Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

Ninth Circuit Holds That Class Action Waiver in Employment Agreement Is Unenforceable, Adding to the Circuit Split on the Issue

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As a condition of employment, Ernst & Young’s employees were required to sign agreements that contained a “concerted action” waiver requiring employees to pursue legal claims against E&Y exclusively through arbitration, and arbitrate only as individuals in “separate proceedings”. An employee brought a class action against E&Y in the United States District Court for the Northern District of California alleging violations of the Fair Labor Standards Act. E&Y moved to compel arbitration and was granted such relief by the District Court, which dismissed the class action. On appeal, a divided U.S. Court of Appeals for the Ninth Circuit reversed, holding that the concerted action waiver in E&Y’s employment agreements violated Sections 7 and 8 of the National Labor Relations Act – specifically, the National Labor Relations Board’s interpretation that such waivers violate that Act. Moreover, because the Ninth Circuit concluded that an employee’s right to act collectively was substantive, rather than procedural, the court further held that the Board’s ban on class action waivers did not conflict with the Federal Arbitration Act, finding that when an arbitration provision effectively waives a substantive federal right, the so-called “savings clause” of the Federal Arbitration precludes enforcement of that waiver.

Our prior blog posts discussed the developing split among federal circuit courts on this issue. For example, in Cellular Sales of Missouri, LLC v. National Labor Relations Board, No. 15-1620 (8th Cir. June 2, 2016), the Eighth Circuit held that arbitration provisions in employment agreements waiving class actions are enforceable. (See also Fifth Circuit, enforcing such provisions; (same). By contrast, in Lewis v. Epic Systems Corp., No. 15-2997 (7th Cir. May 26, 2016), the Seventh Circuit reached a similar result as the Ninth Circuit. This emerging split, coupled with the use of these types of provisions in employment agreements, may result in the United States Supreme Court ultimately deciding to address the issue. Morris v. Ernst & Young, LLP, No. 13-16599 (9th Cir. Aug. 22, 2016).

ARBITRATION CLAUSE CONTAINED ONLY IN “SIDE” AGREEMENTS TO INSURANCE POLICIES, ENFORCED IN DISPUTE OVER “RETROSPECTIVE PREMIUMS”

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A U.S. District Court for the Southern District of New York recently enjoined Advanced Micro Devices (AMD), from proceeding with litigation in California against National Union Fire Insurance Company (NUFIC), related to a dispute over premiums under workers compensation insurance policies. The New York court further required the parties to proceed in arbitration in New York, even though the relevant arbitration agreements were contained within side agreements (the “indemnity and payment agreements”), and not in the relevant insurance policies.

In opposing NUFIC’s request to require AMD to proceed with arbitration, AMD argued that the indemnity and payment agreements unenforceable because they were unauthenticated side agreements that had not been filed with California’s insurance regulators. The court rejected AMD’s argument that the indemnity agreements were not authentic. The court also found that the dispute over the legitimacy of the indemnity and payment agreements would be addressed in arbitration, rather than by the courts. The court further determined that since one iteration of the applicable arbitration clauses broadly applied to “disputes arising out of or relating to the Agreements,” the arbitration could include the premium dispute at issue here.

Finally, the court considered whether it should defer to the first-filed lawsuit in California (it was filed three days before the New York action to enforce arbitration). The court determined that even though the California action was first in time, the dispute at hand was clearly subject to arbitration, and the New York court was “uncertain” that the California court had the “power” to compel the arbitration. Therefore, the court ruled that the arbitration should proceed in New York, and further ruled that a preliminary injunction enjoining the California proceedings was warranted. National Union Fire Insurance Co. v. Advanced Micro Devices, Inc., Case No. 1:16-cv-05699 (USDC S.D.N.Y. Aug. 4, 2016).

This post written by Barry Weissman.

See our disclaimer.

