Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

Third Circuit Affirms Finding That Defendant Waived Its Arbitration Rights

by

In White v. Samsung Electronics America Inc., the Third Circuit Court of Appeals, in a precedential opinion, affirmed a district court order denying defendant Samsung’s motion to compel arbitration, concluding that, “[t]hrough its actions expressing an intent to litigate, Samsung waived its right to arbitration.”

The plaintiffs in this putative class action filed in 2017 brought claims alleging that Samsung, and others, illegally monitored their use of certain internet-based services on their smart TVs and collected personally identifying information, which they transmitted to third-party advertisers and data brokers. The “terms and conditions” the plaintiffs had to accept when setting up their smart TVs included an arbitration provision. Samsung initially moved to dismiss the complaint; however, the parties agreed to a stay and administrative dismissal of the case. In early 2018, the case was reinstated when the plaintiffs filed an amended complaint, which Samsung again sought to dismiss. Samsung also submitted a proposed discovery plan, which did not raise the arbitration provision or a possible motion to compel arbitration. The district court granted the motion to dismiss, after which the plaintiffs filed a second amended complaint in November 2018, which Samsung again moved to dismiss. The district court granted the motion in part, dismissing all but the Wiretap Act claims.

In May 2020, Samsung filed a motion to compel arbitration, which was denied without prejudice. Samsung then refiled its motion to compel in May 2021, arguing that “it did not waive its right to arbitrate because ‘the prerequisites of waiver — extensive discovery and prejudice — are lacking, and the [relevant] factors do not support a finding of waiver.’” The district court denied the motion, concluding that Samsung had waived its right to arbitrate, and the plaintiffs would suffer “significant prejudice” if compelled to arbitrate. Samsung appealed the district court’s decision to the Third Circuit, and while the appeal was pending, the U.S. Supreme Court issued its decision in Morgan v. Sundance Inc. Through supplemental briefing, Samsung brought the decision in Morgan to the court’s attention, arguing that the decision rejected a “prejudice-based waiver analysis” in connection with motions to compel arbitration.

Relying on the Federal Arbitration Act and the recent decision in Morgan, the Third Circuit concluded that “Samsung’s litigation actions here evince a preference for litigation over arbitration.” The court noted that Samsung agreed to stays in discovery so it could instead pursue its motions to dismiss the plaintiffs’ claims on the merits, which, to Samsung’s advantage, resulted in the dismissal of all but one claim. The court also found that Samsung “engaged in multiple instances of non-merits motion practice and acquiesced to the District Court’s pre-trial orders” and noted that Samsung submitted pro hac vice applications in the case and participated in several court conferences. The court also noted that the discovery plan asked whether the case was subject to court-annexed arbitration and, while the case was not subject to that particular type of arbitration, “Samsung should have disclosed that another type of arbitration may be applicable.” Relying on Morgan, the court affirmed the district court’s decision refusing to refer the matter to arbitration, concluding that Samsung waived its right to arbitrate.

White v. Samsung Electronics America Inc., No. 22-1162 (3d Cir. Mar. 7, 2023).

Ninth Circuit Affirms District Order Refusing to Compel Arbitration

by

In City of Laurel, Mississippi v. Cintas Corp. No. 2, the Ninth Circuit Court of Appeals addressed the issue whether a valid arbitration agreement existed between the plaintiff City of Laurel, Mississippi, and defendant Cintas Corporation No. 2. The court affirmed the district court’s order denying Cintas’ motion to stay proceedings and compel arbitration, concluding that “there is no valid arbitration agreement between Cintas and the City.”

The case involved two contracts. The first contract, referred to as the “master agreement,” was between Cintas and “the lead public agency” and included an arbitration clause. The second contract was between Cintas and the city, and included provisions establishing how Cintas would deal with the city and other “participating public agencies.” The parties did not dispute that there was a valid arbitration agreement between Cintas and the “lead public agency” as stated in the first contract. Rather, the dispute focused on whether “the same [arbitration] agreement exists between Cintas and the City.”

The city brought breach of contract claims against Cintas, and the district court denied Cintas’ motion to stay the action and compel arbitration. In affirming the district court’s decision, the Ninth Circuit first noted that under the FAA, “the court is limited to determining (1) whether a valid agreement to arbitrate exists, and, if it does, (2) whether the agreement encompasses the dispute at issue.” The court found the contract between Cintas and the city did not include an arbitration clause, and instead provided that Cintas and the city would resolve disputes “directly between them in accordance with and governed by the laws of the State in which [the City] exits.” The court found that if this language compelled arbitration, “it would be superfluous in light of the arbitration agreement incorporated into the Master Agreement,” noting that courts “must avoid interpreting a contract in a way that would render provisions ‘redundant and superfluous.’” The court also rejected Cintas’ argument that the court should “harmonize” the two contracts by applying the arbitration agreement contained in the contract between Cintas and the lead public agency, citing Morgan v. Sundance Inc., which stated that “a court may not devise novel rules to favor arbitration over litigation.”

