Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

COURT DECLINES TO VACATE ARBITRAL DECISION IN FACE OF SEVEN CHALLENGES MADE BY PRO SE PLAINTIFF

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Last month the Southern District of New York granted DCH Auto Group’s motion to confirm a favorable arbitral decision dismissing a pro se plaintiff’s arbitration with prejudice, over a host of different challenges seeking vacatur of that decision. The plaintiff, Marciano, brought workplace discrimination claims against DCH. During the course of the litigation, plaintiff was represented intermittently by outside counsel, notified of various discovery delinquencies, made multiple requests for extensions of time to comply with said deficiencies or other deadlines, and was warned at least twice that no further extensions would be granted. The arbitrator ultimately dismissed the arbitration with prejudice based on these factors, as well as the detriment DCH faced with having to defend a case that had already been litigated for two-and-a-half years but not proceeded beyond discovery.

The court systematically rejected all seven of Marciano’s challenges to the arbitration decision. First, the court found no wrongdoing by DCH where the AAA made a mistake in providing a pre-corrected version of the arbitration decision. Second, the court rejected the claim that the arbitrator was guilty of misconduct for failure to hear evidence because the allegedly ignored evidence was unsolicited, submitted long after the operative deadline, and the arbitral decision was likely already made before the submission. Third, there was no non-speculative evidence of bias by the arbitrator. Fourth, the allegedly improper ex parte communications did not prejudice Marciano because they were mainly comprised of exchanges between DCH and the AAA (not the individual arbitrator), contained non-dispositive procedural questions, and were not “untoward.” Fifth, the court rejected Marciano’s challenge that DCH’s participation in the arbitration required vacatur. Sixth, the arbitrator was justified in refusing Marciano’s request to further postpone the arbitration proceedings because of the numerous extension requests that had been granted throughout the proceedings and because Marciano had adequate notice and ample time to respond by the deadlines. Finally, the court found no manifest disregard of the law on the arbitrator’s behalf and noted that Marciano failed to, despite notice, adequately respond to discovery inquiries regarding her disability status—a threshold issue in the case. Accordingly, the court granted DCH’s motion to confirm and denied Marciano’s motion to vacate.

Marciano v DCH Auto Grp., Case No. 11-9635 (USDC S.D.N.Y. Apr. 27, 2017)

This post written by Thaddeus Ewald .

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COURT REJECTS CLAIM THAT ARBITRATOR’S RULING WAS IN MANIFEST DISREGARD OF THE LAW

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A court has granted a petition to confirm an arbitration award despite the defendant’s argument that the arbitrator acted in manifest disregard of the law. While acknowledging questions regarding the continuing viability of manifest disregard for the law as a basis for vacating arbitration awards, the court decided the case assuming that it is still the law, but found that the developer had not met the heavy burden of showing “that the arbitrator knew the applicable law, and yet chose to ignore it.”

The case arose from a claim by the plaintiff, an architect, that the defendant, a developer, failed to pay for the architect’s services and used its drawings without authorization. The defendant argued that five decisions of the arbitrator showed manifest disregard for the law: (1) awarding damages for debts incurred before the developer was formed, in contravention of the developer’s operating agreement; (2) awarding lost profits, despite a contractual waiver of consequential damages; (3) awarding copyright damages despite a lack of evidence that the drawings were copyrightable; (4) awarding two sets of copyright damages for the same drawings; and (5) deciding the copyright question despite it being outside the scope of the arbitration clause.

The court found that the defendant failed to meet its burden regarding the third and fourth decisions regarding copyright damages because it failed to raise these issues during arbitration. Regarding the award for debts incurred before the developer’s formation, the court found that it was not clear whether the arbitrator’s decision was based on veil piercing, a finding that a contract other than the operating agreement was controlling, or concessions by the defendant in testimony, and thus manifest disregard for the law had not been shown. As to the award of lost profits, the court found that the contract that contained the waiver of consequential damages contained other provisions suggesting that this waiver did not apply to lost profits. Finally, regarding the arbitrator’s authority over copyright infringement claims, the court found the contract language was broad enough and the case law cited by the parties was unclear enough to make it impossible to say that the arbitrator’s decision showed manifest disregard for the law.

