Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

THE SIXTH CIRCUIT HOLDS THAT CLASS ACTION ARBITRATION WAIVERS ARE PROHIBITED UNDER THE NATIONAL LABOR RELATIONS ACT

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The Sixth Circuit enforced a National Labor Relations Board’s (“NLRB”) order finding that Alternative Entertainment Inc., a Michigan-based satellite television retailer, violated the National Labor Relations Act (“NLRA”) by requiring employees to sign arbitration agreements that precluded them from pursuing class or collective arbitration claims. The Sixth Circuit noted that the NLRA guarantees the right to concerted legal action and does not permit employers to force individual arbitration of employees’ employment or workplace-related claims, stating “[m]andatory arbitration provisions that permit only individual arbitration of employment-related claims are illegal pursuant to the NLRA and unenforceable pursuant to the [Federal Arbitration Act’s] saving clause.”

The NLRB was seeking enforcement of its order finding that Alternative Entertainment violated the NLRA when it forbade an employee from talking with his co-workers about a proposed compensation change and by firing the employee for complaining to management about it, as well as when it barred employees from pursuing class action litigation or collective arbitration of work-related claims. The NLRB sought to enforce the award, and Alternative Entertainment sought relief from the order.

In holding that the NRLA prevents employers from pursuing class action litigation or collective arbitration of workplace-related claims, the Sixth Circuit joined previous rulings by the Seventh and Ninth Circuits. To the contrary, the Fifth and Eighth Circuit have held the opposite and have found class arbitration waiver provisions to be enforceable despite the NLRB’s claim that this kind of arbitration provision violates Section 7 of the NLRA.  The Supreme Court has accepted this issue for review and presumably will resolve this Circuit conflict.  National Labor Relations Board v. Alternative Entertainment, Inc., No. 16-1385 (6th Cir. May 26, 2017).

This post written by Jeanne Kohler.
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KENTUCKY FEDERAL COURT FINDS SUBJECT-MATTER JURISDICTION HAS NOT BEEN “REVERSE PREEMPTED” BY APPLICATION OF KENTUCKY’S INSURERS REHABILITATION AND LIQUIDATION LAW

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The question presented to the Court was “whether federal law has opened the door for state law to ‘reverse preempt’ the diversity jurisdiction statute.” The McCarran-Ferguson Act was enacted by Congress to prevent federal laws from interfering with state insurance regulation. The Liquidator sought to expand the existing McCarran-Ferguson “reverse preemption” framework to prevent the Defendant from exercising their right of removal pursuant to 28 U.S.C. § 1441. The Court determined that application of the Kentucky Insurers Rehabilitation and Liquidation Law (“IRLL”) had exclusive jurisdiction over the matter, which “would directly conflict with federal law” and “therefore, the IRLL jurisdiction provision must be preempted by the federal removal and diversity subject matter jurisdiction statute.”

Having established subject-matter jurisdiction necessary to adjudicate the dispute, the Court declined to abstain from exercising its jurisdiction under the Colorado River doctrine, as the Liquidator included a demand for common law contract damages, and there was no longer a parallel state proceeding. The Court requested additional briefing on the issue of whether the FAA can apply in light of the parties’ “Governing Law” agreement that restricted the Court to the law of Kentucky.

H. Brian Maynard, Liquidator of Kentucky Health Cooperative, Inc. v. CGI Technologies and Solutions, Inc., 3:16-cv-00037 (USDC E.D. Ky. Jan 3, 2017)

This post written by Nora A. Valenza-Frost.

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ARBITRATION PROVISION ENFORCEABLE DESPITE QUESTIONS ABOUT LEGITIMACY OF REMAINDER OF AGREEMENT

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A New York state trial court has denied a motion to stay arbitration in an action brought by plaintiffs, a private equity firm and its affiliate, against defendants, two of plaintiffs’ former officers, despite plaintiffs’ argument that the employment and separation agreements containing the relevant arbitration clauses were invalid.

Plaintiffs’ lawsuit alleged, inter alia, that defendants breached their fiduciary duties and committed fraud by engaging in multiple transactions in plaintiffs’ names for defendants benefit. Defendants responded with five counterclaims and nine affirmative defenses, including that the dispute was subject to arbitration. In opposing arbitration, Plaintiffs relied upon a case in which a court held that the plaintiff had “raised a threshold issue regarding the validity of the parities’ agreement” and that “the validity of the arbitration provision was thus an issue for the court to decide.” The court found this case inapposite, finding that defendants’ employment and separation agreements left no doubt that matters regarding their employment would be resolved by arbitration. Emphasizing that doubts regarding whether an arbitration clause covers a particular dispute should be resolved in favor of coverage, the court held that the arbitration provisions were valid and binding, even if the rest of the employment agreements were not valid, because plaintiffs had failed to show “that the arbitration agreements were permeated by fraud.”

Plaintiffs also challenged a portion of the arbitration agreement stating that plaintiffs “shall pay all fees in excess of those which would be required if the dispute was decide in a court of law,” arguing that the burden of this cost would prevent them from pursuing their claims against defendants. However, emphasizing that courts are loathe to interfere “with the freedom of consenting parties in structuring their arbitration relationship,” the court found that plaintiffs had not provided evidence showing that litigating the matter in court would be cheaper or that they were unable to bear these costs. The court also refused to dismiss defendants’ counterclaims for reimbursement of their legal fees and violation of a non-disparagement clause. However, it dismissed defendants’ claim for defamation, which was based on the allegations of plaintiffs’ complaint, because such statements are absolutely privileged, and dismissed their claim for harassment because New York does not recognize this as an independent cause of action.

