Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

Seventh Circuit Concludes That Arbitration Clause That Waives ERISA Remedies Is Invalid

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The Seventh Circuit Court of Appeals recently concluded that an arbitration clause that prohibited claimants from seeking or receiving any remedy that provided additional retirement benefits or other relief was unenforceable because it prospectively waived ERISA remedies.

James Smith worked for Triad Manufacturing Inc. Triad offered Smith and other employees a defined contribution employee retirement plan. In 2018, after Smith had left Triad, Triad added an arbitration provision with a class action waiver to the plan, which stated:

Each arbitration shall be limited solely to one Claimant’s Covered Claims, and that Claimant may not seek or receive any remedy which has the purpose or effect of providing additional benefits or monetary or other relief to any Eligible Employee, Participant or Beneficiary other than the Claimant.

In 2020, Smith filed a putative ERISA class action alleging that Triad’s board had breached fiduciary duties and engaged in prohibited transactions based on the board’s governance of the retirement plan. The board filed a motion to compel arbitration or, in the alternative, to dismiss.

The district court denied the board’s motion. The district court concluded that Smith had not consented to the arbitration clause because his employment with Triad ended in 2016 but the arbitration clause had been added in 2018 and there was no evidence that Smith had even received notice of the amendment. The court also concluded that the arbitration clause was “unenforceable because it prospectively waived Smith’s right to statutory remedies provided by ERISA.”

The Seventh Circuit affirmed the district court’s decision. It agreed that the arbitration clause was unenforceable because its language prohibiting claimants from seeking or receiving any remedy that provided additional benefits or other relief was inconsistent with ERISA’s allowance of “such other equitable or remedial relief as the court may deem appropriate, including removal of [a] fiduciary.” The Seventh Circuit did not address whether Smith had agreed to the arbitration clause, whether he had received notice of the provision, or whether a plan sponsor can unilaterally add an arbitration clause. The Seventh Circuit did, however, conclude that “ERISA claims are generally arbitrable” and noted that the arbitration clause’s class action waiver did not present any problem, as the Seventh Circuit “has blessed that arbitration maneuver many times.”

Smith v. Board of Directors of Triad Manufacturing, Inc., No. 20-2708 (7th Cir. Sept. 10, 2021).

Ninth Circuit Affirms Order Confirming Arbitration Award

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The Ninth Circuit Court of Appeals affirmed a California district court order granting the plaintiff-union’s motion to confirm an arbitration award against the defendant. On appeal, the defendant claimed the district court erred in determining that the collective bargaining agreement between the parties continued beyond the expiration date of June 30, 2017. But the Ninth Circuit disagreed, finding that certain events necessary for the agreement to expire on that date had not taken place. As such, the court rejected the argument that the plaintiff implicitly waived its grievance under the collective bargaining agreement by failing to raise it before June 30, 2017. Instead, the court found that the defendant waived its argument that certain pleadings submitted by the plaintiff contained judicial admissions that the collective bargaining agreement expired on June 30, 2017, as the argument was not raised in the district court.

Sheet Metal Workers Local Union 105 v. Titan Sheet Metal, Inc., No. 20-55849 (9th Cir. Sept. 10, 2021).

Eighth Circuit Holds Company Waived Its Right to Arbitration Where It Litigated the Case for Nearly a Year

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The Eighth Circuit Court of Appeals recently held that a parent company of a lender could not compel homeowners to arbitrate a case that it had already litigated for almost a year in a Missouri federal court.

In Sitzer v. National Association of Realtors, several homeowners filed a putative class action against various real estate entities, including HomeServices of America Inc., the parent company of the lender, alleging that the real estate entities engaged in anticompetitive practices.

Despite actively litigating the case in federal court for 305 days, HomeServices moved to compel arbitration under a listing agreement between the homeowners and the real estate entities, which required “[a]ny controversy or claim between the parties to this Contract, its interpretation, enforcement or breach[,] … [to] be settled by binding arbitration.” The Missouri district court denied the motion because HomeServices was not itself a party to the listing agreement. HomeServices appealed to the Eighth Circuit.

