Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

DISTRICT COURT DENIES MOTION TO COMPEL ARBITRATION

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A federal court in Missouri denied a defendant’s motion to compel arbitration. Two contracts were at issue. The first was a contract between the plaintiff, a pharmacy benefits manager, on the one hand, and a network of pharmacies – in which defendant, a chain of pharmacies in Oklahoma, participated – on the other. This contract governed the payment of pharmacy claims and did not include an arbitration provision. A separate contract directly between the plaintiff and defendant regarding claims audits contained an arbitration agreement. The plaintiff made claim for reimbursement for certain claims under the former agreement, and the defendant then initiated an arbitration in Missouri. The plaintiff resisted arbitration, and filed an action in court challenging arbitration on the grounds that the contract at issue contained no arbitration provision. The court agreed, noting that the evidence submitted made clear that the claims pertained only to the agreement with no arbitration agreement, and that therefore the claims could and should proceed in court. Express Scripts, Inc. v. The Apothecary Shoppe, Inc., No. 4:12-cv-01035 (USDC E.D. Mo. Sept. 30, 2013).

This post written by John Pitblado.

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“Buyer’s Remorse,” or Did the Nature of the Reinsurance Commissions Really Violate Florida Law?

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A Florida circuit court recently denied defendants’ motions for summary judgment in a suit filed by a Costa Rican insurer against two reinsurance brokers – one from the United States and one from England – alleging breach of contract and a host of claims involving negligence, breach of fiduciary duty, and misrepresentation. The crux of the plaintiff’s complaint is that the brokers’ commission earnings were unreasonable, excessive, and undisclosed because a less-than-$200,000 flat commission bid for the brokerage business during an initial bidding stage (which was allegedly terminated) grew to nearly $2 million in a subsequent bidding stage wherein the bid quoted only a total price of over $12 million, without separate premium and brokerage commission line items. The defendants’ motions asserted that Florida law does not impose limits on broker compensation, particularly in arms-length transactions between sophisticated parties, and does not mandate voluntary disclosure of brokers’ earnings, lest a contract requires it. In addition, the insurer chose to award its business as it did because the defendants presented the best price, terms, and other conditions of the reinsurance. Since the Order does not provide any analysis or reasons for the ruling, although it may have given some indication during argument, the Order does not indicate whether the Court denied the motion due to the presence of disputed issues of material fact or because of a disagreement with the legal arguments made by the movants. Instituto Nacional de Seguros v. Hemispheric Reinsurance Group, Case No. 10-33653 CA 04 (Fla. Cir. Ct. Oct. 7, 2013).

This post written by Kyle Whitehead.

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NINTH CIRCUIT DECLARES ARBITRATION AGREEMENT TO BE UNCONSCIONABLE, AVOIDING CONCEPCION

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The Ninth Circuit affirmed a ruling holding an arbitration agreement to be unconscionable under California contract law. Attempting to narrow the limits of the U.S. Supreme Court’s ruling in AT&T Mobility v. Concepcion, the Ninth Circuit found the agreement unconscionable in a manner not “uniquely applicable to arbitration.” The arbitration agreement at issue was part of an employment contract, and the district court found the arbitrator selection process to be peculiarly unfair, insofar as it essentially left the choice of arbitrator to the employer. The provision employed a process allowing both sides to nominate three choices, and then strike out choices until only one selection remained. It allowed the party against whom arbitration was sought to make the first deletion from the list, with the parties to take turns thereafter. The district court found that this effectively meant that the last arbitrator standing would be one of the three employer-chosen names. It also found other terms in the contract unfairly balanced in the employer’s favor and “shocked the conscience.” The Ninth Circuit affirmed the district court’s finding that the contract was unconscionable under state contract law, in a way that did not unfairly target its arbitration provision, thus avoiding the strictures of Concepcion and the FAA, which presumptively favor arbitration. Chavarria v. Ralph’s Grocery Co., No. 11-56673 (9th Cir. Oct. 28, 2013).

This post written by John Pitblado.

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DESIGNATION OF SPECIFIC ARBITRATOR NOT INTEGRAL TO ARBITRATION AGREEMENT

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In Virginia, defendant’s employment of plaintiff for house cleaning services became messy when plaintiff sued her employer for numerous torts, statutory violations and breach of contract. With foresight, defendant had required plaintiff to sign a one-page Arbitration Agreement requiring resolution of “any and all claims, disputes, or controversies arising out of” plaintiff’s employment exclusively by the National Arbitration Forum (“NAF”) and sought to enforce that Agreement. The NAF was no longer available to administer the arbitration. Plaintiff argued that designation of the NAF as exclusive arbitrator was integral to the Agreement and the NAF’s unavailability rendered the Agreement unenforceable. The lower court agreed, but the matter was ultimately tidied up in defendant’s favor. On appeal, the supreme court found the NAF designation was not integral to the agreement because: (1) the Agreement included a severability provision, (2) the sole object of the Agreement was to require arbitration, (3) the parties were presumed to know the courts are directed by statute to appoint an arbitrator when an arbitration agreement fails to appoint one, and (4) nothing indicated that the parties considered the contingency that the NAF might not be available. Schuiling v. Harris, slip op (Va. Sept. 12, 2013).

This post written by Abigail Kortz.

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THIRD CIRCUIT AFFIRMS ORDER FINDING CONFIDENTIALITY OF DELAWARE CHANCERY COURT’S ARBITRATION PROCEEDINGS UNCONSTITUTIONAL

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On September 25, 2012, we reported on an order finding unconstitutional the confidentiality provision of Delaware’s novel business arbitration procedures, in which a sitting judge of the Court of Chancery presides in court as arbitrator. The federal district court held that since the arbitration process essentially functions like a civil trial, the confidentiality provision violated the qualified right of access to criminal and civil trials protected by the First Amendment. On appeal, the Third Circuit affirmed (with one dissenting judge), but not before conducting the First Amendment “experience and logic test,” which the lower court had failed to do. As to “experience” the court explored the history of both civil trials and arbitrations and concluded that “both the place and process of Delaware’s proceeding have historically been open to the press and general public.” Regarding the “logic” of public access to the arbitration proceedings, the court held that the “benefits of openness weigh strongly in favor of granting access to Delaware’s arbitration proceedings” and in “comparison, the drawbacks of openness” are relatively slight. The court did not give much weight to the Delaware chancellor and judges’ arguments that: (1) privacy is necessary to protect closely held information, (2) privacy is necessary to prevent the “loss of prestige and goodwill” of the disputants, (3) privacy encourages a “less hostile, more conciliatory approach,” and (4) that public access would “effectively end Delaware’s arbitration program.” The court concluded, “the interests of the state and the public in openness must be given weight, not just the interests of rich businesspersons in confidentiality.” Delaware Coalition for Open Government, Inc. v. Strine, Case No. 12-3859 (3d Cir. Oct. 23, 2013).

This post written by Michael Wolgin.

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