Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

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).

Federal Circuit Affirms Denial of Oil Company’s Attempt to Compel Arbitration Following Loss at Trial

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Benton Energy Service Co. (BESCO) has lost its appeal seeking to compel arbitration in a drilling patent dispute against Cajun Services Unlimited LLC. The Federal Circuit Court of Appeals, upholding a decision from the Eastern District of Louisiana, recently found that BESCO waived its right to arbitration of its claims in light of the extended litigation that took place before BESCO even raised the possibility of arbitration.

In January 2017, Cajun filed suit against BESCO in Louisiana district court in a dispute over ownership and intellectual property rights in an elevator system used in oil drilling. For seven months following BESCO’s first responsive pleading in that case, BESCO made no mention of arbitration, raising it for the first time in opposition to one of Cajun’s motions for summary judgment following discovery. That case was administratively closed, but a separate, similar suit was later filed. This time, BESCO raised arbitration as an affirmative defense, but only in the context of Cajun’s breach of contract claim. The case proceeded to trial, where a jury found in Cajun’s favor on all claims.

Following the jury verdict, BESCO moved to compel arbitration of all Cajun’s claims, asking the district court to vacate the jury verdict in light of an arbitration provision between the parties.  The district court denied BESCO’s motion to compel arbitration, noting that BESCO had failed to take any action to initiate arbitration until two years after litigation had commenced, and following an unfavorable trial on the merits. The court concluded that BESCO had waived its right to arbitration of all its claims by substantially invoking the judicial process to Cajun’s prejudice. On appeal, the Federal Circuit found that the Louisiana district court did not clearly err in its conclusion and thus affirmed.

District Court Predicts that Alabama Supreme Court Would Refuse to Extend Bad Faith to Reinsurance Disputes

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The United States District Court for the Middle District of Alabama recently predicted that the Alabama Supreme Court would refuse to recognize bad faith claims in the context of reinsurance disputes if it was presented with the question. The district court therefore granted a reinsurer’s motion to dismiss several bad faith claims against it.

Alabama Municipal Insurance Corporation (“AMIC”) sued Munich Reinsurance America, Inc. for purportedly underpaying several reinsurance claims by approximately $1.9 million. AMIC asserted bad faith claims as part of its suit. Munich Re moved to dismiss those claims, arguing Alabama does not (or rather, would not) recognize bad faith in the context of reinsurance disputes.

The district court agreed. It therefore granted Munich Re’s motion to dismiss and denied a motion by AMIC to amend. In sum, the court noted that the Alabama Supreme Court has limited bad faith claims to insurance situations “that most resemble typical insurance contracts” (e.g., those in which the insured is a consumer or individual, etc.) The district court noted that the Alabama Supreme Court declined to extend the tort to a situation involving a dispute between a primary and excess insurer and that another United States district court had predicted “that the Alabama Supreme Court would not choose to extend the tort to suretyships.” The district court noted that the tort was designed to protect vulnerable insureds who have little negotiating power when signing insurance contracts and that the insurer-reinsurer dynamic is not such a situation.

The court therefore predicted that the Alabama Supreme Court would not recognize bad faith claims in the context of insurer-reinsurer disputes and dismissed those claims.

Alabama Municipal Ins. Corp. v. Munich Reinsurance Am., Inc., No. 2:20-cv-00300-MHT-JTA (Doc. No. March 16, 2021).

Ninth Circuit Vacates “Bizarre” Arbitration Award in Drug-Related Employment Termination Dispute

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In a 2-1 decision, the Ninth Circuit Court of Appeals recently reversed a district court’s order confirming an arbitration award in favor of a former Costco employee who had been fired for selling cocaine on company property. The arbitrator found that the employee’s termination was barred by the doctrine of “industrial double jeopardy,” because he had already incurred a three-day suspension for his conduct, and awarded that the employee be “made whole.”

The Ninth Circuit took issue with the fundamental fairness of the arbitration proceedings. Following the presentation of evidence, the arbitrator engaged in extensive ex parte communications with the terminated employee and the Teamsters Union, which had represented the employee at arbitration. The arbitrator also conveyed a $6,000 settlement offer to the employee, which Costco was unaware of and had not authorized. When rendering his decision, the arbitrator did so via a “vague and bizarre” email sent only to the Teamsters Union, which said: “The above named grievant prevails in his grievance. The Union’s arguments as to double jeopardy were correct. Union remedy is adopted. So that I can look at myself in the mirror, my resignation is effective today.” The arbitrator failed to provide any reasoned basis for his decision, without any finding of fact or statement of law. He then resigned after rendering his email judgment.

Acknowledging the high standard that must be met to vacate an arbitration award, the Ninth Circuit ultimately decided that the arbitration proceedings deprived Costco of a fundamentally fair hearing, and entitled Costco to vacatur of the award. “For all we know,” the majority commented, “the arbitrator flipped a coin, consulted a ouija board, or threw darts at a dartboard to determine the outcome.” The court concluded: “No Party agreeing to arbitration bargained for a proceeding such as this.”