Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

No “Meeting of the Minds” Where Material Terms of Arbitration Agreement Were Changed After Party Electronically Signed Document

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This action concerned a dispute between the plaintiffs, two individual investors, and the defendants, a financial planning adviser and her firm. After the plaintiffs’ investments did not work out as they had hoped, the plaintiffs filed suit against the defendants in the Western District of North Carolina for state law contract and fraud claims.

The defendants moved to compel arbitration under the asset management agreement that the plaintiffs executed when they hired the defendants to manage their investments, which required the parties to arbitrate any dispute that may arise between the parties concerning any transaction or the construction, performance, or breach of the agreement. The defendants also moved to dismiss for lack of personal jurisdiction, to transfer venue, and to dismiss for failure to state a claim, but all motions, including the arbitration motion, were denied by the district court. Notably, the district court denied the defendants’ motion to compel, as the parties submitted different versions of the asset management agreement and therefore had not formed an agreement to arbitrate.

The Fourth Circuit affirmed the district court’s order, holding that the parties did not form an agreement to arbitrate. Calling it a “very simple contract dispute,” the circuit court relied on general principles of contract formation and found there was no “meeting of the minds,” and therefore no contract, because both parties did not agree to the same terms. The circuit court noted that the two versions of the agreement submitted to the district court differed as to a number of terms, including one that added an extra account to be managed and designated how it was to be managed. The circuit court found there was no evidence in the record to establish that the plaintiffs were ever informed of, let alone reviewed, such changes.

Because the designation of which accounts were to be managed and how they were to be managed would be of paramount importance for any couple turning over its hard-earned savings to a financial firm for management, the circuit court found that the fact that the defendants did not bother to solicit this information from the plaintiffs after they submitted the signed form through DocuSign, a commonly used online platform for signing and transmitting documents, was fatal to the formation of the contract.

The circuit court noted that while the defendants (a sophisticated certified financial professional and her firm) changing the terms of an agreement after a customer signs it does not add to the impression of fairness that one hopes to get from a financial institution managing an individual investor’s portfolio, what happened here was at best “sloppy” on the part of the defendants and precluded formation of a contract.

Rowland v. Sandy Morris Financial & Estate Planning Services LLC, No. 20-1187 (4th Cir. Apr. 7, 2021)

Seventh Circuit Holds EEOC Right-to-Sue Letter Does Not Trump a Binding Arbitration Agreement

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This case involved a dispute between Bruce Melton and his former employer, Pavilion Behavioral Health System, for unlawful discharge after a routine background check revealed Melton’s criminal convictions.

Melton first filed a charge with the Equal Employment Opportunity Commission, alleging discrimination based on his carpal tunnel disability, but the investigator found no evidence of discrimination, closed the file, and issued a right-to-sue letter. Melton thereafter sued Pavilion in federal court, claiming he was wrongfully discharged because he was in the process of expunging his criminal record and also because Pavilion discriminated and retaliated against him for taking medical leave for carpal tunnel surgery.

Relying on the parties’ arbitration agreement that required workplace concerns to be resolved through final and binding arbitration, the district court granted Pavilion’s motion to compel arbitration, finding Melton’s claims were covered by the arbitration agreement, which Melton adopted by signing the acknowledgment form and never opting out.

Ruling in favor of Pavilion, the arbitrator found there was no evidence to support Melton’s claims. Pavilion thereafter moved to confirm the award in district court. Melton opposed confirmation, claiming he was entitled to proceed in court under the EEOC’s right-to-sue letter. The district court granted Pavilion’s motion to confirm the award, reasoning that, although the arbitration agreement permitted Melton to file administrative charges with the EEOC, it prohibited him from pursuing any claims in court. Melton appealed, claiming he never signed the arbitration agreement himself but rather merely signed a form that referred to it.

On appeal, the Seventh Circuit affirmed, finding that the parties entered into an enforceable arbitration agreement and Melton presented no valid ground to vacate, modify, or correct the arbitration award.

The circuit court noted that it was undisputed that Melton signed a form acknowledging he received a copy of the arbitration agreement, which covered the claims Melton wanted to pursue, and understood that if he did not opt out within 30 days, he was bound by it. “True, the form that he signed was not the arbitration agreement itself, but by signing it he committed himself to that agreement.” The circuit court also found that the EEOC’s right-to-sue letter did not override the arbitration agreement; it merely allowed Melton to move beyond the administrative process and pursue any rights that he may have in court — rights that Melton had waived by previously entering into the binding arbitration agreement.

