Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

Fifth Circuit Holds Propriety of Class Arbitration Is “Gateway” Issue for Courts

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The Fifth Circuit has joined a number of other circuits and concluded that whether class arbitration is appropriate under the terms of a particular arbitration agreement is a “gateway” issue to be decided by courts, not an arbitrator, absent “clear and unmistakable” language to the contrary.

The court further concluded that there was no “clear and unmistakable” language allowing an arbitrator to rule on the propriety of class arbitration in the agreement before it.

20/20 Communications Inc. employs a number of field sales managers. It requires them to sign an arbitration agreement that bars class arbitration. Several sales managers initiated arbitration and sought to assert class claims. 20/20 filed a declaratory judgment action seeking a declaration that class claims were barred under the agreement. While that action was pending, however, an arbitrator concluded that the class arbitration bar was unenforceable under the National Labor Relations Act. 20/20 filed a separate action seeking to vacate that ruling. The district court denied 20/20’s request and confirmed the arbitrator’s ruling. The district court in 20/20’s declaratory judgment action subsequently concluded that the arbitration agreement at issue authorized arbitrators, not the courts, to determine the propriety of class arbitration.

The Fifth Circuit consolidated 20/20’s appeals from both rulings against it. The court first held that whether an agreement allows or prohibits class arbitration is a threshold/”gateway” issue for courts to decide unless the arbitration agreement “clearly and unmistakably” provides that the issue is for an arbitrator to decide. The Fifth Circuit noted that this conclusion was consistent with the conclusion reached by every other circuit court (the 4th, 6th, 7th, 8th, 9th, and 11th Circuits) to consider the issue. Turning to the agreement at issue, the Fifth Circuit concluded that the arbitration agreement did not clearly and unmistakably allow the arbitrator to determine the propriety of class arbitration. The agreement “prohibit[ed] class arbitrations to the maximum extent permitted by law,” and it made no sense for the parties to have included such language yet at the same time mean for the arbitrator to decide whether he could hear class claims. The court also rejected the claim that various provisions that vested arbitrators with broad and general powers allowed them to adjudicate whether class arbitration was allowed. Those provisions did not include “the requisite clear and unmistakable language that arbitrators, rather than courts, shall decide questions of class arbitrability.” Thus, the court reversed and vacated the judgments of the district court.

20/20 Commc’ns, Inc. v. Crawford, No. 18-10260 (5th Cir. July 22, 2019) (consolidated with 20/20 Commc’ns, Inc. v. Blevins, No. 19-10050).

Maryland Federal Court Denies Untimely Request to Vacate Arbitration Award

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Pursuant to the FAA, a motion to vacate, modify, or correct an arbitration award must be served within three months after the award is filed or delivered. 9 U.S.C. § 12. Thus, a Maryland federal court held that the defendants’ request, via its answer on August 27, 2018, to vacate an arbitration award issued on January 31, 2018, was untimely.

The court also rejected the defendants’ argument that there was a genuine dispute of material fact regarding the existence of the franchise agreement based on the date of the subject franchise agreement referenced in the plaintiff’s papers. The defendants admitted that they entered into the franchise agreement attached to the plaintiff’s motion for summary judgment to confirm the arbitration award. The agreement contained the arbitration clause underlying their dispute. Thus, the court held that the “[p]laintiff’s failure to reference the accurate franchise agreement date in both their application to confirm arbitration award and motion for summary judgment does not create a genuine issue of material fact regarding the franchise agreement’s existence.”

Choice Hotels Int’l, Inc. v. Gopi Hosp., LLC, No. 8:18-cv-01680 (D. Md. July 18, 2019).

SDNY Dismisses Captive Reinsurer’s Counterclaims, Finding Reinsurance Agreement Never Rescinded and Cedent’s Duty to Cede Premiums Never Arose

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The Southern District of New York granted a ceding insurer’s motion to dismiss certain counterclaims by a defendant-reinsurer, finding their reinsurance agreement was never rescinded and that the cedent adequately performed. The decision arose from a captive reinsurance agreement between Employers HR, an entity that provides outsourced insurance to the employees of temporary staffing agencies, and AmTrust North America, the ceding insurer that issued that insurance. As part of the agreement, AmTrust would reinsure the policies it issued with the defendant, Signify Insurance Ltd., a captive reinsurer created by Employers HR. The agreement required Signify to post collateral securing its reinsurance obligations, while AmTrust was required to cede certain premiums to Signify. Upon learning that Signify had not posted the required collateral, AmTrust wrote to Signify demanding that it do so in full within 30 days, otherwise it would terminate the agreement from inception. Signify posted a substantial portion of the security two days later and then wrote to AmTrust advising that it was “accepting” its termination of the agreement. The next day, however, AmTrust withdrew its intention to terminate and demanded that Signify provide all remaining collateral.

