Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

Eighth Circuit Finds “Entire Contract” Challenge Must Be Decided by Arbitrator, Reverses Order Denying Motion to Compel Arbitration

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The Eighth Circuit Court of Appeals reversed and remanded a decision by the U.S. District Court for the District of Minnesota denying defendant SUNZ Insurance Co.’s motion to compel arbitration of crossclaims asserted by Payday Inc. The district court held without further analysis that it was “not convinced” whether Payday’s crossclaims fell within the scope of a valid arbitration clause. On appeal, the Eighth Circuit explained that Payday did not oppose SUNZ’s motion to compel on the ground that the arbitration clause itself was invalid; rather, it contended the contract containing the arbitration clause was superseded by a subsequent contract, thus purportedly voiding the arbitration clause. Citing the U.S. Supreme Court’s decision in Buckeye Check Cashing Inc. v. Cardegna, 546 U.S. 440 (2006), the Eighth Circuit held that a challenge to the validity of an entire contract is to be decided by an arbitrator in the first instance, whereas a challenge to the validity of an arbitration clause is to be decided by the court. Because Payday’s challenge was to the contract as a whole, not to the arbitration clause, the Eighth Circuit found the district court erred in denying SUNZ’s motion to compel arbitration.

Benchmark Insurance Co. v. SUNZ Insurance Co., No. 21-1679 (8th Cir. June 6, 2022).

U.S. Supreme Court: FAA Preempts California Labor Law to Extent It Prevented Enforcement of Individual Arbitration Agreement

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California’s Labor Code Private Attorneys General Act of 2004 (PAGA) authorizes “aggrieved employees” to sue their employer on behalf of themselves “and other current or former employees” to obtain civil penalties that previously could only have been recovered through an action brought by the state of California. As interpreted by California courts, the statute effectively provides a rule of claim joinder, permitting a party to unite multiple claims against a defendant in a single action.

In the case before the court, a former employee filed a PAGA action against Viking River Cruises, alleging it had violated California’s Labor Code by failing to provide her final wages within 72 hours of her termination. Her complaint also asserted a wide array of other Labor Code violations allegedly suffered by other Viking employees, including violations relating to minimum wage payments, overtime, rest periods, and meal periods.

The plaintiff’s employment contract with Viking included an agreement to arbitrate any dispute arising out of her employment and a “class action waiver” providing that, in any arbitral proceeding, the parties could not bring any dispute as a class, collective, or representative PAGA action. The employment agreement also included a severability clause stating that in the event the class action waiver was held to be invalid, any “portion” of the waiver that remained valid would be “enforced in arbitration.”

Relying on the arbitration agreement, Viking moved to compel arbitration of the employee’s “individual” PAGA claim, i.e., the claim she asserted she had suffered, and to dismiss the “class” PAGA claims asserted on behalf of other employees. The trial court denied the motion, and the California Court of Appeal affirmed, holding that categorical waivers of PAGA standing are contrary to state policy and that PAGA claims cannot be severed into arbitrable individual claims and nonarbitrable class claims. Viking petitioned for, and the U.S. Supreme Court granted, certiorari. And the Supreme Court has now reversed.

The court grappled with California case law, including Iskanian v. CLS Transportation Los Angeles LLC. After considering FAA jurisprudence, the court overruled California law only to the extent it held that arbitration agreements may not selectively apply to “individual PAGA claims” but not “class” claims. The court determined that the application of Iskanian forced the contracting parties in this case into an unacceptable choice: either accept “class action arbitration” of all claims, including those of employees not a party to the arbitration agreement, or forego arbitration altogether. But the court recognized that arbitration procedures are “poorly suited to the higher stakes of massive-scale disputes” involved in class actions due in part to the absence of “multilayered review” making it more likely that errors will go uncorrected, and the fact that the “vast number of claims entail the same risk of ‘in terrorem’ settlements that class actions entail.” As a result, Iskanian’s “indivisibility rule effectively coerces parties to opt for a judicial forum” to resolve their dispute rather than the arbitral procedure they had contractually agreed upon to settle disputes between themselves. This was incompatible with the FAA, and the court reversed on this ground.