Melton v. Pavilion Behavioral Health System, No. 20-2399 (7th Cir. Apr. 9, 2021)

Eleventh Circuit Holds That “Notice of a Motion to Vacate” Under FAA Cannot Be Accomplished by Email Absent Express Written Consent

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After an arbitration resulted in an award that included more than $650,000 in attorneys’ fees, the liable party filed a motion to vacate that portion of the award in a federal district court. The attorney for that party, however, only emailed opposing counsel a “courtesy copy” of the 20-page memorandum in support of the motion to vacate and did not formally serve the motion itself until a few weeks later — beyond the FAA’s three-month deadline to seek vacatur of an award. The district court denied the motion to vacate and confirmed the arbitration award, reasoning that the defending party had not consented to service by email, and as a result, there was no timely service of the motion to vacate the award.

On appeal, the Eleventh Circuit affirmed the district court’s ruling, explaining that the FAA imposes strict procedural requirements, including those relating to service of a notice of motion to vacate an award. Federal Rule of Civil Procedure 5 allows service “by other electronic means,” including email, but only to the extent “that the person consented to in writing.” The Eleventh Circuit determined that the adverse party here had not consented in writing, notwithstanding that the underlying arbitration agreement referenced the AAA construction rules, which permit service by email under certain circumstances. Service by email is permitted only for service of “notices required by” the AAA construction rules, and those rules do not include the motion at issue here, requesting that a court vacate an arbitration award. Accordingly, because the adverse party never provided express written consent for email service, the court affirmed the district court’s decision that there was no valid service of the motion to vacate, and also affirmed the confirmation of the award.

O’Neal Constructors, LLC v. DRT America, LLC, No. 20-11045 (11th Cir. Apr. 1, 2021).

Fourth Circuit Enforces Arbitration Agreement’s Waiver of Appellate Review

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The Fourth Circuit Court of Appeals upheld the enforceability of an employment agreement’s waiver of appellate review of an arbitration award. The waiver purported to waive both judicial and appellate review of the arbitrator’s decision. The district court held the waiver of all judicial review of the arbitration award was unenforceable under the Federal Arbitration Act, but nevertheless found the award was enforceable and dismissed the petition to vacate. On appeal, the Fourth Circuit appeared to agree, without deciding, that the complete waiver of all judicial review of an arbitration award was contrary to the FAA but found the waiver of appellate review to be consistent with the FAA’s policy objectives. In so doing, the court noted that arbitration awards are increasingly “reflexive[ly] appealed … leading to arbitration no longer being treated as an alternative to litigation, but as its precursor. The reflexive appeal of an arbitration award is all the more lamentable when the parties have expressly waived that right.” Finding no reason to reject the parties’ contractual agreement to waive appellate review, the court dismissed the appeal. 

Beckley Oncology Associates, Inc. v. Abumasmah, No. 19-1751 (4th Cir. Apr. 8, 2021).

Sixth Circuit Concludes District Court Lacked Authority to Award Attorneys’ Fees Following Arbitration

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The Sixth Circuit recently reversed a district court’s decision to award attorneys’ fees after the Circuit concluded that the claim on which the fees were awarded was subject to mandatory arbitration, and noted that the arbitrator had not awarded any fees for that claim.

Members of the UAW union sued TRW Automotive U.S. LLC for breach of contract and violations of ERISA claiming that TRW violated a collective bargaining agreement (CBA) when it changed their health care coverage. The district court compelled arbitration pursuant to a clause in the CBA that provided in relevant part that arbitration “shall be the exclusive remedy for the enforcement by [the union] of any claim against the Company.” The arbitrator ruled in favor of the union workers.

The district court then granted in part a motion the union filed seeking statutory attorneys’ fees for their ERISA vesting claim, a claim that the district court found was not before the arbitrator and was instead before the court. Specifically, the court “declined to award any ERISA attorney’s fees and costs incurred through the date of the arbitration award because ‘the ERISA claim was not addressed prior to or at arbitration’” but “granted [the union workers’] request for attorney’s fees and costs related to their ERISA claim incurred after the arbitration award.”

The Sixth Circuit reversed. In short, the Court concluded that the district court “lacked the authority” to award fees or otherwise make rulings on the union workers’ ERISA vesting claim “because the ERISA vesting claim and ERISA attorney’s fee claim . . . were both subject to mandatory arbitration under the CBA, allowing only limited court review for issues of legality or enforcement.”  The Court explained:  “Once the arbitrator finds a merits violation, the parties are responsible for raising any remedy issues in their remedy demands during arbitration. . . .  The parties do not have to return to the district court once a merits violation is found just to seek permission to present ‘ripe’ remedy issues to the arbitrator. Plaintiffs’ position, presented without any supporting legal authority, would lead to an untenable result where the arbitrator performs fact-finding but the district court issues the remedy. Not only would this contradict the CBA’s declaration that arbitration is the exclusive remedy for any dispute, but it would also defeat the purpose of arbitration if the parties still have to litigate remedy issues in federal court.”

UAW International et al. v. TRW Automotive U.S. LLC, Nos. 19-2252/2262 (6th Cir. Mar. 11, 2021).