Andrew Poplinger to Speak about Virtual Arbitration and Mediation of Complex Cases for SVAMC Event

Where Advocacy Meets Business

Andrew Poplinger to Speak about Virtual Arbitration and Mediation of Complex Cases for SVAMC Event

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October 2020 – On Thursday, October 8th, Andrew Poplinger will participate in a panel discussion about “Virtual Arbitration and Mediation of Complex Cases: Lessons Learned,” hosted by The Silicon Valley Arbitration and Mediation Center (“SVAMC”). Panelists will discuss lessons learned when conducting virtual hearings, including whether it is appropriate to mandate virtual hearings, how to test witness credibility, best practices for ensuring confidentiality and security, time management techniques, overcoming technology challenges, and the continuing role of virtual platforms post-pandemic.

The webinar will begin at 3:00pm EST. Registration is available here.

SVAMC is a non-profit foundation based in Palo Alto, California that promotes efficient technology dispute resolution, including advancing the use of arbitration and mediation in technology and technology-related business disputes in Silicon Valley, throughout the U.S. and around the world.

Chaffetz Lindsey is a sponsor of this event.

Court of Int’l Trade Issues Favorable Decision for JSW Steel in Commerce Dept’s Tariff Exemption Process

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August 2020 – Law360 reported on a recent decision from the Court of International Trade in favor of Chaffetz Lindsey’s client, JSW Steel (USA).  In the first court decision addressing exemptions from the President’s 25% tariff on steel imports, the Court found that the Commerce Department’s decisions denying JSW exemption from the tariffs violated the Administrative Procedure Act, because Commerce’s decisions “are devoid of explanation and frustrate judicial review,”  and because of “defects in the record and Commerce’s failure to engage with record evidence.”

The Court remanded the matter to the agency for reconsideration. The Court denied JSW’s request for discovery “at this juncture” concerning ex parte communications between the Commerce officials and representatives of U.S. Steel, Nucor and AK Steel, who objected to JSW’s exclusion requests.  However, the Court ordered Commerce to “certify” whether it directly or indirectly considered those ex parte communications in denying JSW’s exclusion requests.  The Court also directed that, if Commerce claims it did not consider these ex parte communications, it must explain to the Court “how it determined that the discussions at these meetings with the objectors were not directly or indirectly considered in its decisions.”  The Commerce Department must provide this certification by August 17, 2020.

The Chaffetz Lindsey team included Sandy Litvack, Drew Poplinger, R. Matthew Burke, Gerard Bifulco and Oslen Grant.  The Law360 article is available here, though a subscription might be required for access.

 

 

SDNY Rules in Favor of Chaffetz Lindsey Client The Insurance Company of the State of Pennsylvania

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July 2020 – Chaffetz Lindsey client, AIG insurer The Insurance Company of the State of Pennsylvania (ICSOP), recently won summary judgment on its claims for reinsurance coverage for payments to Dole Food Company related to environmental liabilities going back to the 1960s.  Manhattan federal judge Laura Taylor Swain issued the ruling.

Judge Swain ruled Thursday that London-based reinsurer Equitas Insurance Ltd. must cover a $7.25 million share of ICSOP’s $20 million payment to Dole under a three-year umbrella policy issued for 1968-1971.  ICSOP made the payment to cover claims stemming from homeowners’ claims for alleged environmental pollution at a California housing tract developed by a Dole subsidiary in the 1960s on land previously occupied by an oil tank farm.  ICSOP had purchased two facultative reinsurance policies covering the umbrella policy from Equitas’s predecessors, underwriters at Lloyd’s of London.  ICSOP paid the full limit under the umbrella policy towards Dole’s liability for 44 years of continuous pollution after Dole sought coverage under the “all sums” doctrine, which allows a policyholder to recover up to the full policy limits under any policy issued during the period of contamination.  Dole’s other policies contained pollution exclusions barring coverage.

Equitas denied ICSOP’s reinsurance claims, arguing that under applicable English law, it was under no obligation to honor ICSOP’s settlement with Dole because English law does not recognize the all sums doctrine, and the reinsurance policies therefore could only cover losses actually occurring within the three-year policy period.

Judge Swain granted ICSOP’s motion for summary judgment, and denied Equitas’s cross-motion, accepting Chaffetz Lindsey’s argument that, under the English principle of “back-to-back coverage,” the reinsurance coverage was coextensive with the coverage under the ICSOP policy.  Because the all sums doctrine applied to the ICSOP policy under its governing Hawaii law, it also applied to the reinsurance policies.  Judge Swain held that, “[t]he mere fact that English law governs the reinsurance policies, including their stated policy periods of three years, is not sufficient to overcome the presumption English law applies in favor of back-to-back coverage and does not excuse [Equitas’s] obligation to indemnify ICSOP under the law governing the ICSOP-Dole policy.”

Judge Swain also rejected Equitas’s argument that ICSOP’s alleged failure to provide timely notice of its claims excused Equitas from paying losses under the reinsurance policies.  She held that, even if notice were late, Equitas failed to present any evidence that ICSOP “acted with ‘extreme dishonesty’ such that EIL may have been ‘seriously prejudiced,’” as required to support its late-notice defense.

ICSOP’s legal team included Bill Goldsmith from AIG and Peter Chaffetz, Drew Poplinger and Oslen Grant from Chaffetz Lindsey.  The full order can be found here.

Insurance/Reinsurance Report, June 2020
(Vol. 8)

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Another nail in Bellefonte’s coffin?

On remand, SDNY holds facultative reinsurer liable for defense costs in excess of indemnity limits. 

Global Reins. Corp. of Am. v. Century Indem. Co., 13 Civ. 6577 (LGS) (S.D.N.Y. Mar. 2, 2020).

Thirty years ago, the U.S. Court of Appeals for the Second Circuit decided, in Bellefonte Reinsurance Co. v. Aetna Cas. & Sur. Co., 903 F.2d 910 (2d Cir. 1990), that the limits of liability stated in a facultative reinsurance certificate cap the reinsurer’s liability for both indemnity and defense costs.  Although the Bellefonte rule was criticized, for years it stood as an obstacle to complete reinsurance recovery for cedents whose policies required them to pay defense costs in addition to limits.

As we have previously reported, in Global v. Century, multiple courts have been deconstructing Bellefonte step-by-step.  The first step took place in the Second Circuit, which reversed the district court’s decision based on Bellefonte and its progeny, pointedly questioning Bellefonte’s validity.  843 F.3d 120 (2d Cir. 2016) (discussed in Volume 2). Rather than overruling Bellefonte, however, the Second Circuit certified the question to the New York Court of Appeals.  In the second step, the Court of Appeals responded that reinsurance contracts are to be interpreted under ordinary contract law principles, and that there is no special Bellefonte rule under New York law.  30 N.Y.3d 568 (2017) (discussed in Volume 3).  The Second Circuit then remanded the case to the district court to interpret the specific facultative contracts at issue.  890 F.3d 74 (2d Cir. 2018).

The district court has now issued its decision on remand.  In this latest chapter, the district court concluded that the reinsurance limit did not cap the reinsurer’s obligation to cover defense costs when the cedent pays both indemnity and defense costs.  However, opining on an issue that was arguably unnecessary to its decision, the court also stated that the reinsurance limit does cap the reinsurer’s obligation to pay defense costs when the cedent pays only defense costs.

The court based its decision on the language of the reinsurance contracts, interpreted in light of expert testimony regarding industry custom and practice at the time the reinsurance was placed in the 1970s.  It found that the “plain and unambiguous meaning of the reinsurance contracts is that the dollar amount stated in [the certificates] caps Global’s obligation to pay losses and also caps Global’s obligation to pay expenses when there are no losses, but does not cap Global’s obligation to pay expenses when there are losses.”

The court first noted that the reinsured policies contained a “Supplementary Payments” provision requiring Century to pay defense costs in addition to the stated policy limits.  The Court then focused on two provisions of the reinsurance certificates. First, the “Follow Form Clause” provided that the reinsurer’s liability “shall be subject in all respects to all the terms and conditions of” the underlying Century policies, except when otherwise provided in the facultative certificates.  Second, the “Payments Provision” stated, “In addition [to loss payments], the Reinsurer shall pay its proportion of expenses [including defense costs] … in the ratio that the Reinsurer’s loss payment bears to the Company’s gross loss payment.”  That provision further provided that, “[i]f there is no loss payment, the Reinsurer shall pay its proportion of such expenses only in respect of business accepted on a contributing excess basis and then only in the percentage stated in” the certificate.

Taken together, these provisions meant that where Century paid both losses and defense costs under the reinsured policies, Global was obligated to cover defense costs in excess of the liability limit equal to its proportional share of the loss.  On the other hand, where Century paid only defense costs, the court read the “Payments Provision” to cap the reinsurer’s liability for defense costs.   Because Century had, in fact, paid both losses and defense costs, the court granted summary judgment for Century, finding that it was entitled to recover a proportional share of defense costs in excess of the liability limits.

Read the court’s full decision here.


