Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

FEDERAL COURT RESOLVES ARBITRATION CHALLENGES TO DISSOLUTION OF LAWYER AND NON-LAWYER PARTNERSHIP

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A federal court recently decided a host of different motions related to an arbitration dissolving the now-defunct Beltway Law Group (“BLG”), a firm that operated websites and other marketing efforts to attract clients on behalf of unaffiliated trial law firms. The arbitrator had previously resolved the primary dispute between the parties—non-lawyer partners who provided marketing services and the lawyer-partner—by ordering the dissolution of the firm. The opinion discussed herein arose from the parties’ various motions challenging or supporting an arbitrator’s resolution of the secondary disputes between the parties: attorneys’ fees and costs (awarded to the lawyer-partner), motions to vacate and to confirm, and supervision of the winding down process.

The non-lawyer partners sought to vacate the arbitration award under each of the four statutory bases recognized by the Federal Arbitration Act, as well as for manifest disregard of the law. In turn, the court rejected each of these challenges and upheld the arbitral award. First, the court rejected vacatur based on “undue means” because the challenging partners did not present clear and convincing evidence of fraudulent conduct or undue means that denied them a “fundamentally fair hearing.” Second, the court rejected vacatur based on “evident partiality” because the challenging party failed to meet the “heavy burden” of showing that the circumstances indicated any improper motives on behalf of the arbitrator. Third, the court rejected vacatur based on “”misconduct” by the arbitrator because the arbitrator’s refusal to stay the proceedings and allow one of the non-lawyer partners more discovery was not unreasonable nor an abuse of discretion. Fourth, the court addressed the challenging parties’ contention that the arbitrator acted with “manifest disregard” of the law—the legal viability of which as a basis to vacate an arbitration award remains uncertain. The court declined to resolve that issue by finding that the challenging parties’ failed to meet the manifest disregard standard (even assuming it is viable) – that the arbitrator knowingly refused to apply a governing legal principle that was well defined and clearly applicable.

Proceeding to the other pending motions before it, the court next granted the lawyer-partner’s motion to confirm the arbitral award because there was no valid basis to vacate it. It further denied the non-lawyer partners’ motion to appoint a receiver to facilitate the winding down of BLG because appointment of a receiver must be ancillary to primary relief—not primary relief itself—and because the issue of receivership was already adjudicated in the underlying arbitration. Finally, the court rejected the lawyer-partner’s motion seeking sanctions against the non-lawyer partners because their positions were not frivolous or deceptive.

Ray v. Chafetz, Case No. 16-428 (USDC D.D.C. Feb. 17, 2017)

This post written by Thaddeus Ewald .

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FEDERAL CIRCUIT UPHOLDS $455 MILLION INTERNATIONAL ARBITRATION AWARD, BUT FINDS THAT FEDERAL STATUTORY INTEREST RATE, RATHER THAN HIGHER RATE SPECIFIED BY ARBITRATIONS TRIBUNAL, APPLIES POST-JUDGMENT

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The Federal Circuit has upheld a district court’s confirmation of a $455 million award by an international arbitration tribunal, but modified the judgment to clarify that, after the date of the district court’s judgment confirming the award, interest will accrue at the federal statutory rate rather than the tribunal’s higher post-award rate.

The case involved patent infringement and breach of contract claims regarding technologies related to genes that provide resistance to certain herbicides. The Federal Circuit found that it had jurisdiction over the appeal as the matter arose under the patent laws of the United States. Because the case involved an international arbitration, enforcement of the award was regulated by the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention”), which, like the Federal Arbitration Act, requires that courts apply a highly deferential standard of review when evaluating challenges to the decisions of arbitrators. In this case, the Federal Circuit found that appellants failed to show that the tribunal’s decision was contrary to public policy, reflected a manifest disregard for the law, or was otherwise reversible under these deferential standards.

However, the Federal Circuit found that the district court erred by denying a motion to amend its judgment to use the federal statutory rate for post-judgment interest, rather than the higher rate that the tribunal stated would apply “from the date of this Award until full payment.” The Federal Circuit emphasized the distinction between post-award interest (i.e., after the date of the arbitration award) and post-judgment interest (i.e., after the date of district court’s order confirming that award), and noted that it was undisputed that the tribunal’s attention was not called to this distinction. Citing precedent holding that the statutory rate applies to post-judgment interest unless the parties or arbitrators “unambiguously express their intent to replace the federal rate for the post-judgment period,” the Federal Circuit found that there was no such unambiguously expressed intent and, therefore, the federal statutory rate would apply to that period.

Bayer CropScience AG v. Dow Agrosciences LLC, 2016-1530 (Fed. Cir. Mar. 1, 2017)

This post written by Jason Brost.

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SIXTH CIRCUIT FINDS IT HAS NO JURISDICTION OVER APPEAL OF ORDER COMPELLING ARBITRATION AND ENJOINING STATE COURT PROCEEDINGS

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The Sixth Circuit has dismissed the appeal of an order granting a motion to compel arbitration and to enjoin certain state court proceedings, finding the order was not appealable because the district court stayed the matter pending arbitration rather than dismissing it.

