Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

NJ Supreme Court Finds State Arbitration Law Applies to FAA-Exempt Workers

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The New Jersey Supreme Court issued a combined opinion in two cases arising from arbitration agreements in employment contracts. The plaintiffs in the respective cases claimed they fell within section 1 of the Federal Arbitration Act (FAA), also known as the “exemption clause,” and thus that their disputes were not subject to arbitration. The question in both cases was whether the disputed arbitration clauses would still be enforceable under the New Jersey Arbitration Act (NJAA), even assuming section 1 of the FAA applied. The court answered in the affirmative, thereby reversing the appellate decision in one case and affirming it in the other.

Section 1 of the FAA states that the FAA shall not “apply to contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.” Citing a 2019 decision by the U.S. Supreme Court, the court held that section 1 applies only to transportation workers engaged in interstate commerce. It was undisputed that the plaintiffs in one of the subject cases were exempt. The court remanded the other case for a determination whether the plaintiffs fell within section 1. Nonetheless, the court explained that, absent preemption, New Jersey arbitration agreements have been automatically subject to the NJAA since 2003. The court held that the NJAA is nearly identical to the FAA and incorporates the same policies strongly favoring arbitration. The court therefore rejected the notion that the arbitration clauses at issue were not (or otherwise could not be) governed by the NJAA merely because they did not expressly invoke the statute. Moreover, having determined that the NJAA is not preempted by the FAA, the court ruled that the NJAA may apply to arbitration agreements even if parties to the agreements are exempt from arbitration under section 1 of the FAA.

Arafa v. Health Express Corp., No. 083174, and Colon v. Strategic Delivery Solutions, LLC, No. 083154 (N.J. July 14, 2020).

Arkansas Federal Court Finds McCarran-Ferguson Act Does Not Supersede the New York Convention or Chapter II of the FAA

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In a case involving an arbitration agreement between foreign nationals and U.S. citizens, which is governed by the Convention on the Recognition and Enforcement of Foreign Arbitral Awards and its implementing legislation, chapter II of the FAA, the U.S. District Court for the Western District of Arkansas found that the McCarran-Ferguson Act does not supersede the Convention or chapter II of the FAA, therefore directing the plaintiff’s claims for insurance coverage to arbitration.

Plaintiff J.B. Hunt Transport Inc.’s claims arose out of a dispute concerning two insurance policies issued to it by Certain Underwriters at Lloyd’s and Steadfast Insurance Co., under which the plaintiff sought defense and indemnity coverage for claims presented in a separate lawsuit involving the wrongful death of a woman by an employee of one of the plaintiff’s contracted carriers.

Underwriters moved for arbitration pursuant to the arbitration provision in its policy with the plaintiff directing any disputes to an arbitrator. In its motion to compel, Underwriters argued that the Convention, which provides that the “court of a Contracting State … shall, at the request of one of the parties, refer the parties to arbitration,” is controlling law under the Supremacy Clause, rendering the arbitration provision valid and enforceable. Conversely, the plaintiff argued that Arkansas law, which bars the enforcement of binding arbitration clauses in insurance contracts, should control pursuant to the McCarran-Ferguson Act, which creates a system of “reverse-preemption” for state insurance laws. Underwriters responded that the McCarran-Ferguson Act does not apply to the Convention or chapter II of the FAA and that, as a result, the court should enforce the arbitration provision. The lynchpin of Underwriters’ argument was that the Convention and chapter II of the FAA are not “acts of Congress” subject to the McCarran-Ferguson Act. In support of its argument, Underwriters cited a variety of cases concluding that the McCarran-Ferguson Act does not supersede the Convention or chapter II of the FAA.

Steadfast also opposed Underwriters’ motion for arbitration, arguing that it was not a party to the policy between Underwriters and the plaintiff and therefore was not subject to the arbitration provision. Steadfast asked the court to stay the plaintiff’s claims against it in the event the court granted arbitration.

The district court held that the McCarran-Ferguson Act does not supersede the Convention or chapter II of the FAA. The court noted that the McCarran-Ferguson Act does not nullify international agreements, but rather is limited to domestic affairs. As such, the Convention and chapter II of the FAA are not within the scope of the McCarran-Ferguson Act, and the Convention and chapter II of the FAA are not reverse-preempted by Arkansas law barring the enforcement of arbitration agreements in insurance contracts.

