Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

DIVIDED THIRD CIRCUIT PANEL HOLDS THAT WAIVER OF ARBITRATION CLAUSE DOES NOT APPLY TO FUTILE ARGUMENTS

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On July 13, 2016, a U.S. Court of Appeals for the Third Circuit panel held that an arbitration clause is not waived simply because a party failed to raise a futile argument. The case arose out of a putative class action alleging over $50 million in untrebled damages relating to purported overcharges of fees stemming from the recording of deeds and mortgage instruments. The case was pending in the District of New Jersey, where strong precedent suggested that a motion to compel bipolar arbitration—that is individual, rather than class-wide—would have been futile. Following the U.S. Supreme Court’s decision in AT&T Mobility v. Concepcion, 563 U.S. 333 (2011), where the Court found that the Federal Arbitration Act preempted state laws that had previously prohibited a party from compelling bipolar arbitrations, the defendants notified the plaintiffs that they would be seeking to compel arbitration of this kind. The U.S. District Court for the District of New Jersey granted the motion.

On appeal, the Third Circuit found that “futility can excuse the delayed invocation of the defense of arbitration.” Examining what other federal courts had held previously, the Third Circuit panel, over a strong dissent, held that “[w]hy would we require a party to make a futile gesture to prevent waiver when we do not require such gestures in other scenarios?” The panel went on to state that the correct test is whether it was almost certain that a motion to compel arbitration would have been denied. Finding that test satisfied in these circumstances, the panel found that because defendants demanded bipolar arbitration less than a month after Concepcion, the plaintiffs were not prejudiced and affirmed the district court’s order compelling the case to individual arbitration.

Chassen v. Fidelity National Financial, Inc., Case No. 15-3789 (3d Cir. July 13, 2016).

This post written by Zach Ludens.

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ORDER COMPELLING ARBITRATION REVERSED DUE TO FAILURE TO DETERMINE THE EXISTENCE AND SCOPE OF ARBITRATION AGREEMENT

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The Ninth Circuit recently reversed a trial court for compelling arbitration without issuing an order that (1) made “the necessary factual findings as to the parties’ communications,” (2) determined “the law applicable to contract formation,” and (3) ruled “as a matter of law what constituted the offer, acceptance, or terms of the contract.” The appellate court remanded for the trial court to “resolve factual issues and make legal conclusions regarding the scope of the parties’ agreement.” Due to the basic threshold error, the court determined that it did not need to consider the parties’ arguments regarding unconscionability, waiver, and due process. Cunico Corp. v. Custom Alloy Corp., Case No. 14-56544 (9th Cir. Sept. 6, 2016).

This post written by Michael Wolgin.

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SECOND CIRCUIT PANEL ADHERES TO CIRCUIT PRECEDENT AND AFFIRMS ENFORCEABILITY OF EMPLOYMENT CLASS ACTION WAIVERS

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The Second Circuit issued a summary order affirming a decision by the Southern District of New York compelling arbitration pursuant to class-action and collective-action waivers contained in an employment arbitration agreement. The agreement required employees to submit all employment and compensation-related claims to arbitration and mandated that such claims be decided on an individual basis. The sole issue on appeal was whether the arbitration provision’s “prohibition of class or collective adjudication of work-related claims illegally restrict[ed] employees’ substantive rights under the NLRA and the [Norris-La Guardia Act], and [was] unenforceable under the [Federal Arbitration Act].” The court described the landscape of the Circuit split on this issue, noting that the National Labor Relations Board (NLRB) and the Seventh and Ninth Circuits have rejected the class/collective action waivers, whereas the Fifth and Eighth Circuits have held that such waivers may be enforceable. The Second Circuit panel then followed its own precedent, citing its 2013 decision in Sutherland v. Ernst & Young LLP, which is aligned with position of the Fifth and Eighth Circuits. The court then affirmed the enforceability of the waivers here. Patterson v. Raymours Furniture Co., Inc., Case No. 15-2820-cv (2d Cir. Sept. 2, 2016).

