Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

Former Employees Not Bound by Their Former Union’s Arbitration Agreement

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The former employees of a waste management company sued their former employer for violations of various federal and state labor laws. The company sought to compel arbitration and dismiss the complaint, relying on an arbitration agreement into which the former employees’ union had entered with the company more than 10 months after the former employees had left the company and commenced litigation. The court found that the determination regarding whether the employees were parties to the agreement was a “threshold inquiry [and] is the type usually decided by a court unless the parties have ‘clearly and unmistakably’ agreed to arbitrate that issue.” Finding no clear agreement to consign such threshold inquiries to the arbitrator, the court went on to hold that the arbitration agreement applied only to “present and future employees,” not past employees, and therefore did not bind the plaintiffs. The court distinguished Raymond v. Mid-Bronx Haulage Corp., No. 1:15-cv-05803 (S.D.N.Y. Nov. 2, 2017), in which the court held that a union contract may require past employees to submit their claims to arbitration. Raymond‘s holding was conditioned on the employee still being a member of the union. In addition, the arbitration agreement in Raymond explicitly applied to “past employees.” Here, no such explicit language was included in the arbitration agreement, nor were the past employees still members of the union. As such, they were not parties to, and therefore not bound by, the agreement to arbitrate. The court therefore denied the motion to compel arbitration.

Orlando v. Liberty Ashes, Inc., No. 1:15-cv-09434 (S.D.N.Y. Jan. 15, 2020).

Court Compels Arbitration of Balance Billing Dispute Under a California Health Plan, Severs Certain Unconscionable Provisions, and Rejects Class Arbitration Proceedings

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A patient sued her health plan and the plan’s debt collector under various California and federal laws in connection with alleged attempts by the plan to unlawfully collect the balances of the plaintiff’s medical statements that were in excess of the insurance allowed amounts. The defendants moved to compel arbitration based on arbitration agreements that the plaintiff executed when she enrolled in the health plan from year to year beginning in 2012. The plaintiff, however, opposed arbitration, arguing that (1) the arbitration agreements did not comply with section 1363.1 of the California Health and Safety Code, which requires that an arbitration provision be “prominently displayed” and meet certain other conditions, and (2) the agreements were unconscionable.

The court rejected the plaintiff’s arguments. With respect to section 1363.1, the court found that it was preempted by the Affordable Care Act for the time period in which that law was applicable and that the plan’s arbitration disclosures complied with the law. And as to unconscionability, the court found that the agreements’ attorney fees and cost-splitting provisions were unconscionable, but these provisions could be severed from the arbitration agreements and would not preclude arbitration.

The plaintiff also argued that, if the court were to compel arbitration, it should be on a class basis because the arbitration agreements included references to “parties” asserting a claim (in plural form). The court, however, was not convinced. Relying on the U.S. Supreme Court’s Stolt-Nielsen decision and Ninth Circuit authority, the court held that even an ambiguous arbitration agreement did “not provide a sufficient basis to conclude that parties to an arbitration agreement agreed to” resolve their dispute in a class proceeding. The court therefore compelled individual arbitration.

Hunter v. Kaiser Foundation Health Plan, No. 3:19-cv-01053 (N.D. Cal. Jan. 17, 2020).

First Circuit Refuses to Vacate Arbitration Award Following Stock Dispute

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The First Circuit recently denied a corporation’s numerous arguments seeking to vacate an arbitration award in favor of the individual who sold an entity to the corporation. The court’s decision reflected the narrow review of arbitration awards and the uphill battle that litigants face when trying to vacate such awards, even when arbitrators allegedly misinterpret contracts.

IBC Advanced Alloys Corp. purchased Beralcast from Gerald Hoolahan and Gary Mattheson in exchange for cash and IBC stock. When Hoolahan later tried to sell his stock, his brokerage firm told him it had been “unsuccessful in obtaining approval [for the sale] from the issuer.” Hoolahan’s attorney called IBC and was told that IBC had blocked the sale of Hoolahan’s shares because Hoolahan allegedly failed to disclose a claim against a sister company to one of Beralcast’s predecessor companies. Even worse, Hoolahan later learned that IBC had allowed Mattheson to sell his shares. Hoolahan initiated arbitration pursuant to the sale agreement.

The arbitrator ruled in Hoolahan’s favor, concluding that IBC had denied Hoolahan the benefit of the agreement and deliberately breached it. After concluding that IBC acted in bad faith, the arbitrator awarded Hoolahan his costs and fees. Hoolahan moved to confirm the award, while IBC moved to vacate or modify it. The district court confirmed the award and IBC appealed.

The First Circuit affirmed. Noting that review of arbitration awards is exceptionally narrow, the court first rejected IBC’s argument that the award was procured by undue means because it was based on testimony by Hoolahan’s attorney regarding his call to IBC, which IBC claimed violated ethical rules regarding contacting a party represented by counsel. The court explained that the arbitrator concluded that Hoolahan’s attorney’s call did not violate ethical rules because the attorney had credibly testified that he did not know IBC was represented by counsel until the end of the call and noted that the arbitrator’s determination of “ill-will” between IBC and Hoolahan was based on more than the call by Hoolahan’s attorney in any event.

IBC next claimed that the arbitrator acted improperly by not postponing the arbitration hearing when the IBC employee who spoke to Hoolahan’s attorney could not be present and by refusing to accept an affidavit from the employee. The First Circuit rejected that claim as well. The court noted that IBC never asked for a postponement and did not raise that argument before the district court. Nevertheless, applying plain error review to the argument, the court rejected this argument as “border[ing] on the absurd.” The arbitrator did not act improperly by not granting a continuance sua sponte or by allowing an affidavit in lieu of live testimony.

