Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

NINTH CIRCUIT FINDS ARBITRATION AGREEMENT IN EMPLOYMENT APPLICATION WAS UNCONSCIONABLE

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In this case, Ritarose Capili, a sales associate, brought an action against her former employer The Finish Line, Inc. (“Finish Line”), an athletic retailer in California federal court. Finish Line made a motion to compel arbitration based on an arbitration agreement in its employment application, which was denied. Finish Line appealed to the Ninth Circuit.

First, the Ninth Circuit agreed with the California federal court’s finding that the arbitration agreement was adhesive, and thus at least “minimally procedurally unconscionable” because it was essentially offered on a “take it or leave it” basis. Next, the Court also concurred with the district court’s finding that a cost-sharing provision in the arbitration agreement — which required the plaintiff to pay up to $10,000 at the outset of arbitration, not including the fees and costs for legal representation — was substantively unconscionable because it imposes substantial non-recoverable costs on low-level employees just to get in the door, effectively foreclosing vindication of employees’ rights. The Ninth Circuit also found that the district court correctly determined that a provision in the arbitration agreement that allowed Finish Line, but not the employee, to seek judicial resolution of specified claims, was substantively unconscionable. Thus, the Ninth Circuit held that based on the entire record, the district court did not err in finding that the arbitration agreement was both procedurally and substantively unconscionable. The Ninth Circuit also found that the district court did not abuse its discretion by declining to sever the unconscionable portions of the arbitration agreement, noting that “[w]here unconscionability permeates the entire agreement, California courts may refuse to sever unconscionable provisions.” Thus, the Ninth Circuit held that the district court properly denied Finish Line’s motion to compel arbitration.

Capili v. The Finish Line, Inc., No. 15-16657 (9th Cir. July 03, 2017).

This post written by Jeanne Kohler.

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SPECIAL FOCUS: UPDATE ON THE STATUS OF THE COVERED AGREEMENT

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Both the E.U. and the Trump Administration have now indicated that they will sign the Covered Agreement negotiated by the Obama Administration. How and when will the various provisions of this Agreement be implemented? In a Special Focus article we discuss implementation issues and possible consequences for the non-E.U./U.S. market.

This post written by Rollie Goss.

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COURT COMPELS ARBITRATION OF NON-SIGNATORY PARTY SEEKING TO RECOUP DAMAGES FLOWING FROM CONTRACT CONTAINING ARBITRATION CLAUSE

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A federal district court has required Scottsdale Insurance Company to arbitrate a claim against Kinsale Insurance Company based on an arbitration clause in a contract between Kinsale and its insured – a contract to which Scottsdale was not a party – based on the doctrine of equitable estoppel, because “Scottsdale’s claims are entirely dependent on Kinsale’s obligations to provide insurance coverage” under the contract containing the arbitration clause.

The case arose because Scottsdale paid to defend and then settle a personal injury claim against its insured, P. Tamburri Steel, LLC, which resulted from a construction project. AJA Services, Inc. had agreed to indemnify Tamburri for any personal injury claims that resulted from that project. Another entity, AJA Skies the Limit, Inc., was insured by Kinsale under a policy containing a broad arbitration provision. In another matter, Tamburri had sought and received an order reforming its subcontract with AJA Services to name AJA Skies the Limit as the actual party, making the Kinsale policy available to pay Tamburri’s claim against AJA Services. Scottsdale then sued Kinsale in federal court to recover the sums it paid to settle and defend the personal injury case.

Kinsale moved to compel arbitration pursuant to the arbitration clause in its contract with AJA Skies the Limit. While it was undisputed that Scottsdale was not a party to that contract, Kinsale argued that Scottsdale was bound to arbitrate under the theory of equitable estoppel, because Scottsdale’s claims relied upon certain terms of the insurance policy. Scottsdale argued that it was not seeking to enforce any right under the insurance contract, but was instead seeking to enforce “the equitable right to recover amounts that should have been paid by Kinsale.” However, the court found that “Scottsdale’s claims depend almost entirely on the scope of Kinsale’s policy and the coverage Kinsale owes Tamburri under that policy,” as that the policy “is what provides Tamburri with (and Scottsdale, as subrogee) the defense and indemnity that Scottsdale ultimately seeks”. Thus, the court granted Kinsale’s motion to compel arbitration.

Scottsdale Inc. Co. v. Kinsale Inc. Co., No. 17-0350 (E.D. Penn. May 26, 2017).

This post written by Gail Jankowski.

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TENTH CIRCUIT UPHOLDS CONFIRMATION OF ARBITRAL AWARD IN LLC DISSOLUTION DISPUTE

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The Tenth Circuit recently affirmed a district court’s confirmation of an arbitration award in a dispute regarding the dissolution of Knowledge Strategy Solutions, LLC (“KSS”). KSS was a partnership between the professional corporations of Anne Kershaw (“Kershaw”) and Shannon Spangler (“Spangler”). On less than amicable terms, the two negotiated a withdrawal from KSS effective June 30, 2014, but Kershaw filed the necessary paperwork terminating the corporation four days early without Spangler’s knowledge. Kershaw did not tender to Spangler PC its share of KSS’s capital account or other assets, and instead created a new LLC (“KSS-New York”) and placed KSS’s assets into that company, prompting Spangler to file suit.