In a dissenting opinion, one of the circuit judges concluded that the underlying agreement between the parties compels arbitration of the dispute, and he would reverse the judgment of the district court and remand the case with instructions to compel arbitration.

City of Laurel, Mississippi v. Cintas Corp. No. 2, No. 22-15476 (9th Cir. Mar. 6, 2023).

Ninth Circuit Recognizes Precedent Restricting Arbitration-Favoring Rules, Compels Parties to Arbitrate Anyway

by

In litigation “bookended by two Supreme Court decisions on arbitration,” namely, Epic Systems Corp. v. Lewis and Morgan v. Sundance Inc., the Ninth Circuit recognized Morgan’s holding prohibiting courts from creating “arbitration-favoring procedural rules” but nonetheless found that the lower court correctly compelled the parties to arbitrate their wage and hour dispute over the plaintiff’s protest.

Teresa Armstrong sued Michaels Stores Inc., alleging violations of California wage and hour laws on behalf of a putative class of Michaels’ employees. Michaels answered and asserted its right to arbitration as an affirmative defense. Thereafter, the parties submitted a joint case management statement listing the legal issues in the case, including whether Armstrong agreed to arbitrate her claims. Michaels represented that it planned to move to compel arbitration after conducting discovery. Michaels subsequently served five interrogatories and required Armstrong to produce 28 pages of documents relevant to certain non-arbitrable claims. Neither party filed any discovery motions.

Michaels moved to compel arbitration in August 2018, approximately 10 months after Armstrong had originally filed suit. Armstrong opposed it, arguing that Michaels had waived its right to arbitration due to delay. The district court ruled in favor of Michaels and the arbitrator awarded summary judgment to Michaels. Armstrong appealed to the Ninth Circuit.

While the appeal was pending, the U.S. Supreme Court decided Morgan, which held that “the plain language of the Federal Arbitration Act restricts courts from creating arbitration-favoring procedural rules.” The Ninth Circuit noted that, before Morgan, “to give voice to the FAA’s policy favoring enforcement of arbitration agreements, we held that waiver of the right to arbitration was disfavored.” Like most other circuits, the Ninth Circuit had created “an arbitration-specific waiver test,” which imposed a “heavy burden” on parties arguing that the right to arbitrate had been waived. After Morgan, courts are now required to treat arbitration agreements just like any other contract and, as such, “may not devise novel rules to favor arbitration over litigation.”

In light of Morgan, parties asserting waiver must now demonstrate (1) knowledge of an existing right to compel arbitration and (2) intentional acts inconsistent with that existing right. Unlike before, parties no longer have to demonstrate prejudice to the person opposing arbitration caused by such inconsistent acts.

The Ninth Circuit applied the precedent to Michaels’ actions in the litigation and found that Michaels had not intentionally acted inconsistently with its right to compel arbitration. On the contrary, Michaels consistently stated its intent to move to compel arbitration. Further, Michaels did not actively litigate the merits of the case in the district court. Its limited discovery requests were related to Armstrong’s non-arbitrable claims. Finally, Michaels’ motion to compel arbitration was filed within a year of the lawsuit originally being filed against it. Even under the post-Morgan regime for analyzing waiver of the right to compel arbitration, the Ninth Circuit held Michaels’ actions in this case insufficient to waive its right.

Armstrong v. Michaels Stores Inc., No. 21-15397 (9th Cir. Feb. 13, 2023)

Arbitrability Is Question for Court in Case Alleging Fraud Regarding Agreement Between Parties

by

The Court of Appeals of Maryland recently held that the question of arbitrability was for a court, not an arbitrator, to decide where the plaintiffs alleged that the defendants had fraudulently induced them to enter agreements they did not understand contained arbitration clauses.

Several Maryland residents obtained structured settlements to compensate them for injuries allegedly caused by their purported exposure to lead-based paint. Access Funding, LLC and Assoc, LLC (collectively the “Factoring Companies”) entered into agreements with those residents whereby the Factoring Companies paid them a discounted lump sum and the residents assigned their rights to periodic future payments to the Factoring Companies. The agreements contained arbitration clauses that stated “[o]nce your transaction has closed any claim or dispute . . . shall be resolved by mandatory binding arbitration.” Under Maryland law, the agreements were contingent on court approval, which the parties obtained.

The residents subsequently filed a putative class action complaint alleging, among other things, that the Factoring Companies engaged in fraud and other misconduct in inducing them to execute the agreements. To make a procedurally complex story much more simple, the Factoring Companies moved to compel arbitration. The Maryland trial court granted the motion to compel, reasoning that arbitrability was for the arbitrator to decide, but Maryland’s intermediate appellate court reversed. The Court of Appeals of Maryland reviewed the case and agreed with the intermediate appellate court that the motion to compel should have been denied.

