Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

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.

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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.

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TENNESSEE SUPREME COURT HOLDS THAT STATE UNCONSCIONABILITY LAW DOES NOT IMPLICATE CONCEPCION AND IS NOT PREEMPTED BY FAA

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The Supreme Court of Tennessee reversed the lower courts’ rulings that a non-mutual arbitration provision in an installment contract on the sale of a manufactured home was unconscionable and unenforceable. In doing so, however, the court rejected the argument that the state court precedent on unconscionability of arbitration agreements was preempted by the FAA ala the U.S. Supreme Court’s Concepcion decision. Because the state court precedent did not adopt a per se rule that any degree of non-mutuality of remedies in an arbitration provision in an adhesion contract renders the provision unconscionable, the doctrine was not implicated by Concepcion and was not preempted by the FAA. Indeed, the court held, state law would determine unconscionability based on “all the facts and circumstances of a particular case.” The fact that the state law “makes mutuality of remedies an important consideration in determining unconscionability does not overly burden arbitration agreements, so long as all of the circumstances of the particular agreement are taken into account.” Berent v. CMH Homes, Inc., Case No. E2013-01214-SC-RLL-CV (Tenn. June 5, 2015).

This post written by Michael Wolgin.

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SIXTH CIRCUIT REVERSES VACATUR OF AWARD STRESSING LIMITED SCOPE OF PERMISSIBLE JUDICIAL REVIEW

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The district court had vacated an arbitration award that had reinstated a terminated hospital employee under a collective bargaining agreement. The district court based its ruling on its interpretation of the CBA, which it believed did not authorize an arbitrator to modify the degree of discipline imposed on an employee. The Sixth Circuit reversed, holding that at best, the district court had adopted one of multiple reasonable interpretations of the CBA (another reasonable one being the interpretation of the arbitrator). Because the arbitrator was “arguably construing” the contract, and was not acting fraudulently or dishonestly, the district court should have refrained “from imposing [its] interpretation of the contract on the parties.” The Sixth Circuit reversed and reinstated the arbitration award. Oakwood Healthcare, Inc. v. Oakwood Hospital Employees Local 2568, Case No. 14-2155 (6th Cir. June 15, 2015).

This post written by Michael Wolgin.

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IN BATTLE OVER EMPLOYMENT COMPENSATION, SECOND CIRCUIT AFFIRMS DISTRICT COURT DECISION TO DENY ARBITRATION

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On interlocutory appeal, the Second Circuit affirmed a district court decision denying arbitration because a later-signed compensation agreement did not retroactively apply as it contravened the intent of a prior independent contractor agreement.

Plaintiff-Appellees Timothy Pratt, William Burrell (“plaintiffs”) and others brought a putative class action suit against Cellular Sales of New York and its parent company (together “Cellular”) for a denial of compensation and other benefits as plaintiffs were considered independent contractors instead of employees. Cellular required plaintiffs to create a separate corporate entity and also sign an independent sales agreement before acting as a representative to sell Verizon Wireless services. Cellular later hired plaintiffs as full-time employees and where the parties executed a new compensation agreement, which contained an arbitration provision. At issue was whether plaintiffs were required to arbitrate claims that occurred prior to the new compensation agreement.

Plaintiffs argued that the compensation agreement should not be applied retroactively and only prospectively. Defendants argued that the compensation agreement did not contain an “express temporal limitation” and therefore could apply to claims prior to the memorialization of the compensation agreement. The court noted that the plaintiffs and Cellular had an evolving relationship, whereby Cellular only started to provide employee benefits to plaintiffs after the new compensation agreement was executed. Additionally, the court noted that Cellular “affirmatively stated that [plaintiffs] were not employees for over a year, it rings hollow for them to now argue that the parties intended the word “employment” in the Compensation Agreements to apply retroactively as to this dispute.” For these and other reasons, the court denied Cellular’s motion to compel arbitration. Holick v. Cellular Sales of New York, LLC, No. 14-4323 (2nd Cir. Sept. 22, 2015).

This post written by Matthew Burrows, a law clerk at Carlton Fields in Washington, DC.

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