After finding the Convention controls, the district court analyzed four factors to determine whether the Convention applied to the arbitration provision at issue: (1) whether a written arbitration agreement exists between the parties; (2) whether the arbitration provision provides for arbitration in the territory of a signatory of the Convention; (3) whether the relationship between the parties involves a commercial subject matter; and (4) whether the relationship between the parties is not entirely domestic. The district court found that the second and third requirements for applying the Convention were easily met where the arbitration provision stated that the arbitration should occur in New York, which is located within the signatory’s territory, and the parties’ insurer/insured relationship is commercial in nature.

As to the first and fourth requirements, the plaintiff argued that the Convention did not apply because the arbitration provision only applies to disputes between reinsurers and that the relationship between the plaintiff and Underwriters was entirely domestic because it obtained the Underwriters policy through a U.S.-based broker. The district court rejected both arguments, finding that the arbitration provision was part of the policy held by the plaintiff, and referenced the policy to which the plaintiff was a party. The court also noted that while the plaintiff may have gone through a U.S. broker, Underwriters is a foreign-based company, and the broker had to go through the U.K.’s insurance market.

The court also stayed the remaining claims against Steadfast until the conclusion of arbitration.

J.B. Hunt Transport, Inc. v. Steadfast Insurance Co., No. 5:20-cv-05049 (W.D. Ark. July 1, 2020).

Second Circuit Affirms Denial of NFL Player’s Petition to Vacate Arbitration Award, Rejecting Arguments of Harm Caused by Failure to Disclose CBA-Related Documents

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The case was brought by Philadelphia Eagles offensive tackle David Lane Johnson against the NFL Players Association, the NFL, and the NFL Management Council related to a 10-game suspension for using performance-enhancing substances. The collective bargaining agreement at issue included a policy regarding testing, discipline, and an arbitration appeal process for players found to be in violation. When Johnson appealed his suspension under the policy, the arbitrator issued an award upholding Johnson’s discipline. Johnson then sued the Players Association, the Management Council, and the NFL, seeking vacatur of the arbitration award and asserting claims for breach of the duty of fair representation, breach of the collective bargaining agreement, and violation of his rights under various labor laws. The district court denied Johnson’s petition for vacatur, confirmed the arbitration award, dismissed certain of Johnson’s claims, and ultimately granted summary judgment against Johnson as to all remaining claims.

On appeal, the Second Circuit rejected Johnson’s argument that the Players Association’s “failure to provide him with documents including ‘the complete Policy, his discipline file, and his testing history file’ amounted to a ‘per se‘ breach of its duty of fair representation.” Even assuming the failure of a union to produce documents constituted a breach, which the court indicated was unprecedented, Johnson still could not identify how the failure of the Players Association to provide these documents affected the outcome of his arbitration.

The Second Circuit also ruled that the district court did not err in granting summary judgment to the Players Association on Johnson’s claim that the union failed to provide him with copies of “side agreements” to the Management Council’s policy. The court was not persuaded by Johnson’s arguments, including that Johnson was entitled to damages for the late production of documents by the Players Association. Johnson was unable to dispute (1) the evidence in the record that all relevant documents had been produced; and (2) that there was no showing of any impact on the arbitral outcome or of bad faith.

The Second Circuit also affirmed the denial of the motion to vacate the arbitration award based on Johnson’s argument that he lacked a full and fair hearing. The Second Circuit concluded, “Johnson was given clear notice of the contemplated disciplinary action that was to be taken against him, the appeal was heard by a qualified arbitrator, and he had a full and fair opportunity to present arguments. That was more than sufficient under our precedent to confirm the award.”

Johnson v. National Football League Players Association, No. 19-2734 (2d Cir. July 17, 2020).

€643 Million Arbitration Award Was Within Arbitration Panel’s Power to Award and Not a Result of Manifest Disregard of the Law

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Precision Castparts Corp. purchased companies with manufacturing facilities in the United States and Germany for €800 million. After the sale closed, Precision discovered that the seller had “manipulated financial documents of the acquired companies to show that they were ‘high margin’ and ‘high cash flow’ businesses. In fact, the acquired companies were ‘functionally insolvent.'”

