Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

Seventh Circuit Adds to Circuit Split, Holds Section 1782 Does Not Authorize Federal Courts to Compel Discovery for Use in Private Foreign Arbitration

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On a question of first impression in the Seventh Circuit regarding whether U.S. law allows federal courts to compel discovery for use in a private foreign arbitration, the Seventh Circuit joins the Second and Fifth Circuits in ruling that Section 1782 of the U.S. Code does not apply to private international arbitrations. This decision departs from recent rulings in the Fourth and Sixth Circuits, which concluded that Section 1782 applies to private commercial arbitrations.

This case arises out of an indemnification dispute over losses incurred when an aircraft engine caught fire during testing in South Carolina. Rolls-Royce PLC manufactured and sold a Trent 1000 engine to the Boeing Company for incorporation into a 787 Dreamliner aircraft. In January 2016, Boeing tested the new aircraft at its facility near the Charleston International Airport. A piece of metal became lodged in an engine valve, restricting the flow of fuel to the engine. As Boeing employees attempted to fix the problem, the engine caught fire, damaging the aircraft. Boeing demanded compensation from Rolls-Royce, and in 2017 the companies settled for $12 million. Rolls-Royce then sought indemnification from Servotronics, Inc., the manufacturer of the valve.

The relevant agreement between Rolls-Royce and Servotronics required any dispute not resolved through negotiation or mediation be submitted to binding arbitration in Birmingham, England, under the rules of the Chartered Institute of Arbiters. After failed negotiations, Rolls-Royce initiated arbitration with the Charted Institute of Arbiters in London.

Servotronics filed an ex parte application in the U.S. District Court for the Northern District of Illinois asking the court to issue a subpoena compelling Boeing to produce documents for use in the London arbitration pursuant to Section 1782(a). The judge initially granted it and issued the requested subpoena. Rolls-Royce intervened and moved to quash the subpoena, arguing that Section 1782(a) does not permit a district court to order discovery for use in a private foreign commercial arbitration. Boeing intervened and joined the motion to quash. The judge reversed course and quashed the subpoena, agreeing with Rolls-Royce and Boeing that Section 1782(a) does not authorize the court to provide discovery assistance in private foreign arbitrations. Servotronics appealed.

Focusing on the statutory phrase “foreign or international tribunal” – or more particularly, the word “tribunal” – the Seventh Circuit held that the London arbitration does not qualify as a “foreign tribunal” under Section 1782. The panel concluded that a “foreign tribunal” as written in the statute means a governmental, administrative, or quasi-governmental tribunal operating under a foreign country’s practices and procedures. “Private foreign arbitrations, in other words, are not included.”

The panel also noted that a narrower interpretation of the word “tribunal” would conflict with the Federal Arbitration Act, which allows only the arbitration panel (and not the parties) to summon witnesses before the panel to testify and produce documents and to petition the district court to enforce the summons. Section 1782, however, permits both foreign tribunals and litigants to obtain discovery orders from district courts. “If § 1782(a) were construed to permit federal courts to provide discovery assistance in private foreign arbitrations, then litigants in foreign arbitrations would have access to much more expansive discovery than litigants in domestic arbitrations,” the panel wrote.

The panel found it difficult to “conjure a rationale” for giving parties to private foreign arbitrations such broad access to federal court discovery assistance in the United States while precluding such discovery assistance for litigants in domestic arbitrations.

Servotronics, Inc. v. Rolls-Royce PLC and the Boeing Company, No. 19-1847 (7th Cir. Sept. 22, 2020)

Arbitration Award In Favor Of Major League Baseball Confirmed As Southern District Of New York Bats Telemicro’s Challenges Away

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The dispute involved Telemicro’s breach of a contract with Major League Baseball Properties for the rights to broadcast MLB games in the Dominican Republic. Telemicro failed to make payments under the contract, prompting MLB to terminate the contract and demand arbitration. In response to the arbitration demand, Telemicro sought a stay of the arbitration proceedings in a New York state court, and failed to submit an arbitrator ranking list to the American Arbitration Association. As a result, the AAA deemed Telemicro to have accepted the entire list of proposed arbitrators and made an appointment from it. Shortly thereafter, Telemicro’s request for a stay was denied. After a six-month proceeding, the arbitrator issued a final award to MLB, including an award for attorneys’ fees.

