Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

Texas Supreme Court Finds Erotic Dancer and Club Had “Meeting of the Minds” to Enforce Arbitration Agreement

by

Stephanie Sotero Hernandez was killed in a car accident after leaving work at Baby Dolls Topless Saloons Inc. Hernandez’s estate filed a wrongful death suit against the club alleging it continued serving alcohol to Hernandez’s co-worker, the driver of the car, after knowing she was intoxicated. The club moved to compel arbitration based on the arbitration clause in its contract with Hernandez. A Texas court of appeals affirmed a trial court order denying the club’s motion, finding the terminology in the contract was “uncertain” and lacked “definiteness,” thus invalidating any agreement to arbitrate. The Texas Supreme Court reversed.

Hernandez’s estate argued the motion should be denied because there was never a “meeting of the minds” between Hernandez and the club. The court disagreed, finding that to conclude otherwise, as did the court of appeals, ignores that Hernandez and the club operated under the contract on a weekly basis for nearly two years before her untimely death. The court therefore rejected the notion that the parties never entered a valid contract. Hernandez’s estate also argued that the arbitration clause itself was limited in scope and inapplicable, but the court again disagreed, emphasizing the bolded and capitalized clause in the contract explicitly delegating gateway arbitrability issues of this sort to the arbitrator. The court thus reversed and remanded with instruction to grant the club’s motion to compel arbitration.

Baby Dolls Topless Saloons, Inc. v. Sotero, No. 20-0782 (Tex. Mar. 18, 2022).

Ninth Circuit Agrees Non-Signatory Cannot Be Compelled to Arbitrate Under California Law

by

Defendants appealed a California federal district court order denying their motion to compel arbitration of the plaintiff’s claims for trade secret misappropriation, common law misappropriation, and unfair competition. The issue was whether the plaintiff could be equitably compelled to arbitrate, despite there being no contract in which it agreed to do so. The Ninth Circuit held there was no basis for compelling arbitration. The court noted that under California law, a non-signatory to an arbitration agreement may be compelled to arbitrate under two circumstances: (i) if its claims are “dependent, on or inextricably intertwined” with the underlying contractual obligations of the agreement containing the arbitration clause; or (ii) if it receives a “direct benefit” from the contract containing the arbitration clause. Agreeing that neither circumstance was present here, the court affirmed the district court order denying the defendants’ motion to compel.

Thrasio, LLC v. Boosted Commerce, Inc., No. 21-55621 (9th Cir. Mar. 18, 2022).

Second Circuit Affirms Order Confirming Arbitration Award Finding No Partiality Related to Arbitrator’s (Attenuated) Personal and Business Relations

by

An individual appealed from an order confirming an arbitration award. The appellant argued that the district court erred in refusing to vacate the arbitration award on grounds of “evident partiality.” The appellant contended that this basis for vacatur existed because the arbitrator’s law clerk was the father-in-law of one of the petitioners’ brothers, and the arbitrator had a separate business relationship with the law clerk. The Second Circuit was not convinced. Under the FAA, evident partiality may be found only “where a reasonable person would have to conclude that an arbitrator was partial to one party to the arbitration.” Similarly, under applicable New York state law, partiality exists if “the arbitrator and the party or witness have some ongoing relationship” and it is shown that the losing party suffered “prejudice to its rights as a result.” The Second Circuit agreed with the district court that the arbitrator’s relationship to the underlying petitioners was not shown to have “crossed the line.” The court noted that this relationship was “far more attenuated than situations where this Court and New York courts have vacated awards for evident partiality.” And even assuming that the appellant had established partiality, which he had not, the Second Circuit agreed with the district court that, because the appellant had knowledge of the relationship in question during the arbitration proceedings, the “evident partiality” objection was waived.

Magid v. Waldman, No. 20-3216 (2d Cir. Feb. 25, 2022).

Arbitration Provisions Delegating “All Disputes” to Arbitration Are Sufficiently “Clear and Unmistakable Evidence” of Parties’ Intent to Arbitrate Arbitrability

by

An arbitration provision providing that “all controversies which may arise between the parties” was sufficiently broad and clear to require disputes related to the arbitration panel’s jurisdiction to be settled by the arbitration panel itself. “The question of who decides arbitrability is itself a question of contract.” “In determining whether the arbitrability of a dispute is to be resolved by the court or the arbitrator, the arbitration agreement is determinative.” In determining whether the parties have agreed “to arbitrate arbitrability,” a court should require “clear and unmistakable evidence that they did so.”

