Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

Second Circuit Finds International Arbitral Tribunal Formed Under a Bilateral Investment Treaty Constitutes a “Foreign Tribunal” Under 28 U.S.C. § 1782

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Third-party defendants AlixPartners LLP and Simon Freakley (collectively, “AlixPartners”) appealed from a July 2020 order of the U.S. District Court for the Southern District of New York, which granted an application for discovery assistance pursuant to 28 U.S.C. § 1782. Section 1782 allows federal district courts to compel witness testimony or document production from any person or entity “residing” or otherwise “found” in the judicial district for “use in a proceeding in a foreign or international tribunal.” The Fund for Protection of Investor Rights in Foreign States sought assistance from the district court in seeking discovery from AlixPartners for use in an arbitration proceeding the fund had commenced against the nation of Lithuania. The fund brought the proceeding before an arbitral panel established pursuant to a bilateral investment treaty between Lithuania and Russia. The issues on appeal were: (1) whether an arbitration between a foreign state and an investor, which takes place before an arbitral panel established pursuant to a bilateral investment treaty to which the foreign state is a party, constitutes a “proceeding in a foreign or international tribunal” under section 1782; (2) whether the fund is an “interested person” within the meaning of section 1782; and (3) whether the district court abused its discretion in finding certain factors established by the U.S. Supreme Court in Intel Corp. v. Advanced Micro Devices, Inc., 542 U.S. 241 (2004), weighed in favor of granting the fund’s application.

Reinforcing its decision in In re Application of Hanwei Guo, 965 F.3d 96 (2d Cir. 2020), the Second Circuit held that the arbitration panel here qualified as a “foreign or international tribunal” under section 1782, as it was established in accordance with a bilateral investment treaty between two nations and was governed by the UNCITRAL rules. The court found this conclusion to be consistent with both Guo and legislative intent to broaden the reach of section 1782 to allow for discovery assistance within the context of intergovernmental tribunals. Because the fund was a party to the arbitration for which it sought discovery assistance, the court ruled that the fund was an “interested person” under section 1782. Having also determined that the district court did not err in its weighing of the so-called Intel factors, the Second Circuit affirmed the district court’s ruling granting the fund’s application for discovery assistance.

In re Fund for Protection of Investor Rights in Foreign States v. AlixPartners, LLP, No. 20-2653 (2d Cir. July 15, 2021).

Eighth Circuit Holds Claims Against Parent Company Were Precluded by Prior Arbitration Award and Confirmation Denying the Same Claims Against Company’s Subsidiary

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Cellphone network developer Daredevil Inc. brought an action in a Missouri federal district court against Chinese technology firm ZTE Corp., which manufactured and sold telecommunications infrastructure and cellular network equipment, asserting claims for breach of contract, fraud, unjust enrichment, and tortious interference with contract.

Daredevil’s case against ZTE was stayed pending a Florida arbitration of Daredevil’s claims against a New Jersey-based wholly owned subsidiary of ZTE. The arbitrator ultimately denied Daredevil’s claims against ZTE’s subsidiary, and a Florida federal district court confirmed the arbitration award, which was affirmed by the Eleventh Circuit Court of Appeals. Daredevil then reopened its case against ZTE in the Missouri district court, and ZTE moved for summary judgment on the grounds that Daredevil’s claims were precluded by the prior arbitration award and confirmation.

Agreeing with ZTE that Daredevil’s claims were precluded under Florida law by the arbitration award and confirmation, the Missouri district court granted ZTE’s motion for summary judgment. Daredevil appealed, arguing that the district court erred when it applied Florida law instead of Missouri law to the issue of claim preclusion and that its claims against ZTE were also not barred under Florida law because the parties and causes of action did not meet Florida law’s requirement of “identity” for claim preclusion to apply.

On appeal, the Eighth Circuit Court of Appeals held that Florida law governed the preclusive effect of the arbitration award that took place in Florida and was confirmed by the Florida federal district court. The Eighth Circuit also held that ZTE satisfied Florida’s “identity” requirement for claim preclusion to apply, finding that privity existed between ZTE and its subsidiary, and Daredevil’s claims against ZTE were “so closely related to” Daredevil’s arbitration claims against the subsidiary. As a result, the Eighth Circuit affirmed the Missouri district court’s decision.

Daredevil, Inc. v. ZTE Corp., No. 19-3769 (8th Cir. June 18, 2021).

Court Compels Employment Dispute to Arbitration, Rejecting Defenses That Arbitration Clause Did Not Survive Termination and That Clause Was Unconscionable

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The dispute surrounded the employee’s termination due to an inability to be physically present at the workplace. The employee filed suit in Rhode Island state court, alleging that the employer failed to provide reasonable accommodations for her known disability. The employer removed the case to federal court and then filed a motion to compel arbitration.

The employee contended that the employment agreement and its arbitration provision ended with the employment relationship, but the court found that the arbitration clause survived the underlying contract. The court found that the language of the agreement “along with common sense” indicated that employment-related disputes, including termination, were governed by the arbitration provision. The court further ruled that whether the employment agreement was still in effect was a matter of contract interpretation that was for the arbitrator to decide.