Vacating a jury verdict, Second Circuit holds that follow-the-settlements does not bind reinsurer to a settlement that is inconsistent with the unambiguous terms of the underlying policy

Reinsurer was not bound by settlement that stipulated that missing primary policies contained aggregate limits where reinsured umbrella policies provided there were no aggregate primary limits.

Utica Mutual Ins. Co. v. Fireman’s Fund Ins. Co., 957 F.3d 337 (2d Cir. 2020).

Reinsurance contracts commonly include a “follow-the-settlements” clause, which, as the Utica Mutual court explained, binds the reinsurer to the cedent’s coverage determinations, “so long as the settlement decision was made ‘in good faith, reasonable, and within the terms of the applicable policies.’”  Utica Mutual highlighted an important limitation on the follow-the-settlements principle – “a follow-the-settlements clause ‘does not alter the terms or override the language of the reinsurance policies.’”  The Second Circuit reversed a jury verdict awarding Utica Mutual $65 million, holding, as a matter of law, that Utica’s settlement with its insured did not bind its facultative reinsurer, Fireman’s Fund Ins. Co., because the settlement contradicted the plain terms of the underlying policies, as incorporated into the reinsurance contracts.

From 1966 to 1972, Utica issued primary and umbrella policies to Goulds Pumps Co.  Utica obtained facultative reinsurance for each of the umbrella policies from Fireman’s Fund.  The reinsurance contracts contained a follow-the-settlements clause, as well as a “follow-the-form” clause effectively incorporating the terms of the umbrella policies into the reinsurance contracts.

Goulds received numerous bodily injury claims arising from exposure to asbestos, and sought coverage from Utica under the primary and umbrella policies.  Because the primary policies were lost, it was unclear whether they included aggregate limits for bodily injury. This was important because most of the bodily injury claims did not exceed the per person or per accident limits in the primary policies.  Thus, whether the primary policies were subject to aggregate limits determined whether the reinsured umbrella policies were triggered.   Utica and Goulds eventually settled their coverage dispute, stipulating that the missing primary policies contained aggregate limits, that those limits had been exhausted, and thus that the umbrella policies reinsured by Fireman’s Fund had been triggered.

When Fireman’s Fund denied coverage, Utica commenced suit.  Utica argued that, under the follow-the-settlements clause, Utica’s agreement with Goulds that the missing primary policies contained aggregate limits bound Fireman’s Fund.  Fireman’s Fund countered that, among other things, the settlement was contrary to the terms of the umbrella policies, as incorporated into the reinsurance contracts.  In particular, the umbrella policies provided that Utica “shall be liable only for the ultimate net loss … in excess of . . . the amounts of the applicable limits of liability of the underlying insurance as stated in the Schedule of Underlying Insurance Policies.”   The Schedule in the umbrella policies included aggregate limits for property damage, but said nothing about aggregate limits for bodily injury.

The trial court denied Fireman’s Fund’s multiple motions for judgment as a matter of law that the reinsured umbrella policies were not triggered.  Following a two-week trial, the jury returned a verdict for Utica.  The court then entered judgment for Utica for principal and prejudgment interest of approximately $65 million.

The Second Circuit reversed.  It found that the district court should have entered judgment as a matter of law for Fireman’s Fund because the umbrella policies unambiguously provided that they attached only in excess of primary policies that did not contain aggregate limits.  Therefore, the losses that Utica and Goulds allocated to the reinsured umbrella policies fell outside the terms of the policies and the reinsurance contracts as a matter of law.

Importantly, the court noted that it “did not ignore relevant follow-the-settlements authority.”  Rather, the court explained that its “decision is congruent with a continuous line of authority establishing that, to trigger deference under the follow-the-settlements doctrine, the settlement decision in question must be reasonable and in good faith but must also be within the terms of the reinsured policy.”

Full disclosure:  Chaffetz Lindsey represented Fireman’s Fund before the Second Circuit.

Read the court’s full decision here.


Ohio Supreme Court declines to determine whether “those sums” language requires “all sums” allocation

No allocation issue arises when property damage was not progressive, but occurred at a fixed, discernable time.

Lubrizol Advanced Materials, Inc. v. Nat’l Union Fire Ins. Co. of Pittsburgh, PA, No. 2018-1815 (Ohio Apr. 23, 2020).

When property damage or bodily injury develops progressively over a number of years, as can be the case with some asbestos or environmental losses, the progressive damage or injury may trigger multiple liability insurance policies issued across the years of injury. Ultimately, all insurers that issued policies triggered by such progressive loss will typically be required to share in the loss based on their relative shares of exposure.  However, the question often arises in these scenarios whether the insurers’ liability to the insured is several, in which case the insured must pursue a separate claim against each insurer for each insurer’s pro rata share of coverage. Alternatively, each insurer’s liability to the insured may be joint and several, such that the insured can seek coverage for its full loss (up to policy limits) under any triggered policy year.  In that case, it is up to the insurers to spread the loss pro rata through contribution claims.

As with most issues, this question cannot be answered in the abstract because the specific policy language controls.  But Ohio courts have previously ruled on the issue in connection with CGL policy language requiring the insurer to pay “all sums” arising from bodily injury or property damage during the policy period.  The Ohio Supreme Court has held that such “all sums” language can, subject to all the terms of the policy, render multiple insurers jointly and severally liable to the insured (up to policy limits) for the same progressive loss, even if some of that loss occurred outside a particular insurer’s term of coverage.  Insurers who face such joint and several liability, and who thereby discharge in whole or part the coverage obligations of other insurers, can then seek contribution from those other carriers.

But what if the policy provides that the insurer will pay “those sums” arising from bodily injury or property damage during the policy period?  Is “those sums” narrower than “all sums”? That was the question presented to, though not conclusively answered by, the Ohio Supreme Court in the Lubrizol case.

Between 2001 and 2008, Lubrizol manufactured and sold allegedly defective resin to a customer, IPEX.  IPEX used Lubrizol’s resin to make pipes, which it then sold to its consumers.  When the pipes failed, IPEX settled a number of claims against it and sued Lubrizol.  Lubrizol settled with IPEX and sought coverage from National Union under an umbrella policy issued in 2001.  Lubrizol argued that it was entitled to coverage under the National Union policy for all of its losses under Ohio’s “all sums” allocation rule, even though the policy used the term “those sums,” and not “all sums.”  After Lubrizol sued National Union in federal district court in Ohio, the federal court certified to the Ohio Supreme Court the following question:

Whether an insured is permitted to seek full and complete indemnity, under a single policy providing coverage for “those sums” the insured becomes legally obligated to pay because of property damage that takes place during the policy period, when the property damage occurred over multiple policy periods.

In essence, the question before the court was whether the “all sums” allocation method should also be applied to policies with “those sums” language.

The court determined, however, that it need not decide whether the “those sums” language required application of “all sums” allocation.  No allocation rule, “all sums” or otherwise, could apply to Lubrizol’s loss because the issue of allocation only arises where property damage or bodily injury stems from ongoing “progressive injury.”  In this case, Lubrizol did not prove that a progressive loss triggered multiple policies.  Although Lubrizol incurred losses in different policy periods, the specific date of each injury was discernable.  Specifically, the parties could determine how much resin was produced on a given date, how much was sold to IPEX, when the relevant lots of plumbing were produced, sold, and installed, and when they failed.  Accordingly, the court held that the “operative contract language is not the reference to policy coverage for ‘those sums’ but rather to injury or damage ‘that takes place during the policy period.’”  Because the injuries occurred at discernable times, there was no reason to use any methodology to allocate liability across multiple insurers and policy periods.

The court did, however, comment on the specific import of the “those sums” language.  The court returned to first principles.  Insurance policies are contracts.  Thus, the court remarked, “[a]s with any contract, insurance policies should be interpreted as written, and the meaning of the phrase ‘those sums’ depends on the context of each policy and each case.”  The court therefore declined to “set a bright line rule based merely on a party’s use of the word ‘those’ instead of ‘all.’”

Notably, three of the seven judges joined in a concurring opinion, which went one step further.  The concurring judges concluded that the “those sums” language would unambiguously preclude an “all sums” allocation.  They would have found that, “[w]hen a contract provision says that an insurer is required to pay only ‘those sums’ that arise from damage that occurs ‘during the policy period,’ that is all the insurer may be required to pay.”  Moreover, and perhaps calling into question some of the earlier Ohio decisions in this area, the concurrence also noted that the clear difference in meaning between “those sums” and “all sums” made it unnecessary for the court to address in this case the “continuing vitality” of the court’s prior “all sums” rulings.

Read the court’s full decision here.


Maryland Court of Appeals adopts pro rata allocation for long tail claims

Court applies “unavailability exception” limiting allocation to years in which coverage was purchased or otherwise available in the market.

Rossello v. Zurich Am. Ins. Co., No. 24, September Term, 2019 (Md. Apr. 3, 2020).

In another state high court decision addressing the allocation of long-tail losses from progressive injuries, the Maryland Court of Appeals held – following a line of prior holdings from the State’s intermediate appellate court – that pro rata allocation applies in determining coverage for liability arising from progressive property damage or bodily injury.  Under “pro rata” allocation, the insured can only recover from each insurer the portion of the loss corresponding to the insurer’s time on the risk.