On the motion to confirm the award before the Southern District of New York, Telemicro argued that the decision to proceed with the appointment of an arbitrator despite the pendency of its motion for stay in New York state court constituted a due process violation. Telemicro argued that it would not have been able to participate in the selection of the arbitrator without waiving its challenge to the jurisdiction of the arbitration. The court was not persuaded, noting that Telemicro failed to explain why it waited until the last day the list was due to seek a stay, and further that Telemicro took no action to challenge the appointment of the arbitrator within the arbitration process after the stay was denied. Furthermore, MLB made “a credible argument” that Telemicro’s submission of the list of potential arbitrators would not have waived its right to seek a stay.

Telemicro also argued that the arbitrator manifestly disregarded the law when making the award of attorney’s fees. The parties’ contract, however, stated that Telemicro would “reimburse MLB for any attorney’s fees and all costs and other expenses incurred by MLB in connection with the breach” of the agreement. Lastly, the court found Telemicro’s argument that the arbitrator acted in manifest disregard of the law because he viewed the MLB’s invoices in camera to be baseless, stating that such reviews are frequently performed in camera.

Major League Baseball Props., Inc. v. Corporacion de Television y Microonda Rafa, S.A., Case No. 1:19-cv-8669-MKV (S.D.N.Y. Sept. 14, 2020).

Fifth Circuit Affirms Significant Arbitration Award of Attorney’s Fees, Clarifying the Limited Scope of Review and Ruling That the Panel Did Not Exceed Its Authority

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Beyond International, Inc. and an individual (“Beyond”) appealed the district court’s order granting plaintiffs’ motion to confirm an arbitration award in favor of Diverse Enterprises, Ltd., Co., LLC and other parties (“plaintiffs”). The dispute arose out of an alleged failure to meet minimum sales requirements under a distribution agreement (“Agreement”), which contained an arbitration clause. The arbitration panel entered an award in favor of the plaintiffs, which included $432,135.60 in attorneys’ fees. Beyond moved to modify the fee award, contending, in pertinent part, that one of the plaintiffs’ law firms charged only $225 an hour instead of the $400 hourly rate to which the parties had stipulated. The panel denied Beyond’s motion.

In the district court, Beyond sought vacatur or modification of the award of attorney’s fees, contending that the panel exceeded its authority. The district court rejected Beyond’s argument and confirmed the arbitration award, concluding that there was no limiting language concerning the arbitrator’s authority in the Agreement, and that there was no “evident material miscalculation” or “mistake” in the award. The court also found that the panel “reasonably relied on the parties’ stipulation that attorneys’ fees ranging from $200 to $400 would be reasonable.”

On appeal, Beyond argued that the panel was limited to awarding “reasonable fees” and not “multiples” of fees, and that the panel violated Texas law by “awarding fees not actually incurred.” The Fifth Circuit rejected these arguments, explaining that the scope of its review would address only the question of whether the award was “rationally inferable” from the Agreement. Here, the court held, the Agreement broadly authorized the panel to settle “any claim or controversy arising out of or relating to” the Agreement, and granted the prevailing party “reasonable attorneys’ fees … and related costs and expenses.” The court held that this language did “not necessarily limit the parties to fees actually incurred.” The court then affirmed the district court’s denial of vacatur of the panel’s fee award, noting that it would not reach “the merits of Beyond’s excessive fee claim because that argument goes beyond our power to review the arbitration decision.”

Diverse Enterprises, Limited Company, L.L.C. v. Beyond International, Inc., Case No. 19-51121 (5th Cir. Sept. 17, 2020).

S.D.N.Y. Affirms Arbitration Award Over Challenge to Impartiality of Arbitrator

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Schuyler Line Navigation Co., LLC (“SLNC”) argued, in part, that the arbitrator’s partiality should be inferred from his previous representation of KPI Bridge Oil, Inc. (“KPI”) and its affiliates, alleged hope for future business from KPI, and the extent of his relationship with KPI and other business relationships. The District Court rejected these arguments, finding that SLNC fell short of demonstrating evidence of partiality or corruption.

