Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

London Court of Appeal Vacates and Remands Decision Blocking Transfer of Approximately 370K Annuity Policies

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A London Court of Appeal recently vacated and remanded a High Court’s decision precluding the approval of a deal to transfer approximately 370,000 annuities after concluding that the High Court made several errors in its analysis of the relevant factors in play.

Prudential Assurance Co. (PAC) and Rothesay Life PLC entered into a reinsurance agreement “to transfer the majority of the economic risk and reward of the annuity business covered by the agreement from PAC to Rothesay.” The “assets backing the annuity policies were transferred by PAC to Rothesay as part of the premium for the reinsurance.”

A separate business transfer agreement “contemplated that the parties would cooperate to achieve the actual transfer of th[e] business through” regulatory and court approval.

As part of the approval process, the parties asked the High Court of Justice of the Business and Property Courts in London “to sanction a scheme … providing for the transfer from PAC to Rothesay of some 370,000 annuity policies written by PAC” under the United Kingdom’s Financial Services and Markets Act 2000, which permits discretionary court approval of such schemes if “in all the circumstances of the case, it is appropriate to sanction the scheme.”

The High Court declined to approve the scheme. In short, the court did so because, among other things, (1) “Rothesay did not have the same capital management policies or the backing of a large well-resourced group” (in other words, PAC, which was part of the Prudential family, had much more support from its parent in the event of a financial crisis) and (2) “it had been reasonable, in the light of PAC’s sales materials, age and reputation, for policyholders to have chosen PAC on the basis of an assumption that it would not seek to transfer their policies” (in other words, policyholders selected PAC for its financial strength and reputation and reasonably believed that they would be dealing with PAC for the life of their annuities, which could be decades).

PAC and Rothesay appealed, and the Court of Appeal vacated and remanded.

In sum, the Court of Appeal held, among other things, that the High Court “ought not to have concluded that there was a material disparity between the non-contractual external support potentially available for each of PAC and Rothesay” (put differently, the court wrongly believed Rothesay had less support from its parent than PAC had from its parent) because the High Court “disregarded the opinion of [an independent] expert and the [Prudential Regulation Authority] as to [PAC’s and Rothesay’s] future financial resilience on the false basis that those opinions were themselves founded upon only a snapshot of the current year” when they were not.

Even putting that aside, the Court of Appeal explained that the theoretical availability of “non-contractual parental support” that the High Court felt would be provided by PAC’s parent (Prudential) to protect its reputation in the event of a financial crisis at PAC was irrelevant because it was not proper to “assume that any non-contractual parental support will be available in the future” because, among other things, “[p]arents can never be required to support their subsidiaries” and “parents of insurers are always at liberty to sell their regulated subsidiaries.” The independent expert had, in any event, concluded that the risk of either “PAC or Rothesay needing external support in the future was remote,” and the High Court failed to give that opinion proper weight.

Turning to the High Court’s analysis concerning the policyholders’ decisions and expectations, the Court of Appeal concluded that the High Court “ought not to have accorded any weight to the fact that the objecting policyholders chose PAC on the basis of its age, venerability and established reputation, and reasonably assumed that PAC would always provide their annuities” because such subjective considerations were irrelevant and the “only correct question was whether the transfer would have a material adverse effect on the security of their benefits.”

In re Prudential Assurance Co., No. [2020] EWCA Civ 1626 (Feb. 12, 2020).

Eleventh Circuit Holds University Cannot Arbitrate Student’s Breach of Contract and Misrepresentation Claims

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In Young v. Grand Canyon University, the Eleventh Circuit Court of Appeals held that the U.S. District Court for the Northern District of Georgia was wrong to compel arbitration of a student’s breach of contract and misrepresentation claims against a university, as federal regulation 34 C.F.R. § 685.300(e)-(f) prohibits a college or university that accepts federal student loan money from enforcing pre-dispute arbitration agreements when a student brings a “borrower defense claim.”

Plaintiff Donrich Young was enrolled in a doctoral degree program at Grand Canyon University in Arizona and took out federal loans to pay for the program. As part of Young’s admissions process, GCU required him to sign a comprehensive arbitration agreement, which stated that any dispute arising from his enrollment would be resolved by binding arbitration.