On appeal, the circuit judge first addressed the threshold question of whether the court or the arbitrators get to decide default-based waiver questions (i.e., whether a party has waived its right to arbitration based on active participation in a lawsuit or other action inconsistent with the right to arbitration). Relying on 40 years’ worth of precedent in the Eighth Circuit as well as in other jurisdictions, the circuit judge found it was up to the court, not an arbitrator, to decide default-based waiver questions.

The circuit judge then addressed the issue of waiver and held that HomeServices waived its right to arbitrate by aggressively litigating the case in federal court for close to a year, having joined other defendants’ motions to dismiss and to transfer the case to another judicial district, negotiated a proposed scheduling order, participated in a scheduling hearing, filed an answer to the complaint, and replied to written discovery. “A party cannot keep a contractual right to arbitration in its back pocket and pull it out only when it is ready for a ‘do over,’” said the circuit judge. Having actively litigated the case in court for 305 days, the company was required to “live with the consequences.”

Sitzer v. Nat’l Ass’n of Realtors, No. 20-1779 (8th Cir. Sept. 10, 2021).

Court Permits Munich Re to Expand Its Counterclaims Against Cedent AMIC, Following Dismissal of AMIC’s Bad Faith Claims

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On April 13, 2021, we reported on a decision by the U.S. District Court for the Middle District of Alabama that dismissed a portion of a complaint brought by cedent Alabama Municipal Insurance Corp. (AMIC) for bad faith against its reinsurer Munich Reinsurance America Inc., based on the court’s prediction that the Alabama Supreme Court would refuse to recognize bad faith claims in the context of reinsurance disputes.

The district court has now granted Munich Re’s motion for leave to file a second amended answer and add two counts for declaratory relief to its counterclaim regarding the parties’ rights under the relevant reinsurance treaties, including AMIC’s alleged litigation management and reporting responsibilities. The court rejected AMIC’s arguments that the request to amend was unduly delayed, or that the discovery plan would be inadequate if the amendments were permitted.

Alabama Municipal Insurance Corp. v. Munich Reinsurance America Inc., No. 2:20-cv-00300 (Sept. 8, 2021).

Fifth Circuit Holds Prior Waiver of Right to Arbitrate State Law Claims Does Not Waive Right to Compel Arbitration of Newly Asserted Federal Claims

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In protracted litigation springing from the sale of “free” credit reports that “were not really free,” the Fifth Circuit Court of Appeals held that a party’s waiver of its right to arbitrate state law claims did not result in a waiver of its right to compel arbitration of newly asserted federal law claims. In a purported class action, the plaintiff originally asserted several claims under Illinois law against One Technologies, L.P. One Tech removed to federal court and filed a motion to dismiss. After that motion was partially denied, One Tech moved to compel arbitration, which was granted by the district court but reversed on appeal, with the Fifth Circuit holding that filing of the motion to dismiss waived the right to arbitrate the state law claims.

On remand, the plaintiff filed an amended complaint asserting, for the first time, claims under the Credit Repair Organizations Act, a federal consumer protection statute that regulates the practices of such organizations. One Tech moved to compel arbitration, arguing in part that it “could not possibly have waived its right to arbitrate” the new claims because they were not raised until after the previous waiver occurred through the filing of the motion to dismiss. The district court denied the motion, but the Fifth Circuit reversed again on appeal.

In so holding, the Fifth Circuit stressed that waiver of arbitral rights is claim-specific. A party waives arbitration by “substantially invoking the judicial process to the detriment or prejudice of the other party.” For waiver purposes, “a party only invokes the judicial process to the extent it litigates a specific claim it subsequently seeks to arbitrate.” One Tech could not have waived its right to arbitrate the CROA claims at issue because they had not even been asserted by the plaintiff when One Tech previously moved to dismiss the state law claims. Because One Tech moved to compel arbitration of the newly asserted federal law claims without first waiving its right to do so, the Fifth Circuit reversed and remanded.

Forby v. One Technologies, L.P., No. 20-10088 (5th Cir. Sept. 14, 2021).