Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

Second Circuit Affirms Arbitration Award of Over $2M in Fees to Prevailing Party

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EB Safe commenced arbitration proceedings against Mark Hurley arising out of a business dispute. The arbitrators ruled in Hurley’s favor and awarded him expenses and attorneys’ fees totaling more than $2 million. A New York district court subsequently denied EB Safe’s petition to vacate the award and granted Hurley’s cross-petition to confirm. On appeal, EB Safe argued the award should have been vacated because it was in manifest disregard of the law and/or because Hurley procured the award by fraud through committing perjury at the arbitration.

The Second Circuit disagreed in both respects, noting first that the “manifest disregard of the law” standard is limited only to the “exceedingly rare instances where some egregious impropriety on the part of the arbitrators is apparent.” EB Safe claimed that in deciding Hurley’s fee request, the arbitrators failed to apply the “reasonableness” standard required by Delaware law. But the court found no basis for the argument in the record, and thus found it was properly rejected by the district court. In addition, despite inconsistencies in Hurley’s arbitration testimony, the court found EB Safe failed to meet the burden for vacating an award purportedly procured by fraud. Because the inconsistencies could have been equally attributable to confusion, mistake, or faulty memory, the court found EB Safe failed to show clear proof of “willful intent to provide false testimony.” As such, the Second Circuit affirmed the district court order in its entirety.

EB Safe, LLC v. Hurley, 19-cv-3859 (2d Cir. Oct. 20, 2020)

Ninth Circuit Affirms Denial of DIRECTV’s Motion To Compel Arbitration, Creating Circuit Split on Procedure for Determining Scope of Arbitration Agreements

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The plaintiff had filed a class action alleging that DIRECTV made calls to his cell phone in violation of the Telephone Consumer Protection Act. DIRECTV attempted to compel arbitration by relying on an agreement that the plaintiff had signed with AT&T Mobility, which had become an affiliate of DIRECTV subsequent to the formation of the agreement. The agreement included an arbitration clause extending to “all disputes and claims between” the plaintiff and AT&T Mobility, “includ[ing], but … not limited to … claims arising out of or relating to any aspect of the relationship between” them. As defined in the contract, AT&T Mobility also included its “affiliates.”

The Ninth Circuit explained that the proper procedure for interpreting the arbitration agreement at issue was first to determine whether a valid agreement was formed between the plaintiff and the party attempting to compel arbitration, i.e., DIRECTV. Relying on California law, the Ninth Circuit approved the district court’s holding that, at the time of the arbitration agreement, the reasonable expectation of the parties would not have considered DIRECTV to be included as an affiliate of AT&T Mobility. The Fourth Circuit, in contrast, would have determined whether the arbitration agreement was formed between the plaintiff and the party named in the arbitration agreement (AT&T Mobility), and then would have determined whether the scope of that agreement would include the party seeking to compel arbitration (DIRECTV).

The Ninth Circuit supported its view by reasoning that its approach avoids an “absurd result,” which it must avoid under the California rules of contract interpretation. In so doing, the court distinguished the U.S. Supreme Court’s Lamps Plus decision, which held that the “contra proferentem” rule of contract interpretation was preempted by the FAA.

Revitch v. DIRECTV, LLC, Case No. 18-16823 (9th Cir. Sept. 30, 2020).

Court Denies Motion To Compel Arbitration and To Appoint Arbitrators Where Parties Had Agreed To Arbitrate and There Was No Impasse

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In a case where both the plaintiffs and the defendant agreed the matter should be arbitrated, the Southern District of Ohio refused to compel arbitration and denied the plaintiffs’ motion for the appointment of arbitrators. The parties’ contract provided for arbitration before the American Arbitration Association, but the AAA declined to administer the arbitration because the defendant “failed to comply with the AAA’s policies regarding consumer claims.” Both parties were amenable to private arbitrations, but they could not agree whether the arbitration should be conducted individually or as one consolidated arbitration. As a result, the plaintiffs argued that the parties had reached an impasse and requested that the court either compel arbitration or appoint arbitrators.

The court first held that a party may not seek to compel arbitration under Section 4 of the FAA “where there has been no refusal to arbitrate.” “A party has ‘refused to arbitrate’ within the meaning of Section 4 if it commences litigation or is ordered to arbitrate the dispute by the relevant arbitral authority and it fails to do so.” The court denied the motion to compel arbitration under Section 4 because it found that the defendant had not unequivocally refused to arbitrate. Rather, the defendant expressly acknowledged the agreement to arbitrate, and the parties were working together to select arbitrators, but had so far failed to agree. Although the parties had not been able to agree on arbitrators for more than a year, the court found that some of this delay was attributable to the plaintiffs’ change in position regarding consolidated arbitration.

