Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

California District Court Grants Motion to Compel, Referring Issue of Arbitrability to Hong Kong Arbitration Forum

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A district court in California granted a motion to compel arbitration pursuant to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards. A shareholder’s agreement between the parties contained a provision requiring arbitration before the Hong Kong International Arbitration Centre (HKIAC), and also incorporated the HKIAC’s rules by reference. The plaintiff claimed the arbitration clause was inapplicable to the instant dispute. The defendants argued that arbitrability questions must be decided by the HKIAC. The district court agreed, finding the HKIAC rules clearly and unmistakably demonstrated the parties’ intent to delegate threshold arbitrability issues to the HKIAC. The district court also found the relevant shareholder’s agreement was enforceable against the plaintiff, even though he did not sign it, since his corporation signed the agreement as his alter-ego.

Michael Pak v. EoCell, Inc., et al., Case No. 20-cv-05791-VC (N.D. Cal. Oct. 28, 2020).

Determination of Valid Arbitration Agreement May Be Dependent on “Outward Manifestations and Circumstances Surrounding the Transaction”

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The Ninth Circuit vacated the denial of a motion to compel arbitration and remanded for determination of whether a valid arbitration agreement exists in a recent lawsuit governed by Washington state law. According to the Ninth Circuit, the district court’s “sparse analysis” left it unclear whether the court had “properly considered all the relevant facts and circumstances” necessary to determine whether there was sufficient “mutual assent required for the formation of a valid contract.” Such a determination requires an “inquiry into [the plaintiff’s] intent – based on the reasonable meaning of his words and acts to assent to the terms of the Agreement.”

The district court “bypassed” that analysis, and instead deemed the facts and circumstances to be “identical in all material facts and circumstances” to those of another plaintiff that the court had previously determined to have assented to the agreement. However, the Ninth Circuit noted that one of the plaintiffs received the agreement beforehand while the other did not, and that the plaintiff relevant to this appeal did not submit a declaration to the court, which would have enabled the court to better determine whether mutual assent existed based on the “outward manifestations and circumstances surrounding the transaction.” As such, the court vacated and remanded for determination as to whether the factual record supported the establishment of a valid and enforceable arbitration agreement.

Reichert v. Rapid Investments, Inc., No. 19-35989 (9th Cir. Oct. 21, 2020).

Ninth Circuit Holds That a Change-of-Terms Provision Cannot Bind Parties To a New Browse-Wrap Agreement

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The Ninth Circuit recently concluded that a consumer was not bound by updated terms merely because she accessed a website that contained new terms in a “browse-wrap” agreement on the website. The court also concluded that an arbitration clause in the original “click-wrap” terms that did apply did not preclude arbitration under a California rule invalidating arbitration clauses that preclude public injunctive relief actions under the California Unfair Competition Law.

In 2014, Rachel Stover purchased a credit monitoring product called Experian Credit Score. In so doing, she assented to certain terms and conditions, including an arbitration clause requiring arbitration of any claims arising out of the transaction “to the fullest extent permitted by law” and a change-of-terms provision stating that “[e]ach time” she “accessed . . . the . . . Product Website,” she manifested to “the then-current” terms of the agreement.

Stover cancelled her subscription in 2014, but accessed the website again in 2018. The following day, she filed a putative class action in California federal court alleging violations of, inter alia, the Fair Credit Reporting Act and California’s Unfair Competition Law.

Experian moved to compel arbitration. The District Court granted that motion. It concluded that (1) the dispute was governed by Experian’s 2018 terms because the change-of-terms clause in the 2014 terms made the 2018 operative as soon as Stover logged onto the website in 2018, (2) a carve out for Fair Credit Reporting Act claims in the 2018 terms did not apply, and (3) Stover’s claims were not exempt from arbitration under the California Supreme Court’s decision in McGill v. Citibank, N.A., 393 P.3d 85, 94 (Cal. 2017), which held that “a provision in any contract . . . that purports to waive, in all fora, the statutory right to seek public injunctive relief under the [California Unfair Competition Law (UCL)] is invalid . . . .”

The Ninth Circuit affirmed on appeal, albeit on different grounds.

The court held that “[i]n order to bind parties to new terms pursuant to a change-of-terms provision, consistent with basic principles of contract law, both parties must have notice that the terms have changed and an opportunity to review the changes.” In this case, “[b]ecause Stover ha[d] not alleged that she had such an opportunity, the 2018 terms did not form a valid contract.” The court also explained “that mere inquiry notice of changed terms is [not] enough to bind the parties to them” and that “Stover had no obligation to investigate whether Experian issued new terms without providing notice to her that it had done so.” The 2014 terms applied.

The court then concluded that arbitration was not precluded by McGill. The arbitration clause in the 2014 terms provided for arbitration “to the fullest extent allowed by law.” That phrase “presumably exclude[d] claims for public injunctive relief in California.” Stover’s claims, the court explained, did not meet the Article III standing requirement for seeking public injunctive relief. As a result, “the McGill rule d[id] not excuse Stover from binding arbitration.”

Rachel Stover v. Experian Holdings, Inc., No. 19-55204 (9th Cir. Oct. 21, 2020).

Court Grants Temporary Restraining Order Enjoining FINRA Arbitration From Proceeding Pending a Decision on Arbitrability

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A court recently granted a temporary restraining order enjoining a FINRA arbitration from proceeding after the court concluded that there was a serious question regarding arbitrability.

Barry Horowitz, an estate planning attorney who had a relationship with Lincoln Financial Securities Corporation, allegedly referred some clients to Thomas D. Renison, an insurance agent.

Renison was charged with federal crimes (though those charges were later dropped). Renison nevertheless was barred from the securities industry. Horowitz ultimately terminated his relationship with Renison as a result of these alleged improprieties.

Several of Horowitz’s clients whom he had referred to Renison claimed that Horowitz and Lincoln Financial were liable for damages caused by Renison’s alleged fraud.

The clients sought to arbitrate the dispute under FINRA’s arbitration rules. Horowitz and Lincoln Financial sought to stay those proceedings, but when those requests were denied, filed a declaratory judgment action seeking a declaration that the clients did not have a right to compel arbitration because there was no written arbitration agreement between the parties, and FINRA did not apply. Horowitz and Lincoln Financial sought a temporary restraining order enjoining the FINRA arbitration from proceeding until a court could rule on the question of arbitrability.

The United States District Court for the District of Connecticut granted the temporary restraining order requested by Horowitz and Lincoln Financial. The court noted that, under Second Circuit precedent, Horowitz and Lincoln Financial would be irreparably harmed if they were forced to expend time and resources arbitrating an issue that was not arbitrable. The court also concluded that Horowitz and Lincoln Financial had raised a serious question as to whether FINRA applied because there was an open question as to whether the clients were their “customers” within the meaning of FINRA Rule 12200. Finally, the court found that the hardships tipped decidedly in favor of Horowitz and Lincoln Financial because a temporary restraining order maintained the status quo, and because arbitrability rested on a binary legal question.

Lincoln Fin. Sec. Corp. v. Foster et al., No. 3:20-cv-01132-VLB (D. Conn. Oct. 20, 2020).

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)