Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

SIXTH CIRCUIT HOLDS PIZZA HUT FRANCHISEE WAIVED ARBITRATION RIGHT

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The world’s largest Pizza Hut franchisee, NPC International, Inc. (“NPC”), which operates more than 1200 Pizza Hut restaurants in the United States, was sued in federal district court by employees in five separate collective action lawsuits for alleged unpaid “off the clock” work, meeting, and training time. The district court found that the defendant employer’s litigation actions waived its contractual right to insist on arbitration of employees’ claims for unpaid compensation by failing to assert timely the right. The district court accordingly denied NPC’s motion to compel arbitration in all five cases. NPC appealed.

The Sixth Circuit Court of Appeals affirmed, concluding that NPC had “slept on its rights” by waiting almost fifteen months before raising the arbitration issue in any of the five cases. Further, it was only after NPC obtained unfavorable rulings on its initial dispositive motions that it moved to dismiss or compel arbitration. Finally, NPC’s belated assertion of its right to arbitration caused plaintiffs actual prejudice in the form of unnecessary delay and expense.

Gunn v. NPC Int’l, Inc., Nos. 14-6036/6040/6041/6042/6044 (6th Cir. Aug. 28, 2015).

This post written by Whitney Fore, a law clerk at Carlton Fields in Washington, DC.

See our disclaimer.

COMPLAINT FAILS TO OVERCOME HEIGHTENED PLEADING STANDARD FOR FRAUD RELATING TO REPORTING OF REINSURER’S LOSSES

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The Southern District of New York granted Amtrust Financial Services’ motion to dismiss after finding that the plaintiff failed to specifically allege misstatements or omissions necessary to prove scienter in claims related to purported misrepresentations of defendant’s consolidated financial statements. Plaintiff claimed that Amtrust’s financial statements fraudulently misrepresented losses associated with insurance policies, the premiums for which had been ceded to a foreign subsidiary. Amtrust’s foreign subsidiary, located in Luxemburg, operated using an equalization reserve, allowing the reinsurer to offset losses by drawing on the fund. Such reserves are not a feature of U.S. reinsurance companies, and the generally accepted accounting principles (“GAAP”) does not address how such withdrawals should be accounted. The court held that the alleged misstatements failed to specifically allege any facts relating to fraud or scienter. The complaint did not contain sufficient facts to support a material violation of the GAAP or the required intent to defraud. The court reiterated the notion that GAAP principles are subject to the discretion of management. Absent specific facts relating to an intent to conceal or defraud, the determination relating to accounting principles alone was held to not be sufficient to maintain an action alleging securities fraud. Harris v. Amtrust Financial Services Inc., Case No. 14-CV-736 (USDC S.D.N.Y. Sept. 29, 2015).

This post written by Joshua S. Wirth, a law clerk at Carlton Fields in Washington, DC.

See our disclaimer.

FEDERAL COURT ALLOWS SEALING OF A PETITION SEEKING CONFIRMATION OF ARBITRAL AWARD

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On August 14, 2015, a federal district court in New York entered an order allowing a petition to confirm an arbitration award to be filed in redacted form with the arbitration award to be filed under seal. The case is pending between the Century Indemnity Company and the Global Reinsurance Corporation, U.S. Branch. The underlying arbitral award deals with a reinsurance dispute relating to underlying policies issued by Century to Caterpillar Tractor Company during the late 1960s and early 1970s and claims under the policies for asbestos products personal injury lawsuits. According to Century’s Petition, Century and Global had an agreement that certain arbitration information be kept confidential. The most recent arbitration award confirmation is part of ongoing claims between Century and Global on reinsurance policies to underlying policies to manufacturers such as Caterpillar for ongoing underlying claims, such as the asbestos claims here. We most recently reported on these cases on July 21, 2015. Century Indemnity Co. v. Global Reinsurance Corp. of America, Case No. 15-cv-6426 (USDC S.D.N.Y. Aug. 14, 2015).