The Knabb Partnership v. Home Income Equity, LLC, Civil Action No. 17-373 (E.D. Pa. April 19, 2017)

This post written by Jason Brost.

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THIRD CIRCUIT PERMITS LIMITED DISCOVERY ON ISSUE OF VALIDITY OF ARBITRATION AGREEMENT

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In an unpublished opinion, the Third Circuit affirmed a decision denying a defendant bank’s motion to dismiss a consumer complaint in favor of arbitration when the contract containing the arbitration clause was not referenced in or attached to the complaint, agreeing that the plaintiff should be allowed to engage in limited discovery on the issue of the validity of the arbitration agreement.

The plaintiff, a customer of the defendant bank, sued alleging that the defendant’s overdraft protection program violated federal law and breached a contract with the plaintiff. According to the defendant, it had three contracts with the plaintiff: an account agreement, an overdraft protection agreement, and a service agreement related to electronic money transfers. The plaintiff alleged the existence of the account and overdraft protection agreements, but her complaint did not mention the service agreement, and the plaintiff filed a declaration stating that she had no recollection of seeing or agreeing to the service agreement. The account agreement did not contain an arbitration agreement and the overdraft protection agreement was not part of the record, such that the disputed service agreement was the only source of any provision purportedly requiring plaintiff to arbitrate the dispute.

The defendant argued that the trial court had “usurped the role of the arbitrator,” because, under the terms of the arbitration agreement, questions over the validity of the contract were for the arbitrator to decide. The Third Circuit disagreed, however, finding that the trial judge had not decided that the contract was invalid, but instead simply allowed limited discovery on the issue of arbitrability. Citing its earlier decision in Guidotti v. Legal Helpers Debt Resolution, LLC, the Third Circuit found that where “the parties’ agreement to arbitrate the dispute is not clear on the face of the complaint (or incorporated documents),” a motion to dismiss in favor of arbitration should be decided using a summary judgment standard. Because the service agreement – the only operative contract containing an arbitration clause – was not referenced in or attached the complaint, the existence of such a duty was not clear on the face of that complaint, and the plaintiff was entitled to limited discovery on the validity of and applicability of that agreement.

Horton v. FedChoice Federal Credit Union, No. 16-3960 (3d Cir. Apr. 25, 2017)

This post written by Jason Brost.
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SUPREME COURT HOLDS FEDERAL ARBITRATION ACT PREEMPTION APPLIES TO CONTRACT FORMATION RULES

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Last week, the U.S. Supreme Court rejected the Kentucky Supreme Court’s use of a clear-statement rule to require that powers of attorney specifically authorize a representative to enter into an arbitration agreement, finding that the rule violated the Federal Arbitration Act’s (“FAA”) equal treatment principle. The plaintiffs in two consolidated cases were the wife and daughter of individuals who lived and died at a Kindred Nursing Centers facility. They each held powers of attorney with broad authority to manage their family members’ affairs. When each plaintiff signed the necessary paperwork to move their family member into the Kindred facility, they signed binding arbitration agreements.

The present dispute arose from a lower court action in which the plaintiffs sued Kindred over allegations that substandard care caused their family members’ deaths. Kindred moved to dismiss the suits on the basis of the arbitration agreements, the lower courts denied those motions, and the Kentucky Supreme Court affirmed. The state’s highest court found that one plaintiff’s (Wellner) power of attorney was not broad enough to permit her to enter into an arbitration agreement on behalf of her husband, but that the other plaintiff’s (Clark) power of attorney was sufficiently broad. However, the Kentucky court invalidated both arbitration agreements based upon a so-called clear-statement rule—that a power of attorney must specifically state that the representative has the power to enter into an arbitration agreement lest the individual’s “sacred” right of access to the courts and to trial by jury be violated. This rule complied with FAA’s demands that arbitration agreements be treated equally, the court explained, because it would apply to arbitration and other contracts implicating “fundamental constitutional rights.”

