Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

Second Circuit Holds That Refusal to Enjoin Arbitration Is Immediately Appealable, Clarifies Standard for Obtaining Preliminary Injunction Enjoining Arbitration

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The Second Circuit Court of Appeals recently held that a district court’s refusal to enjoin arbitration was immediately appealable because the arbitration agreement was governed by state law rather than the Federal Arbitration Act. The Second Circuit went on to clarify the standard for obtaining a preliminary injunction enjoining arbitration and remanded the case for a determination of whether that standard was met.

The Resource Group International Ltd. (TRGI) and related entities and TRGI’s chairman and director, Muhammad Ziaullah Khan Chishti, entered into a preferred stock purchase agreement with several other entities. The agreement contained an arbitration clause that provided for arbitration in accordance with “the Uniform Arbitration Act as in effect in the State of New York.” Chishti subsequently resigned from TRGI and executed a release agreement with the entities who had signed the stock purchase agreement. The release agreement contained (1) a forum-selection clause designating the state and federal courts in New York as the “exclusive jurisdiction” for any litigation between the parties and (2) a merger clause stating that the release agreement constituted the “entire agreement” between the parties and that it “supersede[d] all prior arrangements or understandings.” The release agreement required Chishti to refrain from commencing litigation or other proceedings against TRGI and others.

Chishti subsequently initiated arbitration against TRGI claiming that TRGI had breached the stock purchase agreement. TRGI then filed suit in the Southern District of New York claiming that Chishti had breached the release agreement. TRGI sought a declaratory judgment that the release agreement superseded the stock purchase agreement’s arbitration provisions and a temporary restraining order and a preliminary injunction staying the arbitration proceedings. The district court denied the preliminary injunction, concluding that TRGI had not shown irreparable harm or a likelihood of success. TRGI appealed.

The Second Circuit first concluded that it had jurisdiction to consider TRGI’s interlocutory appeal. Although Section 16 of the FAA precludes appeals from interlocutory orders refusing to enjoin arbitration subject to the FAA, the Second Circuit explained that the parties to the stock purchase agreement “opted out of the FAA and expressly elected New York state law to govern any arbitration.” New York law allowed for interlocutory appeals from orders refusing to enjoin arbitration.

Turning to the merits, the Second Circuit held that the release agreement did in fact supersede the stock purchase agreement and that TRGI was likely to succeed on its claim on that point. The release agreement also made clear, however, that at least some claims could be arbitrable. The Second Circuit therefore remanded the case to determine whether the instant claims were arbitrable under the release agreement. The Second Circuit also explained that “forced arbitration of inarbitrable claims may constitute irreparable harm when the arbitration is one for which any award would not be enforceable and for which the time and resources expended in arbitration is not compensable by any monetary award of attorneys’ fees or damages.” The Second Circuit instructed the district court to consider that standard on remand.

Resource Group International Ltd. v. Chishti, No. 23-286 (2d Cir. Jan. 22, 2024).

Eleventh Circuit Dismisses Appeal From Order Compelling Arbitration and Staying Case for Lack of Jurisdiction

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The Eleventh Circuit Court of Appeals dismissed, sua sponte, a district court order that granted defendant Trina Solar (U.S.) Inc.’s motion to compel arbitration and stay the underlying case. The court did not address the facts of the case in its per curiam opinion, other than to note the dismissal and closure of the case would not impact the merits of the litigants’ claims. Without discussion, the court based its dismissal on 9 U.S.C. § 16(b)(1)–(3), and the precedent cited in its opinion confirming “[a]n appeal may not be taken from an interlocutory order that compels arbitration and stays, rather than dismisses, the action.” The court noted the district court order that the plaintiff sought to appeal “stayed, rather than dismissed, the case and expressly contemplated further proceedings.” The court dismissed the appeal, concluding it lacked jurisdiction to consider the underlying order compelling arbitration and staying the case.