EX PARTE COMMUNICATIONS BETWEEN REINSURER’S ATTORNEY AND PARTY-APPOINTED ARBITRATOR LEAD TO VACATUR OF AWARD

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The Sixth Circuit recently held that a lower court erred by refusing to vacate an arbitration panel’s interim and final awards due to ex parte communications between one of the arbitrators and the attorney for the appellee, reinsurer National Union Fire Insurance Company of Pittsburgh (NUFIC). The appellant, cedent Meadowbrook Insurance Group (Meadowbrook), and NUFIC entered into a reinsurance agreement containing an arbitration provision. When NUFIC asserted that Meadowbrook overbilled its reinsurance claims, the parties instituted an arbitration in front of a three person panel, including two party-appointed arbitrators and a neutral umpire. The parties agreed to scheduling orders that instituted a ban on all ex parte communications after the filing of the first brief in any arbitration. After the date of filing, the attorney for NUFIC and the arbitrator that had been selected by NUFIC commenced ex parte communications on three different occasions. The Sixth Circuit, upon review, found that while such ex parte communications did not void an award per se, the communications could void an award if they violated the terms of the arbitration agreement. The Sixth Circuit found here that the ex parte communications violated the scheduling orders and also prejudiced Meadowbrook’s rights under the arbitration agreement. The Sixth Circuit therefore vacated both awards. Star Insurance Co. v. National Union Fire Insurance Co. of Pittsburgh, Pa., Case Nos. 15-1403/1490 (6th Cir. Aug. 18, 2016).

This post written by Joshua S. Wirth.

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FIFTH CIRCUIT FOLLOWS D.R. HORTON AND MURPHY OIL PRECEDENT, RULING THAT AN ARBITRATION AGREEMENT PROHIBITING EMPLOYEE CLASS OR COLLECTIVE ACTIONS IS PERMISSIBLE

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The Fifth Circuit refused to enforce an order of the NLRB that found an arbitration agreement was invalid because it waived an employee’s right to maintain employment related class or collective actions. In a short two-page ruling, the court held that the order of the NLRB was not in line with its D.R. Horton and Murphy Oil decisions, and granted review of the NLRB order. Citi Trends, Inc. v. NLRB, Case No. 15-60913 (5th Cir. Aug. 10, 2016).

This post written by Barry Weissman.

See our disclaimer.

NINTH CIRCUIT ALLOWS DISPUTE TO PROCEED IN COURT AFTER ARBITRATION DISMISSED FOR FAILURE TO PAY DEPOSIT

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In mid-June, the U.S. Court of Appeals for the Ninth Circuit issued an opinion which holds that where an arbitration proceeding is dismissed because one side is unable to pay their share of the arbitration, the case may proceed in court—even though there is an arbitration clause. The case involved a claim for legal malpractice, and the retainer agreement had a mandatory arbitration provision. The federal district court compelled the case to arbitration, where it proceeded, until the underlying plaintiff was unable to pay AAA’s required deposit of $ 18,562.50. AAA then inquired as to whether the law firm defendant was willing to cover the deposit, but the firm declined.

Accordingly, the AAA arbitrator terminated the arbitration due to the missing deposit. The law firm moved to lift the stay and have the case dismissed for the plaintiff’s failure to comply with a court order under Federal Rule of Civil Procedure 41(b). Although the district court explicitly found that the plaintiff was “unable to pay for her share of arbitration,” it ultimately dismissed the complaint because the AAA rules required the parties to bear the costs of arbitration equally and the FAA deprived the court of authority to hear “the claims that would have been subject to the arbitration agreement.”

The Ninth Circuit panel found ample guidance in its 2004 ruling in Lifescan, Inc. v. Premier Diabetic Servs., Inc., 363 F.3d 1010, in which it held that, where the arbitration rules agreed to by the parties allow an arbitrator to dismiss an arbitration for failure to pay costs, such dismissal of the arbitration is “pursuant to the parties’ agreement.” The Ninth Circuit thus reversed, finding that the FAA’s “silence is telling,” with no provision compelling dismissal under such circumstances. The Ninth Circuit went on to limit its holding, noting that it did not apply where parties refused to arbitrate by choosing not to pay the costs of arbitration, but noting that requiring dismissal would deprive the plaintiff of a forum in which to have her claims adjudicated.

Tillman v. Rheingold, Valet, Rheingold, Shkolnik & McCartney, Case No. 13-56624 (9th Cir. June 15, 2016).

This post written by Zach Ludens.

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