Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

Vacation of Arbitration Award for Manifest Disregard of the Law Is “Exceedingly Rare,” Requires “Egregious Impropriety”

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The U.S. District Court for the Southern District of New York denied a petition to vacate a $65 million arbitration award based on the petitioner’s argument that the arbitrator’s decision was in “manifest disregard of the law.” The court explained that a “litigant seeking to vacate an arbitration award based on alleged manifest disregard of the law bears a heavy burden, as awards are vacated on grounds of manifest disregard only in those exceedingly rare instances where some egregious impropriety on the part of the arbitrator is apparent.”

A court may vacate an award for manifest disregard of the law only if the court finds both that:

  1. The arbitrators knew of a governing legal principle yet refused to apply it or ignored it altogether; and
  2. The law ignored by the arbitrators was well defined, explicit, and clearly applicable to the case.

In contrast, a court must uphold an arbitration award so long as “the arbitrator has provided even a barely colorable justification for his or her interpretation of the contract.”

Here, the court found that the arbitrator’s award was “extensively reasoned” and “correctly applied New York law.” As such, the court granted the respondent’s cross-motion to confirm the arbitration award.

The court denied the respondent’s motion for attorneys’ fees, despite noting that it retained “inherent equitable powers to award attorney’s fees when the opposing counsel acts in bad faith, vexatiously, wantonly, or for oppressive reasons,” and despite the fact that it dispatched the petitioner’s motion to vacate with relative ease. Although the petitioner’s arguments failed, the court did not find that counsel had acted “in bad faith … or for oppressive reasons.” The respondent argued that the petitioner’s motion breached clear provisions of the arbitration agreement prohibiting such filings, and it should therefore be awarded the fees it had been forced to expend. But the court noted that the agreement “effectively incorporated FAA review into [the] contract” and, further, that “courts have held provisions that prevent or discourage petitioners from challenging arbitral awards are unenforceable.”

Risen Energy Co. v. Focus Futura Holding Participações S.A., No. 1:23-cv-10993 (S.D.N.Y. June 11, 2024).

District Courts May Not “Look Through” Applications to Modify, Confirm, or Vacate Arbitral Awards

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Ascension Data & Analytics LLC terminated its contract with Pairprep Inc. for data extraction services after an alleged data breach involving Pairprep’s servers and Pairprep’s alleged “failure to extract reliable data.” Ascension subsequently initiated arbitration proceedings against Pairprep pursuant to the parties’ contract in an attempt to recover the remediation costs incurred as a result of Pairprep’s data breach. Pairprep asserted counterclaims against Ascension, and the arbitration panel ultimately rendered a monetary award in Pairprep’s favor.

Ascension petitioned the Northern District of Texas to vacate the arbitration award. Shortly thereafter, Pairprep filed an application to confirm the arbitration award in Texas state court. The state court confirmed the award and entered a final judgment in favor of Pairprep. In the federal proceeding, Ascension filed a motion for a preliminary injunction against the state court proceeding, while Pairprep argued that the district court lacked subject matter jurisdiction. The district court agreed and dismissed the matter due to a lack of subject matter jurisdiction.

The Fifth Circuit Court of Appeals affirmed the dismissal, relying on the U.S. Supreme Court’s recent decision in Badgerow v. Walters. There, the Supreme Court concluded that district courts may not “look through” the application for confirmation or vacation of an arbitration award to determine whether the court has jurisdiction over the matter. Rather, “a court may look only to the application actually submitted to it in assessing its jurisdiction.”

The fact that a petition seeks enforcement or vacation of an arbitration award rendered under the Federal Arbitration Act is not sufficient. Rather, the court must identify some additional “independent basis for its jurisdiction,” such as satisfaction of the requirements for diversity jurisdiction or federal question jurisdiction. The court noted that an arbitration award “is no more than a contractual resolution of the parties’ dispute … [a]nd quarrels about legal settlements — even settlements of federal claims — typically involve only state law, like disagreements about other contracts.” As such, if there is no other additional basis for federal jurisdiction that is shown on the petition to modify, confirm, or vacate an arbitration award, then the matter is one for state courts, not federal courts.

Ascension Data & Analytics, LLC v. Pairprep, Inc., No. 23-11026 (5th Cir. June 25, 2024)

Alabama Federal Court Seals and Approves FLSA Settlement Agreement, Addresses Confidentiality Provision

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The plaintiff was employed by defendant Pilot Catastrophe Services Inc. as an insurance claims adjuster, where she was responsible for inspecting property damage claims and providing damage estimates to insurance companies. The plaintiff brought a collective action under the Fair Labor Standards Act (FLSA) alleging that she and other claims adjusters were misclassified as salaried employees exempt from overtime requirements, and Pilot violated the FLSA by failing to pay overtime wages. Pilot filed a motion to compel arbitration pursuant to the arbitration provisions set forth in the plaintiff’s employment agreements and moved to dismiss the class and consolidated action claims. While the motions were pending, the parties filed a joint status report confirming that the plaintiff did not oppose Pilot’s motion to dismiss the class action and collective action claims. The parties also reported that after agreeing to arbitrate, they reached a settlement of the plaintiff’s FLSA claims and requested 60 days to finalize the settlement. After further revising the settlement agreement, the parties filed an amended joint motion to approve the settlement. Pilot filed a motion to seal the amended joint motion and settlement agreement.

