Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

Court Finds Pre-Hearing Nonparty Deposition Subpoenas Permitted by FAA, and Rule 45 Territorial Limit Not a Bar for Virtual Deposition

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Nonparty Lawrence Satz received an arbitral subpoena in a proceeding between International Seaway Trading Corp. and Target Corp. Satz was a former owner of Seaway. The subpoena — the second issued to Satz during the proceeding — sought documents and virtual deposition testimony about certain issues he had refused to discuss at his first deposition. Before the second deposition, Satz moved to quash the subpoena on three grounds, each of which was rejected.

First, he claimed the arbitrator lacked the authority to issue a nonparty deposition subpoena before the arbitration hearing. In In re Security Life Insurance Company of America, 228 F.3d 865 (8th Cir. 2000), the Eighth Circuit held that section 7 of the Federal Arbitration Act implicitly authorizes arbitrators to issue pre-hearing document subpoenas, but did not reach the issue of pre-hearing deposition subpoenas. Despite decisions from various other circuit courts of appeal that section 7 does not authorize pre-hearing nonparty discovery, including cases expressly rejecting Security Life, the Minnesota district court declined to follow those other cases. Instead, it held that under Security Life, arbitrators are authorized to issue pre-hearing deposition subpoenas, finding no meaningful distinction between the reasoning for allowing such subpoenas for written discovery, but not depositions. Satz next argued the subpoena is unenforceable because it did not comply with the 100-mile territorial limit imposed by Federal Rule of Civil Procedure 45. But the court was unpersuaded, finding Rule 45 now allows service of subpoenas anywhere in the United States and, perhaps more importantly, that the distance limitation for holding the deposition does not bar enforcement of a subpoena for a virtual deposition that Satz could attend from home. Finally, the court rejected Satz’s relevance and burden arguments, noting both issues were already considered by the arbitrator and that the court would not second-guess the arbitrator’s conclusions. 

International Seaway Trading Corp. v. Target Corp., No. 0:20-mc-00086 (D. Minn. Feb. 22, 2021).

West Virginia District Court Rejects DirecTV’s Bid to Compel Arbitration Finding Breadth of Arbitration Agreement “Absurd” and “Unconscionable”

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In 2012, the plaintiff entered into a cellphone service contract with AT&T Mobility in which she agreed to arbitrate all disputes and claims with AT&T Mobility and its “subsidiaries, affiliates, agents, employees, predecessors in interest, successors, and assigns.” Three years later, AT&T Inc., the parent company of AT&T Mobility, acquired DirecTV, which, unlike AT&T Mobility, provided satellite television service, not cellphone service.

In 2017, the plaintiff sued DirecTV in the U.S. District Court for the Northern District of West Virginia claiming that DirecTV violated the Telephone Consumer Protection Act (TCPA) by calling her cellphone to advertise DirecTV products and services even though her phone number is listed on the National Do Not Call Registry. Recognizing that the plaintiff had never been a DirecTV customer, DirecTV nonetheless moved to compel arbitration, asserting that the dispute was covered by an arbitration agreement in the contract governing the plaintiff’s cellphone service from AT&T Mobility, a DirecTV “affiliate.”

The district court denied DirecTV’s motion to compel arbitration, finding that the plaintiff’s claims did not fall within the scope of the arbitration agreement. DirecTV appealed to the Fourth Circuit, arguing that the plaintiff had signed the arbitration agreement that included AT&T and its “affiliates.” The plaintiff argued that the agreement did not apply to DirecTV despite AT&T Mobility’s acquisition of the company in 2015.

The Fourth Circuit vacated the district court’s decision, finding that the plaintiff formed an agreement to arbitrate with DirecTV and that the dispute fits within the broad scope of that agreement. However, noting the district court’s observation that a construction that does “not so limit the scope of the arbitration clause would be unconscionably overbroad,” the Fourth Circuit remanded the matter to further address unconscionability under West Virginia law.

On remand, the district court once again denied DirecTV’s motion to compel arbitration, holding that the arbitration provision was “overbroad, absurd and unconscionable, and far exceeds anything contemplated by Congress in enacting the FAA.”

The district court determined that the provision was procedurally unconscionable, not only because of the “huge imbalance” between the AT&T conglomerate and the plaintiff who may be somewhat knowledgeable as to the TCPA but unlikely to have expertise in arbitration clauses but also because the provision was a “non-negotiable term” that the plaintiff was not permitted to opt out of or alter if she wanted to obtain AT&T Mobility’s services.

The district court also determined that the arbitration provision was substantively unconscionable because no reasonable AT&T Mobility customer would believe that by signing the arbitration agreement, she was consenting to arbitrate not only with AT&T Mobility but also with any entity that ever might share a corporate umbrella with AT&T Mobility. “[C]onstruing ‘affiliate’ to cover entities like DirecTV would lead to results so absurd that no reasonable person could have intended or anticipated that they would follow from her cell-phone service agreement.”