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

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COURT COMPELS NON-SIGNATORY AFFILIATES, BUT NOT BROKER, TO ARBITRATE PREMIUM PAYMENT DISPUTE

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National Union Fire Insurance Company of Pittsburgh brought a petition in a New York federal court, to compel nine related companies to arbitrate a payment dispute relating to certain policies of insurance issued to the Beelman Truck Company. In connection with the insurance, Beelman Truck Company entered into premium payment agreements with National Union that contained an arbitration provision. The agreements were signed by Frank J. Beelman, III, on behalf of the Beelman Truck Company. The payment agreements (and the policies to which they related) defined the signatory, Beelman Truck Company, to include its subsidiaries and affiliates. National Union sought to compel not only Beelman Truck Company, but eight of its affiliates, to arbitrate the payment dispute. Beelman Truck Company conceded it must arbitrate, but the eight affiliates challenged the petition, arguing they were not signatories and should not be bound the agreements’ arbitration provisions. In addition, Beelman Truck Company brought a counter-petition to compel the broker who placed the policies to be included in the arbitration. The Court granted National Union’s petition, finding the payment agreements unambiguously included affiliates. However, it denied the counter-petition, finding no evidence that the broker was a signatory, or could otherwise be bound by the arbitration clause in the payment agreements under principles of estoppel. National Union Fire Insurance Company of Pittsburgh v. Beelman Truck Company, Case No. 15-cv-8799 (USDC S.D.N.Y. Aug. 24, 2016).

This post written by John Pitblado.

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THIRD CIRCUIT AFFIRMS DISMISSAL OF SUIT TO VACATE FINRA ARBITRATION AWARD

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This case involved an underlying arbitration before an arbitration panel operating under the Financial Industry Regulatory Authority (“FINRA”) rules, which was brought by Judith and Kenneth Goldman against their financial advisor, Barry Guariglia, and his employer Citigroup Global Markets. The Goldmans had followed their investment adviser when he left his prior employer, Merrill Lynch, and went to Citigroup. In the arbitration, they claimed that when they transferred their account to Citigroup, they were subjected to a “devastating margin call” that wiped out their retirement savings. After 10 days of evidence and argument, and after the Goldmans submitted their case in chief, Citigroup moved to dismiss for lack of evidence. The FINRA arbitration panel dismissed the case, noting that “[w]hile all the claims were quite stridently argued, not a single claim was proven to be true by evidence.”

The Goldmans then filed a motion to vacate the arbitration award in a Pennsylvania federal court, and Citigroup moved to dismiss for lack of subject matter jurisdiction, which was granted by the court. In its decision, the court noted that it did not have subject matter jurisdiction because the Federal Arbitration Act does not itself create federal subject matter jurisdiction, and that the parties were not diverse, and thus, federal question jurisdiction would be required for the court to consider a motion to vacate an arbitration award. The Pennsylvania federal court found that the Goldmans failed to raise a federal question and simply sought to “assert the same claims they unsuccessfully brought in their arbitration.” The Goldmans then appealed to the Third Circuit Court of Appeals.

In their appeal, the Goldmans asserted that a district court can “look through a motion to vacate” at the underlying subject matter, relying on footnote in a prior Third Circuit decision, Goldman Sachs v. Athena Venture Partners, which stated that the district court has subject matter jurisdiction over a motion to vacate because the arbitration included federal securities law claims. The Third Circuit, however, rejected that argument, and found that it was not bound to follow the footnote in that case, noting that the footnote was an “unexamined exercise of jurisdiction and so is without precedential effect” and that the “drive-by jurisdictional ruling” in Athena goes against Third Circuit precedent. Thus, the Third Circuit affirmed the Pennsylvania federal court’s order dismissing the suit for lack of subject matter jurisdiction.

Goldman et al. v. Citigroup Global Markets Inc., et al., No. 15-2345 (3d Cir. Aug. 22, 2016).

This post written by Jeanne Kohler.

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