The case arose after Rossello was diagnosed in 2013 with mesothelioma caused by his exposure to asbestos beginning in 1974.  Lloyd E. Mitchell, Inc. (Mitchell) installed the asbestos while performing construction at Rosello’s workplace.  After Rossello obtained a judgment against Mitchell, he obtained a writ of garnishment against Mitchell’s insurer, Zurich, which had issued CGL policies to Mitchell between 1974 and 1977.  The court stayed garnishment pending resolution of Zurich’s coverage obligations.

Zurich argued, and the court agreed, that Rossello’s damages should be allocated on a pro rata time-on-the-risk basis across all insurable periods during which Rossello was exposed to asbestos.  Notably, however, the court also adopted what is commonly referred to as the “unavailability exception,” which limits allocation to years in which coverage was purchased or otherwise available in the market.  That is, although the insured is generally allocated the pro-rated share of loss corresponding to periods of no coverage, if the gap in coverage is due to the fact that insurance was not commercially available, then such periods of unavailability do not factor into the pro rata allocation.

The court found that the burden to prove that coverage was unavailable falls on the insured or claimant.  In this case, however, Zurich acknowledged that 1985 was the final year that Mitchell would have been able to purchase coverage for asbestos liabilities, and Rossello did not prove otherwise.  The court therefore held that the relevant period for allocation was twelve years – from Rosello’s initial exposure in 1974 until the final year insurance was available in 1985 – and that Zurich was liable only for its four-year pro rata share.

Read the court’s full decision here.

Arbitration in the Courts, June 2020
(Vol. 3)

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U.S. Supreme Court holds that New York Convention permits non-signatories to enforce arbitration agreements:

Non-signatories may enforce arbitration agreements under traditional state law principles, such as equitable estoppel.

GE Energy Power Conversion France SAS, Corp. v. Outokumpu Stainless USA, LLC, 590 U.S. ___ (2020).

In GE Energy Power, the U.S. Supreme Court resolved a split among federal Circuit Courts of Appeals over whether Article II of the 1958 United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“New York Convention” or “Convention”) precludes the enforcement of arbitration agreements by non-signatories under state law doctrines, such as equitable estoppel. The Eleventh and Ninth Circuits have held that the Convention only permits signatories to enforce agreements to arbitrate, while the Fourth and First Circuits, among others, have held that nonsignatories can enforce arbitration agreements falling under the Convention when permitted by ordinary state law principles, including equitable estoppel. Compare Outokumpu Stainless USA, LLC v. Converteam SAS, 902 F.3d 1316, 1326 (11th Cir. 2018), and Yang v. Majestic Blue Fisheries, LLC, 876 F.3d 996, 1001–1002 (9th Cir. 2017), with Aggarao v. MOL Ship Mgmt. Co., 675 F.3d 355, 375 (4th Cir. 2012), and Sourcing Unlimited, Inc. v. Asimco Int’l, Inc., 526 F.3d 38, 48 (1st Cir. 2008).  The Supreme Court held the Convention permits nonsignatories to enforce arbitration agreements under ordinary principles of state law.

In 2007, Outokumpu (then known as ThyssenKrupp Stainless USA, LLC) entered into a series of contracts with F.L. Industries, Inc. for the construction of cold rolling mills at Outokumpu’s steel manufacturing plant in Alabama.  Each contract contained an identical arbitration clause providing for arbitration in Germany under the Rules of the International Chamber of Commerce.  F.L. Industries subsequently executed a subcontract with GE Energy Power Conversion France SAS, Corp. (GE) to manufacture motors for the cold rolling mills.  After GE’s motors failed, causing substantial damage, Outokumpu and its insurer sued GE in Alabama state court.  GE removed the case to federal court under Section 205 of the FAA, which provides for federal removal jurisdiction over claims seeking to enforce arbitration agreements and awards governed by the New York Convention.  GE then moved to compel arbitration, citing the arbitration clause in the contracts between Outokumpu and F.L Industries.  GE first argued that it was a party to the arbitration agreements, which defined “Sellers” and “Parties” to include subcontractors. GE also claimed that it could enforce the arbitration agreement against Outokumpu under the doctrine of equitable estoppel, which permits non-signatories to enforce the arbitration agreement in a written contract against a signatory where the signatory asserts claims against the nonsignatory deriving from the contract.

The district court granted GE’s motion to compel, holding that GE qualified as a party to the arbitration agreement.  The district court therefore did not reach GE’s equitable estoppel argument.

On appeal, the Eleventh Circuit Court of Appeals reversed, holding that GE could not enforce the arbitration agreement, because it interpreted the Convention to require that “the parties actually sign an agreement to arbitrate their disputes in order to compel arbitration.”  The circuit court based its holding on the language in Article II requiring “[e]ach Contracting State [to] recognize an agreement in writing under which the parties undertake to submit to arbitration all or any differences which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not, concerning a subject matter capable of settlement by arbitration.”  Accordingly, the Eleventh Circuit held that GE could not enforce the arbitration agreement under its terms or equitable estoppel principles because it did not sign the agreement.

The Supreme Court reversed.  Resolving the circuit split, the Court held that ordinary state law principles permitting nonsignatories to enforce arbitration agreements applied to agreements governed by the Convention.  Chapter 2 of the FAA, which implements the New York Convention, provides that Chapter 1 governing domestic arbitrations “applies to actions and proceedings brought under this chapter [2] to the extent that [Chapter 1] is not in conflict with . . . the Convention.”  The Court has previously held that Chapter 1 of the FAA permits nonsignatories to enforce arbitration agreements against signatories under “traditional principles of state law,” including the doctrine of equitable estoppel.  The question before the Court was thus whether the common law doctrine of equitable estoppel was “in conflict with” the New York Convention.  The Court held that it was not.

Because the Convention was silent on the issue of nonsignatory enforcement, it did not conflict with the “traditional principles of state law” that apply to the enforcement of arbitration agreements by non-signatories under Chapter 1.  In particular, the Court held that, although Article II(3) requires that a contracting state “shall . . . refer the parties to arbitration” when the parties have entered into a written agreement to arbitrate, it “does not state that arbitration agreements shall be enforced only” if there is a signed agreement between the parties, and “does not restrict contracting states from applying domestic law to refer parties to arbitration in other circumstances.”  Thus, the Convention “does not prevent the application of domestic laws that are more generous in enforcing arbitration agreements.”  That is, the “nonexclusive language” of Article II does not “set a ceiling that tacitly precludes the use of domestic law to enforce arbitration agreements,” and “nothing in the text of the Convention ‘conflicts with’ the application of domestic equitable estoppel doctrines permitted under Chapter 1 of the FAA.”

Although it determined that the Convention’s text was sufficient to reach this conclusion, the Court found that its interpretation was buttressed by the drafting history of the Convention, which suggested that the drafters intended only to “impose baseline requirements on contracting states,” and decisions from the courts of other contracting states permitting nonsignatories to enforce arbitration agreements.

Read the court’s full decision here.

 

Fifth Circuit holds arbitrator determines the scope of institutional rules governing reconsideration of awards:

Arbitrator’s interpretation of institutional rules adopted by the parties is entitled to deference.

Communications Workers of America., AFL-CIO v. Southwestern Bell Telephone Company, 953 F.3d 822 (5th Cir. 2020).

Most institutional rules provide arbitrators with some authority to correct or amend their awards.  In Communications Workers, the Fifth Circuit Court of Appeals addressed how to determine whether an arbitrator violates such a rule in changing his award. The Fifth Circuit held that, so long as the arbitrator is making an effort to interpret the rules, the court must defer to the arbitrator’s interpretation of the scope of his authority under the rules.

Communications Workers of America (CWA) filed a grievance against Southwestern Bell alleging that the company violated the parties’ collective bargaining agreement (CBA) by assigning fiber optic cable-splicing work to one group of workers, Premises Technicians.  When the grievance could not be resolved, CWA initiated arbitration under the Labor Arbitration Rules of the American Arbitration Association (AAA), as provided for in the CBA.

During the arbitration, Southwestern Bell relied on a prior settlement agreement between the parties, which permitted the company to “assign Premises Technicians all work from and including the Serving Terminal up to and including the customer premises for IP enabled products and services.”  The company argued that the broad right to assign “all work” to Premises Technicians included cable splicing.

Over Southwestern Bell’s objection, CWA introduced an exhibit detailing “specific agreements” between a Southwestern Bell affiliate and a different CWA bargaining unit over the tasks assigned to Premises Technicians.  Relying on that exhibit, the arbitrator issued an award finding that Southwestern Bell had violated the CBA by assigning cable-splicing work to Premises Technicians.  The arbitrator agreed with Southwestern Bell that the settlement agreement permitted the assignment, but found, based on the exhibit, that the “past practice” of the parties required formal negotiation to add cable splicing to the job duties of Premises Technicians.  In the award, the arbitrator specifically stated that he “would be inclined to find that no violation of the [CBA] occurred” but for the exhibit, which demonstrated the “clear practice that the parties have chosen to abide by.”

