Reinsurance Focus

The Southern District of New York denied class certification to a group of plaintiffs seeking to collectively sue a group of insurers over purported regulatory approval violations regarding workers’ compensation policies. The court concluded that class adjudication was not the superior method of litigation, in part because of the significant recovery purportedly available to each of the approximately 220 members of the prospective class.

A number of New York employers filed a putative class action alleging that several insurers from whom they purchased workers’ compensation policies had violated New York law requiring regulatory approval of, among other things, rates. Specifically, the plaintiffs claimed that the insurers sold them guaranteed cost policies that were properly approved by New York’s Department of Financial Services but later entered into “reinsurance participation agreements” with the plaintiffs that were not approved by the Department and that effectively converted the guaranteed cost policies to “quasi retrospective rating plans.” In essence, the plaintiffs alleged that the insurers converted the plans from fixed premium plans to variable premium plans that created the possibility that the employers would have to pay more for coverage.

The plaintiffs sought to certify a class of New York employers who were charged more for premiums as a result of the “reinsurance participation agreements.” The putative class purportedly encompassed some 220 class members collectively owed $62 million. Approximately a dozen of those class members had already initiated their own actions. In addition, the defendant insurers noted that all of the putative class members had agreed to forum-selection clauses agreeing to litigate disputes regarding the policies in Nebraska and/or class action waivers.

The district court denied class certification after concluding that the plaintiffs had failed to establish that a class action was the superior method of litigation under Rule 23(b)(3).

Under the first factor considered under Rule 23(b)(3) — whether class members have a strong interest in individually controlling the litigation — the court concluded that the individual plaintiffs had a strong interest in individually litigating this case. The value of the case per plaintiff was high ($62 million for 220 plaintiffs), and several of the plaintiffs had already initiated individual litigation. This was not a prototypical class action in which individual litigation was precluded because the cost of litigation far exceeded the value to individual plaintiffs.

Turning to the second factor — whether members of the class had already brought suit — the court reiterated that a dozen plaintiffs were pursuing individual actions and arbitrations.

With respect to the third factor — the desirability of concentrating the litigation in a particular forum — the court noted that there was some appeal to concentrating the litigation in New York because the plaintiffs were New York businesses, but the existence of Nebraska forum-selection clauses and class action waivers precluded a finding that New York was desirable.

Finally, the court concluded that the fourth factor — the manageability of a class action — weighed against certification because of the 12 individual actions, the class action waivers, and the forum-selection clauses. The court would be required to make individual determinations as to which individual actions to enjoin and which plaintiffs could remain part of the class.

In closing, the court once again emphasized that the significant potential recovery available to each plaintiff rendered a class action unnecessary in light of the above factors.

The court therefore denied the plaintiffs’ motion to certify their class.

Nat’l Convention Servs., LLC v. Applied Underwriters Captive Risk Assurance Co., No. 1:15-cv-07063 (S.D.N.Y. July 27, 2019).

The Ninth Circuit has concluded that a defendant in a putative class action waived its right to compel arbitration after sitting on that right for nearly a year while it sought adjudication of a merits-based dispositive motion to dismiss in the Northern District of California.

June Newirth and several other named plaintiffs filed a putative class action against Aegis Senior Communities LLC, the operator of the senior living communities in which they resided. The plaintiffs claimed that Aegis defrauded seniors by falsely representing that staffing levels were based on the needs of residents when staffing was in fact determined by budget considerations.

The agreements between the plaintiffs and Aegis contained an arbitration clause requiring the parties to arbitrate “any legal claim or civil action arising out of or relating to care or services provided” by Aegis. Aegis removed the plaintiffs’ action to federal court and filed a motion to compel arbitration and a motion to dismiss. Aegis subsequently withdrew its motion to compel arbitration, however. Over the course of the next year, the parties engaged in discovery, mediation, and litigated a motion to dismiss filed by Aegis on the merits of several of the plaintiffs’ claims.

The district court denied Aegis’ motion to dismiss. Aegis then filed a new motion to compel arbitration. By then, nearly a year had passed since Aegis’ original motion to compel.

The district court denied Aegis’ new motion to compel arbitration. The court concluded that Aegis had waived its right to seek to compel arbitration. Aegis appealed that decision.

The Ninth Circuit affirmed. The court noted that arbitration agreements are subject to general contract principles, including waiver, but that waiver of an arbitration clause is not favored and a party seeking to establish such a waiver bears a heavy burden of proof. The court also explained that the question whether a right to arbitrate has been waived is subject to a federal law standard that requires the party claiming waiver to establish: “(1) knowledge of an existing right to compel arbitration; (2) intentional acts inconsistent with that existing right; and (3) prejudice to the person opposing arbitration from such inconsistent acts.”

