Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

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.”

Sixth Circuit Reverses District Court for Exceeding Its Authority by Ruling on Arbitrability in the Presence of an Unchallenged Delegation Clause

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The plaintiff alleged that she was a victim of an illegal predatory loan orchestrated by the defendant’s company. The loan allegedly charged excessive interest but was shielded from U.S. law by tribal sovereign immunity.

The plaintiff filed suit, alleging that the loan was illegal and that the defendant had committed RICO and other consumer protection violations. The loan contract, however, included an arbitration provision, providing that “any dispute … related to this agreement will be resolved through binding arbitration” under tribal law, subject to review in tribal court. The defendant moved to compel arbitration, contending that the plaintiff agreed to a delegation clause to arbitrate issues “concerning the validity, enforceability, or scope” of the arbitration agreement, but the district court denied the defendant’s motion. The court found that the enforceability of the arbitration agreement “has already been litigated, and decided against [the defendant], in a similar case commenced in Vermont.”

The Sixth Circuit reversed, finding that the district court exceeded its authority by resolving the issue of arbitrability and finding that the arbitration agreement was enforceable. The provision delegating the question of arbitrability to an arbitrator was invoked by the defendant but was never specifically challenged by the plaintiff or addressed by the district court. “Only a specific challenge to a delegation clause brings arbitrability issues back within the court’s province.” Accordingly, the “district court should have enforced [the delegation clause] and referred the case to arbitration.”

The Sixth Circuit was not persuaded by the plaintiff’s argument that the issue of arbitrability related to the defendant’s standing, and therefore could be adjudicated in court. In response, the Sixth Circuit noted that a “logical conundrum” exists because courts still must determine the existence of the contract even when a delegation clause exists in the underlying arbitration agreement. The court, however, relied on its prior decision in another case that “signaled” that a “nonsignatory’s ability to enforce an arbitration agreement concerned a question of arbitrability.” The court determined that it would “follow suit and find that whether [the defendant] can enforce the arbitration agreement against [the plaintiff] presents a question of arbitrability that [the] arbitration agreement delegated to an arbitrator.”

 Swiger v. Rosette, No. 19-2470 (6th Cir. Mar. 4, 2021).

Court Confirms “Baseball Arbitration” Award, Finds Party Alleging Unfairness Was Caught Looking When It Failed to Object

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The U.S. District Court for the Eastern District of Missouri confirmed an arbitration award in favor of Clayco Inc. in a dispute with its subcontractor arising from a construction contract. The parties’ contract provided detailed dispute resolution procedures comprising 13 paragraphs providing for mediation followed by arbitration if the mediation was unsuccessful. However, the contract also provided for an “alternate condensed and accelerated procedure” that could be “invoked” at Clayco’s option. This condensed procedure called for eight hours of mediation “followed by a ‘baseball arbitration’ in which the mediator immediately takes the role of arbitrator, each side submits a best and final offer and the arbitrator chooses of the two offers as the award.”

Clayco invoked the “baseball arbitration” procedure by letter to the subcontractor and the American Arbitration Association (AAA), as provided in the parties’ contract. More than nine months later, the mediation and arbitration were held according to the condensed procedure, and the arbitrator selected Clayco’s best and final offer as the award, resulting in an approximate $1.7 million award.

The subcontractor sought to vacate the award, arguing that Clayco had not properly “invoked” the procedure because it never received a copy of Clayco’s letter to the AAA selecting the condensed procedure. The court found that whether the subcontractor received a copy of the letter was irrelevant under the terms of the parties’ contract, which only required Clayco to make a “written application” to the AAA. Furthermore, the subcontractor had ample notice of the mediation and arbitration and never “made a formal written objection” to the proceeding. Instead, after the unfavorable arbitration award was rendered, it submitted an affidavit of counsel to the court in support of its motion for vacatur stating that counsel “asserted that [the ‘baseball arbitration’ was unfair.”

The court described the subcontractor’s argument as a “flimsy post hoc excuse[]” and stated that “a party may not sit idle through an arbitration procedure and then collaterally attack that procedure on grounds not raised before the arbitrators when the result turns out to be adverse,” quoting Marino v. Writers Guild of America, East, Inc., 992 F.2d 1480 (9th Cir. 1993). Since the arbitration process took place according to the parties’ contract, and the subcontractor had waived any procedural defects even if it did not, the court confirmed the award.

Clayco, Inc. v. Food Safety Grp., Inc., No. 4:20-mc-00739 (E.D. Mo. Mar. 8, 2021).

