Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

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).

Fourth Circuit Holds Estate of Assisted Living Facility Resident Required to Arbitrate Wrongful Death and Survival Claims

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In 2017, the plaintiff’s father was admitted as a resident to an assisted living facility in Greenville, South Carolina. As part of the admissions process, the plaintiff, pursuant to a durable general power of attorney, signed the residence services agreement and the attached binding arbitration agreement. A few months later, an employee at the assisted living facility administered incorrect medication to the plaintiff’s father, which ultimately led to his death.

The plaintiff, on behalf of her father’s estate, filed wrongful death and survival actions against the assisted living facility and related entities in federal district court in South Carolina. The defendants moved to dismiss and compel arbitration under the arbitration agreement.

Finding the plaintiff’s claims concerning her father’s care at the assisted living facility fell within the scope of the arbitration agreement, the district court focused on the enforceability of such agreement. The plaintiff challenged the agreement’s enforceability, claiming that the residence services agreement and arbitration agreement should be merged, and since certain provisions of the residence services agreement were purportedly unconscionable, so too were the provisions of the arbitration agreement.

The district court noted that merger has no relevance on the unconscionability of the arbitration agreement because arbitration provisions are severable from the remainder of the contract. The district court therefore looked only to whether the specific provisions of the arbitration agreement were unconscionable and found that, contrary to the plaintiff’s arguments, they were not so oppressive that a fair and honest person would not accept them. The district court therefore granted the motion to dismiss and compel arbitration.

On appeal, the plaintiff argued that the mandatory arbitration agreement and the underlying residence services agreement should be considered as one merged contract, the terms of which were unconscionable under state law and therefore unenforceable.

The Fourth Circuit Court of Appeals affirmed the district court’s decision, finding the lower court properly limited its consideration to the terms of the arbitration agreement and that nothing in the record established that the terms of the arbitration agreement were unconscionable under South Carolina law.

Kelly v. Capital Senior Living Corp., No. 19-2263 (4th Cir. June 17, 2021).

Texas Federal Court Compels Arbitration of Civil Rights Claims but Stays Proceedings to Avoid Future Statute of Limitations Issues

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The plaintiff filed suit for alleged civil rights violations arising from his former employment with the defendant. The defendant moved to dismiss and compel arbitration, citing an arbitration clause in the plaintiff’s employment agreement. A provision in the arbitration agreement placed a limit on the number of allowable depositions and special interrogatory requests but authorized the arbitrator to allow additional discovery he or she deemed appropriate. The plaintiff conceded that he signed the arbitration agreement but claimed the discovery limitations rendered it unconscionable and thus unenforceable, including because they were more restrictive than the Federal Rules of Civil Procedure. The court disagreed, noting that the U.S. Supreme Court considered and rejected an almost identical argument in Gilmer v. Interstate/Johnson Lane Corp. The plaintiff also cited no authority in which an arbitration clause was deemed unconscionable on the ground that its discovery restrictions were more onerous than the Federal Rules of Civil Procedure. The court therefore granted the defendant’s motion to compel arbitration but did not dismiss the action, choosing instead to stay the proceedings to preserve the plaintiff’s claims in the event they are not resolved by arbitration.

Pirzada v. AAA Texas, LLC, No. 4:21-cv-00664 (S.D. Tex. June 15, 2021).