Precision instituted an arbitration before the American Arbitration Association, International Centre for Dispute Resolution, alleging claims for fraudulent inducement and breach of warranty. The tribunal found that the seller breached the contractual agreement and fraudulently induced Precision to purchase the acquired companies. The tribunal awarded damages of €643 million for the fraudulent inducement claim, and €100 million for the breach of contract claim, which was subject to a contractual cap of the same amount. The tribunal stated that the breach of contract award was subsumed within the €643 million fraudulent inducement award and was not in addition to that amount.

The Southern District of New York confirmed the award, finding that it was within the scope of the arbitrators’ power and that the arbitrators had not engaged in manifest disregard of the law. The seller argued that the tribunal disregarded two Delaware legal doctrines, the rehash doctrine and the bootstrapping doctrine, which are “intended to prevent taking contract breach and damages allegations and dressing them up as a fraud claim for the same damages where the contract and fraud allegations are materially identical.”

In rejecting the seller’s argument that the claim was subject to the rehashing or bootstrapping doctrines, the tribunal found that, although there was overlap between the two claims, the “fraudulent misconduct went well beyond breaches of the [contract].” “The broader and different nature of the conduct pleaded to support the fraudulent inducement claims, combined with the additional pleading of intent, which is an element of fraud but not contract breach, was enough to defeat [the seller’s] bootstrapping argument.”

With regard to the rehashing doctrine (which focuses on the claimed damages as opposed to the bootstrapping doctrine, which focuses on the claimed basis for liability), the court found that the rehashing doctrine did not apply because the contract breach claim was limited to €100 million by the contractual indemnity cap, but the fraudulent inducement claim was not subject to any cap. The court found that the tribunal’s determinations did not manifestly disregard the law but rather were well supported by the law. In addition, the issues were within the scope of the arbitrators’ powers as both claims arose from the acquisition that was the subject of the contract, and the contract provided for arbitration of any claim or controversy arising out of or related to it.

Precision Castparts Corp. v. Schulz Holding GmbH & Co. KG, No. 1:20-cv-03029 (S.D.N.Y. July 20, 2020).

Third Circuit Concludes Arbitration Agreement Is Unenforceable Under the Prospective Waiver Doctrine

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The Third Circuit Court of Appeals has refused to enforce an arbitration agreement because it impermissibly limited claims to those available under tribal law at the expense of federal statutory claims. The court also concluded that the relevant clause could not be severed from the agreement.

Christina Williams and Michael Stermel entered into payday loan agreements that provided that they were subject to and governed by tribal law. The agreements also “limit[ed] disputes to tribal laws and to tribal courts.” The agreements also contained arbitration agreements.

Williams and Stermel sued in federal court on behalf of a putative class for violations of federal and Pennsylvania law, claiming that the agreements charged unlawfully high interest rates. The defendants moved to compel arbitration. The district court denied the defendants’ motion.

The Third Circuit affirmed. It explained “that arbitration is only appropriate so long as the prospective litigant effectively may vindicate his or her statutory cause of action in the arbitral forum” and that “arbitration agreements that limit a party’s substantive claims to those under tribal law, and hence forbid federal claims from being brought, are unenforceable.”

Applying those principles to Williams’ and Stermel’s claims, the court evaluated the loan agreements and concluded that they impermissibly limited claims to tribal law claims. The court rejected the defendants’ argument that the agreements were proper because they allowed borrowers to make claims under “such federal law as is applicable under the Indian Commerce Clause.” The court read the contract differently, as only allowing claims under tribal law, and also concluded that the restriction to the Indian Commerce Clause was improper because it precluded claims under other federal provisions, including a RICO claim asserted by the plaintiffs.

The Third Circuit also concluded that a severability clause did not save the balance of the arbitration agreement “because the prohibited waiver here [was] not severable.” The court concluded that clauses limiting claims to those available under tribal law was an essential term of the contract and that “the arbitration agreement’s clear reference to the exclusive application of tribal law is intertwined with the arbitration process and is central to it.” The court could not enforce arbitration without impermissibly rewriting the contract.

Williams v. Medley Opportunity Fund II, LP, No. 19-2058 (3d Cir. July 14, 2020).