Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

CALIFORNIA APPELLATE COURT REVERSES TRIAL COURT, GRANTS MOTION TO COMPEL ARBITRATION

by

A state appellate court in California reversed a trial court’s decision to deny defendant Santa Lucia Preserve Company’s (“Santa Lucia”) motion to compel arbitration, holding that plaintiffs failed to prove that the underlying arbitration agreement was substantively unconscionable in order for that agreement to be invalidated.

Plaintiffs filed a putative class action complaint against Santa Lucia alleging the company failed to pay requisite overtime compensation in addition to other violations of California’s Business and Professions Code. Santa Lucia moved to compel arbitration under previously signed employment agreements with plaintiffs. Plaintiffs alleged that the arbitration agreements were substantively unconscionable as they lacked mutuality and that they did not provide for judicial review. The trial court denied Santa Lucia’s motion to compel arbitration finding the agreements unconscionable both procedurally and substantively.

The appellate court reversed, finding that the arbitration agreements were not substantively unconscionable for a number of reasons. First, the agreements bound both employee and employer to arbitration for “any dispute or claim.” Second, the agreements waived court and jury trials for both parties. The court noted that judicial review is allowed when “arbitrators exceed[] their power and the award cannot be corrected without affecting the merits of the decisions…” The court determined that plaintiffs’ claims for overtime pay are subject only to the review requirements in Armendariz, namely that an arbitration decision be written and be reviewed under limited circumstances. Valdez v. Santa Lucia Preserve Co., No. H040685 (Cal. App. 6th Dist., Mar. 23, 2015).

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

See our disclaimer.

NINTH CIRCUIT DIRECTS COURT TO VACATE RULING THAT DISQUALIFIED ARBITRATOR IN THE MIDST OF AN ONGOING ARBITRATION

by

The dispute at issue in this case involved claims of fraud in the sale of condominium units asserted by unit purchasers against the condominium developer. Arbitration under the AAA was underway between the parties, when it was discovered that the arbitrator had failed to disclose that he had become involved in business ventures to finance litigation for investment purposes. The developer requested that the AAA disqualify the arbitrator and stay the arbitration, but the AAA denied the request. The developer then convinced the district court to intervene in the pending arbitration and disqualify the arbitrator.

On appeal, the Ninth Circuit determined that the court committed “clear error,” holding that: (1) “the financial relationship in this case is contingent, attenuated, and merely potential” and did not satisfy “evident partiality”; and (2) “the district court’s equitable concern that delays and expenses would result if an arbitration award were vacated is manifestly inadequate to justify a mid-arbitration intervention, regardless of the size and early stage of the arbitration.” The Ninth Circuit entered a writ of mandamus, and directed the district court to vacate its ruling, finding that the lower court’s “interference in ongoing arbitration proceedings raises the specter” of confusion in the court system, and creates “new and important problems” and an issue of law of first impression. In re Sussex, No. 14-70158 (9th Cir. Jan. 27, 2015).

This post written by Michael Wolgin.

See our disclaimer.

SECOND CIRCUIT PARTIALLY REVERSES DISTRICT COURT PRELIMINARY INJUNCTION ORDER IN AID OF ARBITRATION

by

Defendant‐appellant Benihana of Tokyo, LLC appealed a 2014 order of the United States District Court for the Southern District of New York granting the application of plaintiff‐appellee Benihana, Inc. for a preliminary injunction in aid of arbitration of a dispute arising under the parties’ license agreement. The district court enjoined Benihana of Tokyo from: (1) selling unauthorized food items at the restaurant it operates pursuant to the license agreement; (2) using certain trademarks in connection with the restaurant in a manner not approved by the license agreement; and (3) arguing to the arbitral panel, if it rules that Benihana of Tokyo breached the license agreement, that Benihana of Tokyo should be given additional time to cure any defaults. The Second Circuit concluded that the district court was within its discretion in granting the first and second components of the injunction. However, the district court erred in restricting the arguments Benihana of Tokyo may make to the arbitral panel because the parties’ dispute had been submitted to arbitration. The district court undermined the arbital process by independently assessing the merits of the case instead of confining its role to preserving the status quo pending arbitration. Prohibiting a court’s assessment of the merits of the case until after the arbitral decision has been rendered was consistent with the Federal Arbitration Act and the “strong federal policy” favoring arbitration. The Act contains no provision for a court’s pre‐arbitration assessment of whether a particular remedy is supported by the parties’ agreement and therefore may be awarded by the arbitrator. Also, the Second Circuit pointed out that if a court determines the merits of the parties’ arguments in advance of a pending arbitration, the purpose for resorting to arbitration – to avoid litigation – would be frustrated. Finally, refraining from a view on the merits of the case until after an arbitral decision was rendered would also assist the district court in applying the proper and highly deferential standard of review to those decisions. Benihana, Inc. v. Benihana of Tokyo, LLC, No. 14-841 (2d Cir. Apr. 28, 2015).

This post written by Kelly A. Cruz-Brown.

See our disclaimer.

NEW YORK COURT REAFFIRMS THAT REINSURER’S STATUTE OF LIMITATIONS DEFENSE DETERMINED BY ARBITRATORS, NOT COURT

by

Because a reinsurer participated in the arbitrator selection process, the reinsurer was precluded from seeking a stay on statute of limitations grounds pursuant to New York law, a New York appellate court ruled. As discussed in a previous post, the arbitration agreement stated that the parties’ arbitration would be governed by the “arbitration laws of New York State.” New York’s arbitration laws state that a party may raise statute of limitations defense as a threshold issue in the courts. By contrast, the Federal Arbitration Act states that the limitations defense is presumed to be reserved to the arbitrator, rather than the court, except where the parties agree to leave that issue to the court. In its most recent ruling, the court held that although the reinsurer had waived its ability to have the courts determine the statute of limitations issue, that issue may be determined by the arbitrators. In re ROM Reinsurance Management Co. v. Continental Insurance Co., No. 11809 654480/12 (N.Y. App. Div. May 21, 2014).

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

See our disclaimer.

MOTION FOR RECONSIDERATION OF PARTIAL SUMMARY JUDGMENT DENIED CONCERNING LIABILITY CAP ON REINSURANCE CERTIFICATES

by

A district court in New York denied an insurer’s motion for reconsideration of a partial summary judgment order in favor of the reinsurer that concluded that the reinsurance limits set forth nine certificates of reinsurance at issue in the case were inclusive of costs and expenses, and created an overall cap of liability on the certificates. The insured moved for reconsideration of the district court’s opinion based on the Second Circuit’s intervening unpublished opinion, not to be cited as precedent, in Utica Mutual Insurance Co. v. Munich Reinsurance America, Inc., 594 F. App’x 700 (2d Cir. 2014). The district court denied the motion for reconsideration because the insurer conceded that the Utica decision represented an important clarification of existing law and was not in of itself an intervening change in law. Thus, the insurer failed to point to any change in controlling law or any new evidence that might reasonably be expected to alter the conclusion reached by the Court in granting the reinsurer’s partial summary motion. Global Reinsurance Corp. v. Century Indemnity Co., Case No. 13 Civ. 06577 (USDC S.D.N.Y. April 15, 2015).

This post written by Kelly A. Cruz-Brown.

See our disclaimer.