Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

Court Dismisses Reinsurance Litigation in Favor of Prior Pending Action

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The plaintiffs, U.S. Fire Insurance Co. and North River Insurance Co., issued 12 umbrella and excess umbrella liability policies for a combined coverage of $244 million to a manufacturer of respiratory protection equipment and asbestos-containing personal protective products. The plaintiffs subsequently entered into reinsurance contracts that covered the 12 policies. Beginning in March 2017, the plaintiffs billed the reinsurers for amounts they claimed were due under the reinsurance contracts as a result of the plaintiffs’ payments for settling liability under the umbrella policies.

When certain reinsurers refused to pay a portion of the reinsurance billings, the plaintiffs brought this lawsuit in the District of New Hampshire, alleging breach of several of the reinsurance contracts and seeking a declaratory judgment arising out of the reinsurers’ refusal to pay certain billings. However, less than an hour before the plaintiffs initiated the lawsuit, the plaintiffs’ reinsurers (mostly the same reinsurers in the initial action, as well as additional reinsurers) sued the plaintiffs in a New Jersey court. There, the reinsurers alleged that they had made payments to the plaintiffs pursuant to the reinsurance contracts under a reservation of rights and sought reimbursement of those amounts. The reinsurers then moved to dismiss or stay the New Hampshire case, arguing, inter alia, that the court should defer to the New Jersey action pursuant to the prior-pending-action doctrine or the related first-filed doctrine. While this motion was pending, the reinsurers filed a notice of an order issued in the New Jersey action denying U.S. Fire and North River’s motion to dismiss or stay on comity, forum non conveniens, and other grounds.

The New Hampshire court granted the reinsurers’ motion to dismiss. The court based its ruling on the prior-pending-action doctrine, which holds that the pendency of a prior action, in a court of competent jurisdiction, between the same parties, predicated upon the same cause of action and growing out of the same transaction, and in which identical relief is sought, constitutes a good ground for abatement of the later suit. The court cited to the interests of judicial efficiency and avoiding inconsistent judgments. The court found that the New Jersey action involved the same issues presented in this case: “the various reinsurers’ obligations to provide payments to plaintiffs under the Reinsurance Contracts.” The court explained: “As the [reinsurers] seek not only the return of payments they previously made to North River, but also a declaratory judgment as to the parties’ respective rights and obligations under the Reinsurance Contracts, the controlling issues in this litigation will be determined in the New Jersey Action.” The court further found that U.S. Fire and North River already moved to dismiss the New Jersey action, and the court in that case denied the motion and made several rulings that directly impacted the arguments raised by the parties in the New Hampshire case. The court concluded that “principles of comity and the convenience of the parties and witnesses weigh in favor of dismissal of this case in favor of the New Jersey Action.”

U.S. Fire Insurance Co. v. Equitas Ins. Ltd., No. 1:18-cv-01205 (D.N.H. Oct. 24, 2019).

Court Denies Motion to Set Aside Confirmation of Arbitration Award, Rejecting Arguments of Excusable Neglect, Manifest Disregard of the Law, and Exceeding Powers

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The case involved a dispute over an automobile equipment supply contract. The parties’ disagreement was arbitrated, and the prevailing party filed in federal court for confirmation of the award. The supplier, after losing the arbitration, failed to timely respond to the petition for confirmation due to the unexpected death of the husband of the firm’s paralegal. The death “caused unexpected disruptions in the paralegal and legal assistant’s schedules, leading to the [supplier’s] inadvertent failure to meet the award confirmation response deadline.”

The court noted that “the Sixth Circuit has considered excusable neglect in different contexts and repeatedly underscored that it is a difficult standard to satisfy.” The standard is so high that it is “met only in extraordinary cases.” In this case, the court found that the supplier acted in good faith but held that all three of the other factors weighed against a finding of excusable neglect. “Respondent must demonstrate more than just good faith to establish excusable neglect, and it has not done so here.”

Although the court had already determined the supplier had not met the standard to set aside the judgment for excusable neglect, it nevertheless went on to consider the grounds the supplier advanced for vacation of the arbitration award. The court rejected the supplier’s argument that the arbitrator manifestly disregarded the law by, among other things, failing to apply the Uniform Commercial Code and prohibiting the introduction of parol evidence allegedly showing that the supplier did not anticipatorily breach the contract at issue. The court found that the “arbitrator made clear that the contract was unambiguous and fully integrated as written, eliminating the need for parol evidence under the UCC.” The court also rejected the supplier’s argument that the arbitrator exceeded his powers when the arbitrator found that the supplier did not meet the standard to allege fraudulent misrepresentations outside the contract. The court explained that the arbitrator cited the exact case upon which the respondent was relying before the arbitrator had made his ruling. The court further found no basis for the supplier’s argument that “the award [was] not well-reasoned.”

Thyssenkrupp Presta Danville, LLC v. TFW Indus. Supply & CNC Machine, LLC, No. 2:19-mc-50863 (E.D. Mich. Oct. 31, 2019).

California Court Finds Arbitration Agreement Invalid and Unenforceable as a Result of Economic Duress and Undue Influence

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The plaintiff, an agricultural laborer, brought suit against his employer who, in turn, moved to compel arbitration based on the arbitration agreement in the parties’ employment contract. The plaintiff opposed, successfully arguing that the arbitration agreement should not be enforced because of economic duress and undue influence.