The first requirement — knowledge of a right to compel arbitration — was not at issue in this case. Aegis had moved to compel arbitration when the case was filed; it knew it had a right.

With respect to the second requirement — that Aegis had to engage in acts inconsistent with its right to compel — the Ninth Circuit looked to the totality of Aegis’ actions to determine whether Aegis “(1) ma[de] an intentional decision not to move to compel arbitration and (2) actively litigate[d] the merits of a case for a prolonged period of time in order to take advantage of being in court.” After surveying its case law applying that test, the court concluded that “Aegis took actions inconsistent with its known right to arbitrate” by filing and withdrawing its initial motion to compel and actively litigated the case by filing a motion to dismiss for failure to state a claim, which sought dismissal with prejudice on a key merits issue. (The court noted, however, that seeking to avoid or frustrate litigation, by, for example, opposing discovery or filing a motion to dismiss on a non-merits issue, is insufficient to avail oneself of the judicial forum.) (Aegis did not argue that the factual issue regarding one of the named plaintiffs affected Aegis’ knowledge of its ability to compel arbitration under the first factor described above. Aegis clearly knew it could compel arbitration with respect to the other plaintiffs, but it apparently elected not to do so at least in part because it originally mistakenly believed it would still have had to litigate the class action in federal court because of the named plaintiff who it thought had not agreed to arbitrate.)

The Ninth Circuit rejected Aegis’ various arguments regarding its acts that were inconsistent with its right to arbitrate, including: (1) Aegis never expressly waived its right to compel arbitration (a party can impliedly waive a right); (2) Aegis filed a motion to compel (but Aegis withdrew that motion); (3) Aegis engaged in the minimum amount of litigation necessary to comply with court rules and orders (Aegis failed to renew its motion until after an adverse judgment, had sought a judgment on a merits issue, and failed to avail itself of rules allowing relief from case management and discovery obligations); and (4) Aegis mistakenly believed that one of the named plaintiffs had not signed an arbitration agreement (the record established that Aegis had learned that the plaintiff in question had signed such an agreement more than seven months before Aegis ultimately renewed its motion to compel arbitration).

Turning to the third and final requirement — prejudice to the opposing party — the Ninth Circuit concluded that the plaintiffs had been prejudiced by having to defend against Aegis’ motion to dismiss. That was a merits-based issue that the plaintiffs had been forced to address by Aegis’ decision to file a dispositive merits-based motion. The court noted, however, that the plaintiffs had not been prejudiced by issues directly related to their decision to file an action instead of seeking arbitration, including participating in discovery and conferring about mediation, etc.

While the court recognized that a party seeking to establish waiver of an arbitration clause faces a heavy burden, the Ninth Circuit concluded that burden was satisfied in this case.

Newirth v. Aegis Senior Cmtys., LLC, 931 F.3d 935 (9th Cir. July 24, 2019).

Three Brothers Trading LLC d/b/a Alternative Execution Group (AEXG) and Generex Biotechnology Corp. entered into a contract whereby AEXG would secure investors for Generex’s business and, in exchange, Generex would pay AEXG a percentage of the funds received by any investor AEXG had referred. The contract included a “sixty-day ‘No Shop’ exclusivity provision,” which barred Generex from entering “into any financing transaction other than with existing shareholders” or with investors referred by AEXG. The contract required any disputes to be resolved through arbitration. Generex allegedly breached the contract by entering into a financial transaction with a party who was not referred by AEXG. AEXG commenced an arbitration.

The arbitrator determined that Generex violated the no-shop provision and awarded four separate awards to AEXG. AEXG brought a petition to confirm the award, and Generex in turn brought a motion to modify, vacate, and remand the award.

The court explained that it “uses an extremely deferential standard of review for arbitral awards.” However, an award may be remanded to the arbitrator if the “award is incomplete or ambiguous” and the court “is unable to discern how to enforce it.” Pursuant to 9 U.S.C. § 11, remand should not be granted when the court can resolve any alleged ambiguities in the award by modification. The court held that the terms of the second award were ambiguous as there were several interpretations of the award that yielded very different outcomes for the parties. As such, the court was unable to modify the award and remanded the case to the arbitrator for clarification.

Three Bros. Trading, LLC v. Generex Biotechnology Corp., No. 1:18-cv-11585 (S.D.N.Y. July 31, 2019).