Shortly after the issuance of the award, Southwestern Bell filed a motion for reconsideration under Rule 40 of the AAA Labor Rules, which permits the arbitrator to “correct any clerical, typographical, technical, or computational errors in the award.”  The Rule, however, provides that an arbitrator is “not empowered to redetermine the merits of any claim already decided.” Southwestern Bell argued that the arbitrator erred in relying on the exhibit because it “was a different union’s summary of a different bargaining unit having a different collective bargaining agreement.”  The arbitrator agreed and issued a new award, this time finding in favor of Southwestern Bell.  The arbitrator classified his reliance on the exhibit as a “technical error,” and thus concluded that reversing his initial award did not run afoul of the Rule’s prohibition on redetermination of the merits.

The parties subsequently filed cross petitions for enforcement of their respective awards.  Opposing enforcement of the second award, CWA argued that the arbitrator had exceeded his authority because the second award amounted to a reconsideration of the merits of the claims, in violation of Rule 40.  The district court disagreed and enforced the arbitrator’s second award in favor of Southwestern Bell and CWA appealed.  The Fifth Circuit affirmed.  The court held that it “must affirm an arbitral award as long as the arbitrator is even arguably construing or applying the contract and acting within the scope of his authority.”  Because the parties’ CBA incorporated the AAA Labor Arbitration Rules, the arbitrator’s interpretation of Rule 40 was entitled to the same deference as his interpretation of any other provision in the contract.  The court concluded that “the arbitrator’s determination that he had committed a ‘technical’ error was an arguable interpretation of the contract.”  The arbitrator was not required to explain the reasoning behind his interpretation.  Rather, the court was able to “discern a possible rationale” for the arbitrator’s decision that his error in relying on the exhibit was “technical” because the new award “did not alter the merits framework from his first award,” and was consistent with his initial reasoning that he would have found in favor of Southwestern Bell but for the exhibit.

Read the court’s full decision here.

New York Court of Appeals finds “partial final award” not “final” for purposes of functus officio doctrine:

Arbitrators could revisit partial award absent “express, mutual” agreement that award would be final.

American International Specialty Lines Insurance Company v. Allied Capital Corporation, No. 23 (N.Y. Apr. 30, 2020).

While the Fifth Circuit in Communications Workers (953 F.3d 822, discussed above) determined an arbitrator’s power to revise an award under institutional rules, the New York Court of Appeals recently considered the issue under New York common law.  The common law doctrine of functus officio – Latin for “performed one’s office” – provides that “arbitrators relinquish all powers over the parties to the arbitration upon issuance of a final award and, therefore, are precluded from modifying or reconsidering that award.”  Under New York arbitration law, only “final” awards trigger the application of the doctrine of functus officio.  Thus, arbitrators generally have the inherent authority to revisit and change non-final awards. In a decision of first impression, New York’s Court of Appeals, the state’s highest court, addressed the much-debated question of whether partial awards may be “final.”  The Court determined that the Partial Final Award at issue was not “final” because the parties did not reach an “express, mutual agreement” to treat it as such.

In American International, two putative insureds initiated an arbitration against American International Specialty Lines Insurance Company (AISLIC), to recover defense costs and indemnification relating to litigation and a subsequent settlement to resolve claims against the insureds under the Federal False Claims Act.  AISLIC opposed their claim for coverage on the grounds that the settlement did not constitute a “loss” within the meaning of the insurance policies and that the defense costs arose, in part, from unrelated legal work not covered by the policies.

The insureds and AISLIC both moved for summary disposition on the issue of liability.  The insureds contended that they were entitled to an award on liability, and factual issues concerning the quantum of recoverable defense costs could be the subject of a separate evidentiary hearing if the tribunal found AISLIC liable for those costs.  At oral argument on the parties’ summary disposition applications, the panel inquired whether a “partial summary disposition [was] in the cards.” Counsel for the insured expressed that such an award would “make the most sense”; AISLIC’s counsel “never directly commented” on whether it agreed to a partial summary disposition.

The tribunal then issued a “Partial Final Award” holding that the settlement did not constitute a covered loss under the applicable insurance policy, but that one of the insureds was entitled to defense costs, to be quantified following an evidentiary hearing.  After the insureds moved for reconsideration of the Partial Final Award, the tribunal reversed course and issued a “Corrected Partial Final Award,” this time finding that the settlement did constitute a covered loss. Following the evidentiary hearing to determine the amount of defense costs, the tribunal issued a “Final Award” awarding the insureds indemnification and defense costs.

AISLIC petitioned in state court to vacate the Corrected Partial Final Award and Final Award and reinstate the original Partial Final Award.  The trial court denied AISLIC’s petition but the Appellate Division reversed, holding that under New York’s “functus officio doctrine,” the tribunal exceeded its authority when it reconsidered its initial Partial Final Award on liability.

The Court of Appeals reversed, holding that a tribunal is only functus officio after it renders a “final” award—that is, an award that is “coextensive with the issues submitted to the arbitrators by the parties” or “one that resolves the entire arbitration.”

The Court acknowledged that federal courts in New York “have consistently recognized that partial determinations may be treated as final awards where the parties expressly agree both that certain issues submitted to the arbitrators should be decided in separate partial awards and that such awards will be considered to be final.”  See, e.g., Trade & Transp., Inc. v. Nat. Petroleum Charterers Inc., 931 F.2d 191 (2d Cir. 1991).  Without reaching the question, the Court suggested that, under appropriate circumstances, a tribunal could be functus officio with respect to a partial award where the parties, by “express, mutual agreement,” agree that a partial award will be “final” as to the matters determined thereby.

In this case, however, the Court concluded that the tribunal’s Partial Final Award was not final because AISLIC never agreed to bifurcate the proceeding and treat any resulting partial decision as a “final” award.  And “neither the parties nor the arbitrators ever discussed or otherwise demonstrated a mutual understanding regarding whether the proposed severance of the calculation of the defense costs would result in a final partial award.”  Because the parties did not agree that the Partial Final Award would be final, the functus officio doctrine did not apply to that award, and the tribunal did not exceed its authority by reconsidering that decision.

Read the court’s full decision here.

Res judicata effect of prior arbitration award is a question for the arbitrators:

Second tribunal determines the preclusive effect of prior awards.

Certain Underwriters at Lloyd’s, London v. Century Indemnity Company, No. 18-CV-12041 (D. Mass. Mar. 6, 2020).

Under the doctrine of res judicata, a final judgment on the merits precludes a party from re-litigating issues that were or could have been raised in the first action.  Res judicata applies with “equal force to arbitration.”  In this case, the United States District Court of the District of Massachusetts concluded that the question whether a prior arbitration award has res judicata effect in a subsequent arbitration is a question for the arbitrators in the second arbitration—not the court—to decide.

In Lloyd’s, Century Indemnity Company (Century) purchased treaty reinsurance from Certain Underwriters at Lloyd’s, London (Lloyd’s) from 1963 through 1970.  For over 30 years, including the period in which Century held reinsurance from Lloyd’s, Century issued insurance policies to the Boy Scouts of America.  Beginning in the 1990s, the Boy Scouts sought coverage under the policies for sexual molestation claims against individuals associated with the organization.  Century and the Boy Scouts entered a settlement agreement providing that all indemnity and defense costs for each molestation claim would be covered under the Century policy in effect on the date when the first act of molestation had occurred.

In accordance with the settlement terms, Century paid the Boy Scouts’ claims and then sought indemnification from Lloyd’s under reinsurance contracts covering the Boy Scouts’ policies.  Pursuant to the settlement agreement, Century allocated payments for each molestation claim to the policy in effect at the time of the first encounter.  For each policy, Century aggregated all molestation claims into a single loss occurrence under the applicable reinsurance contract.

Lloyd’s denied reinsurance coverage on the ground that Century’s allocation of payments under the Boy Scouts settlement and its aggregation of all molestation claims into a single loss occurrence were not binding on the reinsurer.  Lloyd’s and Century proceeded to arbitration and in May 2018 the panel issued a one-page award holding that Lloyd’s reinsurance did not cover Century’s billings because Century’s allocation agreement with the Boy Scouts was not the product of a “reasonable and business-like investigation.”  Lloyd’s subsequently petitioned for confirmation of the award in federal district court, which the court granted.

Three months after the arbitration, in August 2018, Century submitted new billings to Lloyd’s.  This time, however, Century spread its payments to the Boy Scouts across each of its policies in effect during the entire period of abuse instead of allocating claims to the policy year in effect at the first encounter.  But, as before, Century aggregated all payments under each policy into a single loss occurrence under the applicable reinsurance contract.

Lloyd’s again denied Century’s claims and sought clarification from the arbitral panel on the scope of its award.  The panel issued a Clarification Award explaining that Century’s claim for payment depended on the approval of two steps: allocation of claims to the first date of abuse and accumulation of those claims within a given policy year.  The panel further explained that it had rejected Century’s claims on the ground that its allocation was impermissible and therefore did not reach the question of whether aggregation into a single loss occurrence was permissible.