First, addressing the motion to seal, the court cited prior district court decisions confirming that “when, as here, a settlement must be approved by a court, the settlement becomes part of the judicial record.” However, the court further noted that “confidentiality provisions have been approved in FLSA settlement where the provision is bargained for and the plaintiff receives separate consideration.” The court then found that the plaintiff in this matter “separately bargained for and received separate consideration for the confidentiality provision” reflected in her employment agreements and had jointly moved to approve the amended settlement agreement with Pilot. With this finding, the court concluded that “the public interest in assuring that employee wages are fair” was adequately protected in this case since the monetary terms of the plaintiff’s FLSA settlement were disclosed in the court’s order and contained in the record, and granted Pilot’s motion to seal. Second, the court addressed the amended joint motion to approve the settlement, noting that the Eleventh Circuit recognizes two methods for settlement of FLSA claims, including, as the court utilized in this case, a court determination that the settlement “is a fair and reasonable resolution of a bona fide dispute over FLSA provisions.” Applying this standard of review, the court approved the amended settlement agreement, noting that the plaintiff had a “significant risk of little to no recovery should this action proceed to trial or arbitration” and concluding that the settlement is a “fair and reasonable resolution of her FLSA claims.”

Pleasants v. Pilot Catastrophe Services, Inc., No. 1:23-cv-00132 (S.D. Ala. Apr. 30, 2024).

Ninth Circuit Holds That Arbitration Clause in “Sign-In Wrap Agreement” Is Enforceable

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The Ninth Circuit Court of Appeals recently reversed the denial of a motion to compel arbitration after concluding, contrary to the district court’s decision, that a “sign-in wrap agreement” provided conspicuous notice of terms and that an arbitration clause in the terms was therefore enforceable.

Warners Bros. Entertainment Inc. developed Game of Thrones: Conquest, a mobile game that users could download on their phones. To play the game, users had to press a button labeled “play.” That button was directly over a notice informing users that, by pressing “play,” they agreed to the game’s terms of use. The phrase “terms of use” was a hyperlink to the terms. The first paragraph of the terms advised users in all capitals that the terms required “the use of arbitration on an individual basis to resolve disputes” and involved “waiving your right to a jury trial and class action relief.” An arbitration clause was further down in the terms.

A group of plaintiffs sued Warners Bros. for false and misleading advertising. Warner Bros. moved to compel arbitration. The district court denied that request, concluding that the notice of the terms was “insufficiently conspicuous to bind users to them.”

Warner Bros. appealed and the Ninth Circuit reversed and remanded. The court concluded that the terms were “sufficiently conspicuous” under California law. The court found that the “context of the transaction” supported the enforceability of the terms because users downloaded the app to play the game rather than just accessing a website and thus knew that they would be playing the game for extended periods. The Ninth Circuit also concluded that the visual placement of the notice of the terms — immediately under the “play” button — was clear and conspicuous. The Ninth Circuit also rejected the argument that the terms were substantively unconscionable because the arbitration agreement purportedly banned injunctive relief.

Keebaugh v. Warner Bros. Entertainment Inc., No. 22-55982 (9th Cir. Apr. 26, 2024).

Federal Court Rejects Argument That Subsequent Opt-Out of Arbitration Clause Precluded Arbitration

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The U.S. District Court for the Northern District of Illinois has rejected an argument that opting out of arbitration clauses precluded arbitration under prior arbitration agreements in a dispute between Uber drivers and Uber.

A group of Illinois Uber drivers sued Uber under the Fair Labor Standards Act and Illinois law claiming that Uber misclassified them as independent contractors. Uber moved to compel arbitration, arguing that the drivers had signed multiple platform access agreements that included broad arbitration clauses. The platform access agreements allowed drivers to opt out of the arbitration clauses if they so chose, however. The drivers had not opted out of one or more of the agreements but, when subsequent platform access agreements were presented to them, had opted out of those. They argued that the subsequent opt-outs precluded Uber from enforcing the earlier agreements to arbitrate. The district court disagreed, citing the plain language of the opt-out provision, which provided: “If you opt out of this Arbitration Provision and at the time of your receipt of this Agreement you were bound by an existing agreement to arbitrate disputes arising out of or related to your use of our Platform and Driver App, that existing arbitration agreement will remain in full force and effect.” The court also concluded that the arbitration clauses were not unconscionable under Illinois law. One of the plaintiffs had previously filed suit and obtained a ruling that he was not required to arbitrate any claims, however. The district court gave effect to that decision under issue preclusion principles.

Agha v. Uber Technologies, Inc., No. 1:23-cv-17182 (N.D. Ill. Apr. 22, 2024).