Reinsurance Focus

The plaintiffs brought a class action suit against Extra Space Storage Inc. for false advertising, unfair competition, and violation of the California Consumers Legal Remedies Act. After the case was removed to the U.S. District Court for the Northern District of California, Extra Space moved to compel arbitration based on the rental agreements signed by the class members. The plaintiffs argued that the arbitration provision, which stated that a signatory “will only pursue arbitration on an individual basis and will not pursue arbitration or any other claim on a class-wide, representative, or consolidated basis,” violated California’s McGill rule. The McGill rule provides that a contractual agreement purporting to waive a party’s right to seek public injunctive relief in any forum is unenforceable. The court granted Extra Space’s motion and explained that arbitration provision did not violate the McGill rule because it does not prevent an arbitrator from awarding injunctive relief at large. The court further explained that an action seeking public injunctive relief is not a “representative action.”

Ionescu v. Extra Space Storage Inc., No. 4:19-cv-02226 (N.D. Cal. Aug. 23, 2019).

Taunia Kittler, through Galilea LLC, owned a 60-foot sailing yacht named Galilea. In June 2015, the Galilea crashed off the coast of Panama and was deemed a complete loss. Kittler and Galilea LLC sought insurance coverage from the insurer-defendants, which denied the claim on the ground that the accident had occurred outside the covered cruising area. The insurers then commenced arbitration against Galilea in New York.

In June 2018, while the arbitration was pending, Kittler and Galilea commenced a separate action in Montana federal court, asserting claims that were identical to the counterclaims they asserted in the arbitration proceeding. The insurers moved to dismiss and/or stay the case pending final resolution of the arbitration, and, in March 2019, certain of Kittler and Galilea’s claims were dismissed. The remainder of the insurers’ motion was referred to the magistrate judge for resolution. One month later, the arbitrators issued an award in favor of the insurers, finding that Kittler and Galilea were not entitled to coverage for the Galilea wreckage. In June 2019, while the insurers’ motion to dismiss and/or stay was still pending, Kittler and Galilea moved to vacate the arbitration award in the Southern District of New York.

In the most recent development, the Montana district court agreed with the insurers to stay the case pending the outcome of Kittler and Galilea’s motion to vacate the arbitration award. Because Kittler and Galilea’s claims in the case were identical to those asserted in the arbitration proceeding – which was resolved against Kittler and Galilea – and because Kittler and Galilea have challenged the arbitration award, the court held that the award was not “final.” As such, it determined that a stay of the case was required, citing the “liberal federal policy favoring arbitration.” Given the significant overlap of issues, the court also noted that the case may be rendered moot by the outcome of the proceedings in the Southern District of New York, and that absent a stay of the case, any decisions therein may result in inconsistent rulings.

Galilea, LLC v. Pantaenius Am. Ltd., No. 1:18-cv-00131 (D. Mont. Aug. 26, 2019).

The plaintiff entered into a retail installment contract with New Century Auto Sales for the purchase of a used car. The contract included an arbitration provision that stated that either the plaintiff or the defendants may elect to resolve any claim by neutral, binding arbitration and not by a court action. The court explained that the Federal Arbitration Act requires courts to “rigorously enforce” arbitration agreements, but arbitration clauses are still subject to the same defenses and bars as other contract provisions. The court further explained that a party cannot be required to arbitrate if the party has not agreed to it, and the burden is on the party resisting arbitration to prove this. Here, the plaintiff acknowledged that the defendant invoked the arbitration provision and therefore the case could properly be submitted to arbitration. In view of the plaintiff’s acknowledgement, the court directed the parties to proceed to arbitration.

Chisholm v. New Century Auto Sales, Inc., No. 1:19-cv-01395 (N.D. Ohio Aug. 23, 2019).

The First Circuit recently denied an appeal from the District of Puerto Rico’s refusal to vacate an arbitration award. The dispute centered on a management services agreement containing an arbitration agreement that required binding arbitration of any disputes under the rules of the American Health Lawyers Association (AHLA). The court disagreed with each of the appellant’s asserted bases for vacatur, which included “two main baskets” of arguments that the court divided as: (1) the Puerto Rico Arbitration Act (PRAA) should have governed the arbitration, rather than the FAA alone; and (2) the arbitrator engaged in misconduct, exceeded his powers, and manifestly disregarded the law.

Regarding the PRAA, the appellant argued that the agreement’s choice-of-law provision selecting Puerto Rican substantive law constituted an explicit agreement to proceed under the PRAA. The First Circuit disagreed, citing precedent holding that “a generic choice-of-law clause, standing alone, is insufficient to support a finding that contracting parties intended to opt out of the FAA’s default regime for vacatur of arbitral awards.”

Regarding the purported errors by the arbitrator, the court quoted cases describing arbitration awards as “nearly impervious to judicial oversight.” The court determined that the alleged misconduct by the arbitrator consisted of his treatment of certain evidence. The court held that the appellant not only failed to make the required showing that the arbitrator’s alleged refusal to hear the evidence resulted in the deprivation of a fair hearing, but it was “clear from the arbitrator’s extensive and detailed findings of fact” that much of the evidence was heard and considered by the arbitrator. The court concluded that the appellant simply did not agree with the weight the arbitrator gave to the evidence, which does not justify vacatur.

The court also rejected the appellant’s contention that the arbitrator exceeded his powers by awarding attorneys’ fees and prejudgment interest in violation of Puerto Rican law. The court explained that it would harmonize the parties’ arbitration agreement and the choice-of-law provision by finding that the choice-of-law provision governed the parties’ substantive rights and duties, but did not limit the arbitrator’s authority under the arbitration rules of the AHLA, which authorized the fee and interest award.

Finally, the court turned to the appellant’s last argument that the arbitrator manifestly disregarded the law, which the court explained is based on common law, not the FAA. The court noted that the appellant bears the burden of demonstrating that the arbitrator was confronted with the correct law and then ignored it. Although the appellant presented the arbitrator with “a boatload of legal theories,” the court found that the arbitrator simply rejected those arguments, “and rejection is not ignoring” within the meaning of the manifest disregard doctrine.

Dialysis Access Ctr., LLC v. RMS Lifeline, Inc., No. 17-2014 (1st Cir. Aug. 1, 2019).