Young and seven other students filed a class action suit against GCU claiming that GCU misrepresented to students that they could finish a doctoral degree in 60 credit hours — but in reality, GCU designed its program so that finishing in 60 credit hours is unlikely, which then required students to take and pay for additional research continuation courses. Young and the other students asserted claims for breach of contract, intentional misrepresentation, unjust enrichment, and violations of the Arizona Consumer Fraud Act. The district court dismissed the claims brought by all plaintiffs, except Young, on personal jurisdiction grounds.

GCU then moved to compel arbitration pursuant to the agreement Young had signed as part of his admissions application. The district court granted GCU’s motion to compel, holding that Young’s breach of contract, misrepresentation, and statutory fraud claims were not “borrower defense claims” as defined by the federal regulation at issue and, therefore, were not subject to the regulation’s prohibition on pre-dispute arbitration agreements.

The regulation defines “borrower defense claim” as a “claim that is or could be asserted as a borrower defense as defined in § 685.222(a)(5), including a claim other than one based on § 685.222(c) or (d) that may be asserted under § 685.222(b) if reduced to judgment.” The main disagreement between the parties was whether the phrase “including a claim other than” means to include or exclude claims based on section 685.222(c) or (d) — i.e., claims alleging breach of contract and substantial misrepresentation. The district court interpreted the phrase to exclude breach of contract and substantial misrepresentation claims from the regulation’s definition of “borrower defense claim” and ordered Young’s claims to arbitration.

On appeal, the Eleventh Circuit disagreed, finding that the regulation’s definition of “borrower defense claim” includes breach of contract and substantial misrepresentation claims and therefore shields those claims from arbitration. The panel noted that the district court’s interpretation defies common sense, questioning: “Why would a regulation that all acknowledge was designed to protect student-loan borrowers exclude the most basic, heartland claims that they are likely to bring?” The panel also recognized that the district court’s strained interpretation would include non-contract and non-misrepresentation claims only if reduced to judgment, which would render the “if reduced to judgment” aspect of the borrower defense claim protection meaningless. As a result, the panel reversed the district court’s decision.

Young v. Grand Canyon University, Inc., No. 19-13639 (11th Cir. Nov. 16, 2020).

Fourth Circuit Declines to Vacate Arbitration Award Where Challenge to the Award Was Nothing More Than an Ordinary Disagreement With Its Outcome

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Tecnocap LLC appealed a decision by the U.S. District Court for the Northern District of West Virginia, where it declined to vacate an arbitration award in favor of an employee and labor union in a grievance proceeding related to Tecnocap’s termination of an employee covered by the parties’ collective bargaining agreement.

The parties’ collective bargaining agreement prohibited Tecnocap from “summarily discharging” covered employees and required that termination of employment be “for just cause.” The agreement also subjected grievances involving the interpretation of express provisions of the arbitration agreement. Separate from the agreement, Tecnocap instituted an attendance program wherein employees accrued points for certain absences from work and were then subject to different disciplinary procedures based on the number of accrued points.

After a Tecnocap employee accrued nine points in the attendance program and failed to timely submit paperwork that would allocate one of his absences to FMLA leave, Tecnocap terminated his employment. The union then filed a grievance protesting the employee’s termination, which proceeded through arbitration.

The arbitrator determined that the grievance was arbitrable, rejecting Tecnocap’s argument that the grievance was untimely and should be denied or dismissed on procedural grounds, pointing to the parties’ past conduct of inattentiveness to grievance deadlines as evidence of a waiver of such deadlines. The arbitrator also ruled that Tecnocap did not have “just cause” to terminate the employee because it improperly assessed him with a ninth point.

Tecnocap filed an action in the U.S. District Court for the Northern District of West Virginia under section 301 of the Labor Management Relations Act, 29 U.S.C. § 185, to vacate the arbitrator’s award, and the union filed an action under the same provision to enforce the arbitrator’s decision, which it alleged Tecnocap had refused to follow.

The district court found Tecnocap failed to present evidence that would warrant overturning the arbitrator’s award, including any evidence that the award: (i) was the product of the arbitrator’s bias; (ii) ignored the evidence in favor of the arbitrator’s own brand of “industrial justice”; or (iii) altered the language of the collective bargaining agreement.

Tecnocap then appealed, arguing that the district court should have concluded that the arbitrator’s award did not draw its essence from the collective bargaining agreement and therefore should have been vacated. Affirming the district court’s decision, the panel rejected Tecnocap’s challenge, finding that Tecnocap presented nothing more than an ordinary disagreement with the outcome of the arbitration award based on Tecnocap’s preferred application of the collective bargaining agreement to the underlying facts.

