Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

Court Finds No Manifest Disregard of the Law or Exceeding of Powers in Upholding Arbitration Award Related to Dispute Over Earn-Out Payment

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Markmidco S.àr.l., a Luxembourg company, sold to Zeta Interactive Corp. its interest in a customer relationship management business consisting of several companies that provided to retailers email and text message marketing, database management, and related services. The parties’ agreement called for several earn-out payments to be made upon the determination that the CRM business had surpassed certain revenue thresholds laid out in the contract. Zeta refused to make the first earn-out payment of $4 million, claiming the revenue threshold had not been reached as of the deadline. Markmidco disagreed and referred the parties’ dispute to an arbitrator. The arbitrator agreed with Markmidco and awarded it the earn-out payment.

The parties’ dispute then moved to federal court where Markmidco’s award was confirmed over several arguments from Zeta seeking its vacatur. Zeta argued that the parties’ contract called for a “manifest error” standard of review. However, the court held that the parties “cannot contract for more judicial review than the FAA and Convention grant them.” Zeta next argued that the award should be vacated due to the arbitrator’s manifest disregard of the law, but failed to identify any instance of the arbitrator ignoring the applicable law.

The court also denied Zeta’s claim that the arbitrator exceeded his powers, stating that his findings were reasonable interpretations based on analysis of specific provisions of the purchase agreement. When presented with an argument that an arbitrator has exceeded his powers, the “sole question” for the court is “whether the arbitrator (even arguably) interpreted the parties’ contract, not whether he got its meaning right or wrong.” As such, Zeta’s argument failed.

Zeta also argued that the grounds for vacatur stated in the Delaware Uniform Arbitration Act should apply rather than those provided by the Federal Arbitration Act because the parties’ contract included a choice-of-law provision selecting Delaware law. The court held that, under Third Circuit law, state law vacatur standards apply only when the parties express a clear intent to supplant the FAA standards with state law standards. A choice-of-law provision that applied broadly to the parties’ contract was not a sufficiently clear expression of the parties’ intent to opt out of the FAA scheme.

Lastly, Zeta argued that enforcement of the award was premature because other proceedings between the two parties were ongoing. The court held that Zeta’s claims in the collateral proceeding did not overlap with the issues submitted by the parties to the arbitrator. The court also held that issuing a stay or denying enforcement of the award at this time “would transform a summary proceeding into a protracted dispute,” contrary to the “basic purpose” of arbitration. The court ordered enforcement of the arbitration award.

Markdutcho 1 B.V. v. Zeta Interactive Corp., No. 1:17-cv-01420 (D. Del. Nov. 12, 2019).

Eleventh Circuit Clarifies Standard for New York Convention’s Public Policy Defense to Foreign Arbitration Awards

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The dispute involved an arbitration related to alleged medical malpractice by doctors selected by Carnival Cruise Lines to treat a wrist injury of a Serbian employee of Carnival. The employee’s employment agreement with Carnival contained mandatory arbitration and forum selection clauses and a choice-of-law clause designating the governing law as the law of Panama, the law of the flag of the employee’s cruise ship. Notwithstanding the choice of Panamanian law, the employee filed a foreign arbitration asserting a claim under U.S. law, including the Jones Act, for vicarious liability against Carnival. The arbitrator ruled that the employee could not assert the U.S. law claims and that she would not be entitled to relief under Panamanian law. The employee then filed a lawsuit in a federal district court seeking to vacate or deny enforcement of the foreign award under the New York Convention. The district court denied the employee’s petition, rejecting the employee’s arguments that the arbitrator wrongfully deprived her of the opportunity to assert her claim under the Jones Act and that the award was void as against U.S. public policy.

On appeal, the Eleventh Circuit affirmed the district court’s ruling. The Eleventh Circuit rejected the employee’s argument that the court was required to refuse to enforce the award because she was allegedly deprived of a statutory remedy against Carnival. The court ruled that it would not refuse to enforce the award “simply because the remedies available under Panamanian law [were] less favorable” to the employee “than the remedies available under U.S. law.” The court further found that the remedies available under Panamanian law were not “so inadequate that enforcement would be fundamentally unfair.” The court held: “[T]he test for whether a court should refuse to enforce a foreign arbitral award based on public policy is not whether the claimant was provided with all of her statutory rights under U.S. law during arbitration. Rather the public-policy defense ‘applies only when confirmation or enforcement of a foreign arbitration award would violate the forum state’s most basic notions of morality and justice.'” The employee had not made that showing here.

Cvoro v. Carnival Corp., No. 18-11815 (11th Cir. Oct. 17, 2019).

Connecticut Supreme Court to Consider Whether Parties Can Use FAA to Extend Time to Vacate Arbitration Award

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The Connecticut Supreme Court will consider whether the parties to an arbitration agreement can circumvent Connecticut’s 30-day statutory deadline for filing an application to vacate an arbitration award by including in the arbitration agreement a choice-of-law provision stating that the agreement is governed by the Federal Arbitration Act, which contains a three-month time limitation for filing applications to vacate arbitration decisions.

