Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

New Jersey District Court Rejects Challenge to Arbitration Award on the Basis of Public Policy

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The petitioner challenged an arbitration award on the basis that it conflicted with public policy. “[T]he Third Circuit has explained that this exception does not … sanction a broad judicial power to set aside arbitration awards as against public policy.” Thus, the limited public policy exception applies only when “the arbitration decision and award create an explicit conflict with an explicit public policy.” For example, the court referenced numerous situations in which arbitration awards were vacated on public policy grounds where the safety of the general public is implicated, such as vacating an arbitration award that reinstated a pilot who flew while intoxicated or overruling an award that reinstated an employee who violated a public safety regulation at a nuclear power plant. Here, citing various labor laws, the petitioner argued that his employment contract’s forfeiture provision deprived him of wages that he earned based on his performance at Wells Fargo Advisors, and he was prevented from working off his loan obligations because he was discharged without cause. The court found that the petitioner’s dispute was a private contractual relationship between him and Wells Fargo Advisors and did not implicate public policy or public harm.

The petitioner also argued that the panel manifestly disregarded the law, as Wells Fargo Advisors encouraged the panel to resolve the dispute based on “industry practice” instead of the applicable law and that “representations that Wells Fargo Advisors advanced during the proceedings, in conjunction with the [a]ward which it received, raise an inference that the law was ignored.” The court’s review of the record indicated that the panel “was neither encouraged nor directed to disregard the law in resolving the parties’ dispute” and that support for the award can be derived from the terms and provisions of the petitioner’s employment contract.

Lastly, the petitioner argued that the panel excluded certain evidence during the hearings, which would have established that he was discharged from Wells Fargo Advisors without cause. The court found such evidence would have been irrelevant, as the petitioner’s letter offer stated that he was hired on an at-will basis, providing Wells Fargo Advisors a right to terminate the petitioner’s employment at any time, with or without advance notice and with or without cause.

The arbitration award was confirmed.

Caputo v. Wells Fargo Advisors, LLC, No. 3:19-cv-17204 (D.N.J. May 29, 2020).

U.S. Supreme Court Holds Equitable Estoppel Can Allow Non-Signatories to Compel Arbitration Under the New York Convention

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The U.S. Supreme Court has held that equitable estoppel doctrines can be invoked by non-signatories seeking to compel arbitration under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards.

ThyssenKrupp Stainless USA contracted with F.L. Industries Inc. to build cold rolling mills at ThyssenKrupp’s steel plant in Alabama. The contracts between ThyssenKrupp and F.L. contained arbitration clauses. F.L. subcontracted with GE Energy Power Conversion France SAS Corp. for motors for the mills. After GE Energy delivered the motors, Outokumpu Stainless USA acquired the plant from ThyssenKrupp. Shortly thereafter, the motors allegedly failed. Outokumpu sued GE Energy, which sought to compel arbitration under the arbitration clauses in the ThyssenKrupp-F.L. contracts.

The district court granted GE Energy’s motion. It concluded that the ThyssenKrupp-F.L. contracts included subcontractors within the definition of the terms “seller” and “parties” and that Outokumpu and GE Energy were therefore parties to the ThyssenKrupp-F.L. contracts. The court therefore declined to reach GE Energy’s alternate argument that the arbitration clauses were enforceable under equitable estoppel principles even if the litigants were not parties.

The Eleventh Circuit reversed. It concluded, in relevant part, that the Convention required parties to sign arbitration agreements, that GE Energy had indisputably not signed the ThyssenKrupp-F.L. contracts, and that GE Energy could therefore not rely on equitable estoppel because that doctrine conflicted with the Convention’s signatory requirement.

The Supreme Court granted certiorari to resolve a circuit split and held that equitable estoppel doctrines can allow non-signatories to compel arbitration under the Convention.

The court explained that chapter 1 of the Federal Arbitration Act (FAA) “permits a nonsignatory to rely on state-law equitable estoppel doctrines to enforce an arbitration agreement” and that the Convention in turn provided that chapter 1 of the FAA applies to proceedings brought pursuant to the Convention’s implementing legislation “to the extent that [chapter 1] is not in conflict with [the implementing legislation] or the Convention.” Thus, the court needed to determine whether applying equitable estoppel principles conflicted with the Convention.

The court concluded it did not. It explained that the Convention was “silent” on the issue and that that “silence [was] dispositive … because nothing in the text of the Convention could be read to otherwise prohibit the application of domestic equitable estoppel doctrines.”

The court also explained that the relevant section of the Convention did not contain exclusionary language stating that arbitration agreements could only be enforced in the circumstances identified. In addition, the Convention “contemplate[s] the use of domestic doctrines to fill gaps in the Convention,” its drafting history supported the conclusion that domestic law could apply, and a majority of the courts of other signatory countries to analyze the issue had concluded that the Convention “does not prohibit the application of domestic law.”

The Supreme Court, therefore, remanded the case to the Eleventh Circuit to consider the merits of GE Energy’s equitable estoppel argument.

