding, LLP, became MASN, a regional sports network with rights to broadcast both Orioles and Nationals games. The agreement set the broadcast fees from 2005-2011, after which the parties were to negotiate those fees. The parties further agreed to arbitrate disputes before the Revenue Sharing Definitions Committee (“RSDC”), a MLB-created body comprised of representatives of other MLB clubs.

A fee dispute arose between the parties regarding the broadcasting of Nationals games, and the matter proceeded to arbitration. The Nationals were represented by Proskauer Rose, which the Orioles and MASN objected to based on Proskauer’s past representations of the Nationals, MLB, and each of the three teams with members participating on the RSDC. Despite this objection, the arbitration proceeded and resulted in an order setting the amount MASN would pay the Nationals from 2012-2016.

MASN moved to vacate the award on numerous grounds, but the district court rejected all but one; the court found that that Proskauer’s representation of the Nationals led to “evident partiality,” making the proceedings fundamentally unfair. However, the district court rejected MASN’s motion to order the parties to re-arbitrate the matter in an arbitral forum unaffiliated with MLB.

The appellate court upheld the finding of evident partiality, noting that, under the FAA, a party seeking to vacate an arbitration award on this basis “bears the burden of showing that a reasonable person, considering all the circumstances, would have to conclude that an arbitrator was partial to one party to the arbitration”. The court found that MASN and the Orioles had met this burden based on the sheer volume of Proskauer’s representation of the RSDC panel members and MLB and the failure of the panel members to investigate the issue sufficiently or to fully disclose their own relationships to Proskauer. The appellate court also upheld the trial court’s refusal to order the parties to re-arbitrate the matter in a different forum. Emphasizing the FAA’s strong bias in favor of enforcing agreements to arbitrate as written, the court held that parties are free agree to “insider” arbitral forums that, like the RSDC, may be inherently prone to certain conflicts. The court also noted that the problem that led the original award to be vacated – Proskauer’s conflicts – had been remedied by the National’s hiring of new counsel. Thus, the court found that the parties could not be ordered to arbitrate the matter in a forum other than the RSDC.

TCR Sports Broad. Holding, LLP v. WN Partner, LLC, 3595, Index 652044/14 (N.Y. App. Div. July 13, 2017)

SIXTH CIRCUIT AFFIRMS ARBITRATOR’S DECISION IN ENVIRONMENTAL REMEDIATION MATTER

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The Sixth Circuit has affirmed an order confirming an arbitration award regarding indemnification obligations for environmental cleanup owed by William Farley toward the Eaton Corporation arising out of the 1986 sale of an industrial property. Farley argued that the remediation in question was not covered by the relevant indemnification provision and that the arbitrator improperly ignored that provision’s unambiguous language. Applying the extreme deference given to arbitrator’s decisions, the Sixth Circuit disagreed.

Eaton purchased the property from Condec Corporation in 1986, and Condec agreed to indemnify Eaton for expenses “resulting from non-compliance prior to August 8, 1986 by [Condec], with any applicable laws, regulations, orders, or other requirements of any governmental authorities existing on or before August 8, 1986.” While a state environmental regulator had issued a Letter of Deficiency in 1982 and a Notice of Violation in 1984, both related to the environmental contamination that later needed to be remediated, and Condec was not ordered to clean it up until after the sale. After Condec’s successor entity went bankrupt, Farley assumed Condec’s indemnification obligations under a new agreement with materially identical terms.

After numerous indemnification payments were made to Eaton, Farley filed a claim against it contesting the validity of some of these payments, and Eaton counterclaimed for additional remediation costs. Farley argued that Eaton’s remediation costs were not covered by the indemnification provisions in the operative agreements, because Eaton was not ordered to clean up the site until after August 8, 1986. The arbitrator disagreed, finding that the intent of the agreement was to indemnify Eaton for the cleanup of contamination existing prior to the 1986 sale, and the arbitrator awarded Eaton over $175,000 in damages and over $1 million in attorneys’ fees and costs.

Challenging this award, Farley argued that the arbitrator had disregarded the explicit language of the indemnification provision and read an intent into that provision that was not supported by its language. The Sixth Circuit, noting that it could not overturn the decision of the arbitrator “[s]o long as the arbitrator is arguably construing or applying the contract and acting within the scope of his authority,” even if the court were “convinced that he committed serious errors,” found that Farley’s arguments were insufficient, and it upheld the arbitrator’s decision.

Farley v. Eaton Corp., Case No. 16-3893 (6th Cir. July 20, 2017)

This post written by Jason Brost.

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