In A Better Way Wholesale Autos, Inc. v. Saint Paul, 192 Conn. App. 245 (2019), the Connecticut Appellate Court affirmed the trial court’s dismissal of a plaintiff’s application to vacate an arbitration award on the ground that the application was untimely because it was filed more than 30 days after the award. Under a Connecticut statute, “[n]o motion to vacate, modify or correct an award may be made after thirty days from the notice of the award to the party to the arbitration who makes the motion.” The appellate court concluded as a matter of law that parties may not circumvent that statute by agreeing to have the FAA’s three-month limitation period apply. Thus, even though the arbitration agreement at issue provided that “[a]ny arbitration under this Arbitration Provision shall be governed by the Federal Arbitration Act … and not by any state law concerning arbitration,” Connecticut’s 30-day limitation applied.

A Better Way Wholesale Autos, Inc. v. Saint Paul, 192 Conn. App. 245 (2019).

Second Circuit Finds Arbitrator Within Authority to Bind Absent Class Members to Arbitration

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In reversing a New York federal court, the Second Circuit found the arbitration was within the arbitrator’s authority in binding absent class members to class proceedings because, by signing the operative arbitration agreement, the absent class members — employees of the defendant — bargained for the arbitrator’s construction of their agreement with respect to class arbitrability. The issue whether the arbitrator exceeded her authority in certifying an opt-out, as opposed to a mandatory, class was not before the Second Circuit, and thus the matter was remanded to the district court.

The court found that the arbitrator’s decision was supported, in part, by the American Arbitration Association’s Supplementary Rules for Class Arbitrations, which provide that “the arbitrator shall determine as a threshold matter … whether the applicable arbitration clause permits the arbitration to proceed on behalf of … a class.” Furthermore, the arbitration agreement provided that questions of arbitrability and procedural questions were to be decided by the arbitrator.

The Second Circuit noted that it was not for the court to “decide whether the arbitrator’s class certification decision was correct on the merits of issues such as commonality and typicality. We merely decide that the arbitrator had the authority to reach such issues even with respect to the absent class members.”

Jock v. Sterling Jewelers Inc., No. 18-153 (2d Cir. Nov. 18, 2019).

Eighth Circuit Rejects Claim That Arbitration Clause in Retainer Was Unconscionable

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The Eight Circuit has rejected a plaintiff’s claim that an arbitration clause in a retainer agreement she signed with a law firm after receiving a call from a purported agent of the firm informing her of a purported life-threatening medical condition was unconscionable.

Allegedly, someone acting on behalf of McSweeney Langevin LLC, a law firm, called Jerri Plummer and told her that there was a life-threatening issue with the transvaginal mesh that had previously been implanted in her. The caller also told Plummer that the caller could arrange for Plummer to have the mesh surgically removed and could set Plummer up with an attorney to seek compensation for her surgery. As a result, Plummer signed a retainer agreement with McSweeney Langevin and underwent the surgery. According to Plummer, the surgery was less than successful. She sued an array of defendants, including McSweeney Langevin.

McSweeney Langevin sought to compel arbitration pursuant to the retainer agreement Plummer signed. The district court, applying the law of Washington, D.C., concluded that the arbitration agreement was unconscionable and refused to compel arbitration.

On appeal, the Eighth Circuit reversed and remanded.

The court noted that under D.C. law, an agreement must generally be both substantively and procedurally unconscionable to be unenforceable, but that in an egregious situation, it is sufficient for an agreement to be procedurally unconscionable alone.

With respect to substantive unconscionability, the Eighth Circuit allowed McSweeney Langevin to cure the district court’s finding that the agreement was unconscionable because Plummer could not afford to pay the costs of arbitration by volunteering to pay her costs. The court relied on several federal court decisions applying D.C. law that had similarly allowed litigants seeking to compel arbitration to cure substantive unconscionability by covering costs.

The court therefore turned to procedural unconscionability, noting that Plummer faced an uphill battle to establish that the retainer agreement was unconscionable in light of the fact that it was not substantively unconscionable. On the whole, the Eight Circuit concluded that the retainer was not procedurally unconscionable. The retainer agreement was sent to Plummer more than a month after the initial call she received regarding her mesh. The agreement informed Plummer that she had the “freedom to contract” by bargaining for certain terms in the agreement. The retainer was six pages long (including a nearly full-page signature page) and was easy to read. The fact that it was marked urgent and was sent shortly before Plummer’s surgery was not sufficient, considering all the facts, to render the agreement procedurally unconscionable.

Despite acknowledging that the circumstances that gave rise to this lawsuit were “troubling,” the Eighth Circuit determined that the retainer agreement was not procedurally unconscionable. It therefore reversed the district court’s decision.

Finally, the Eighth Circuit also rejected Plummer’s contention that the retainer agreement was unenforceable because McSweeney Langevin violated ethical obligations by failing to explain the ramifications of the arbitration provision to Plummer. The court assumed that the retainer agreement would be unenforceable if the attorneys have violated ethical obligations, but concluded that no such violations occurred. The agreement informed Plummer of the basic consequences of the arbitration clause. It conspicuously noted, among other things, that Plummer was waiving her right to a jury and a judicial appeal and that arbitration was her only recourse.

Plummer v. McSweeney, No. 18-3059 (8th Cir. Oct 23, 2019).