SDNY Vacates Arbitration Award in International Maritime Shipping Dispute

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Petitioner Copragri and respondent Agribusiness United DMCC are foreign buyers and sellers of feed and grain, respectively, who entered into sales agreements for grain cargoes. Pursuant to its obligations under the sales agreements, Agribusiness chartered a vessel from Vitosha Maritime Ltd. to transport the grain cargoes from Louisiana to Morocco. The vessel’s master issued bills of lading for the cargoes to Agribusiness. Copragri was not a party to the bills of lading, the back of which included a provision calling for arbitration in New York.

After Vitosha Martina presented a claim against Agribusiness for delays of the vessel and other expenses at the discharge port in Morocco, Agribusiness presented an indemnity claim to Copragri. Six years later, Agribusiness commenced arbitration of this claim, and an arbitration panel was selected without Copragri’s participation. Copragri objected to the arbitration on several grounds, primarily because the governing contracts between the parties were the sales agreements for grain cargoes, and not the bill of lading under which Agribusiness had initiated the New York arbitration. These objections were provided both to Agribusiness and to the arbitration panel. However, Copragri’s objections were ignored, and the arbitration panel issued an award to Agribusiness for $208,300. The award did not address Copragri’s various objections or issues of arbitrability or jurisdiction, nor did it include any legal citations.

Copragri thereafter filed a petition in the Southern District of New York to vacate the award, which the court granted. The court held that because Copragri was not a party to the bill of lading and therefore did not consent to arbitration in New York, the arbitration panel acted outside its scope and authority when issuing its award. The court also held that the arbitration panel’s failure to analyze or even address Copragri’s various objections — a number of which could have been outcome-determinative — constituted a manifest disregard for the law, further justifying vacatur.

Alabama District Court Grants Hospital’s Motion to Compel Arbitration in Dispute Against Third-Party Beneficiary to Medical Services Contract

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In 2015, the plaintiff was in a car accident that required emergency room medical treatment at Andalusia Regional Hospital. The plaintiff had health insurance at the time through United HealthCare, which maintained a contract for medical services with Andalusia. The plaintiff alleged that in connection with her treatment, Andalusia failed to submit her bills to United HealthCare or follow other required procedures, in violation of the medical services contract. As a third-party beneficiary, the plaintiff filed a class action lawsuit to enforce the terms of the contract and to recover damages incurred as a result of Andalusia’s alleged contractual violations. Andalusia was not named as a defendant in the class action, though the court later joined Andalusia as the sole defendant and dismissed the plaintiffs’ claims against all other parties.

After being added to the lawsuit, Andalusia moved to compel arbitration pursuant to the arbitration clause within the medical services contract between Andalusia and United HealthCare. The plaintiff opposed, arguing: (1) the arbitration clause does not bind her as a third-party beneficiary; (2) Andalusia’s motion to compel arbitration was untimely; and (3) the arbitration agreement was unconscionable. The court dismissed these arguments and granted Andalusia’s motion to compel arbitration.

Finding first that a valid and enforceable arbitration agreement existed between Andalusia and United HealthCare, the court ruled that the arbitration agreement was binding on the plaintiff as a third-party beneficiary. The court found that because a third-party beneficiary stands in the shoes of the signatories to a contract, the beneficiary is bound by the entirety of the contract that he or she wishes to enforce. Put simply, a “third-party beneficiary cannot accept the benefit of a contract, while avoiding the burdens or limitations of that contract.”

With respect to the timeliness argument, the court did not agree with the plaintiffs’ argument that Andalusia failed to initiate arbitration within one year of written notice of the dispute, as provided in the contract. The court noted that the plaintiff, as master of her own complaint, decided not to name Andalusia as a defendant to the lawsuit originally filed in May 2016, and thus there was no actual dispute between the plaintiff and Andalusia that could be arbitrated until the court joined Andalusia in March 2020. Holding otherwise — which would have required Andalusia to preempt the plaintiff and interject itself into the litigation to secure its arbitration rights — would have “absurd results” that conflict with arbitration law and “erode core values of the American legal system.”

Finally, the court found that the arbitration agreement was not unconscionable. The court recognized that whenever parties operate at different levels of sophistication, there is a risk of disparate bargaining power — a requirement to finding the terms of an agreement unconscionable. However, the court reminded the plaintiff that as a third-party beneficiary, she stands in the shoes of United HealthCare, and there were no concerns of equal bargaining power as between United HealthCare and Andalusia.