Lloyd’s thereafter denied Century’s revised billings. In November, 2018 Century commenced a second arbitration challenging Lloyd’s denial of the new billings.  When Lloyd’s refused to arbitrate, Century filed a petition in the district court to compel arbitration.  Lloyd’s then moved to dismiss the petition on the ground that, inter alia, Century’s demand for arbitration was a collateral attack on the previous arbitral award and barred by the doctrine of res judicata.  Century argued that the previous award did not decide the propriety of its new billings and that, in any event, whether the prior award should be accorded preclusive effect was a question for the second arbitration panel.

The district court, citing authority from federal courts across the country, agreed that whether the prior award was entitled to res judicata effect in the second arbitration was a question for the second panel. The court therefore granted Century’s motion to compel because “[t]he issue here is not whether Century is seeking to attack the proceedings that resulted in the [first] Arbitration Award, but whether the Arbitration Award precludes arbitration regarding the August 2018 billings.”

Read the court’s full decision here.

Andrew Poplinger Speaks About COVID-19’s Impact on Arbitration

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May 2020 – On Tuesday, May 19th, Andrew Poplinger will participate in a webinar discussion titled, “Arbitration after the COVID-19 Pandemic: a New Dawn or Business as Usual?” The webinar is hosted by the International Association of Lawyers (UIA), a global and multi-cultural organization for the legal profession that facilitates professional development, stimulates learning and networking, and promotes the Rule of Law.

The webinar will begin at 5:30 CEST (11:30am EST). Registration is available here.

An Early Experience With Arbitration By Video

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Few things are more frustrating and costly than an indefinite interruption to a trial or arbitration that is in full swing and within days of completion. That is the prospect we faced when the COVID-19 shutdown forced a mid-hearing adjournment of a complex, high-stakes International Chamber of Commerce (ICC) arbitration on which we had been working for years. This article recounts how we worked with opposing counsel and the tribunal to restart and complete the hearing a week later by videoconference.

Unexpected Developments

Our hearing opened normally on March 9 , with both sides’ fact witnesses and party representatives, as well as one of the arbitrators, having traveled to New York from abroad.  Because none of the fact witnesses was a native English speaker, translators were also on hand. The plan was to complete fact witnesses in the first week and expert witnesses in the second. While COVID-19 was in the news, we did not yet foresee any difficulty in completing the hearing on schedule. Indeed, we planned to share a good New York steak dinner with our client and team after the final day, two weeks hence.

How wrong we were!

Over the course of that first week concern about COVID-19 grew daily. Nonetheless, we still didn’t imagine the scope of what was coming and remained determined through the week to forge ahead and complete the hearing as planned. However, by Friday of the first week the potential for adjournment was clearly there. By Sunday it became reality, as the parties and witnesses were called home ahead of impending travel restrictions. Everyone who had been with us in New York that week returned to two weeks of self-quarantine in their home countries.

Not very long ago, that would have thrown the case into an open-ended limbo. Leaving aside the uncertain duration of the COVID-19 crisis, it would likely have been many months before we could find a an open week for all participants. Fortunately, our tribunal was committed to avoiding that outcome. It recognized that in the circumstances, meeting by video would become the “new normal,” if the technology was ready. The tribunal directed the parties to meet and confer and, if possible, come back by Wednesday of what would have been week two of the hearing with a technical and procedural protocol for resuming by video. Counsel for both sides worked together to make this happen.

The Challenge

The requirements seemed steep. We needed a system that would allow up to 40 individuals to participate or observe. Everyone had to have a clear view of the tribunal, the witnesses and examining counsel. All participants had to be able to read the expert PowerPoint presentations and the numerous exhibits to be used in cross-examination. We also required that the tribunal and counsel continue receiving individual feeds of the LiveNote transcript.

In any event, the technical solution proved to be much simpler than anyone expected. Although we had been using Zoom and similar products for some time, we had not fully appreciated their full capabilities. We also had been used to doing video conferences with professional video equipment from our office conference rooms. With that experience, we initially contemplated that participants would use their firms’ conference facilities or go to commercial videoconference centers in each of the relevant cities. That approach proved to be both unfeasible – as offices around the world were closing – and out of date.

The Solution

Instead, like so many others during these past days, we quickly became familiar with how robust modern videoconferencing applications have become. In our case we chose to work with Zoom, which under our firm’s license can support a video conference of unlimited duration with up to 100 participants. Within a short time, all involved learned to choose between “gallery view” which displays all participants in thumbnail-sized windows, and the self-explanatory “speaker view.” By asking non-speakers to silence their microphones and stop their video feed, we could limit the video display to the person speaking or to selected participants. Once the hearing got under way, we generally had the tribunal members, the witness, and the examining attorney on the screen. The remaining participants, usually between 30 and 40, could observe quietly.

By selecting the “share screen” function, the expert witnesses were able to present their PowerPoint slides while remaining visible in a separate window to the right of the screen. As needed, the arbitrators and attorneys could also come on view alongside the shared document. During cross-examination, a trial support person took over the “share screen” function to display and highlight documents, portions of witness statements and the hearing transcript that were the subject of the questioning. That worked exactly as in an in-person hearing.

The court reporter listened in as a participant and transmitted her real-time transcript via a software application called “LiveLitigation,” which has long been in use in the United States for video depositions.

The Videoconference Meeting Rooms

Our firm set up the virtual hearing venue as a permanent Zoom meeting room for the duration of the hearing. We provided the necessary credentials to all participants, who were then free to enter or leave the room at any time over the course of the week. Just as in an in-person hearing, the tribunal and each of the parties also maintained separate “breakout rooms” where they could confer privately among themselves.

On Friday, March 20, exactly one week after we had last met in person, we reconvened with the tribunal, opposing counsel, and the court reporter on video for a “technical rehearsal,” just to make sure the system would work and to give the arbitrators and counsel a chance to become familiar with the pertinent Zoom features. For that test run, there were well over 30 participants, all joining from their own homes, in three different countries and four time zones. We found the sound and picture quality to be excellent. After a few minutes, we knew we could resume on Monday and finish our hearing.

What We Used at Home

While we had done individual witness examinations by video or telephone, this was our first experience with a full-blown video hearing. It was also our first time presenting and cross-examining witnesses with limited, and in some cases, no paper documents. This also was not as difficult as expected. For us, the ideal personal set-up involved three devices with screens plus a mobile phone. We used an iPad to work with documents uploaded to PDF Pro. This allows the creation of virtual examination binders in which you can mark up and highlight documents just as you would with paper. We participated in the hearing through our main computer or laptop, and then received the transcript on a third device. A person with a large enough monitor could display the hearing and transcript in separate windows on one screen. No doubt other approaches would work equally well. While Zoom has a “chat” function, it only allows the choice of sending your message to a single participant or everyone. For that reason, and to avoid mishaps, our lawyers team used our phones to keep a private group chat open on which we could confer among ourselves as we were listening. This was a big improvement over trading post-it notes at the counsels’ table.

Examination Notebooks, Real and Unreal

The one throwback to our old ways was the parties’ agreement to provide physical cross-examination binders to the expert witnesses. One of the arbitrators also asked to receive physical binders. Fortunately, our vendor was still available to produce and deliver the binders. We agreed for these to be delivered in a sealed package to the witnesses no less than one hour before their cross-examination was scheduled to begin. We instructed the witnesses that they should only unwrap their notebook on camera at the start of their examination. We also agreed to exchange these files electronically with opposing counsel within 45 minutes of the start of cross-examination, on the understanding that there would be no discussion of their contents with the witnesses. Our protocol also specified that anyone in the room with the witness be visible at all times. That rule proved moot, however, because every participant joined individually from their home or office.

Final Impressions

The hearing wrapped up on Friday, March 27, only a week later than planned. Over the course of five days seven experts made presentations and submitted to cross examination. There were also three “hot-tubbing” sessions where experts for both sides answered questions from the tribunal. The hearing days ran on the same schedule as when we had been meeting in person and ran with equal efficiency. Weekend and evening preparation sessions with the witnesses also worked very well by video.

It was clear from the informal parting exchanges that everyone thought the video format had been a success, with little or no disadvantage compared to the in-person meeting at which we had started. The parties have also agreed to hold closing arguments by Zoom.

Nonetheless, we can’t yet conclude that video offers full equivalence.

As noted, all of our percipient witnesses testified in person in the first week. We don’t know whether the tribunal could have assessed the credibility of such evidence just as effectively by video. Also, it was probably easier to meet by video following an entire week of being together in a conventional hearing. Moreover, it was only in the first week that we required simultaneous translation. Because all of our second week testimony was in English, we did not face the additional challenge of adding separate language feeds to a video hearing. We can also foresee logistical issues where participants are based in more divergent time zones. In our case most participants were on Eastern Daylight Time. The maximum time difference from that time zone was three hours and that affected only a single participant.

It is still less than three weeks since we learned we would be completing our case by video. Given the exigent circumstances, we did not have time to canvass the literature or discuss the merits of the 2018 Seoul Protocol on Videoconferencing in International Arbitration. Our approach was ad hoc and guided by common sense.