The Southern District of New York ruled that this “clear and unmistakable” standard was satisfied by the contract’s delegation of “all controversies” to the “exclusive jurisdiction” of the arbitration panel. “The Court finds that the meaning of this provision is plain indeed: any and all controversies are to be determined by arbitration. The wording is inclusive, categorical, unconditional, and unlimited.”

Having found that the arbitration panel had jurisdiction over the dispute, the court next addressed the argument that the panel had “manifestly disregarded” the law in its interpretation of the underlying contract at issue, sufficient to warrant vacatur of the panel’s award. The court noted that the Second Circuit follows a three-part test in evaluating such claims: (1) the law allegedly ignored must have been clear and explicitly applicable to the matter before the arbitrators; (2) disregard of the law must have led to an erroneous outcome; and (3) the arbitrators must have known of the law’s existence and its applicability to the case, and must have disregarded it intentionally. The court found that the litigant fell well short of satisfying that standard. A “straightforward dispute over contractual interpretation” is “precisely the sort of Panel determination to which the Court is required to defer.” There was no support for the argument that the panel ignored clear and explicitly applicable law or any evidence of the panel’s subjective intent to disregard the law. As such, the court confirmed the panel’s award.

Katalyst Securities LLC v. Marker Therapeutics Inc., No. 1:21-cv-08005 (S.D.N.Y. Mar. 9, 2022).

D.C. Circuit Concludes That IMF Did Not Waive Immunity by Agreeing to Arbitration

by

The D.C. Circuit recently affirmed the dismissal of a suit against the International Monetary Fund (IMF) that sought to modify or vacate an arbitration award after concluding that the IMF did not waive its immunity from judicial process in the agreement that authorized the arbitration.

The IMF enjoys broad “immunity from every form of judicial process except to the extent that it expressly waives its immunity for the purpose of any proceedings or by the terms of any contract.” The IMF hired Leonard A. Sacks & Associates, P.C. to negotiate disputes it had with several contractors related to renovations of the IMF’s headquarters. The agreement between the IMF and Sacks incorporated the IMF’s immunity “from every form of judicial process” and explained that, in accordance with the IMF’s broad immunity, disputes concerning the agreement were “to be resolved not by litigation, but by arbitration.” The agreement’s arbitration clause concluded by stating: “It is understood and agreed that the submission of a claim or dispute to arbitration … shall not be considered to be a waiver of the immunities of the IMF.”

A dispute arose between Sacks and the IMF regarding Sacks’ fee. The parties submitted that dispute to arbitration and an arbitration panel awarded Sacks a small increase in its fee. Sacks was displeased with the result of the arbitration, however, and sued the IMF in D.C. Superior Court seeking a modification or vacatur of the arbitration award, as generally allowed by D.C. law.

The IMF moved to dismiss Sacks’ action based on its immunity. The district court granted the IMF’s motion and Sacks appealed to the D.C. Circuit, which affirmed.

The D.C. Circuit compared the agreement between Sacks and the IMF to the contract in C & L Enterprises Inc. v. Citizen Band Potawatomi Indian Tribe of Oklahoma, in which the U.S. Supreme Court held that a Native American tribe had waived its immunity to suit in state court under the terms of an agreement with a construction contractor that included an arbitration clause that the Supreme Court held established that the tribe had consented to the enforcement of arbitration awards under the arbitration clause in Oklahoma state court.

Unlike the contract in C & L Enterprises, the “IMF contract contain[ed] express preservations of immunity.” The IMF-Sacks agreement viewed “resolution of disputes by arbitration as part and parcel of preserving [the IMF’s] immunity from judicial process.” The IMF-Sacks agreement’s arbitration clause also concluded by noting “that the submission of a claim or dispute to arbitration … shall not be considered to be a waiver of the immunities of the IMF.”

Based on this language, which distinguished the IMF-Sacks agreement from the agreement at issue in C & L Enterprises, the D.C. Circuit concluded that it could not say that the IMF explicitly waived immunity. The D.C. Circuit therefore affirmed the dismissal of Sacks’ suit.

Leonard A. Sacks & Associates, P.C. v. International Monetary Fund, No. 21-7034 (D.C. Cir. Feb. 25, 2022)