The court also rejected the employee’s argument that the arbitration provision was unconscionable under governing state law (Utah). Regarding substantive unconscionability, the court found that the contract was not “so one-sided as to oppress or unfairly surprise an innocent party” and that there was no “overall imbalance in the obligations and rights imposed by the bargain.” The court disagreed with the employee that the arbitration provision lacked mutuality or that the required venue of Utah, the employer’s home state, was unfair. Regarding mutuality, the court held that it required only that both parties would be bound to the terms of any dispute that would be required to be submitted to the arbitrator (not that the contract must be equally balanced or that every dispute needed to be arbitrated). And regarding the venue, the court found that a Utah-based arbitration did not increase the likelihood of partiality (noting that the agreement required an arbitrator from the AAA) or create undue expense and inconvenience (the employer agreed to conduct arbitration remotely).

Regarding procedural unconscionability, the court was not persuaded by the employee’s argument that she did not have a reasonable opportunity to understand the terms of the employment agreement. The court found that the employee’s allegations went to the unconscionability of the contract as a whole, rather than the arbitration provision, which was an issue for the arbitrator, not the court.

The court compelled arbitration and elected to dismiss the complaint rather than enter a stay of the proceedings since all of the employee’s claims were subject to arbitration.

Trainor v. Primary Residential Mortgage, Inc., No. 1:20-cv-00426 (D.R.I. June 16, 2021).

District of Puerto Rico Holds Article II of the Convention on Foreign Arbitral Awards Preempts the McCarran-Ferguson Act

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In a dispute over whether an international insurance policy provided coverage for losses resulting from a fire that destroyed the insured property, the U.S. District Court for the District of Puerto Rico determined that the Convention on the Recognition and Enforcement of Foreign Arbitral Awards and chapter 2 of the Federal Arbitration Act (FAA) preempt the McCarran-Ferguson Act. The plaintiff had purchased from several Lloyd’s syndicates an insurance policy containing an arbitration provision and providing coverage for property located in Puerto Rico. The plaintiff argued that the McCarran-Ferguson Act “reverse-preempted” the Convention and the FAA such that Puerto Rican insurance law controlled whether the parties’ dispute was arbitrable. The plaintiff further argued, and the insurers did not dispute, that the Puerto Rico Insurance Code prohibits insurance policies from requiring arbitration of disputes. The insurers, however, argued that the Convention and FAA preempted Puerto Rico’s Insurance Code, and therefore the arbitration provision must be enforced.

The district court agreed with the insurers. The court noted that this “inquiry is the subject of a complex circuit split,” with the Second and Eighth Circuits holding that state anti-arbitration laws reverse-preempt the Convention through the McCarran-Ferguson Act because the Convention is not a “self-executing treaty,” while the Fourth and Fifth Circuits have held that the Convention is not reverse-preempted because, among other reasons, the McCarran-Ferguson Act is “limited to the domestic realm and is thus not meant to grant state anti-arbitration laws reverse preemption against treaties or federal laws dealing with international relations.”

The Puerto Rico district court began its analysis by noting that the supremacy clause of the U.S. Constitution provides that treaties “shall be the supreme Law of the Land,” and the U.S. Supreme Court has held that courts must regard a treaty as “equivalent to an act of the legislature, whenever it operates of itself without the aid of any legislative provision.” Such a treaty is described as “self-executing.”

Because Article II of the Convention “unequivocally regulates the enforcement of international arbitration agreements and directly instructs courts to enforce its provisions without the need for legislative intervention,” the court found it to be self-executing. The court noted that Article III, on the other hand, may not be self-executing, but the Supreme Court has previously stated that portions of a treaty may be self-executing while others are not, so that finding is not an impediment to holding that Article II of the Convention is self-executing.

The Convention was signed by the United States in 1959 and ratified in 1970, whereas the McCarran-Ferguson Act was enacted in 1945. When a treaty and a federal statute conflict, the one last in date controls. Therefore, because the court found the Convention to be self-executing and therefore on par with an act of the legislature (i.e., a federal statute), and because the Convention was adopted and ratified after the McCarran-Ferguson Act was enacted, the Convention “is fully invocable and is not subject to the [McCarran-Ferguson Act’s] reverse preemption.”

Green Enterprises, LLC v. Dual Corp. Risks Ltd., No. 3:20-cv-01243 (D.P.R. June 15, 2021).

Wisconsin Federal Court Vacates Order Compelling Arbitration and Reopens District Court Case, Finding “Extraordinary Circumstances” Justified Relief Under FRCP 60(b)

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Marcia Laude filed suit alleging that her late husband was not adequately cared for while residing in a nursing home operated by the defendants. In 2019, a Wisconsin district court granted the defendants’ motion to compel arbitration and dismissed the case without prejudice. Two years later, the plaintiffs sought relief from the order compelling arbitration and requested, under Federal Rule of Civil Procedure 60(b), that they be permitted to pursue their case in federal court. Rule 60(b) allows the court to relieve a party from a final judgment or order for certain specified reasons, or for “any other reason that justifies relief.” Obtaining relief under the “catchall” provision requires proof of “extraordinary circumstances.” Here, the court accepted that extraordinary circumstances existed because the defendants moved to compel arbitration years ago, over the plaintiffs’ objection, and then refused to arbitrate or even communicate with the plaintiffs for 13 months, leaving them without a remedy. The plaintiffs also argued that the defendants impliedly waived their right to arbitrate given their conduct since the 2019 order. The court agreed, and thus granted the plaintiffs’ request to reopen the case in federal court, under Rule 60(b)(6).

Laude v. Azar, No. 2:19-cv-00783 (E.D. Wis. June 15, 2021).