Nonetheless, the decisions we made and the arrangement we landed proved to be largely consistent with that guidance. Overall, this was a good and memorable experience that opened our eyes to how far video meeting capabilities have evolved. We do not predict that video will replace in person hearings when normal times return, but we also think this alternative approach will see far greater use.

Peter Chaffetz is a founding partner of Chaffetz Lindsey. Yasmine Lahlou and Andrew Poplinger are partners at Chaffetz Lindsey.

View this article on the New York State Bar Association website.

 

Click here to view our full list of COVID-19 Information and Resources.

 

Arbitration in the Courts, March 2020
(Vol. 2)

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AAA arbitrator decides whether claims were subject to arbitration before the AAA or the Commissioner of Major League Baseball . . .

Incorporation of AAA Rules constitutes “clear and unmistakable” agreement that AAA arbitrator shall determine its own jurisdiction. 

WN Partner, LLC v. Baltimore Orioles Ltd. P’ship, 179 A.D.3d 14, 112 N.Y.S.3d 68 (1st Dep’t 2019).

In WN Partner, LLC v. Baltimore Orioles, the parties indisputably agreed to arbitrate.  The court was called upon to tackle the question of who was to be the arbitrator of the parties’ dispute.

The dispute arose out of a broadcast partnership agreement between the Washington Nationals and the Baltimore Orioles, two Major League Baseball franchises.  The parties had agreed to arbitrate all disputes under the partnership agreement before the Commissioner of Major League Baseball, except in the event the League had a financial interest in the dispute. In that case, the arbitration would be resolved before the American Arbitration Association (AAA) under the AAA Rules.

After the dispute arose and the Orioles initiated an arbitration before the AAA on the ground that the League had a financial interest in the dispute, the Nationals asked the court to enjoin the AAA arbitration and order the parties to proceed before the Commissioner.

The court refused.  Instead, noting that AAA Rule 7(a) provides that the “arbitrator shall have the power to rule on his or her own jurisdiction,” it held that, by adopting the AAA Rules and agreeing to arbitrate “all disputes” under the agreement, the parties had “clearly and unmistakably” agreed that the AAA arbitrator would decide who had jurisdiction to hear the dispute.  Accordingly, the arbitrator, not the Commissioner or the court, would decide the threshold issue of whether, under the facts, Major League Baseball had a financial interest that required arbitration before the AAA.

Read the court’s full decision here.

 

Non-signatory shareholder of corporate party to arbitration agreement could not compel arbitration . . .

Claims against the shareholder did not arise out of his role in the corporation.

City of Almaty, Kazakhstan v. Sater, 2019 WL 6681560 (S.D.N.Y. Dec. 6, 2019).

It is generally accepted that a non-signatory may be bound to an arbitration agreement “if so dictated by the ordinary principles of contract and agency.” In City of Almaty, the court addressed when a shareholder may invoke the arbitration agreement in his company’s contract with a third party in a dispute between the shareholder and the third party.

The plaintiffs—a Kazak municipality and a Kazak bank— sued various defendants including Felix Sater, before a federal court in New York, asserting claims for fraud and conversion on the basis that the defendants had assisted former city and bank officials to launder and store money stolen from the plaintiffs. Prior to commencing the action, the plaintiffs had hired a company called Litco to investigate and help them locate and recover their stolen assets, including the monies allegedly laundered by Sater.

In a Kafkaesque twist, while their lawsuit was pending in New York, the plaintiffs discovered that Sater actually owned Litco and was leading its efforts on behalf of the plaintiffs to locate the very assets they accused Sater of concealing. Upon making this discovery, the plaintiffs terminated their contract with Litco. That contract contained an arbitration provision requiring the parties to arbitrate any dispute under the agreement under the American Arbitration Association (AAA) rules. It also included a release of all claims against Litco and unidentified “officers, directors, shareholders, interest holders, members, partners, . . . agents, employees, managers and representatives.” Following termination, Litco commenced arbitration against the plaintiffs seeking to collect outstanding payments for services rendered. Litco also asked the arbitrators, inter alia, to find that the release covered the plaintiffs’ claims against Sater, as Litco’s shareholder.

Although he did not seek to compel arbitration, Sater claimed that the effect of the release in the Litco contract on the plaintiffs’ claim was a question for the arbitrators in the Litco arbitration. Sater therefore asked the federal court in New York to stay the litigation pending the arbitrators’ decision on whether the release in the Litco contract barred the plaintiffs’ claims against Sater.

Under U.S. federal law, there is a presumption that courts, not arbitrators, decide whether the parties have agreed to arbitrate a dispute. Nevertheless, the U.S. Supreme Court has long recognized that the question may be for the arbitrator in the first instance where the parties have “clearly and unmistakably” delegated to the arbitrator the authority to determine such issues (often referred to as “arbitrability”). Courts have generally held that an arbitration agreement incorporating institutional rules granting arbitrators jurisdiction to determine their own jurisdiction constitutes such a clear and unmistakable delegation of the authority to decide arbitrability to the arbitrators.

Here, as a threshold matter, the court held that it, rather than the arbitrator, would determine whether the effect of the release in the Litco agreement on the plaintiffs’ claims was arbitrable. Although Litco and the plaintiffs’ incorporation of the AAA Rules into their arbitration clause reflected their agreement to delegate arbitrability questions to the arbitrators, the court held that such incorporation did not constitute a “clear and unmistakable” agreement between Sater and the plaintiffs to arbitrate the arbitrability of Sater’s defense based on the release. Not only was Sater not a signatory to the agreement, but Sater acknowledged that he had hidden his affiliation with Litco from the plaintiffs.

On the merits of the arbitrability question, the court concluded that Sater, as a shareholder and officer of Litco, was not entitled to invoke the arbitration agreement in the Litco contract under any recognized non-signatory theory. First, under New York law, a shareholder or officer may be entitled to enforce an arbitration clause in his corporation’s contract if the claims against the officer concern his conduct on behalf of the company in connection with the agreement. Sater, however, could not avail himself of this theory here because the plaintiffs’ claims centered on actions he had allegedly taken in his personal capacity, before the Litco contract had come into force. The court next found that Sater could not enforce the arbitration provision as a third-party beneficiary because the arbitration agreement did not explicitly provide for arbitration with non-parties to the agreement, such as Sater. Finally, the court held that Sater could not force the plaintiffs to arbitrate the enforceability of the release on a theory of estoppel. The plaintiffs’ lawsuit relating to Sater’s conduct before the agreement with Litco was not sufficiently intertwined with the Litco arbitration, nor was the plaintiffs’ relationship with Sater sufficiently close to suggest that the plaintiffs implicitly consented to extend their agreement to arbitrate to Sater. The court accordingly concluded that Sater could not invoke the arbitration clause in the Litco contract, and denied the motion to stay.

Read the court’s full decision here.

Award in favor of Trump Campaign for breach of NDA vacated . . .

Arbitrator exceeded authority by deciding claims outside demand for arbitration and violated public policy by awarding damages for statements made in court proceeding.

Denson v. Donald J. Trump For President, Inc., No. 101616/17, 2020 WL 573113 (1st Dep’t Feb. 6, 2020).

New York state arbitration law, similar to the Federal Arbitration Act, provides that an award may be vacated if the arbitrator “exceeded his power or so imperfectly executed it that a final and definite award upon the subject matter submitted was not made.”  NY CPLR 7511(b)(iii).  In Denson, a court vacated an award of damages for breach of a non-disclosure and non-disparagement agreement (NDA) on this ground.  In particular, the court found that the arbitrator exceeded his authority, in part, because the award addressed claims outside the scope of the demand and, in part, because some of the relief granted was in violation of strong state public policy.

Jessica Denson served as the Director of Hispanic Engagement for the company that ran Donald Trump’s 2016 presidential campaign (Trump Campaign).  As a condition of her employment, Denson signed an NDA, which prohibited her from disclosing confidential information detrimental to Trump and from disparaging him publicly.  The NDA contained an arbitration clause, which provided the Trump Campaign with the unilateral right to arbitrate “any dispute arising under or relating to the NDA” pursuant to the American Arbitration Association (AAA) Commercial Rules.  Denson also agreed in the NDA that she would not challenge the submission of a dispute to arbitration.

One year after the election, Denson filed an action in New York state court against the Trump Campaign asserting violations of the New York City Human Rights Law, including sexual discrimination and a hostile work environment.  The Trump Campaign responded by filing a demand for arbitration with the AAA, alleging that Denson’s statements in her state court complaint violated her confidentiality and non-disparagement obligations under the NDA.  The Trump Campaign then filed a motion to compel Denson’s state court action to arbitration.  The court denied the Trump Campaign’s motion, finding that Denson’s claims arose under the Human Rights Law, not the NDA.

While the motion to compel was pending in state court, Denson filed an action in New York federal court seeking a declaration that the NDA was unenforceable as against public policy, and the Trump Campaign filed a cross-motion to compel arbitration.  The federal court compelled arbitration of that case on the ground that Denson’s direct challenge to the enforceability of the agreement did arise under the NDA.  The arbitrator ultimately awarded the Trump Campaign monetary damages of $50,000, holding that Denson breached the NDA by making disparaging statements about Trump in the course of her federal action, as well as through statements made on her Twitter account after Denson filed her state court action.

