Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

DISCOVERY IN AID OF FOREIGN LITIGATION DENIED IN ARBITRATION INVOLVING EXPANSION OF THE PANAMA CANAL

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In a dispute involving the expansion of the Panama Canal, a federal district court has denied an application for an order pursuant to 28 U.S.C. § 1782 to obtain discovery in aid of foreign litigation. The controversy concerned Grupo Unidos por el Canal, S.A.’s (GUPC’s) ex parte application to obtain discovery from an entity with whom the Autoridad del Canal de Panama (ACP) contracted to provide program management services in connection with the Panama Canal project. The contract between GUPC and ACP contains an arbitration clause which provides that any dispute arising from the Canal project be arbitrated in Miami, Florida, under the Rules of Arbitration of the International Chamber of Commerce.

GUPC, along with several co-claimants, commenced the arbitration proceeding against ACP. The Miami-based proceeding is alleged to be the “international tribunal” supporting GUPC’s Section 1782 request for documents. Several objections were made to that request, including (1) the Miami arbitration is a private commercial arbitration and not a “tribunal” within the ambit of Section 1782, (2) the Miami arbitration is not a “foreign or international” tribunal within the meaning of Section 1782 because the seat of the arbitration is in the United States, and (3) the proposed subpoena is unduly burdensome, intrusive, and an attempt to circumvent the contractual procedural and discovery limitations in the arbitration. The court found the proceeding was not a “tribunal” for purposes of Section 1782 and, therefore, found it unnecessary to consider whether the private, Miami-based arbitration was “international.” The court also found that even if the statutory requirements were met, Grupo would not be allowed discovery of 165 million documents that were physically located in Panama, noting that such discovery would be overly burdensome. Grupo’s ex parte application was denied. In re Grupo Unidos Por El Canal, S.A., No. 1:14-mc-00226 (USDC D. Colo. Apr. 17, 2015).

This post written by Renee Schimkat.

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D.C. CIRCUIT HOLDS THAT WHOLLY FOREIGN RETROCESSIONS NOT SUBJECT TO U.S. EXCISE TAX

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In late May, the United States Court of Appeals for the District of Columbia Circuit affirmed a grant of summary judgment to a reinsurer in a dispute with the IRS regarding the imposition of U.S. excise taxes on a wholly foreign retrocession arrangement. The case involved Validus Reinsurance, Ltd., which is organized under the laws of and with a principal place of business in Bermuda. The court found that the relevant provision of the Internal Revenue Code did not apply extraterritorially and ordered the return of the taxes paid by Validus. Validus is a foreign reinsurance company with no operations in the United States. However, Validus does sell reinsurance to insurance companies selling policies covering risks, liabilities, and hazards within the United States. Validus also purchases retrocessions for its own reinsurance, often from other non-U.S.-based retrocessionaires. The transactions at bar involved a U.S.-based risk with reinsurance issued by Validus and a retrocession issued by a foreign retrocessionaire.

Congress had expanded the excise tax applicable to foreign insurance in order to “eliminate an unwarranted competitive advantage now favoring foreign insurers,” which were not subject to U.S. income tax laws. After another amendment, the particular provision of the Code section at issue, § 4371, requires an excise tax of one cent per dollar of premium paid on foreign-issued “reinsurance covering any of contracts taxable” as casualty insurance or life insurance. Because the retrocession is covering reinsurance that covers the taxable underlying contract, the court had to resolve an ambiguity in the statute. Looking to the fact that the government’s proposed reading would lead to a “cascading tax theory” with no limit as to the number of times that the government could collect tax on retrocessions with some underlying U.S.-based risks, the court determined that Congress had not shown an intent for the law to apply this extraterritorially. Under the canon of statutory interpretation against implying a reading of extraterritoriality absent a showing of intent by Congress, this transaction was an overbroad reading of the statute. Validus Reinsurance, Ltd. v. United States, No. 13-109 (D.C. Cir. May 26, 2015).

This post written by Zach Ludens.

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COURT DENIES MOTION TO COMPEL ARBITRATION, FINDING TERMS OF AGREEMENT TO ARBITRATE INADEQUATELY DISCLOSED

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A New York district court denied defendant Gogo LLC and Gogo Inc. (collectively “Gogo”) motions to transfer venue, compel arbitration, and dismiss for lack of standing in a lawsuit relating to internet services.

Plaintiffs filed a putative class action against Gogo alleging common law breach of the implied covenant of good faith and fair dealing, unjust enrichment, and violation of various consumer protection statutes. The lawsuit stems from the purchase of wireless internet connectivity services, available in airports and aboard air flights. Plaintiffs’ allege that Gogo mislead customers into purchasing a single one-month wireless internet service subscription, but then automatically renewed those services without obtaining their signatures or authorization.

The court looked into whether plaintiffs were given effective notice of the terms and conditions for their online purchases. As such, the offeror, in this case Gogo, “must show that a reasonable person in the position of the consumer would have known about what he was assenting to.” The court found that Gogo did not effectively draw plaintiffs’ attention to their terms and conditions nor did they provide their terms and conditions to purchasers via email or other methods of delivery. The court finally addressed Gogo’s jurisdictional argument. Gogo alleged that because plaintiffs were eventually fully reimbursed for subsequent internet charges, they lacked standing to sue. The court, citing Second Circuit precedent, found that since plaintiffs have “a practical stake in the dispute,” they continue to have standing to sue. Berkson v. Gogo, Case No. 14-CV-1199 (USDC E.D.N.Y. April 9, 2015).

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

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SEVENTH CIRCUIT REJECTS CHALLENGE TO ARBITRATION AWARD BASED ON “MANIFEST DISREGARD OF THE LAW” AND FRAUD

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This case involved a FINRA arbitration held to resolve a dispute over money allegedly owed to Ameriprise Financial Services by a former financial adviser. The financial adviser appealed the district court’s confirmation of the award favoring Ameriprise, contending that the award was procured by fraud and that the arbitrator committed a manifest disregard of the law. On appeal, the financial adviser first contended that the award should be reviewed under the Wisconsin Arbitration Act instead of the FAA. The Seventh Circuit, however, disagreed, holding that the parties’ arbitration agreement expressly selected the FAA, and that the FAA was applicable notwithstanding potential application of other Wisconsin law on the merits of the dispute. Regarding “manifest disregard,” the Seventh Circuit rejected the financial adviser’s contention that the panel inappropriately applied federal securities laws instead of certain states’ laws. The court explained that it “is not manifest disregard of a law to consider [the state law] and its relation to [federal law] and then conclude that the law does not apply in the specific factual situation at issue.” The court also noted that the panel had not issued a written opinion, and that the court would not “second-guess the arbitrators’ decision based on speculation when it is possible for the panel to have reached the decision it did based on the evidence presented to it.” As to fraud, the Seventh Circuit held that Ameriprise’s counsel’s closing argument, in which counsel asserted that the financial adviser “violated” certain laws and characterized certain cases as “on point,” did not misrepresent the record or the law. Renard v. Ameriprise Financial Services, Inc., No. 14-1730 (7th Cir. Jan. 30, 2015).

This post written by Michael Wolgin.

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