Kershaw moved to compel arbitration, which a Missouri state court ordered for some of the claims regarding the alleged breach of KSS’s operating agreement and breach of fiduciary duties, but retained jurisdiction over other counts. Arbitration was temporarily delayed when KSS-New York filed for bankruptcy and a bankruptcy court issued an automatic stay, but after the stay was lifted the arbitrator issued an award in Spangler’s favor. The award encompassed Spangler’s share of KSS’s capital account, but did not include any award for KSS’s intangible assets which were then in possession of KSS-New York in bankruptcy. A district court confirmed the arbitral award, and Kershaw appealed.

On appeal, the Tenth Circuit affirmed the district court’s confirmation over Kershaw’s three objections: that the district court’s decision demonstrated (1) disregard for the bankruptcy court’s order, (2) disregard for the Missouri state court’s order, and (3) disregard of a Missouri statute.

First, the appeals court upheld the lower court’s finding that the arbitrator did not exceed the scope of his arbitral authority by awarding Spangler its value of KSS’s capital account upon termination. Despite Kershaw’s argument that the capital account money was transferred to KSS-New York and thus subject to bankruptcy protection, the court explained that money is fungible and Kershaw retained liability for the undistributed capital account even though it transferred the actual money to KSS-New York. Unlike money, however, KSS’s intangible assets now in KSS-New York’s possession were not fungible and the arbitrator thus appropriately refrained from awarding any part of those assets subject to bankruptcy protection. The Tenth Circuit specifically noted that this differential treatment of monetary and intangible assets demonstrated the arbitrator was aware of the limits of his authority imposed by the bankruptcy proceeding and fastidiously adhered to those limits.

Second, the court rejected Kershaw’s argument that the arbitrator disregarded the state court’s order compelling arbitration by improperly including compensation in the arbitral award. Inclusion of compensation via revenue, Kershaw argued, encroached upon the Missouri court’s retention of jurisdiction over compensation-based claims, which were excluded from the arbitration provision. The Tenth Circuit affirmed the district court’s holding that this argument impermissibly challenged the arbitrator’s legal conclusions and factual findings.

Third, the appeals court declined to decide whether Kershaw’s argument that the omission of a statute’s complete language in a quotation by the district court was manifest disregard of the law. The court noted that the lower court’s statutory analysis was an alternative finding, and thus even a favorable ruling for Kershaw would not require reversal of the award’s confirmation, because the lower court’s primary holding is undisturbed.

A. Kershaw, P.C. v. Shannon L. Spangler, P.C., No. 16-1483 (10th Cir. July 10, 2017).

This post written by Thaddeus Ewald .

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NINTH CIRCUIT FINDS INCORPORATION OF ICC RULES INTO ARBITRATION AGREEMENT CONSTITUTES CLEAR AND UNMISTAKABLE EVIDENCE OF DELEGATION OF ARBITRABILITY TO ARBITRATOR

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In a case involving three related contracts, only one of which contained an arbitration agreement, the Ninth Circuit has held that incorporation of the rules of the International Chamber of Commerce (ICC) into an arbitration agreement constitutes clear and unmistakable evidence of delegation of arbitrability to the arbitrator. The first contract was one between Portland General Electric Company (PGE) and a contractor to build a power plant. It required the contractor to obtain a performance bond, which was issued by two insurers (the Sureties). Neither the construction contract nor the bond contained arbitration provisions. The construction contract also required the contractor to obtain a guaranty of performance from Abengoa S.A. Abengoa issued a guaranty to PGE, under which Abengoa and PGE agreed to submit any disputes to arbitration conducted by and under the rules of the ICC. The guaranty further stated that once arbitration commenced, either party could implead or raise any claim against any other entity, provided the claim arose out of or in connection with an agreement with a subcontractor or the guaranty.

Subsequently, PGE declared the contractor in default and terminated the construction contract, prompting Abengoa to file a request for arbitration with the ICC, naming PGE as respondent and the contractor as an impleaded party. Abengoa then moved to join the Sureties in the arbitration. The Sureties denied liability under the performance bond, and PGE sued them in federal court and moved to enjoin them from arbitrating their claims against PGE. The Sureties argued that PGE had expressly agreed in the guaranty that the ICC tribunal would decide whether Abengoa could join the Sureties and for what purposes, but the court granted PGE’s request for a preliminary injunction and refused to stay the litigation.

On appeal, the Ninth Circuit disagreed, finding that the parties, by agreeing to arbitration under the ICC Rules, had delegated the authority to decide the “gateway” questions of arbitrability at issue because the ICC rules expressly vest arbitrators “with the authority to determine questions of arbitrability.” The Ninth Circuit thus vacated the District Court’s order, concluding that the litigation must be stayed while the tribunal determined whether PGE was required to arbitrate its claims against the Sureties.

Portland Gen. Elec. Co. v. Liberty Mut. Ins. Co., No. 16-35628 (9th Cir. July 10, 2017)

This post written by Gail Jankowski.

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