The court found that all the elements of economic duress were met: (1) a sufficiently coercive wrongful act on the part of the defendant (the arbitration agreement was provided to the plaintiff after he had arrived in California and living in employer-controlled housing); (2) no reasonable alternative on the part of the plaintiff (the plaintiff was in possession of an H-2A visa obtained with the help of the defendants, believed he was only permitted to work for the defendants and had already begun working for the defendants); (3) knowledge of the plaintiff’s economic vulnerability (the defendants acknowledged that employees like the plaintiff often were the sole financial earners in their families); and (4) actual inducement to contract (the plaintiff was in a challenging financial situation with very few financial resources available to him, and no reasonable worker in his shoes could have refused to sign the arbitration agreement).

The court also found that a number of factors suggestive of undue influence were present. Such factors include: (1) discussion of the transaction at an unusual or inappropriate time; (2) consummation of the transaction in an unusual place; (3) insistent demand that the business be finished at once; (4) extreme emphasis on untoward consequences of delay; (5) the use of multiple persuaders by the dominant side against a single servient party; (6) absence of third-party advisers to the servient party; or (7) statements that there is no time to consult financial advisers or attorneys. Here, the plaintiff was presented with the arbitration agreement during a new-hire orientation in a hotel parking lot, at the end of the workday, where he was given no place to sit. Further, evidence was presented that the defendants made insistent demands that the signing of the contracts be completed rapidly, without time to review them, and repeatedly emphasized the negative consequences of failing to comply with the rules. Accordingly, the arbitration agreement was found to be invalid and unenforceable, and the defendants’ motion to compel arbitration was denied.

Martinez-Gonzalez v. Elkhorn Packing Co., No. 3:18-cv-05226 (N.D. Cal. Oct. 29, 2019).

Court Enforces Arbitration Agreement Incorporated Into “Notice to Employees”

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The U.S. District Court for the Northern District of Texas compelled arbitration in a putative Fair Labor Standards Act class action based on language in a “notice to employees” that put the plaintiffs on notice that they were agreeing to arbitrate claims in an incorporated (and hyperlinked) arbitration agreement. The court also rejected various other defenses to arbitration raised by the plaintiffs in an attempt to avoid arbitration.

Cotton Patch Café LLC, a restaurant chain, hired Ian Norred to be a server when he was 17 years old. Cotton Patch also hired Rain Bennett when she was 18 years old. Norred and Bennett signed an electronic document titled “Notice to Employees” that contained a section titled “Arbitration Acknowledgment, Safety Pledge and Receipt” and another section titled “Agreement to Arbitrate.” The latter section provided, among other things: “I agree to use binding arbitration, instead of going to court, for any claims, including any claims now in existence or that may exist in the future” against Cotton Patch. It also referred Norred and Bennett to a hyperlink that read “View Agreement” where they could read the full arbitration agreement. The notice to employees also stated: “By my signature below, I acknowledge that I have received and read (or had the opportunity to read the … [a]rbitration [a]greement. …”

Norred sued Cotton Patch claiming that it had violated the Fair Labor Standards Act by not adequately compensating him and other similarly situated employees. Bennett joined Norred’s suit. Cotton Patch responded by seeking to invoke the arbitration provision. Norred and Bennett claimed that they were unaware of the terms of the agreement and could not have assented to them (because the terms were not in the notice to employees and were accessible by hyperlink). They also claimed that there was no valid agreement to arbitrate because the notice to employees did not indicate that Cotton Patch had offered consideration in exchange for the arbitration clause.

Applying Texas contract law, the Northern District of Texas concluded that a valid contract existed and that the contract included the notice to employees and arbitration agreement. The notice to employees contained sufficient language to incorporate the arbitration agreement by reference. The notice to employees was also clear on that point. The arbitration agreement was also supported by mutual consideration and was mutual, requiring all parties to arbitrate.

The court also rejected Norred and Bennett’s defenses. Norred and Bennett argued, among other things, that the contract was illusory because the agreement to arbitrate was unilateral and because Cotton Patch could unilaterally terminate the agreement. The court rejected that argument, noting that the agreement was mutual and Cotton Patch’s power to terminate the agreement did not apply to claims prior to termination. The court also rejected the argument that the language in the agreement established that it applied only to current employees (Norred and Bennett had previously stopped working at Cotton Patch.) Notably, the court rejected Norred’s argument that he was not bound by the agreement because he signed it while he was underage. Although it was true that a minor could repudiate a contract, he had to do so within a reasonable time after turning 18, which Norred did not do in this case. Finally, the court concluded that the agreement between Cotton Patch and Norred and Bennett was not unconscionable.

Norred v. Cotton Patch Café, LLC, No. 3:19-cv-01010 (N.D. Tex. Oct. 22, 2019).

Texas Magistrate Denies Motion for Attorneys’ Fees Incurred in Seeking Confirmation of Arbitration Award

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The plaintiff successfully confirmed an arbitration award concerning certain franchise agreements and then sought attorneys’ fees and costs incurred in connection with its confirmation action based on the attorneys’ fees provision in the franchise agreements. The defendants opposed because the arbitrator had already issued a final award awarding attorneys’ fees and costs in the arbitration.

The franchise agreement provided that if either party instituted arbitration and prevailed against the other party based entirely or in part on the terms of the franchise agreement, the prevailing party shall be entitled to recover from the losing party, in addition to any judgment, reasonable attorneys’ fees and arbitration costs. The magistrate judge found that, by its plain terms, the fee provision did not expressly authorize the court to award attorneys’ fees for enforcing an arbitration award.

Furthermore, where an arbitration award includes an award of attorneys’ fees – which it did here – a trial court may not award additional attorneys’ fees for enforcing or appealing the confirmation of the award unless the arbitration agreement provides otherwise.

Stockade Franchising, LP v. Kelly Rest. Grp., LLC, No. 1:18-cv-00918 (W.D. Tex. Oct. 24, 2019).