Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

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.

New Jersey Supreme Court Affirms $56M Refund to Johnson & Johnson for Overpayment of Insurance Premium Tax

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The New Jersey Supreme Court recently ruled that Johnson & Johnson is required to pay an insurance premium tax (IPT) based only on its premiums for risks located within the state of New Jersey rather than nationwide, entitling the company to a $56 million tax refund.

Prior to 2011, New Jersey insurance laws required J&J, as a holder of self-procured insurance, to pay its IPT based only on risks located in New Jersey. However, in a 2011 amendment to the state’s insurance laws, the Legislature authorized additional taxation on surplus lines insurance policies by adding the following sentence to N.J.S.A. 17:22-6.64: “If a surplus lines policy covers risks or exposures in this State and other states, where this State is the home state, … the tax payable pursuant to this section shall be based on the total United States premium for the applicable policy.” J&J, despite not being a holder of surplus lines coverage, thereafter voluntarily increased its IPT payments to reflect the amount due on its nationwide insurance premiums. In November 2015, J&J filed a claim with the New Jersey Department of Banking and Insurance (DOBI) and the director of the Division of Taxation, seeking a refund of nearly $56 million in excess IPT that it had paid since 2011.

After the division denied its refund claim, J&J filed a complaint in the Tax Court. The Tax Court found in favor of the DOBI and the division, concluding that the 2011 amendments that authorized the collection of IPT for surplus lines insurance coverage based on total nationwide premiums applied equally to self-procured coverage. The Appellate Division reversed, finding that J&J’s IPT obligations should have continued to be based solely on the risks it insured that were located within New Jersey. Stressing that the original plain language of the statute “clearly limited J&J’s tax liability to the risks it insured in New Jersey [and] was not changed in any way, shape, or form in the 2011 amendment,” the Appellate Division explained that it was “bound to follow and apply” that language. The Appellate Division ultimately declared itself unable to conclude that the New Jersey Legislature, by specifically stating that the amendment applied only to surplus lines insurance coverage, likewise intended to extend it to self-procured coverage.

In a one-paragraph majority decision, the New Jersey Supreme Court affirmed the ruling “substantially for the reasons expressed” by the Appellate Division.

Court Compels Arbitration Because Non-Signatory “Knowingly Exploited” and Obtained Benefits of Agreement

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The Eastern District of Pennsylvania recently compelled arbitration involving a claim by a plaintiff who had not signed a Comcast subscriber agreement on the ground that the plaintiff had used benefits under the agreement and exercised control over the Comcast account. The court held that the plaintiff was therefore equitably estopped from avoiding arbitration.

James Shelton’s father signed up for Comcast and agreed to Comcast’s subscriber agreement, which provided, among other things, that Mr. Shelton’s father was accepting the agreement “on behalf of all persons who use [Comcast’s] Equipment and/or Service(s) at the Premises” (i.e., the Shelton household) and that Mr. Shelton’s father had “sole responsibility for ensuring that all other users understand and comply with the terms and conditions of this Agreement and any applicable policies.” The agreement also contained an arbitration clause.

Mr. Shelton, who lived in the Shelton household, subsequently placed a service call to Comcast in which he acknowledged using Comcast’s services and setting up his account online. Mr. Shelton also “associated his own personal cell phone with the Shelton Household Account.”

Mr. Shelton later filed suit alleging that Comcast and other defendants violated the Fair Credit Reporting Act by “check[ing] his credit report without a permissible purpose.”

Comcast moved to compel arbitration pursuant to the subscriber agreement.

The U.S. District Court for the Eastern District of Pennsylvania granted Comcast’s motion. Applying Pennsylvania law, the court held that Mr. Shelton was “equitably estopped from avoiding the Arbitration Provision” in the subscriber agreement because, even though “other members of [Mr. Shelton’s] household … originally contracted for Comcast’s services,” Mr. Shelton had “sought and obtained benefits under the agreement by … not only using the Comcast services provided under the agreement at the Shelton Household, but also by exercising control over the account.” Mr. Shelton “‘did more than just passively benefit from the services.’”

Shelton v. Comcast Corp., No. 2:20-cv-01763 (E.D. Pa. Jan. 21, 2021).

New York Federal Court Confirms $2M Arbitral Award to Defunct Liquor Distributor in Dispute Over Royalties Owed to Rapper Snoop Dogg

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This royalties dispute arose out of an agreement between Cognac Ferrand S.A.S., a French company that produces and sells various liquors and spirits, and Mystique Brands LLC, a company that imports and markets liquors and spirits in the United States, involving the importation and marketing of Ferrand’s cognac in the United States.

In 2008, the parties executed a contract in which Ferrand granted Mystique the five-year exclusive right to import and market certain products in the United States. Under that agreement, Mystique agreed to purchase certain minimum amounts of Ferrand’s products each year and to enter into a marketing agreement with the musical artist Calvin Brodus, aka Snoop Dogg, for the promotion of those products, the costs of which Mystique would pay. The agreement granted Ferrand the right to terminate the agreement if Mystique became insolvent or filed a bankruptcy petition, or if Mystique committed a “material breach” that it failed to cure within 30 days.