This post written by Zach Ludens.

See our disclaimer.

THIRD CIRCUIT ADOPTS CONSTRUCTIVE KNOWLEDGE STANDARD TO REVERSE VACATUR OF AWARD

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The Third Circuit reversed an order vacating an arbitration award after concluding that the plaintiff had waived its right of waiver. In the decision, the Third Circuit joined the First, Second, Eighth, and Ninth Circuits in adopting a “constructive knowledge” standard for finding waiver in the context of arbitration.

Defendant-appellants, Goldman, Sachs & Co. and others contested an order vacating an arbitration decision in favor of plaintiff-appellee, Athena Venture Partners, L.P. During arbitration, one of the three arbitrators disclosed that he had been charged with the unauthorized practice of law in an unrelated case. Neither Athena, Goldman, nor the other members contested his continued participation in the arbitration. Only after an unfavorable result, did Athena conduct a background check on the arbitrator and found that he significantly misrepresented the scope of his legal problems. Athena’s successful motion to vacate the arbitration award in District Court was premised on violation of the parties’ agreement to arbitrate due to the arbitrator’s failure to disclose. The Third Circuit reversed, adopting the “constructive knowledge” approach to waivers. Constructive knowledge requires that parties use reasonable care and diligence to investigate potential conflicts. The court noted that this standard “prevents the losing party from receiving a second bite at the apple” (citations omitted). The Ninth Circuit held that Athena failed to apply timely diligence in conducting an investigation only until after it had lost the arbitration. Athena knew or should have known of the conflict and failed to act in a timely manner, thus waiving its rights to challenge the award. Goldman, Sachs & Co. v. Athena Venture Partners, L.P., Case No. 13-3461, (3rd Cir. Sept. 29, 2015).

This post written by Joshua S. Wirth, a law clerk at Carlton Fields in Washington, DC.

See our disclaimer.

NINTH CIRCUIT HOLDS THAT STATE DECISION BARRING WAIVER OF REPRESENTATIVE CLAIMS DOES NOT CONFLICT WITH FEDERAL ARBITRATION ACT

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On June 25, 2012 and July 7, 2014, we reported on the issue of waiver of representative claims under California’s Private Attorneys General Act of 2004 (“PAGA”). In Iskanian v. CLS Transportation of Los Angeles, LLC, the California Supreme Court held that a representative claim under PAGA was not waivable. Following a district court’s dismissal of a claim under PAGA following a motion to compel arbitration, the United States Court of Appeals for the Ninth Circuit was asked to decide whether the California rule from Iskanian was preempted by the Federal Arbitration Act (“FAA”). The Ninth Circuit held that it was not.

The case involved a dispute regarding overtime wages between a former employee and Luxottica Retail North America, Inc. Prior to the California Supreme Court’s holding in Iskanian, Luxottica moved to compel arbitration under a dispute resolution agreement, and the district court agreed, dismissing the case to arbitration. However, in so doing, the district court reached a holding that ultimately was in conflict with Iskanian, which was decided during the pendency of the appeal. Finding that, among other purposes, the purpose of PAGA was to “permit aggrieved employees to act as private attorneys general to collect civil penalties for violations of the Labor Code,” the Ninth Circuit held that the FAA did not preempt the Iskanian rule because its saving clause permits invalidation by “generally applicable contract defenses, such as fraud, duress, or unconscionability,” and that the Iskanian rule was one of those generally applicable contract defenses that may be persevered by the savings clause. The court then found that the Iskanian rule expresses no preference regarding whether such representative claims must be litigated or arbitrated, and, therefore, it did not conflict with the FAA because it did not “conflict with arbitration.” Sakkab v. Luxottica Retail North America, Inc., No. 13-55184 (9th Cir. Sep. 28, 2015).

This post written by Zach Ludens.

See our disclaimer.