Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

COURT COMPELS ARBITRATION TO DETERMINE THE ARBITRABILITY OF REINSURANCE DISPUTE WITH CAPTIVE INSURANCE COMPANY

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In a suit by an auto body company against a captive insurance company for rescission of certain workers compensation reinsurance participation agreements, for disgorgement of $70,000 paid thereunder, and for fraud, breach of contract, and unfair business practices, the court compelled arbitration of all claims. The auto body company argued that arbitration should not be compelled because a clause within the arbitration agreement stated that it was “only intended to provide a mechanism for resolving accounting disputes in good faith” (the dispute here did not involve an accounting dispute). The court, however, interpreted the entire arbitration agreement to find that the agreement “was intended to govern all disputes arising from the parties’ commercial transaction, not merely accounting disputes.” The court further found that the language in the arbitration agreement providing that the arbitrator would decide the “construction and enforceability” of the agreement delegated to the arbitrator the threshold question of whether the dispute was arbitrable. The court bolstered this finding by holding that the agreement’s incorporation of the AAA Rules, which provide that parties must arbitrate the arbitrability of a dispute, is another “clear and unmistakable delegation provision.” Accordingly, the court delegated to the arbitrator the auto body company’s contentions that the reinsurance agreements were unlawful and that a condition precedent to arbitration had not been satisfied. Mike Rose’s Auto Body, Inc. v. Applied Underwriters Captive Risk Assurance Co., Case No. 16-cv-01864 (USDC N.D. Cal. Sept. 28, 2016).

This post written by Michael Wolgin.

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FIFTH CIRCUIT AFFIRMS ORDER COMPELLING ARBITRATION AGAINST NON-SIGNATORIES BASED ON “INTERTWINED CLAIMS” ESTOPPEL

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A physician sued several healthcare entities for wrongful termination of employment, negligence, breach of contract, and tortious interference with at-will employment. While two of the defendants were signatories to plaintiff’s employment agreement which contained an arbitration clause, the other defendants were not. Noting that Texas law expressly recognizes the theory of “direct benefits” estoppel, the trial court reasoned that because the defendants’ liability under the tortious interference claim could not be determined without reference to the employment agreement, the plaintiff must arbitrate that claim. Regarding the plaintiff’s other claims, the trial court applied the theory of “intertwined claims” estoppel and required the plaintiff to arbitrate those claims as well.

On appeal, the Fifth Circuit affirmed the trial court’s rulings, including the application of intertwined claims estoppel. The court explained that intertwined claims estoppel involved compelling arbitration when a non-signatory defendant has a “close relationship” with a signatory and the claims are “intimately founded in and intertwined with the underlying contract obligations.” Relying on a Texas Supreme Court case that “intimated at the validity of” the theory, on lower courts in Texas that applied the theory, and on the fact that arbitration of disputes is strongly favored under federal and state policy, the Fifth Circuit determined that the “Texas Supreme Court, if faced with the question, would adopt intertwined claims estoppel.” Finding that plaintiff regarded all of the defendants as closely related by failing to differentiate his factual allegations for each claim, and that the claims at issue closely related to plaintiff’s alleged wrongful termination, the Fifth Circuit affirmed. Hays v. HCA Holdings, Inc., Case No. 15-51002 (5th Cir. Sept. 29, 2016).

This post written by Gail Jankowski, a law clerk at Carlton Fields in Washington, DC.

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THE TENTH CIRCUIT AFFIRMED DECISION THAT TWO PUTATIVE CLASS ACTIONS MUST BE ARBITRATED

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This dispute involves two cable subscribers (Andrew Alwert and Stanley Freedman) who filed putative class actions against Cox Communications Inc. for allegedly tying monthly set-top box payments to its premium cable services.

The background of the dispute can be found here. In sum, in 2009, several of Cox’s premium cable subscribers filed suits against the company for allegedly tying the service to its set-top box rentals. The suits were consolidated and transferred to Oklahoma federal court. However, in 2011, the Oklahoma federal court denied the request to certify a national class. Many of the subscribers/plaintiffs then filed putative class actions in several geographic regions around the country (Alwert filed on behalf of Cox subscribers in its New Orleans market and Feldman filed on behalf of Cox subscribers in its Arizona market). The various regional actions were again consolidated and transferred to the Oklahoma federal court. The parties agreed to stay all actions except one case brought on behalf of Cox subscribers in its Oklahoma City market (the Healey litigation). After the court granted class certification in that case, Cox moved to compel arbitration, which was denied. Cox appealed, and the Tenth Circuit affirmed. While the Healey appeal was pending before the Tenth Circuit, the Oklahoma federal court lifted the stay on the Alwert and Feldman cases. Cox answered both complaints and plaintiffs then sought discovery. Cox then moved to compel arbitration in both the Alwert and Feldman cases. In December 2014, the Oklahoma federal court granted the motions, finding that the arbitration clauses covered the present litigation, that Cox had not waived arbitration and the arbitration clauses were supported by consideration and were not illusory. The plaintiffs appealed and the Tenth Circuit granted the petition to appeal.

The Tenth Circuit affirmed the Oklahoma federal court’s order compelling arbitration of both cases, finding that the arbitration clauses in Alwert and Feldman’s subscriber agreements cover the matters raised in their cases, and that Cox did not waive its right to arbitration. The Tenth Circuit distinguished these cases from Healy, because in Healey, Cox engaged in litigation and did not move to compel arbitration until a class of subscribers was certified. The Court noted that Cox’s decision to litigate in Healy does not legally impact its decision to compel arbitration in the Alwert and Feldman cases, as the matters involve different parties and claims.
Thus, the Court held that Cox had not waived its right to arbitrate.