The panel determined that the collective bargaining agreement plainly delegated authority to the arbitrator to adjudicate grievances involving the interpretation or application of the express provisions of the agreement and that upon being delegated with that authority, the arbitrator had the authority to review whether Tecnocap fulfilled its obligations under the agreement and whether the termination comported with the agreement’s “just cause” limitation. The panel held that the arbitrator’s decision was a clear exercise in applying the agreement’s provisions and that Tecnocap failed to point to any limitation in the agreement that prevented the arbitrator from making her decision.

Tecnocap, LLC v. United Steel, Paper & Forestry, Rubber, Mfg., Energy, Allied Industrial & Serv. Workers Int’l Union AFL-CIO/CLC, Local Union No. 152M, No. 19-1263 (4th Cir. Jan. 19, 2021).

Tenth Circuit Agrees Arbitration Award Issued Absent an Arbitration Agreement Was a “Farce,” Orders Sanctions Against Pro Se Petitioner

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Petitioner James Wicker appealed an order dismissing his application to confirm a $2 million arbitration award issued in his favor against respondents Bayview Loan Services LLC and U.S. Bank, N.A. Wicker obtained the award after the respondents failed to respond to his “binding self-executing irrevocable” counteroffer containing certain “scattered and incoherent” references to arbitration. The district court dismissed Wicker’s effort to confirm the award, finding the arbitration was “bogus” and the award was a “farce” absent an agreement to arbitrate. On appeal, Wicker claimed the district court usurped the arbitrator’s authority to interpret the agreement between the parties. The Tenth Circuit disagreed, finding that Wicker ignored case law establishing that it is for the court, in the first instance, to decide whether the parties agreed to arbitrate. The court also emphasized Wicker’s failure to cite authority that failure to respond to a counteroffer created a contract. As such, the district court’s order was affirmed. Moreover, although Wicker was pro se, finding his appeal was frivolous, the Tenth Circuit granted the respondents’ motion for sanctions and ordered Wicker to pay double appellate costs.

Wicker v. Bayview Loan Services, LLC, No. 19-4169 (10th Cir. Jan. 27, 2021).

Ninth Circuit Denies Non-Signatory’s Bid to Compel Arbitration of Trademark Infringement Claims

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On remand from the U.S. Supreme Court, the Ninth Circuit Court of Appeals considered in Setty v. Shrinivas Sugandhalaya LLP the question whether non-signatories to an agreement may use state law doctrines, such as equitable estoppel, to compel arbitration. Although the Ninth Circuit recognized that non-signatories may have the power to compel arbitration using equitable estoppel under certain circumstances, it ultimately found that the defendant in this particular case was unable to do so.

The underlying case arose from a failed business relationship between two brothers, Balkrishna and Nagraj Setty. While they were in business together, the brothers had personally entered into a partnership agreement that required them to arbitrate disputes related to partnership rights. Eventually, the brothers parted ways, and each brother formed his own company. After Balkrishna Setty and his company (SS Bangalore) brought suit against Nagraj Setty’s company (SS Mumbai) for trademark infringement, SS Mumbai sought to compel arbitration based on the arbitration provision in the brothers’ partnership agreement.

The lower court denied SS Mumbai’s motion to compel, finding that only the brothers (and not their companies) were signatories to the partnership agreement, and Nagraj Setty was not a named defendant in the lawsuit. The Ninth Circuit upheld the lower court’s decision, holding that SS Mumbai could not equitably estop SS Bangalore from avoiding arbitration. SS Mumbai appealed to the Supreme Court.

The Supreme Court remanded the case for further consideration following its recent decision in GE Energy Power Conversion France SAS, Corp. v. Outokumpu Stainless USA, LLC, which ruled that the Convention on the Recognition and Enforcement of Foreign Arbitral Awards does not conflict with domestic equitable estoppel doctrines permitting enforcement of arbitration agreements by non-signatories.

On remand, the Ninth Circuit reaffirmed its earlier decision denying the motion to compel. The court stated that for equitable estoppel to apply in the arbitration context, “it is essential … that the subject matter of the dispute [is] intertwined with the contract providing for arbitration.” The court found that SS Bangalore’s claims against SS Mumbai for trademark infringement were not clearly “intertwined” with the brothers’ partnership agreement providing for arbitration, and thus SS Mumbai, a non-signatory defendant, lacked the power to compel arbitration in this matter.