The First Circuit also rejected IBC’s argument that the arbitrator had exceeded his powers by awarding Hoolahan his costs and fees. Under Delaware law, which governed the agreement, costs and fees were appropriate where, as here, the arbitrator made a finding of “bad faith.”

IBC also claimed that the arbitrator misinterpreted the agreement because the agreement noted that IBC disclaimed any obligation to help Hoolahan sell his shares. The court rejected that argument, noting the very narrow scope of its review: “Even if IBC is right that the arbitrator did not correctly interpret the Agreement, he nonetheless interpreted it. And that is enough.”

Finally, the First Circuit also rejected IBC’s arguments regarding the arbitrator’s calculation of damages, concluding that IBC had not shown “manifest disregard of the law.”

The First Circuit awarded costs to Hoolahan.

Hoolahan v. IBC Advanced Alloys Corp., No. 19-1444 (1st Cir. Jan. 17, 2020).

Fifth Circuit Affirms Arbitration Award and Finds Panel Was Fairly Constituted and Did Not Award Punitive Damages

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In addition to awarding monetary damages against the defendants, the arbitration panel ordered that the defendants be divested of their shares in the plaintiff corporation. The defendants sought to vacate the award, arguing that the panel was improperly constituted and the award included speculative or punitive damages, rendering it unenforceable (among other reasons). The trial court’s judgment confirming the arbitration award was affirmed.

As to the argument that the panel was improperly constituted, the plaintiffs appointed five arbitrators and the defendants appointed two. The defendants argued that the method of selection was against the terms of the contract, which required an equal number of appointed arbitrators per side. While the court agreed that if the selection of the arbitration panel fundamentally departed from the contract’s selection process, the award should be vacated. However, the court found that there was no such departure here, as the contract’s selection process contemplated the number of parties, not the number of sides. Here there were seven parties and seven arbitrators.

As to the argument that the award included speculative or punitive damages, the court found that, while the panel did not have the authority to issue punitive damages per the parties’ agreement, it did possess powers to grant court-enforceable injunctive relief. Divesting the defendants of their shares in the plaintiff corporation “operates to achieve what the panel considered a fair result” to compensate the parties financially and achieve a just outcome, which “is precisely a matter of equity” and therefore distinguishable from punitive damages.

Soaring Wind Energy, LLC v. Catic USA Inc., No. 18-11192 (5th Cir. Jan. 7, 2020).

Nebraska Appellate Court Affirms Dismissal for Lack of Personal Jurisdiction in Suit Involving Breach of Reinsurance Participation Agreement

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The Court of Appeals of Nebraska has affirmed the dismissal of a claim under a reinsurance participation agreement based on lack of personal jurisdiction.

Applied Underwriters Captive Risk Assurance Co., an Iowa corporation with its principal place of business in Nebraska, entered into a reinsurance participation agreement with Doyle Signs Inc., an Illinois corporation based in Illinois. The agreement contained a choice-of-law clause and a forum selection clause providing that the agreement would be governed by Nebraska law and that disputes regarding the agreement would be heard by the “courts of Nebraska.” Applied Underwriters later sued in Nebraska state court alleging that Doyle owed it nearly $380,000 under the agreement.

Doyle moved to dismiss for lack of personal jurisdiction claiming it did not have sufficient contacts with Nebraska to be hauled into court there and, in the alternative, that Nebraska was not a reasonably convenient forum. The trial court granted Doyle’s motion and Applied Underwriters appealed.

The Court of Appeals affirmed. It found the case largely on point with its prior decision in Applied Underwriters Captive Risk Assurance Co. v. E.M. Pizza, Inc., 26 Neb. App. 906, 923 N.W.2d 789 (2019). In that case, the court concluded that the defendant had sufficient minimum contacts with Nebraska for specific jurisdiction but that Nebraska was nevertheless not a reasonably convenient forum.

Attempting to distinguish E.M. Pizza, Applied Underwriters argued that Doyle did business in Nebraska and was subject to general personal jurisdiction there. The court rejected that argument. It concluded that Doyle did not have systematic and continuous general business contacts with Nebraska based on the fact that it had bid for and had been awarded eight contracts by corporate offices outside Nebraska to make signs for Nebraska stores when the signs were manufactured outside Nebraska, transported to Nebraska by third parties, and there was no evidence that, among other things, Doyle had any employees in Nebraska, made sales there, or solicited business there.

In the alternative, the court noted that even if Doyle had sufficient minimum contacts with the state, it was not fair or reasonable for Nebraska courts to exercise jurisdiction over Doyle.

The court also rejected Applied Underwriters’ argument that the forum selection clause conferred jurisdiction on Nebraska’s courts, noting that it had rejected a similar argument in E.M. Pizza.

Finally, the court rejected Applied Underwriters’ contention that Doyle did not challenge service upon it, explaining that courts are still entitled to determine whether Nebraska courts are a convenient forum notwithstanding the apparent lack of challenge to service of process.

Applied Underwriters Captive Risk Assurance Co. v. Doyle Signs, Inc., No. A-19-464, 2019 WL 7425406 (Neb. Ct. App. Dec. 20, 2019) (copy of opinion available from Nebraska court website with a subscription).