Southport Lane Management, LLC et al. v. Adler et al., Index No. 155915/2016 (N.Y. Sup. Ct., April 14, 2017)

This post written by Jason Brost.

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FIFTH CIRCUIT FINDS PAYDAY LENDER’S SUBMISSION OF FALSE WORTHLESS CHECK AFFIDAVITS EQUATES TO WAIVER OF ARBITRATION

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Plaintiffs-Appellees brought suit against short-term lender PLS Financial Services, Inc., and PLS Loan Store of Texas, Inc. (collectively “PLS”), alleging the following scheme. First, as part of the application process, PLS would require customers to provide a blank or post-dated check for the amount borrowed plus fees. PLS assured its customers that the checks would only be used to verify checking accounts and would not be cashed. However, PLS did cash the checks of customers who defaulted, and, if the check bounced, PLS would submit worthless check affidavits to the local district attorney. As a consequence, those customers were notified that they would face criminal charges if they did not pay PLS for the outstanding balance.

Plaintiffs alleged that they fell victim to this scheme and asserted several causes of action against PLS, including malicious prosecution, fraud, and related violations of Texas’s Financial Code. PLS moved to dismiss the proceedings and compel Plaintiffs to arbitrate their claims pursuant to an arbitration clause in the loan agreement. The District Court for the Western District of Texas denied PLS’s motion to dismiss, finding that PLS had waived its right to compel arbitration of Plaintiffs’ claims when it submitted affidavits regarding their checks in the context of the litigation. PLS appealed and this decision followed.

Reviewing de novo, the Fifth Circuit affirmed. PLS first argued that the district court erred by deciding whether PLS waived its right to compel arbitration by participating in litigation conduct when it submitted the affidavits. On this issue, the Fifth Circuit reaffirmed its position that the court, not the arbitrator, is in the best position to decide whether certain conduct amounts to a waiver under applicable law. The panel rejected PLS’s argument that this position was inconsistent with the Supreme Court’s 2014 decision in BG Group, PLC v. Republic of Argentina, and further stressed that unlike other types of waiver, litigation-conduct waiver implicates courts’ authority to control judicial procedures or to resolve issues arising from judicial conduct.

The panel also rejected PLS’s second argument – that the district court erred by ignoring the parties’ express agreement to arbitrate all disputes, including any litigation-conduct waiver claims. Here, the panel found that PLS had waived this issue by raising it for the first time in its motion to reconsider, and in any event, the arbitration did not contain “clear and unmistakable evidence” of an intent to arbitrate the instant litigation-conduct waiver issue.

Last, regarding PLS’s argument that the district court erred in concluding that PLS waived its right to arbitrate by submitting the subject affidavits to the court, the panel found plausible Plaintiffs’ allegation that PLS waived arbitration through such conduct. In so finding, the panel determined that Plaintiffs had demonstrated prejudice from PLS’s submission of the worthless check affidavits, and that by submitting those affidavits, PLS “invoke[d] the judicial process to the extent it litigate[d] a specific claim it subsequently [sought] to arbitrate.”

Vine v. PLS Fin. Servs., Inc., No. 16-50847 (5th Cir. May 19, 2017).

This post written by Thaddeus Ewald .

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COURT REJECTS MOTION TO SEAL SUMMARY JUDGMENT EXHIBITS WHEN MOVING PARTY FAILS TO PROVIDE SUFFICIENT FACTUAL JUSTIFICATION FOR SUCH SEALING

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Utica Mutual Insurance Company’s request that numerous exhibits filed in support of summary judgment be sealed has been rejected by a federal district court, which found that Utica’s general statements about the documents were insufficient to allow the court to “make the ‘specific, on-the-record findings’ required to seal judicial documents.”

Utica and Munich Reinsurance America, Inc. are on opposing sides of two related lawsuits regarding Utica’s attempt to seek reimbursement for asbestos claims under two reinsurance contracts. Both parties moved for summary judgment, and Utica moved to have numerous exhibits in support of these motions filed under seal on the basis that they contained privileged communications with in-house and/or outside attorneys, referred to such privileged information, or contained attorney’s handwritten notes protected by the work product doctrine.

The court began by describing the standards for such a sealing motion, noting the “strong presumption of access” that attaches to documents filed in connection with a summary judgment motion and that overcoming this presumption requires a party to provide facts sufficient to allow the court to make “specific, on-the-record findings . . . demonstrating the closure is essential to preserve higher values and narrowly tailored to serve that interest.” Utica’s explanations, the court found, were not specific enough to meet this standard. In its descriptions of attorney-client communications, the court found that Utica did not explain who all of the recipients were or show that the communications were intended to be or were kept confidential. Regarding attorney notes, the court found that Utica did not indicate whether they were fact or opinion work product. Similarly, the court found that Utica did not specify whether other documents it wished to file under seal were protected by attorney-client privilege or the work product doctrine and otherwise failed to provide information sufficiently specific for the court to determine which documents contained protected information or to narrowly tailor a sealing order to protect that information. However, the court allowed Utica to file as exhibits certain briefs from prior litigation in the same redacted form that they were previously filed.

Utica Mutual Insurance Company v. Munich Reinsurance America, Inc., No. 6:12-CV-00196 (BKS/ATB) (N.D.N.Y. April 26, 2016)

This post written by Jason Brost.

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