GE Energy Power Conversion France SAS, Corp. v. Outokumpu Stainless USA, LLC, No. 18-1048 (U.S. June 1, 2020).

Second Circuit Affirms EDNY Ruling That Customer Is Bound to Arbitration Clause in Amazon’s Conditions of Use

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A customer argued that he is not bound to the arbitration clause included in Amazon’s conditions of use since August 2011 because he never received notice of the clause or manifested his assent to it. Nonetheless, the customer had made at least 27 purchases through Amazon.com since he received notice of the arbitration clause through this litigation, conduct that “a reasonable person would understand to constitute assent.” The circuit court found it irrelevant that the customer denied ever reading the terms and conditions that included the arbitration clause in connection with his purchases because to be bound “an internet user need not actually read the terms and conditions or click on a hyperlink that makes them available as long as [he] has notice of their existence.” The district court’s ruling compelling the parties to arbitration was affirmed.

Nicosia v. Amazon.com, Inc., No. 19-1833 (2d Cir. June 4, 2020).

SDNY Grants Motion to Compel Arbitration, Directs Arbitrability Issue to Arbitrators

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PB Life and Annuity Co. Ltd. sought a judgment that its dispute with Universal Life Insurance Co. was subject to litigation, not arbitration. In response, Universal Life moved to compel arbitration, and PB Life sought a permanent injunction. The motions required interpreting two related agreements – a coinsurance reinsurance agreement, and a trust agreement created pursuant to the reinsurance agreement. An arbitration clause in the reinsurance agreement applied to “all disputes … arising under or relating” to the reinsurance agreement. The trust agreement contained a forum-selection clause requiring the parties to litigate disputes in New York City. PB Life claimed that the underlying dispute was governed solely by the trust agreement and its forum-selection clause.

The court first addressed whether a valid arbitration agreement existed in the first instance and concluded there was. In doing so, it rejected PB Life’s contention that the trust agreement superseded the reinsurance agreement and its arbitration clause because, among other reasons, the very operation of the trust agreement depended on the continued existence of the reinsurance agreement. Any contrary interpretation, the court ruled, would produce a result that is “absurd, commercially unreasonable, or contrary to the reasonable expectation of the parties.” In addition, while the substance of the parties’ dispute was contemplated by both the reinsurance agreement and the trust agreement, the court found that the question of “arbitrability” – whether the dispute was governed by the arbitration clause or the forum-selection clause – was for the arbitrators to decide based on the relevant contract language. Accordingly, the court granted Universal Life’s motion to compel, denied PB Life’s motion for a permanent injunction, and stayed the action pursuant to section 3 of the Federal Arbitration Act.

PB Life & Annuity Co. Ltd. v. Universal Life Ins. Co., No. 1:20-cv-02284 (S.D.N.Y. May 12, 2020).

Eleventh Circuit Partially Reverses District Court Decision Denying Motion to Compel Arbitration Upon Application of Mailbox Rule

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In Mason v. Midland Funding, plaintiffs Mason and Burnett brought an action against a debt collector and its subsidiaries claiming that they violated the Fair Debt Collection Practices Act by allegedly filing lawsuits to collect on unpaid debts even though they knew the debts were “uncollectable.”

The defendants filed a motion to dismiss, which was denied by the U.S. District Court for the Northern District of Georgia. The defendants then filed a motion to compel arbitration, seeking to hold Mason and Burnett to arbitration agreements that the defendants claimed Mason and Burnett agreed to when they obtained credit accounts online, which was ultimately denied. The defendants then filed an interlocutory appeal with the Eleventh Circuit.

The crux of the interlocutory appeal turned on whether Mason and Burnett agreed to arbitrate. The defendants claimed that as part of opening the credit card account, Mason agreed to arbitrate by assenting to a clickwrap agreement that was part of his online application. The defendants also argued that Mason was mailed a welcome packet containing the agreement, along with the credit card, which he used upon receipt.

In support of these arguments, the defendants cited a declaration from the original creditor. The court found that the declaration neither showed the actual application form that Mason filled out and agreed to online nor demonstrated that the online application contained an arbitration provision. Thus, the Eleventh Circuit had no evidence that Mason saw and was required to agree to the arbitration provision when applying.

Although the defendants claimed that the agreement was also mailed to Mason, the Eleventh Circuit rejected the defendants’ application of the “mailbox rule,” finding that they failed to present any “competent evidence” proving they knew that the agreement had been mailed. The court, therefore, affirmed the lower court’s denial of the defendants’ motion to compel arbitration as to Mason.

Conversely, as to Burnett, the Eleventh Circuit found that the defendants provided a much more definitive declaration, which was sufficient to trigger the mailbox rule’s presumption that Burnett received the agreement, including the arbitration agreement contained within it. Thus, the Eleventh Circuit reversed the district court’s denial of the motion to compel arbitration as to Burnett.

Mason v. Midland Funding LLC, No. 18-14019 (11th Cir. May 13, 2020).