In re: Cox Enterprises Inc. Set-Top Cable Television Box Antitrust Litigation, Nos. 15-6076 (Alwert) and 15-6077 (Feldman) (10th Cir. Aug. 26, 2016).

This post written by Jeanne Kohler.

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ELEVENTH CIRCUIT DETERMINES PARTY’S COUNTERCLAIM TO PETITION FOR CONFIRMATION COULD NOT BE CONSTRUED AS MOTION TO VACATE THE ARBITRATION AWARD

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When the appellant failed to file a motion to vacate or modify an arbitration award, it waived its right to raise Section 10 or 11 of the Federal Arbitration Action (“FAA”) as a defense to a motion to confirm the award. Appellant argued that its counterclaim to the petition for confirmation should have been construed as a motion to vacate. Although a district court has “discretion to liberally construe a poorly conceived filing”, there is no obligation for the court to “independently inquire into the most advantageous construction of a represented civil litigant’s filing.” The Court found the counterclaim was “so vague that the district court could not possibly have discerned a factual predicate for Section 10 relief.”

The Court also upheld the District Court’s decision denying appellant’s motion for reconsideration, as appellant neglected to timely move for vacatur or respond to petitioner’s supplement to its petition for confirmation. Since a motion for reconsideration exists for the correction of “obvious errors or injustices” and not to put forth a new argument, the district court did not abuse its discretion by declining to accept appellant’s belated request to construe the counterclaim as a motion to vacate. Careminders Home Care, Inc. v. Concura, Inc., et al., No. 16-10112 (11th Cir. Aug. 25, 2016)

This post written by Nora A. Valenza-Frost.

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ILLINOIS FEDERAL COURT GRANTS MOTION TO CONFIRM ARBITRATION AWARD FOR PRE-HEARING SECURITY

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We previously reported on this case in our blog dated December 21, 2015. The background of the dispute is as follows. A dispute arose between an insurer and its insured under four written program agreements, each containing an arbitration clause. The insurer filed a single demand for arbitration with the American Arbitration Association (the “AAA”), alleging that the insureds failed to pay amounts due under the four program agreements. The insureds raised various objections to the arbitration demand, including that they were entitled to four separate arbitrations. The AAA ruled that the arbitration would continue as one arbitration, and the insureds appointed the sole arbitrator. Shortly thereafter, the insureds filed an action in Texas state court, seeking a Temporary Restraining Order (“TRO”) to stay the arbitration because it had been improperly consolidated. The Texas court granted the TRO, stating that the AAA had failed to follow the arbitration agreements by administering one proceeding, not four, and enjoined the AAA from administering the arbitration. The AAA removed the Texas action to federal court, and filed a motion to dismiss, to which the insureds did not file a response. After the TRO expired, the AAA attempted to resume administration of the arbitration, but the insureds would not participate in the arbitration and informed the AAA that their counsel could not communicate with the AAA given the pending Texas action. Thus, the insurer filed an action in Illinois federal court, where the arbitration was pending, seeking to compel arbitration, which was granted in November 2015. The parties then returned to arbitration.

In the arbitration, predicting future legal resistance from the insured, the insurer petitioned the arbitrators for the insured to post pre-hearing security. The arbitrators granted the petition, and ordered the insured to post about $4.6 million in security. The insured did not post such security, and the insurer thus sought to confirm the panel’s pre-hearing award for security in the Illinois federal court. In response, the insured argued that the award should be vacated because the arbitrators exceeded their authority under Section 10(a)(4) of the Federal Arbitration Act (the “FAA”).

The Illinois federal court first found that an interim pre-hearing security award is an “award” under the FAA. Thus, the court noted that, under the FAA, it must confirm the award unless a statutory exception applies, one of which is Section 10(a)(4)of the FAA. The court also noted that a party seeking relief under Section 10(a)(4) bears a heavy burden and that strong deference is given to arbitrators’ decisions. Then, focusing on the parties’ program agreements, the court held that there is support for the pre-hearing security award in the agreements and arbitration clause. Although the agreements did not mention prehearing security as a remedy available to the parties, the court noted that it does not mean such remedy is not available. In this regard, citing other precedents, the court noted that “[i]f an enumeration of remedies were necessary, in many cases the arbitrator[s] would be powerless to impose any remedy, and that would not be correct. Since the arbitrator[s] derive[] all [their] powers from the agreement, the agreement must implicitly grant [the arbitrators] remedial powers when there is no explicit grant.” The court then stated that the arbitration clause at issue provided that the arbitration was to be conducted under the AAA Rules, which allow for interim awards of security. Thus, the court held that, by adopting the AAA Rules into their agreements, the parties implicitly included the arbitrators’ authority to grant an award like the interim security award at issue. Finding the insured’s arguments to vacate unpersuasive, the court then granted the insurer’s motion to confirm the pre-hearing security award.

Zurich American Insurance Company, et al. v. Trendsetter HR, LLC, et al., No. 1:15-cv-08696 (USDC N.D. Ill. Aug. 24, 2016).

This post written by Jeanne Kohler.

See our disclaimer.