Denson petitioned the court to vacate the award, but the state trial court denied the motion.  On appeal, the Appellate Division reversed, vacating the award in its entirety because the arbitrator had “exceeded his power or so imperfectly executed it that a final and definite award upon the subject matter submitted was not made.” CPLR 7511(b)(iii).  First, the court held that the arbitrator’s finding that Denson’s statements before the federal court breached the NDA violated New York’s “long-standing public policy in favor of a person’s right to make statements during the course of court proceedings without penalty” and “improperly punished [Denson] for availing herself of a judicial forum.”  Second, the court vacated the balance of the award based on Denson’s disparaging Tweets because the Trump Campaign’s demand for arbitration was limited to statements made “in connection” with the state action.  Since there was no indication in the award that the Tweets related to the state action, or that they were posted before the demand to arbitrate,  the arbitrator had exceeded his authority by awarding damages outside the scope of the demand.  Arguably, the court also could have found that the arbitrator likewise exceeded his authority when ruling on Denson’s statements made in the federal action, because it was her statements in the state action that were the subject of the demand.  However, having determined that that portion of the award violated public policy, the court did not reach the issue.

Read the court’s full decision here.

“Administrative closure” did not convert order compelling arbitration into final order subject to immediate appeal . . .

Court’s administrative closure was equivalent to a non-final stay pending the final award.

Psara Energy, Ltd. v. Advantage Arrow Shipping, L.L.C., 946 F.3d 803 (5th Cir. 2020).

The Federal Arbitration Act (FAA) embodies the strong federal policy favoring arbitration.  One example is Section 16, which provides that an order refusing to compel arbitration is always subject to immediate appeal, while an order compelling arbitration is generally not immediately appealable, unless it is “final.” 9 U.S.C. §§ 16(a)(3) & 16(b)(1),(3).  Accordingly, if the court compels arbitration and stays the litigation pending a final award, the order compelling arbitration is not appealable until after the arbitration is completed.  However, “a district court order that compels arbitration and dismisses or closes a case outright possesses finality and confers jurisdiction on [the appellate] court.”  So what happens if the court compels arbitration, but “administratively closes” the case?

The Court of Appeals for the Fifth Circuit answered this question in Psara.  While its claims under a charter party were pending against its counter-signatory in an arbitration in London, Psara sued two non-signatories – its counter-signatory’s corporate successor and its guarantor – in U.S. federal court to enforce its rights under the same agreement.  On the defendants’ motion to refer the plaintiff’s claims to the pending arbitration in London, the magistrate judge found that the defendants were entitled to arbitrate the plaintiff’s claims under the charter party and therefore recommended that the district court direct the parties to arbitration and stay the case pending resolution of the issues in the London arbitration.  Adopting the magistrate’s recommendation, the district court compelled the parties to arbitration and “administratively closed” the case.

The plaintiff appealed that order, arguing that the appellate court had jurisdiction to review the district court’s decision under Section 16 of the FAA because that court’s direction that the case be “administratively closed” was tantamount to a final, outright dismissal.  The United States Court of Appeals for the Fifth Circuit disagreed, finding that “an administrative closure is not different from a simple stay.”  The Fifth Circuit noted that courts use administrative closure “to remove from their pending cases suits which are temporarily active elsewhere (such as before an arbitration panel) or stayed (such as where a bankruptcy is pending).”  The district court’s adoption of the magistrate’s recommendation that the case be stayed, along with the ordinary use of the “administrative closure” procedure, demonstrated that the district court intended to retain jurisdiction pending resolution of the claims in arbitration.  Thus, the district court’s order “administratively closing the case pending arbitration was nonfinal for purposes of appellate review,” and the appeal was dismissed.  As a result, the plaintiff could only return to court after the arbitrators’ award.

This case highlights the strategic importance of the relief litigants seek when moving to compel arbitration.  A party wishing to compel arbitration and avoid costly or distracting collateral litigation should seek a stay pending completion of the arbitration.  Asking for outright dismissal will invite further appellate proceedings in parallel with the arbitration.

Read the court’s full decision here.

Insurance/Reinsurance Report, January 2020
(Vol. 7)

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California Supreme Court finds that notice-prejudice rule is a fundamental public policy that can override policy’s choice of law clause …

Public policy overrides contractual choice of New York law if California has a materially greater interest in the determination of the coverage issue.

Pitzer College v. Indian Harbor Ins. Co., 447 P.3d 669 (Cal. 2019).
Pitzer College v. Indian Harbor Ins. Co., 779 Fed.Appx. 495 (9th Cir. October 11, 2019).

The “notice-prejudice rule” is a California common law doctrine that “generally allows insureds to proceed with their insurance policy claims even if they give their insurer late notice of a claim, provided that the late notice does not substantially prejudice the insurer.” This distinguishes California law from other states that have adopted a “no prejudice” rule, which conclusively presumes that late notice prejudices the insurer and precludes coverage.

In Pitzer, the Ninth Circuit Court of Appeals certified questions to the California Supreme Court seeking guidance on two issues: (1) whether the notice-prejudice rule is a fundamental public policy of the state that overrides an insurance policy’s designation of the law of another state that does not follow the rule; and (2) whether the rule applies to a provision in a pollution policy requiring the insurer’s consent before the insured incurs remediation expenses.

As to the first question, the California Supreme Court held that the notice-prejudice rule is a fundamental public policy of California law. The rule overrides principles of freedom of contract by favoring “compensation of insureds over technical forfeiture,” and “protect[ing] the public from bearing the costs of harm that an insurance policy purports to cover.” Accordingly, under California choice-of-law principles, a court must disregard an insurance policy’s choice-of-law provision if the designated law does not apply the notice-prejudice rule and California has a “materially greater interest in the determination of the issue than the contractually chosen state.”

With respect to the second question, the Court held that the notice-prejudice rule applies to the insured’s failure to comply with a policy provision requiring it to obtain the insurer’s consent before incurring pollution-related expenses covered by the policy. As with other notice requirements, the failure to obtain consent will excuse coverage if it prejudices the insurer by “meaningfully increas[ing]” remediation costs or hampering the insurer’s subrogation rights.” But the insurer is precluded from obtaining what the Court deemed a windfall in the event the insured’s failure to obtain consent causes no harm to the insurer. The Court noted an important limitation on the rule, however. With respect to third-party policies, prejudice is presumed because consent is necessary to protect the insurer’s “paramount” right to control the defense and settlement of claims.

The dispute in this case arose under an insurance policy that Pitzer College purchased from Indian Harbor covering legal and remediation expenses resulting from pollution conditions discovered during the policy period. The policy contained two relevant provisions implicating the questions certified by the Ninth Circuit: (i) a provision requiring Pitzer to obtain Indian Harbor’s consent before incurring any pollution-related expenses; and (ii) a choice-of-law clause providing that New York law governed any dispute concerning coverage. While New York has a statutory notice-prejudice rule (N.Y. Ins. L. 3420(a)(5)), it only applies to policies issued or delivered in New York. As Pitzer’s policy was neither issued nor delivered in New York, the policy was governed by New York common law, which imposes a strict no-prejudice rule, setting up a conflict between New York and California law.

While the California Supreme Court’s answers to the certified questions may seem straightforward, their application to these facts was not. Indian Harbor argued that prejudice was presumed because the policy provided third-party coverage, given that remediation expenses are a form of legal liability under environmental laws. Pitzer, on the other hand, argued that it provided first-party coverage because coverage is triggered by the insured’s own discovery of the happening of an event, rather than a claim by a third party. The California Supreme Court left it to the Ninth Circuit to apply the answers it provided to the certified questions applied to these facts.

The Ninth Circuit, in turn, remanded to the district court to determine: (1) whether California had a materially greater interest than New York in determining the coverage issue, in which case California’s notice-prejudice rule would apply; (2) if California law applied, whether the policy provided first- or third-party coverage; and (3) if the policy provided first-party coverage, whether the insurer suffered any prejudice from Pitzer’s delayed notice, which would justify the denial of coverage.

Read the court’s full decision here.


Delaware Supreme Court finds that a “Securities Claim” must involve a statute, rule, or regulation specifically directed toward securities …

“Securities Claim” does not include claims for breach of fiduciary duty, unlawful payment of dividends, or fraudulent transfer.

In re Verizon Ins. Coverage Appeals, — A.3d –, 2019 WL 5616263 (Del. Oct. 31, 2019).

In Verizon, the Delaware Supreme Court addressed whether claims by a spun-off corporate subsidiary against its director and its former parent company for breach of fiduciary duty, unlawful payment of dividends, and fraudulent transfer were covered “Securities Claims” under an executive and organizational liability policy.