Ferrand terminated the agreement roughly a year later in 2010, citing Mystique’s purported insolvency and unpaid royalties owed to Snoop Dogg. Mystique then initiated arbitration proceedings before the International Centre for Dispute Resolution in New York (ICDR) against Ferrand claiming wrongful termination. Ferrand fought back with a $4.5 million counterclaim, alleging it had been fraudulently induced to enter the deal because Mystique lied about its finances.

The arbitration proceeding was stayed after Mystique filed bankruptcy in 2013, but once Mystique emerged from Chapter 11 in 2017, Ferrand sought to reinstate the arbitration proceeding so that it could pursue its counterclaims against Mystique. The ICDR advised that the matter had been closed administratively, and directed Ferrand to file a new notice of arbitration. The parties proceeded in a new arbitration before a new ICDR arbitrator in New York.

In May 2020, the new arbitrator in New York found in Mystique’s favor and dismissed all of Ferrand’s claims. There, the arbitrator found that Mystique did not breach its minimum purchase obligation or repudiate the agreement and that Mystique’s insolvency did not constitute a material breach. The arbitrator also rejected Ferrand’s breach of contract claim for Mystique’s failure to pay Snoop Dogg because Ferrand had not offered evidence of damages or causation. Finding that Mystique was the “prevailing party,” the arbitrator also awarded Mystique $2 million in attorneys’ fees and costs.

Ferrand thereafter sought relief in the U.S. District Court for the Southern District of New York, filing a petition to vacate the arbitral award pursuant to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards. Ferrand argued that the arbitrator erred by finding that Mystique was the prevailing party in the arbitration and wrongly awarded Mystique nearly $2 million in fees and costs. Mystique opposed the petition and cross-petitioned to confirm the award, also seeking sanctions under both 28 U.S.C. § 1927 and Federal Rule of Civil Procedure 11 against Ferrand for pursuing this action.

The district court denied Ferrand’s petition to vacate the award, finding that the arbitrator did not exceed her authority or act in manifest disregard and that the award was final and definite. The district court determined that Ferrand’s challenge amounted to a mere substantive disagreement with the arbitrator’s reasoning and ultimate determination, which is not a valid basis to overturn the award. Because Ferrand failed to show that any aspect of the award should be vacated, the district court granted Mystique’s cross-petition to confirm the award.

Cognac Ferrand S.A.S. v. Mystique Brands, LLC, No. 1:20-cv-05933 (S.D.N.Y. Jan. 13, 2021).

Seventh Circuit Affirms Wisconsin Federal Court’s Finding That Arbitration Panel’s Decision Was Arbitrary and Capricious Where It Was Contrary to the Evidence in the Record

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This action arises out of a grievance filed by Theresa Taylor, a blind vending machine operator, with the Wisconsin Department of Workforce Development (DWD) over the DWD’s decision to award Jocelyn Belsha, another blind applicant, a bid to operate the vending machine at the Racine/Sturtevant correctional facility over Taylor. In 2007, Taylor accepted the DWD’s invitation to run the vending machines at three Wisconsin correctional facilities on an interim basis. In 2011, the DWD bid out these sites on a permanent basis, granting Belsha a bid to operate the vending machine at the Racine/Sturtevant correctional site.

In July 2015, the DWD convened a three-member arbitration panel to hear Taylor’s grievance.  The arbitration took place in September 2017, and in February 2018, the arbitration panel rendered a decision finding that the DWD “acted in an arbitrary, capricious and biased manner” when it failed to award Taylor the Racine/Sturtevant site during the two selection processes and that Taylor had proved her case “by substantial evidence,” even though she would have also prevailed under a “preponderance of the evidence” test.

The DWD filed a petition for judicial review of the arbitration panel’s decision favoring Taylor. The U.S. District Court for the Western District of Wisconsin vacated the arbitration award, ruling that there were no material deficiencies in the choice of Belsha for the Racine/Sturtevant site, the arbitration panel’s key factual findings were not supported by substantial evidence, and the arbitration panel’s ultimate conclusion was arbitrary and capricious.

Taylor appealed to the Seventh Circuit, which affirmed the district court’s decision. The Seventh Circuit held that Taylor’s appointment to Racine/Sturtevant by the arbitration panel ran afoul of administrative procedure in several ways.

First, the arbitration panel misapprehended the burden of proof — the Seventh Circuit held that preponderance of the evidence, rather than substantial evidence, was the correct burden of proof during the arbitration proceeding and that the arbitration panel fundamentally erred when it applied the substantial evidence standard.

Second, the key factual findings by the arbitration panel were not supported by substantial evidence — the Seventh Circuit held that the panel’s finding that the DWD should have evaluated Taylor based on earlier profitability data rather than more recent data in reinterviews was not supported by substantial evidence, under the Randolph-Sheppard Act, since there were only two questions in the selection criteria that assessed profitability data, and the record did not contain evidence of what operators’ scores would have been using recent data.

Third, the Seventh Circuit found that the arbitration panel’s decision for Taylor as the best operator for the Racine/Sturtevant site was contrary to the evidence and thus arbitrary and capricious.

State of Wisconsin, Dep’t of Workforce Development-Division of Vocational Rehabilitation v. U.S. Dep’t of Education, 980 F.3d 558 (7th Cir. 2020).