With regard to the plaintiffs’ motion for appointment of arbitrators, the court noted that the FAA “expressly favors the selection of arbitrators by parties rather than courts[, however,] Congress recognized that judicial intervention may be required in certain circumstances.” Section 5 of the FAA provides for the appointment of arbitrators “if for any [ ] reason there shall be a lapse in the naming of an arbitrator.” For purposes of Section 5, a “lapse” has been defined as “a lapse in time in the naming of the arbitrator … or some other mechanical breakdown in the arbitrator selection process.” Several courts have found such a “lapse” to have occurred where the parties have deadlocked with regard to the appointment of arbitrators or the process pursuant to which the appointments should be made. Here, despite the one-year delay, the court found that no deadlock had occurred, as the parties both agreed that they were amenable to private arbitration and the names of specific arbitrators had been exchanged. In addition, the AAA had informed the parties that it would consider accepting the arbitration if the defendant took certain steps.

As a result, the court found that it lacked jurisdiction under Section 4 to compel arbitration and under Section 5 to appoint arbitrators, and dismissed the action without prejudice.

Allen v. Horter Investment Management, LLC, Case No. 1:20-cv-11 (S.D. Ohio Sept. 30, 2020).

Fifth Circuit Affirms That District Court in Texas Lacks Jurisdiction to Vacate Arbitration Award in Florida

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Defendants-appellees picked up work orders from the plaintiff-appellant in its Florida offices, performed field work in Florida, and sent invoices to the plaintiff-appellant in Texas, who eventually stopped paying the invoices. The defendants-appellees commenced a AAA arbitration, and a Florida arbitrator eventually found in their favor. The plaintiff-appellant filed suit in Texas seeking to vacate the arbitration award under state law, which defendants-appellees opposed under FRCP 12(b)(2), (b)(3), (b)(5) and under the Colorado River abstention doctrine. The Western District of Texas dismissed the suit for lack of personal jurisdiction.

The circuit court focused on whether the defendants-appellees had “minimum contacts” in Texas, such that a Texas court could exercise specific personal jurisdiction over them. Looking at the parties’ contract, the place of performance was Florida. The circuit court dismissed the remainder of the plaintiff-appellant’s arguments in favor of jurisdiction, notably the argument that the parties’ agreement contained a Texas choice-of-law clause. “While such clauses can be probative of purposeful availment, they’re never dispositive.” Here, despite the Texas choice-of-law clause, the parties’ agreement does not suggest that they expected to resolve their disputes in Texas. In fact, the agreement required arbitration take place in accordance with the AAA’s venue-selection rules, i.e., as close as possible to the project in Florida. Finding no jurisdiction, the circuit court concluded that, “[i]n short, this is Florida’s problem. Not Texas’s.”

Sayers Const., LLC v. Timberline Const., Inc., et al., No. 19-51099 (5th Cir. Oct. 2, 2020)

Fourth Circuit Vacates and Remands Denial of Motion to Stay Case Pending Arbitration After District Court Refuses to Consider Evidence Beyond the Pleadings

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The Fourth Circuit recently vacated and remanded an order denying a motion to stay proceedings pending arbitration after concluding that the district court erroneously failed to consider evidence beyond the pleadings because the motion to stay was part of a motion to dismiss.

Brenda C. Noe sued City National Bank of West Virginia on behalf of a putative class of similarly situated plaintiffs claiming that the bank’s fee practices violated contractual provisions and the West Virginia Consumer Credit and Protection Act, among other things.

The bank filed a motion to dismiss and, in the alternative, moved to stay the action pending referral to arbitration. The district court found it possible that a subsequent agreement altered Noe’s original agreement with the bank such that an agreement to arbitrate was eliminated. The district court then “refused to consider the bank’s evidence calling that elimination into question because the court believed the question was unfit for resolution on a motion to dismiss.”

The bank appealed and the Fourth Circuit vacated and remanded. After determining that it had jurisdiction over the appeal (the circuit court concluded that the bank’s alternative request to stay the case pending arbitration “equated to a motion seeking enforcement of a purported arbitration agreement,” the denial of which conferred appellate jurisdiction), the court concluded “that the district court should have treated the bank’s motion as a motion to stay the litigation and compel arbitration” and that, had the district court done so, it could have considered the bank’s evidence and held a hearing to consider any unresolved questions of fact regarding arbitration.

The Fourth Circuit therefore vacated the district court’s decision denying the bank’s alternative motion to stay and remanded for a determination as to whether the case should be referred to arbitration and, if necessary, a hearing to resolve any related questions of material fact.

Brenda C. Noe v. City National Bank of West Virginia, No. 20-1230 (4h Cir. Sept. 17, 2020)