Mey v. DirecTV, LLC, No. 5:17-cv-00179 (N.D. W.Va. Feb. 12, 2021).

Fourth Circuit Affirms Denial of Vacatur of Arbitration Award, Finding No Deprivation of a Fair Hearing or Manifest Disregard of the Law

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A former vice president of a division within Oracle Corp. filed a demand for arbitration against Oracle, claiming that he was owed additional bonus compensation under the terms of his employment contract and the Maryland Wage Payment and Collection Law (MWPCL). After the parties conducted discovery and filed the equivalent of cross-motions for summary judgment briefing and oral argument in arbitration, the arbitrator ruled that the plaintiff was not due any additional compensation. The arbitrator determined that there were no material facts in dispute that would require a hearing on the merits, Oracle did not breach the parties’ compensation plan by its decision not to pay a larger bonus, and Oracle did not violate the MWPCL. The arbitrator ruled that the compensation plan gave Oracle the right to correct “administrative errors” and that, although the compensation plan omitted a cap on the plaintiff’s potential bonus compensation, it was an “administrative error” that Oracle had the right to rectify. The plaintiff then filed a petition to vacate the award in a Maryland state court, which Oracle then removed to the District of Maryland.

In the district court, the plaintiff argued that the arbitrator ignored the essence of the compensation plan, that the arbitrator deprived him of a fundamentally fair hearing, and that the arbitrator manifestly disregarded the MWPCL. The district court, however, denied the plaintiff’s petition to vacate the award, ruling that there was undisputed evidence that the failure to insert a cap into the plan was, indeed, an “administrative error,” which Oracle was entitled to correct. The court also ruled that the arbitrator had the discretion to decide the case like a summary judgment proceeding and that the arbitrator afforded a full and fair hearing that included discovery, the presentation of evidence, ample briefing, and oral argument. Regarding the MWPCL, the court ruled that the award was not made in manifest disregard of that statute, since the arbitrator had identified and used controlling legal principles to analyze the plaintiff’s claim.

On appeal, the Fourth Circuit affirmed, explaining that the review of an arbitration award is limited and that the district court properly disposed of the issues.

Balch v. Oracle Corp., No. 19-2433 (4th Cir. Feb. 17, 2021).

Ninth Circuit Affirms Removal to Federal Court and Order Compelling Arbitration, Construing Forum Selection Clause and Scope of Arbitration Agreement

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The representative of former stockholders who sold their shares in a leasing corporation pursuant to a stock purchase agreement had filed identical complaints in state court and before an arbitration tribunal alleging a breach of the stock purchase agreement by the bank and seeking an order for specific performance of the contract. The bank removed the case from state court to the U.S. District Court for the Central District of California and then successfully compelled arbitration and obtained dismissal of the case.

On appeal, the Ninth Circuit held that the forum selection clause in the parties’ stock purchase agreement did not waive the right to remove where the clause required litigation to “be brought and determined in Orange County, California,” which is the seat of both state and federal courts. “Because the clause uses the preposition ‘in,’ the contract contemplates federal as well as state courts as proper courts for adjudication.” This contrasts with a 2019 Ninth Circuit case, City of Albany v. CH2M Hill Inc., wherein the relevant forum selection clause waived the right to remove because “there is no federal courthouse located in the designated county.”

The Ninth Circuit also rejected the plaintiff’s argument that the district court erred by compelling arbitration despite a carve-out from the agreement that preserved the ability to seek in court “temporary or preliminary injunctive relief … in aid of arbitration.” The court determined that the plaintiff’s claims were not “in aid of arbitration” because they were not “aimed at preserving the status quo until the dispute may be resolved by an arbitrator.” Rather, the plaintiff’s complaint sought specific performance, a remedy for the defendant’s alleged breach of contract.  Per the parties’ arbitration agreement, only the arbitrator had the power to grant that relief.  The federal district court was correct to compel arbitration.

Meyer v. Fifth Third Bank, No. 19-56506 (9th Cir. Jan. 20, 2021).

Ninth Circuit Affirms Arizona District Court’s Dismissal of Frivolous Petition to Compel Arbitration

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On June 23, 2020, the U.S. District Court for the District of Arizona dismissed a pro se plaintiff’s petition to compel arbitration, finding the action “frivolous” and ordering its dismissal pursuant to Federal Rule of Civil Procedure 12(b)(6). On appeal, the Ninth Circuit Court of Appeals affirmed the district court’s ruling, finding that the district court properly dismissed the plaintiff’s action because the plaintiff failed to allege facts sufficient to state a plausible claim. The Ninth Circuit also rejected the plaintiff’s claim on appeal that the district court violated his constitutional rights, or otherwise acted with impropriety or gave the appearance of impropriety in its conduct.