SLNC also raised an issue with the arbitrator’s “belated disclosure and the lack of his transparency regarding his prior representation of KPI and its affiliate.” The Second Circuit “has repeatedly cautioned that it is not quick to set aside the results of an arbitration because of an arbitrator’s alleged failure to disclose information. Mere failure to disclose, by itself, is an insufficient ground for vacatur. Rather, the critical question is whether the facts that were not disclosed suggest a material conflict of interest.” The District Court, while noting that the arbitrator’s “behavior may not have been exemplary,” found that the belated disclosure did not give rise to an inference of evident partiality sufficient to vacate the arbitration award.

Schuyler Line Navigation Co., LLC v. KPI Bridge Oil, Inc., 1:20-cv-02772 (S.D.N.Y. Sept. 2, 2020)

Court Rejects Claim Based on Interpretation of Clause in Private Purchase and Sale Agreement of Shares and Other Matters

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The United States Bankruptcy Court for the District of Puerto Rico recently rejected a defendant’s arguments that a clause in a Private Purchase and Sale Agreement of Shares and Other Matters was invalid under Supreme Court case law but nevertheless agreed with the defendant’s interpretation of the clause and therefore dismissed the claim against it.

National Promoters and Services, Inc. (“NAPRO”) entered into a Private Purchase and Sale Agreement of Shares and Other Matters (“the Agreement”) with Aseguradora Ancon, S.A. (“Ancon”). Pursuant to the Agreement, Ancon bought certain shares of National Life Insurance Company (“NALIC”) from NAPRO for approximately $2.5 million.

A clause in the agreement (“Clause Four”) provided in part that $300,000 of the purchase price would be deposited in an escrow account “which shall be reserved for nine (9) months in order to guarantee those obligations not reflected in the financial statements as of September 30, 2011, caused to National Life Insurance Company (hereinafter NALIC) by the officers and/or directors of said entity.” Clause Four further provided: “After such nine (9) month period has passed, to the extent that all or part of the sum has not been consumed, the balance, if any, of the aforementioned amount of . . . $300,000 shall be returned to NAPRO.”

Ancon did not fund the escrow fund “because it determined the action unnecessary considering their financial strength and also found that there were claims, risks and unknown losses caused by NALIC that surpassed $300,000.” NAPRO subsequently sued Ancon. Ancon defended in part by claiming that Clause Four was not valid under the Supreme Court’s decision in Bangor Punta Operations, Inc. v. Bangor & A.R. Co., 417 U.S. 703 (1974). Bangor Punta was a shareholder derivative action in which the Supreme Court “held that a shareholder may not complain of acts of corporate mismanagement if it acquired its shares from those that participated in the alleged wrongful transactions.” That holding was based on equitable considerations and the fact that the buying party was trying “to recoup a large part of the price they agreed to pay for their shares” and “reap a profit from wrongs done to others.”

The United States Bankruptcy Court for the District of Puerto Rico rejected Ancon’s argument and held that Bangor Punta was inapposite. “Unlike Bangor Punta, in the instant adversary proceeding, Ancon is the defendant to a recovery of monies action based upon a private stock purchase agreement regarding the sale of NALIC stock by NAPRO.” The action was based on an alleged breach of Clause Four and “there [was] no windfall for Ancon for damages sustained by other premised on a shareholder derivative action lawsuit for corporate mismanagement . . . .”

The court also concluded that Ancon’s reliance on the Supreme Court of Puerto Rico’s decision in Multinational Life Insurance Company v. Carlos Benitez Rivera; Edgardo Van Rhyn Soler, et als., 193 D.P.R. 67 (2015), which applied the Supreme Court’s decision in Bangor Punta, was inapplicable because that case was also based on a different factual scenario.

Because Clause Four was not invalid under Bangor Punta and its progeny, the court turned to interpreting that clause. Applying Puerto Rican law regarding the interpretation of contracts. the court concluded: “The reference in [Clause Four] ‘. . . to the extent that all or part of the sum has not been consumed, the balance, if any, of the aforementioned amount of . . . $300,000 shall not be returned to NAPRO’ refers to the balance of the obligations being consumed, not to the actual payment of the obligations which could be anytime in the future depending on the nature and terms of the obligation.” As a result, the court denied NAPRO’s “request for the defendant to pay the retained amount of $300,000 and orders the dismissal of the complaint.”

In re National Promoters and Services Inc., No. 13-00049-ESL (D.P.R. July 2, 2020)