AmTrust subsequently filed this action alleging breach of contract and seeking a declaration that Signify is required to maintain its security obligations. In its counterclaims, Signify argued, among other things, that AmTrust terminated the agreement from inception or, in the alternative, that the court should rescind the agreement. AmTrust moved to dismiss Signify’s first two counterclaims, while Signify moved to dismiss the complaint in its entirety. The court granted AmTrust’s motion and denied Signify’s.

As an initial matter, the court rejected Signify’s argument that AmTrust unilaterally rescinded the agreement by demanding that Signify post all collateral within 30 days, finding a reasonable person would have understood the letter to be no more than a request to cure. The court held that AmTrust’s letter was insufficient to rescind the reinsurance agreement by itself. Signify’s “mutual rescission” theory was also rejected. Although Signify argued it had “accepted” AmTrust’s “offer” to rescind, the court found no such offer was ever made. The court observed that AmTrust merely threatened to rescind in the event Signify failed to cure its breach and that AmTrust had maintained total discretion to rescind regardless of Signify’s consent. Finally, the court rejected Signify’s claim that AmTrust failed to perform under the agreement by, among other things, failing to cede required premiums. While acknowledging AmTrust’s obligation to cede “gross ceded premium” and to remit “net ceded premium,” the court found that these duties were only triggered by a series of events, including AmTrust’s receipt of bank confirmation that Signify increased its collateral to required levels. Because Signify did not allege that it ever posted that collateral, the court held that AmTrust’s duty to cede premiums to Signify never arose.

AmTrust N. Am., Inc. ex rel. Tech. Ins. Co. & Sec. Nat’l Ins. Co. v. Signify Ins. Ltd., No. 1:18-cv-03779, 2019 WL 3034891 (S.D.N.Y. July 11, 2019).

Ninth Circuit Affirmed That Non-Signatories Could Invoke Arbitration Clause Under Arizona Law

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The U.S. Court of Appeals for the Ninth Circuit held that the district court did not err by allowing non-signatories Jess Smith & Sons Cotton LLC (JSS) and J.G. Boswell Co. to invoke the arbitration clause in a license agreement between Tradeline Enterprises Pvt. Ltd. and the Supima Association of America. The court explained that state law controls whether federal courts may enforce arbitration agreements against signatories at the request of non-signatories. Arizona law controlled in this case. Pursuant to Arizona law, “a non-signatory may compel arbitration with a signatory to an arbitration agreement if the claims at issue are ‘intimately founded in and intertwined with the underlying contract obligations.'” The complaint filed by Tradeline alleged that JSS and Boswell caused Supima to breach and wrongfully terminate the license agreement. Therefore, the claims raised in the complaint were “intertwined” with Tradeline’s license agreement with Supima.

Tradeline Enters. Pvt. Ltd. v. Jess Smith & Sons Cotton, LLC, No. 18-56101 (9th Cir. July 2, 2019).

Ninth Circuit Binds Plaintiff to Arbitration Clause It Never Received, Finding Clause Was “Readily Available” and Incorporated by Reference Into Purchase Order

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The Ninth Circuit affirmed an order granting a motion to compel arbitration and to dismiss, finding that a purchase order issued by the plaintiff to purchase goods from the defendant incorporated a binding arbitration clause encompassing the parties’ dispute. The arbitration clause was contained in terms and conditions expressly incorporated by reference into the defendant’s initial quotation. The plaintiff argued that it never received the terms and conditions — only the quotation — and thus that it could not have agreed to arbitrate. The Ninth Circuit disagreed, finding that the arbitration clause became part of the contract because the terms and conditions were “readily available” to the plaintiff, and the plaintiff therefore “acquiesced” to the arbitration provision by failing to reject it upon issuing its purchase order. The court also rejected the plaintiff’s argument that the arbitration clause was unconscionable, finding that the parties were both business entities with equal bargaining power and that they negotiated their agreement for months. The plaintiff’s final argument that the defendant waived its right to arbitrate was similarly rejected. The court held that the plaintiff failed to carry its “heavy burden” of showing that the defendant acted inconsistently with a known right to compel arbitration and that the plaintiff was prejudiced as a result.

Cunico Corp. v. Custom Alloy Corp., No. 18-55047, 2019 WL 2895148 (9th Cir. July 3, 2019).