The case began in state court where the administratrix of an estate brought various claims against a nursing home where the decedent had resided. The nursing home moved in federal court to compel arbitration and enjoin the administratrix from pursuing her claims in state court, which the district court granted.

The Sixth Circuit’s opinion hinged on the district court’s decision to stay the case pursuant to 9 U.S.C. § 3 rather than to dismiss it. The Sixth Circuit noted that, under 9 U.S.C. § 16(b)(1), such an order is not appealable except as provided for in 28 U.S.C. § 1292(b), which allows interlocutory orders to be appealed only if the district court states in writing that the “order involves a controlling question of law as to which there is substantial ground for difference of opinion and that an immediate appeal from the order may materially advance the ultimate termination of the litigation.” As the district court made no such finding, the order was not appealable. Similarly, the Sixth Circuit found that it had no jurisdiction to review the district court’s order enjoining the state court proceeding, which was entered pursuant to the court’s power to direct arbitration provided by 9 U.S.C. § 4, as 9 U.S.C. § 16(b)(2) specifically prohibits appeals of such an interlocutory order.

Brandenburg Health Facilities v. Mattingly, Case No. 16-6161 (6th Cir. Feb. 24, 2017)

This post written by Jason Brost.

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ARBITRAL AWARD SETTLING BUYOUT PRICE IN DIAMOND BUSINESS DISPUTE AFFIRMED OVER ALLEGATIONS OF ARBITRATOR PARTIALITY

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The arbitration award in a dispute between former joint venture partners in a series of international diamond businesses has been confirmed by the Southern District of New York. The decision resolved motions by Julius Klein Diamonds, LLC, related entities, and several members of the Klein family (the “Kleins”) attempting to vacate the arbitration award ordering them to pay a buyout price of $179 million to LGC USA Holdings. The bulk of the Kleins’ substantive arguments challenging the award alleged bias on the part of the third neutral arbitrator selected by the two party-appointed arbitrators. At the outset of the arbitration, the arbitrator at issue disclosed professional relationships with LGC’s owner as well as the arbitrators, but failed to disclose the extent of those relationships or his pending indictment and later conviction on tax fraud charges.

First, applying the standard set forth by the Federal Arbitration Act and applicable case law, the court rejected the Kleins’ substantive challenges to the arbitral award. While the court noted that third arbitrator could have been more forthcoming concerning the scope of his business relationships with the other arbitrators and LGC’s owner, the court found his initial disclosure was sufficient to put the Kleins on inquiry notice. Thus, the court found that their failure to investigate or object until after an unfavorable award waived any such objection. The court also found insufficient admissible evidence to substantiate the assertion that the undisclosed relationship impacted his partiality in any way. Additionally, the court concluded the arbitrator’s failure to disclose his indictment and subsequent conviction for tax fraud issues did not warrant vacatur because the conviction was unrelated to and did not affect the outcome of the arbitration.

The court also rejected the Kleins’ additional substantive challenges that the arbitrators acted with manifest disregard for the law or exceeded their powers in issuing the award. Noting the high degree of deference afforded arbitration awards, the court found the particular arbitral agreement at issue to be broad, covering “[a]ny controversy or claim arising out of or relating to” the agreements. Thus, the arbitrators did not err by ordering a full buyout of the joint ventures at issue. Nor did the arbitrators err by finding the Kleins joint and severally liable with their associated entities, because the family members were personal signatories to the agreement, agreed to allow the arbitrators decide all disputes, and actively and voluntarily participated in the arbitral process.

LGC Holdings, Inc. v. Julius Klein Diamonds, LLC, Case No. 16-5352 (USDC S.D.N.Y. Feb. 28, 2017).

This post written by Thaddeus Ewald .
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COURT FINDS THAT ARBITRATION AWARD THAT INTERPRETED CONTRACT “TERMINATION” TO INCLUDE CONTRACT “EXPIRATION” WAS NOT A “MANIFEST DISREGARD OF THE LAW”

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Former franchisees filed a petition to vacate an arbitration award entered in favor of their former franchisor which enforced a 2-year non-compete provision in the parties’ franchise agreement when the agreement expired. The arbitrator had determined that the non-compete provision applied, notwithstanding that the provision contemplated applying upon the agreement’s “termination,” and did not refer to the agreement’s “expiration.” The franchisees argued that the arbitrator committed a “manifest disregard of the law,” and that the award “failed to draw its essence” from the parties’ agreement. The court determined that “both readings [were] plausible,” and therefore the award “derived from the essence of the Franchise Agreement.” The court continued, “Where the arbitrator did not act with ‘manifest disregard of the law” there was “no basis to vacate the award.” The court further upheld the arbitrator’s decision to enforce the 2-year non-compete provision from the date the franchisees started to comply with the agreement’s post-expiration terms, rather than from the (earlier) date that the agreement expired. That decision, the court explained, also “comported with the law and thus did not exhibit ‘manifest disregard of the law.’” The court therefore denied the petition to vacate the award, and granted the petition to confirm the award. Frye v. Wild Bird Centers of America, Inc., Case No. 8:16-cv-03216 (USDC D. Md. Feb. 14, 2017).

This post written by Michael Wolgin.

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