Allco Finance Limited Inc. v. Trina Solar (U.S.) Inc., No. 23-13968 (11th Cir. Jan. 11, 2024).

Court Holds Federal Law Governs FAA Arbitration Dispute Related to Surplus Lines Insurance Contract, Compels Arbitration Under Fifth Circuit Preemption of State Law

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Harbor Homeowner’s Association Inc. sued its insurers in Louisiana state court seeking to recover damages allegedly caused by the insurers’ failure to pay claims related to Hurricane Ida. The insurers removed to federal court, arguing that the action related to an arbitration agreement falling under the Federal Arbitration Act (FAA) and the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention), and filed a motion to compel arbitration.

The plaintiff argued in response that arbitration provisions in surplus lines insurance contracts are not enforceable under Louisiana law. The plaintiff also argued that, because the policy included a choice-of-law provision selecting New York law, the court should follow Second Circuit precedent holding that, pursuant to the McCarran-Ferguson Act, the New York Convention did not preempt contrary state law.

The court disagreed, noting that arbitrability under the FAA is a question of federal law, not state law, whereas a choice-of-law clause in an insurance policy provides the substantive insurance law applicable to the contract. As such, the choice-of-law clause did not bear on the arbitrability of the dispute.  Moreover, the court noted that “application of New York state law does not entail application of Second Circuit federal law simply because New York sits within the Second Circuit; a Second Circuit case construing federal law is not New York state law.”

Based on the above, the court found that it was constrained to follow Fifth Circuit precedent holding that the New York Convention preempts contradictory state law, including Louisiana law prohibiting the enforcement of arbitration provisions in insurance contracts, and ordered the parties to arbitrate their dispute.

Harbor Homeowner’s Association, Inc. v. Certain Underwriters at Lloyd’s London, No. 2:23-cv-05043 (E.D. La. Jan. 12, 2024).

Ninth Circuit Reverses Order Denying Motion to Compel Arbitration, Concluding “Delegation Provision” Is Enforceable

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Noting the court was deciding, as a matter of first impression, “what a party must do to specifically challenge a delegation provision and what a court may consider when evaluating this challenge,” the Ninth Circuit Court of Appeals, in Bielski v. Coinbase Inc., reversed a district court order that denied defendant Coinbase’s motion to compel arbitration.

Coinbase is an online cryptocurrency exchange. Plaintiff Abraham Bielski maintained an account, or “digital wallet,” with Coinbase that allowed him to store and transfer cryptocurrency in and out of his account. Before opening his account, Bielski was required to accept Coinbase’s user agreement, which included a three-step process to resolve any disputes: (i) an “informal complaint process,” which involved contacting Coinbase and attempting to resolve the dispute amicably; (ii) a “formal complaint process” involving a written complaint; and (iii) arbitration of the dispute pursuant to an arbitration agreement. The arbitration agreement included a “delegation provision” providing that disputes arising out of the agreement including the “enforceability, revocability, scope, or validity” of the agreement were delegated to the arbitrator.

Shortly after opening his account, a dispute arose involving an unauthorized transfer from Bielski’s digital wallet. Bielski “live chatted” with company representatives, called the company hotline, and wrote two letters requesting help to recover his funds. He then filed a lawsuit under the Electronic Fund Transfer Act and Regulation E alleging Coinbase failed to investigate the unauthorized transfer of funds from his account. Coinbase moved to compel arbitration of the claims under the user agreement. The district court denied the motion to compel concluding the arbitration agreement and the delegation provision were “inseverable” and unconscionable.