The court held that “the question of whether a valid arbitration agreement exists is a question for the court to determine” where a plaintiff alleges that the “approval of the transfer of their structured settlement payment rights was procured through fraud and deceit” and the plaintiff denies “the existence of a valid agreement to arbitrate.” The court explained, “a plaintiff’s alleged inability to understand the terms of an arbitration clause in a written agreement, on the ground that the other party procured the agreement through fraud and deceit, places the existence of a valid agreement to arbitrate at issue and raises an issue to be decided by the court, not the arbitrator.” In this case, the court explained that the plaintiffs allegedly suffered from cognitive deficiencies and had pleaded that the Factoring Companies and other defendants had colluded to “interfere with their ability to obtain independent professional advice and sought to prevent them from fully understanding and appreciating the agreement’s provision with respect to binding arbitration.” The court found these allegations sufficient to place the existence of a valid agreement in question.

Alternatively, the court also held that because “the plain language of the arbitration clause expressly conditions arbitration on closure of the transaction” the plaintiffs “challenge[d] the existence of an agreement to arbitrate, which is an issue for the court” not the arbitrator.

Of note, the court also explained that the Maryland Uniform Arbitration Act, which governed the arbitration issues in this case, was meant to mirror the FAA.

Access Funding, LLC, et al. v. Chrystal Linton, et al., No. 5, September Term 2022 (Ct. App. Md. Dec. 1, 2022).

 

Tenth Circuit Affirms Refusal to Vacate Confirmation Despite Foreign Court’s Annulment of Underlying Arbitration Award

by

The Tenth Circuit recently affirmed a district court’s decision not to vacate a confirmation award even though the underlying arbitration award had been annulled by a Bolivian court following the confirmation. The Tenth Circuit agreed that public policy considerations, including concerns about encouraging endless litigation, rendered the district court’s decision not to vacate the confirmation as within that court’s discretion.

Compañía de Inversiones Mercantiles S.A. (CIMSA) and Grupo Cementos de Chihuahua S.A.B. de C.V. (GCC) entered into a shareholder agreement in which GCC purchased shares of a Bolivian company from CIMSA. The shareholder agreement included an arbitration clause and provided that CIMSA had a right of first refusal if GCC sought to sell its shares. CIMSA attempted to exercise that right when GCC moved to sell shares, but GCC purportedly claimed that CIMSA’s right was invalid and sold the shares to a third party. The sale triggered lengthy arbitration and court proceedings. In short, an arbitral tribunal in Bolivia awarded CIMSA approximately $34 million in damages plus $2 million in costs and fees, all subject to 6% interest. GCC moved to annul the award in Bolivia but lost. CIMSA then obtained an order from the U. S. District Court for the District of Colorado confirming the award. The Tenth Circuit affirmed that award. GCC then persuaded a different panel of the Bolivian court that had ruled against it to annul the arbitral award. With that annulment in hand, GCC moved to vacate the district court’s confirmation order. The district court denied GCC’s motion. GCC appealed that decision to the Tenth Circuit, which affirmed.

GCC initially  argued that a U. S. court cannot confirm an arbitral award that has been annulled by the primary jurisdiction. The Tenth Circuit disagreed, noting:

[W]hen a court has been asked to vacate an order confirming an arbitral award that has later been annulled, it may balance against comity considerations (1) whether the annulment is repugnant to U.S. public policy or (2) whether giving effect to the annulment would undermine U.S. public policy.

GCC nevertheless argued that the district court erred by considering in conjunction with that analysis not only whether the orders of the Bolivian court were repugnant to U.S. public policy, but “whether giving effect to those orders through vacatur of its Confirmation Judgment would offend U.S. public policy.” The Tenth Circuit disagreed, explaining that the district court properly considered whether giving effect to orders would violate public policy (and holding that it would because doing so would “encourage ‘proceedings without end’”) in addition to the question of whether the orders themselves were repugnant to U.S. public policy. The Tenth Circuit held that the district court did not abuse its discretion in concluding “that (1) giving effect to the [] Bolivian orders [annulling the arbitral award] would offend U.S. public policy and (2) GCC acted inequitably in the United States and Bolivian proceedings[:]”

The interests of the finality of judgments, respecting parties’ contractual expectations, and the U. S. policy favoring arbitral dispute resolution support the district court’s conclusion that vacatur of its Confirmation Judgment would violate U.S. public policy. These considerations correspondingly support the district court’s decision against extending comity to the [relevant] Bolivian orders.

The Tenth Circuit also rejected GCC’s arguments that the district court erred by ordering GCC to turnover property held abroad by third parties, and other challenges to turnover orders.

Compañía de Inversiones Mercantiles S.A. v. Grupo Cementos de Chihuahua S.A.B. de C.V., No. 21-1196 (10th Cir. Jan. 10, 2023)