The court further held that, given that the parties must arbitrate the individual PAGA claim, the employee’s non-individual PAGA claims must be dismissed because PAGA does not provide an employee standing to assert non-individual claims in the absence of an individual claim in the same action.

Viking River Cruises, Inc. v. Moriana, No. 20-1573 (U.S. June 15, 2022).

D.C. Circuit Affirms Dismissal of Claims Against Reinsurers

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The D.C. Circuit recently affirmed a judgment in favor of reinsurers in a suit brought by an insured after concluding that the insured could not assert breach of contract and related claims against the reinsurers because the insured had no direct relationship with the reinsurers.

Vantage Commodities Financial Services I LLC hired Equifin Risk Solutions LLC to create a captive insurance entity (Assured Risk Transfer PCC LLC (ART)) to manage risk associated with its business of financing retail energy companies. Equifin found several reinsurers to reinsure ART. One of the companies to which Vantage loaned money (Glacial Energy Holdings) defaulted. Vantage submitted a claim to ART. An arbitrator ruled in Vantage’s favor, but ART could not cover the loss. The reinsurers then informed ART that any claim would be denied because ART had failed to notify them of Vantage’s claims or provide proof of Vantage’s losses within the time limit required in the reinsurance agreements.

Vantage then filed suit against ART, the reinsurers, and companies involved with the formation and management of ART (“Willis Defendants”). Vantage asserted claims for breach of contract and sought a declaratory judgment regarding the reinsurers’ duties and further asserted claims for breach of implied contract, promissory estoppel, and unjust enrichment.

The district court dismissed Vantage’s breach of contract claim and request for declaratory relief against the reinsurers and then granted summary judgment to the reinsurers on the remaining claims.

The D.C. Circuit affirmed. With respect to Vantage’s breach of contract and declaratory judgment claims, the court held that “Vantage failed to plead facts sufficient to show a contractual relationship with the Reinsurers.” The court noted that reinsurers generally do “not have a direct contractual relationship with the original insured unless the terms of the reinsurance agreement create such a relationship,” and the agreements in this case created no such relationship. There were “no allegations that the Reinsurers dealt directly with Vantage or otherwise treated Vantage as if it were directly insured by them.” Turning to Vantage’s remaining claims, the court explained that there was “no record evidence of any consideration to support [Vantage’s] alleged implied contract with the Reinsurers.” The consideration had been between ART and the reinsurers. Vantage’s promissory estoppel and unjust enrichment claims meanwhile suffered “from the absence of any evidentiary support.” The claims “depend[ed] on the existence of an agency relationship between the Reinsurers and either ART or the Willis Defendants,” but “Vantage point[ed] to no evidence of statements or conduct by the Reinsurers that authorized ART or the Willis Defendants to act on their behalf.” The reinsurance binders meanwhile “merely disclose[d] the existence and terms of a reinsurance agreement between ART and the Reinsurers.” Finally, Vantage’s claims against the Willis Defendants for negligence were barred by the “economic loss doctrine” because Vantage sought “to recover purely economic losses” and no exception applied.

Vantage Commodities Financial Services I, LLC v. Assured Risk Transfer PCC, LLC, No. 21-7033 (D.C. Cir. Apr. 22, 2022).

Second Circuit Concludes That Workers Who Deliver Baked Goods Are Not Transportation Workers and Must Arbitrate Their Claims

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A divided panel of the Second Circuit recently held that independent distributors who distribute bakery products were not transportation workers and therefore were not exempt from the Federal Arbitration Act (FAA). The Second Circuit therefore concluded that the transportation workers were bound by an arbitration clause in their agreements.