On appeal, Bielski argued that the delegation provision and the arbitration agreement were unconscionable and unenforceable. The court first addressed what a party must do to challenge a delegation provision, and what a court may consider in evaluating the challenge. Coinbase argued on appeal that Bielski did not do enough to challenge the delegation provision. The court rejected this argument, concluding that by specifically objecting to the delegation provision in his opposition to the motion to compel, Bielski sufficiently challenged the provision. The court noted its approach was consistent with decisions in the Second, Third, and Fourth Circuits, but contrary to the approach in the Sixth and Eleventh Circuits, which require a party to provide “more substance in their delegation provision challenge.” The court then addressed what a court may consider in evaluating the challenge, concluding that “a court must be able to interpret that provision in the context of the agreement as a whole, which may require examining the underlying arbitration agreement as well.” Finally, the court rejected Bielski’s argument that the delegation provision was unconscionable, held that the district court erred in refusing to enforce the delegation provision, and reversed the order denying Coinbase’s motion to compel arbitration.

Bielski v. Coinbase, Inc., No. 22-15566 (9th Cir. Dec. 5, 2023).

Third Circuit Affirms Order Denying Motion to Compel Arbitration After AAA Declines to Administer Arbitration

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The Third Circuit Court of Appeals has affirmed a district court decision denying defendant MicroBilt Corp.’s motion to compel arbitration, finding the plaintiff had fully complied with all provisions of her arbitration agreement with MicroBilt.

In connection with a loan plaintiff Maria Del Rosario Hernandez applied for in 2020, the lender utilized a product offered by MicroBilt, referred to as an “instant bank verification report,” which allowed the lender to verify Hernandez’s identity and financial information. The verification report included information for other persons with the Hernandez name, including a person who was on a government watch list that caused the lender to deny Hernandez’s loan application.

After Hernandez filed a lawsuit alleging MicroBilt violated the Fair Credit Reporting Act, MicroBilt filed a motion to compel arbitration, relying on an arbitration provision that was part of the loan application process. The arbitration provision included an “exclusive resolution” clause, which required that any disputes or claims be resolved exclusively by binding arbitration. The arbitration provision also stated the arbitration would be conducted by a single arbitrator in accordance with AAA rules, punitive and consequential damages were not recoverable, and each party would be responsible for its own attorneys’ fees. Hernandez dismissed her lawsuit and submitted the claim to the AAA. Treating the matter as a “consumer agreement” under the AAA Consumer Arbitration Rules, the AAA administrator assigned to the matter notified MicroBilt that the damages limitation included in the arbitration provision conflicted with Principle 14 of the consumer due process protocol of the rules, which requires that an arbitrator “should be empowered to grant whatever relief would be available in court under law or equity.” MicroBilt refused to waive the damages limitation and the AAA declined to administer the arbitration under Rule 1(d). Hernandez then reinstated her claims in the district court and MicroBilt moved to compel arbitration. The district court denied the motion to compel, finding Hernandez had fully complied with the arbitration provision.

In affirming the district court’s denial of the motion to compel, the Third Circuit recognized the arbitration provision covered Hernandez’s claims but noted that under 9 U.S.C. § 4, it “may compel arbitration only where there is a ‘failure, neglect, or refusal … to arbitrate under a written agreement.’” The court found the district court’s denial of MicroBilt’s motion was correct because Hernandez was in full compliance with the relevant arbitration provisions. As a result, the court concluded it lacked authority under section 4 to compel arbitration. The court also rejected MicroBilt’s argument that the AAA administrator’s requirement that MicroBilt waive the damages limitation was an “arbitrability” issue that should have been resolved by the arbitrator. The court found that, under Consumer Rule 14(a), arbitrators have the exclusive power to rule on “the existence, scope, or validity” of an arbitration provision, and the administrator’s decision to dismiss the arbitration did not implicate any of those issues. The court also rejected MicroBilt’s argument that the “exclusive resolution” clause of the arbitration provision conflicts with Hernandez pursuing her claims in court. The court noted that Hernandez has fully complied with the AAA rules, and “[s]everal courts have allowed plaintiffs to return to court after administrative dismissals under Rule 1(d), despite general agreements to arbitrate.” The court affirmed the district court’s decision denying defendant MicroBilt’s motion to compel arbitration.

Hernandez v. MicroBilt Corp., No. 22-3135 (3d Cir. Dec. 5, 2023).