Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

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).

Sixth Circuit Holds Former Employee Required to Arbitrate “Gateway” Questions Concerning Arbitration Agreement’s Coverage, Enforceability, and Formation

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The plaintiff sued his former employer, Charter Communications, asserting Kentucky state law claims arising out of his termination. After the case was removed to federal court in the Western District of Kentucky, Charter moved to compel arbitration and dismiss, or in the alternative, stay, the lawsuit.

Before the plaintiff’s termination, Charter had announced a dispute resolution program that would require all employees to arbitrate any employment dispute with Charter unless the employee opted out within 30 days. The plaintiff did not opt out, and as a result, the district court dismissed the plaintiff’s suit against Charter and compelled him to arbitrate his employment claims.

The plaintiff appealed to the Sixth Circuit Court of Appeals, arguing that the arbitration agreement did not cover his employment claims, that it was unconscionable, and that Charter failed to give adequate consideration in return for his agreement to arbitrate.

The Sixth Circuit affirmed the district court’s decision to compel arbitration, holding that the arbitration agreement expressly reserved these “gateway” questions concerning coverage and enforceability of the arbitration agreement for the arbitrator to resolve.

The court noted that the arbitration agreement unambiguously stated that “the arbitrator shall have the sole authority to determine whether a particular claim or controversy is arbitrable.” The court also reasoned that the plaintiff never challenged the district court’s holding delegating the enforceability question to the arbitrator and that the plaintiff’s unconscionability argument attacked the arbitration agreement as a whole, and not just the specific provisions delegating unconscionability claims to an arbitrator.

Having determined that both parties gave adequate consideration by agreeing to arbitrate with each other, the court declined to decide whether the arbitrator could decide the gateway question regarding “formation.”

While the Sixth Circuit found that the district court properly compelled the plaintiff to arbitrate his claims, the court determined that the case should have been stayed, rather than dismissed, and therefore remanded the case with instructions to enter a stay pending arbitration.

Anderson v. Charter Communications, Inc., No. 20-5894 (6th Cir. June 11, 2021).