The plaintiffs were “independent distributors” who “own[ed] distribution rights” to distribute baked goods in Connecticut. The plaintiffs contracted with subsidiaries of Flowers Foods Inc. for those rights. They would “pick up” “baked goods from local Connecticut warehouses and deliver the goods to stores and restaurants within their assigned territories.” The plaintiffs “earn[ed] the difference between the price at which” they “acquire[d] the bakery products” “and the price paid by the stores and restaurants.” “In their roles as independent distributors, the plaintiffs” sought to “maximize sales; solicit new locations [to make sales]; stock shelves and rotate products; remove stale products; acquire delivery vehicles; maintain equipment and insurance; distribute Flowers’ advertising materials and develop their own (with prior approval by Flowers); retain legal and accounting services; and hire help.” The plaintiffs could also sell their distribution rights for a profit and carry other goods but did not carry any other goods.

The plaintiffs filed a putative class action alleging violations of the Fair Labor Standards Act and Connecticut wage laws. The defendants moved to compel arbitration pursuant to an arbitration clause in the distribution agreements. The plaintiffs sought to avoid arbitration by arguing that they were transportation workers and were therefore exempt from arbitration under the FAA’s exclusion for “seamen, railroad employees, [and] any other class of workers engaged in foreign or interstate commerce” (i.e., transportation workers). The district court concluded that the plaintiffs were not “transportation workers” and therefore compelled arbitration.

A Second Circuit panel affirmed with one judge concurring and one judge dissenting. The Second Circuit defined “transportation workers” “by affinity” (i.e., by looking to the examples of transportation workers in the FAA’s exemption: Seamen and railroad employees). Both seamen and railroad employees, the court noted, work in the transportation industry. The Second Circuit concluded that “an individual works in a transportation industry if the industry in which the individual works pegs its charges chiefly to the movement of goods or passengers, and the industry’s predominant source of commercial revenue is generated by that movement.”

Applying that standard to the facts before it, the Second Circuit concluded that the plaintiffs were “in the baking industry,” not the transportation industry. Although the plaintiffs spent “appreciable parts of their working days moving goods,” “the stores and restaurants [were] not buying the movement of the baked goods, so long as they arrive.” “The charges [were] for the baked goods themselves, and the movement of those goods [was] at most a component of total price. The commerce [was] in breads, buns, rolls, and snack cakes — not transportation services.”

The Second Circuit also noted that the distributor agreements identified the industry that the distributors worked in as the “baking industry,” not the transportation industry.

Because the plaintiffs worked in the baking industry, not the transportation industry, they were not exempt from the FAA, and the district court therefore properly compelled arbitration.

Bissonnette v. LePage Bakeries Park St., LLC, No. 20-1681 (2d Cir. May 5, 2022).

 

 

Delaware Federal Court Confirms Arbitration Award, Holds Arbitrator Did Not Exceed Authority in Finding Unambiguous Contract Provision Was Unconscionable

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QAD Inc. petitioned the Delaware federal court to confirm an arbitration award it obtained against Block & Company Inc. Block cross-moved to vacate the award. The arbitrator awarded QAD more than $740,000 in connection with a contract dispute between the parties. In moving to vacate the award, Block claimed the arbitrator exceeded his authority in declaring that a limit of liability provision in the contract was unconscionable, despite also finding the contract language itself was unambiguous. Block argued that QAD drafted the provision, and there was no evidence of a gross imbalance between the two sophisticated parties in negotiating the term. The court nonetheless confirmed the award, and denied Block’s motion to vacate, finding Block had not satisfied its “heavy burden” under FAA section 10(a)(4) to show that the award was not “rationally derived from the agreement or supported by the record.” Even if the arbitrator had erred in his interpretation of the case law on unconscionability, the court explained that its power to vacate the award would be constrained because “[e]xceeding one’s powers … is not synonymous with making a mistake.” Because the arbitrator based his assessment of unconscionability on the facts on the record and applicable law, the court held that it could not re-litigate the merits of the unconscionability ruling, regardless of whether the arbitrator reached the correct decision.

QAD, Inc. v. Block & Co., Inc., No. 1:21-mc-00370 (D. Del. Apr. 25, 2022).