Reinsurance Focus

Plaintiffs, three families living in the Lake View area, filed three separate actions against defendants J. Michael White, Eco-Preservation Services LLC, Serma Holdings LLC, Aeta Management Group, Knobloch Inc., and others. The plaintiffs asserted numerous violations of federal and state law related to the provision of sewer services to the plaintiffs’ homes. The defendants filed motions to dismiss for failure to state a claim upon which relief could be granted and opposed the plaintiffs’ implied motions to amend the complaints as futile. The defendants further filed motions to strike the plaintiffs’ deposition notices and to stay discovery pending the resolution of their motions to dismiss. The district court granted the plaintiffs’ implied motions to amend and concluded that the complaints stated plausible claims to relief. The defendants appealed the district court’s order. This district court dismissed the appeals and the defendants moved for reconsideration. The plaintiffs moved for default judgment against the defendants for failure to answer the complaints.

Thereafter, the defendants filed motions to compel arbitration pursuant to arbitration provisions in the purchase agreements entered into by the plaintiffs. The district court denied the motions to compel arbitration, and the U.S. Court of Appeals for the Eleventh Circuit affirmed on the grounds that the defendants waived their right to arbitrate. The court explained that waiver occurs when, under the totality of the circumstances, “both: (1) the party seeking arbitration substantially participates in litigation to a point inconsistent with an intent to arbitrate; and (2) this participation results in prejudice to the opposing party.” The court expressed that the party arguing for waiver bears the heavy burden of proving waiver. Here, the court concluded that the defendants did not act consistently with their right to arbitration because the defendants engaged in the litigation activities previously discussed and only invoked arbitration when it became clear that the three lawsuits would not be dismissed. Moreover, the court concluded that the plaintiffs were prejudiced because the defendants’ conduct “slowed the process and magnified its costs.” As such, the court agreed with the district court that the defendants waived their right to arbitration.

Davis v. White, No. 19-11760 (11th Cir. Jan. 7, 2020).

Defendants, Certain Underwriters at Lloyd’s and its third-party claims administrator, CJW & Associates, sought to enforce a mandatory arbitration clause in a Lloyd’s policy issued to the plaintiffs. Enforcement of the provision depended on the interplay between four laws: (1) a Washington statute barring mandatory arbitration clauses in insurance contracts; (2) Article II, Section 3 of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, which requires courts to enforce arbitration agreements; (3) the McCarran-Ferguson Act, which provides that state insurance law preempts any conflicting “Act of Congress”; and (4) Chapter 2 of the Federal Arbitration Act (FAA), which Congress amended to implement the Convention as it relates to disputes involving foreign parties.

Lloyd’s being a foreign party, the question before the Washington district court was whether amending Chapter 2 of the FAA was an “Act of Congress” within the meaning of the McCarran-Ferguson Act. If so, then the Washington insurance law would preempt the Convention and bar enforcement of the arbitration clause in the Lloyd’s policy.

While recognizing that federal courts have reached diverging conclusions on the issue, the court was persuaded by a California decision finding that the word “shall” in Section 3 of the Convention expressly directs courts to enforce arbitration agreements and thus gives Section 3 “automatic effect.” In other words, Section 3 was “self-executing,” and, consequently, no “Act of Congress” was necessary for it to be enforced. As such, the court held that the McCarran-Ferguson Act did not apply and that the arbitration clause at issue was not invalidated by Washington law. The court went on to find the clause enforceable under the Convention, as limited by Chapter 2 of the FAA. Although an issue arose as to the requirement that at least one party to the arbitration agreement not be an American citizen, the court found the commercial relationship between the parties was sufficiently tied to a foreign state, as the policy was underwritten by the London insurance market, which was created and remains governed by Parliament. Even though CJW was a nonsignatory to the Lloyd’s policy, as Lloyds’ claims administrator, the court found CJW had acted as Lloyd’s agent and thus was permitted to invoke the policy’s arbitration clause.

CLMS Mgmt. Servs. Ltd. P’ship v. Amwins Brokerage of Ga., LLC, No. 3:19-cv-05785 (W.D. Wa. Dec. 26, 2019).

This case arises out of a dispute over a provision of a collective bargaining agreement entered into between Monongahela Valley Hospital Inc. and its employee, who was represented in the action by United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service Workers International Union, AFL-CIO, CLC. The union filed arbitration, pursuant to the arbitration provision in the collective bargaining agreement. The arbitrator ruled in favor of the union, and the hospital filed a complaint with the U.S. District Court for the Western District of Pennsylvania seeking to vacate the award. The district court vacated the award, and the union appealed to the U.S. Court of Appeals for the Third Circuit. The court affirmed the district court’s decision, holding that the arbitrator’s interpretation of the disputed provision in the collective bargaining agreement (1) was a manifest disregard of the plain language of the collective bargaining agreement, (2) ignored the clear intentions of the parties, and (3) “failed to construe such provision to give effect to all parts of the provision. The court explained that the arbitrator ignored the plain language of the collective bargaining agreement when it ruled against the hospital, because its decision “flips the CBA on its head.” Additionally, the court reasoned that the arbitrator exceeded the scope of his authority when he injected a restriction into the collective bargaining agreement that was not bargained for, and was in fact rejected in a prior bargaining.

Monongahela Valley Hospital Inc. v. United Steel Paper and Forestry Rubber Manufacturing Allied Industrial and Service Workers International Union AFL-CIO CLC, No. 19-2182 (3d Cir. Dec. 30, 2019).

The U.S. Court of Appeals for the Ninth Circuit affirmed a California district court order denying the defendant’s motion to compel arbitration, agreeing that the defendant waived its right to arbitrate by actively defending the lawsuit for a year and a half before moving to compel. The court explained that the “heavy burden” of establishing waiver can be overcome by demonstrating “(1) knowledge of an existing right to compel arbitration; (2) intentional acts inconsistent with that existing right; and (3) prejudice to the party opposing arbitration resulting from such inconsistent acts.” It was undisputed that the defendant knew it had a right to compel arbitration. By moving to dismiss twice and then defending an appeal before seeking to enforce that right, the Ninth Circuit found the year-and-a-half delay underscored the defendant’s “‘strategic decision to take advantage of the judicial forum’ in a manner inconsistent with its right to arbitrate.” The court also agreed that the plaintiff had established prejudice in at least three respects. First, in litigating the action for more than a year, he was forced to incur costs “directly traceable” to acts that were inconsistent with the defendant’s known right to arbitrate. Second, ordering arbitration at this stage would effectively force him to relitigate key issues that the court already decided in his favor. Third, granting the defendant’s motion would give it an advantage from first choosing to litigate in federal court; namely, getting two bites at the apple. As such, the order denying the defendant’s motion to compel was affirmed.

Flores v. Adir Int’l, LLC, No. 18-55959 (9th Cir. Dec. 17, 2019).