Justice Kagan authored an opinion for seven justices that squarely rejected the Kentucky Supreme Court’s reliance on the clear-statement rule, holding that it failed to put arbitration agreements on “an equal plane” with other contracts. The FAA includes an equal treatment principle that courts may invalidate arbitration agreements based upon generally applicable contract defenses, but not on legal rules singling out arbitration. The Supreme Court found that the clear-statement rule did exactly what its prior precedent (Concepcion) barred: it adopted a legal rule turning on the distinctive, primary characteristic of an arbitration agreement—the waiver of the right of access to the court and to a jury trial.

The Supreme Court dismissed the Kentucky court’s attempt to sidestep the equal treatment principle by suggesting the clear-statement rule could apply to other fundamental constitutional rights, referring to the hypothetical examples as “patently objectionable and utterly fanciful contracts.”  The Court stated that adopting the respondents’ view “would make it trivially easy for States to undermine the Act—indeed, to wholly defeat it.”

Importantly, the Supreme Court rejected an argument by respondents attempting to salvage the clear-statement rule by characterizing it as only affecting contract formation, and thus, outside of the FAA’s purview. In rejecting that characterization, the Court relied upon the FAA’s text as well as case law. By its terms, the FAA states arbitration agreements be treated as “valid, irrevocable, and enforceable,” thus covering the initial “valid[ity]” of arbitration contracts.” The Court explained that its discussion of duress in Concepcion, a doctrine involving unfair dealing at the contract formation stage, would not make sense if the FAA did not apply to the contract formation stage. Furthermore, if respondents were correct, states could easily make an end-run around it by declaring everyone incompetent to sign arbitration agreements—a rule only affecting contract formation.

In dispensing with the consolidated cases, the Court reversed and ordered enforcement of Clark’s arbitration agreement because the Kentucky court had invalidated that agreement only based on the clear-statement rule. On the other hand, the Court vacated and remanded Wellner’s case for the state court to determine whether its interpretation of the power of attorney was independent of the clear-statement rule.

Kindred Nursing Ctrs. Ltd. P’ship v. Clark, No. 16-32 (USSC May 15, 2017).

This post written by Thaddeus Ewald .
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ARBITRATOR’S PRE-ISKANIAN DECISION THAT PAGA CLAIM MUST PROCEED ON AN INDIVIDUAL BASIS WAS NOT A “MANIFEST DISREGARD OF THE LAW”

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A refinery operator (“Wulfe”), sued his former employer alleging several employment related claims, including a claim under the California Private Attorneys General Act (PAGA). The court compelled arbitration, and the arbitrator ordered Wulfe to proceed with his PAGA claim on an individual basis. While that decision was pending on appeal before the Ninth Circuit, the California Supreme Court and the Ninth Circuit issued opinions (Iskanian and Sakkab, respectively) holding that agreements to waive the right to bring a representative PAGA claim are unenforceable. The Ninth Circuit then remanded this case to the district court to consider the intervening case law, directing “the district court to consider in the first instance Wulfe’s argument that, in light of those subsequent decisions, the arbitrator’s award should be vacated because she exceeded her powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made.” The district court subsequently declined to vacate the award.

On appeal, the Ninth Circuit affirmed the district court’s decision to let the award stand. The Ninth Circuit found that the arbitrator had not exceeded her powers by committing a “manifest disregard of the law.” The Ninth Circuit explained that “the issue is not whether, with perfect hindsight, we can conclude that the arbitrator erred. Rather, the issue is whether the arbitrator recognized the applicable law and then ignored it.” Because at the time the arbitrator ordered the PAGA claim to proceed on an individual basis the law was unsettled, there could have been no manifest disregard of the law. A failure “to correctly predict future judicial decisions” does not meet the test for “manifest disregard.” Wulfe v. Valero Refining Co., Case No. 16-55824 (9th Cir. Apr. 19, 2017).

This post written by Michael Wolgin.

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