The underlying claims at issue arose following Verizon’s divestiture and spinoff of certain businesses into a company called Idearc. After Idearc entered bankruptcy, its trustee sued Verizon and Idearc’s director, alleging violations of fraudulent transfer statutes, payment of unlawful dividends in violation of Delaware General Corporation Law, and common-law claims for breach of fiduciary duty and promoter liability. Although Verizon and the director prevailed in the litigation, Verizon incurred $48 million in defense costs defending itself and the director. Verizon sought coverage for these defense costs.

The policy defined “Securities Claims” as those “[a]lleging a violation of any federal, state, local or foreign regulation, rule or statute regulating securities (including, but not limited to, the purchase or sale or offer or solicitation of an offer to purchase or sell securities).” The Court held that, as a matter of law, the claims at issue did not fall within the definition of “Securities Claims.” Such claims were limited to those alleging violations of laws, rules, or regulations specifically directed toward securities.

None of the claims at issue met that test. The fiduciary duty claims involved common-law duties rather than regulations, rules, or statutes specifically focused on actions involving securities. The claims for unlawful distribution of dividends involved statutes regulating the payment of dividends to protect against the payments resulting in insolvency. The fraudulent transfer statutes were designed to prevent debtors from moving assets (whether or not securities) beyond the reach of creditors. Because these claims were not “Securities Claims,” the policies did not cover Verizon’s defense costs.

Read the court’s full decision here.


Connecticut Supreme Court holds occupational disease exclusion is not limited to claims brought by the insured’s employees …

Exclusion barred all claims for asbestos exposure in the course of employment, regardless of whether claimant was employed by the insured.

R.T. Vanderbilt Co., Inc. v. Hartford Accident & Indem. Co., 216 A.3d 629 (Conn. 2019).

In a decision addressing a “question of first impression nationally,” the Connecticut Supreme Court decided whether a policy exclusion barring liability coverage for “occupational diseases” precludes coverage claims for injury arising from exposure to asbestos in talc and silica products in the course of employment if the claimant was not employed by the insured.

The insured, R.T. Vanderbilt Company, mined and sold talc and silica. Thousands of individuals sued Vanderbilt for injuries allegedly caused by exposure to asbestos in Vanderbilt’s talc and silica between 1948 and 2008. Vanderbilt sought coverage from its primary and excess CGL carriers who issued policies during the period of exposure.

Two of Vanderbilt’s policies, to which several other policies followed form, contained an exclusion for liability arising from “occupational diseases.” Neither policy defined the term “occupational disease.”

Relying on workers compensation statutes, Vanderbilt argued that ‘“occupational disease’ is a term of art that refers only to disputes between [the] employer and [the] employee or to statutory compensation plans for employees.” According to Vanderbilt, the exclusion therefore did not bar claims by individuals who suffered occupational diseases while working for other employers. Although the trial court agreed, the appellate court reversed. The Supreme Court affirmed.

The Court held that the term “occupational disease” had to be given its ordinary meaning, as reflected in dictionaries contemporary to the 1970s and 1980s when the policies were issued. Per these sources, the ordinary meaning of “occupational disease” was an injury sustained in the course of employment and caused by factors arising from the employment. While the term may have also had a meaning in the workers compensation context, it was not devoid of meaning outside that context, and the exclusions here did not reflect an intent to limit their application to the workers compensation context. On the other hand, the inclusion of other policy exclusions for workers compensation claims and employer’s liability demonstrated that “when the drafters of the policy desired to limit the application of an exclusion to a certain group of individuals, they did so.” This rendered “all the more unambiguous the lack of any such express limitation in the occupational disease exclusions.” Although the exclusion was broad, “the breadth of” the exclusions did not render them “any less clear and unambiguous.”

Read the court’s full decision here.


Illinois Supreme Court holds “malicious prosecution” coverage is triggered at time of the wrongful conduct resulting in prosecution …

Only policy in place at the time of the wrongful conduct is triggered, even if the tort of malicious prosecution is completed during the period of a later policy in place when the claimant is ultimately exonerated.

Sanders v. Illinois Union Ins. Co., — N.E.3d –, 2019 IL 124565 (Ill. Nov. 21, 2019).

Sanders was convicted of murder in 1995 based on evidence doctored by Chicago Heights police officers in 1994. In 2011, his conviction was overturned. Sanders’s 2013 retrial ended in a mistrial, and he was acquitted after a third trial in 2014. Sanders settled his malicious prosecution case against Chicago Heights with the city and its insurer under its policy covering 1994. The city and its prior insurer paid $5 million, and the city assigned Sanders its rights under the Illinois Union policies in place from 2011 through 2014.

Illinois Union denied Sanders’s claim for coverage, taking the position that the malicious prosecution did not trigger its policies because it occurred prior to the policy period. The trial court granted Illinois Union’s motion to dismiss, but the appellate court reversed. The Illinois Supreme Court reversed, reinstating the trial court’s decision.

Illinois Union’s policies covered “a Claim arising out of an Occurrence happening during the Policy Period … for … Personal Injury … taking place during the Policy Period” (emphasis in original). The policy defined “Personal Injury” as one or more “offenses,” including “malicious prosecution.” The policy also provided that “[a]ll damages arising out of substantially the same Personal Injury regardless of frequency, repetition, the number or kind of offenses, or number of claimants, will be considered as arising out of one Occurrence.”

The Court held, as a matter of law, that for purposes of coverage under the policy the “offense” of malicious prosecution occurred when the wrongful conduct underlying the claim took place. In Sanders’s case, the offensive conduct was the Chicago Heights police doctoring evidence to incriminate him, before his initial trial. The Court differentiated the “offense” of malicious prosecution under the policy from the tort of malicious prosecution, which is not completed until the victim is ultimately exonerated. The Court found that reference to the tort law definition of malicious prosecution was inconsistent with the policy language and structure. The occurrence-based coverage provided under the policies was not intended to cover acts committed years before the policies commenced.

The Court also rejected Sanders’s argument that his two later trials constituted separate offenses triggering coverage under the later polices. Under the policies’ noncumulation clause, all three trials constituted part of the same “personal injury” because they all arose from the city’s initial doctoring of the evidence. Accordingly, there was only one “occurrence,” which took place at the time of the offense in 1994, prior to the Illinois Union policy periods.

Read the court’s full decision here.

Chaffetz Lindsey Promotes Five Team Members

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New York, NY – January 7, 2020 – Chaffetz Lindsey, a leading New York-based arbitration and litigation boutique, announces the promotion of five team members to new roles in the firm.  The firm promoted Andrew (Drew) Poplinger to partner, Rainbow Willard to counsel, and Joshua (J.D.) Anders, Karen Baswell and Ted DeBonis to Senior Attorney.  These promotions follow the firm’s recruitment of two prominent lateral partners, Caline Mouawad and Alan Lipkin.

Drew joined the firm in September 2012, following his clerkship with the Honorable Richard K. Eaton of the United States Court of International Trade. He was promoted to counsel in 2017.  He represents clients in commercial disputes before state and federal courts, and before all major arbitral institutions and in ad hoc disputes in a variety of industries, including insurance and reinsurance, oil and gas, construction and financial services.  Legal 500 USA has recognized Drew‘s work, naming him one of six “Next Generation Attorneys” nationwide for Advice to Insurers.

“Drew is a gifted advocate and consummate common law lawyer,” said founding partner Peter Chaffetz.  “He works tirelessly and with contagious enthusiasm to master each new case.  We are so pleased to promote Drew to the partnership.”

Drew is admitted to practice in New York and Texas.  He earned his JD summa cum laude in 2006 from Albany Law School, where he was a senior editor for the Albany Law Review. He obtained his BA and MA in political communication from the State University of New York at Albany in 2003.

Rainbow regularly appears in front of international arbitration tribunals and U.S. courts.  One of her great talents is the ability to simplify case presentation and strategy in complex, cross-border matters. She has also helped several clients navigate parallel proceedings in international arbitration and national courts in a host of foreign jurisdictions.  Rainbow is fluent in English, Spanish, and Kaqchikel Maya.

Prior to joining Chaffetz Lindsey in 2017, Rainbow was a senior associate in the international arbitration group of Allen & Overy LLP, where she practiced in the London and New York offices.  Rainbow clerked for the Honorable Kathleen M. Williams of the United States District Court for the Southern District of Florida and served as an assistant federal public defender in the Southern District of Florida, where she appeared as lead defense counsel in more than 100 federal felony cases.  She earned her JD with high honors from Emory University School of Law, an MA in Linguistics from the University of California, Berkeley, and her BA cum laude from Tulane University’s Newcomb College.  Rainbow serves as a member of the Global Steering Committee for the Chartered Institute of Arbitrators Young Members Group, and as Secretary to the Executive Committee of the New York International Arbitration Center.

Commenting on the promotion of Rainbow Willard to counsel, Aníbal Sabater, a member of Chaffetz Lindsey’s management group, said, “Rainbow has played a leading role in some of our most complex arbitration matters.  She is a talented advocate in both English and Spanish. We could not be more impressed with her intelligence and judgment. We look forward to her continued success.”

The firm is promoting Karen Baswell, J.D. Anders and Ted DeBonis to Senior Attorney.  Commenting on these three promotions, Peter Chaffetz said, “J.D., Karen, and Ted have been at the heart of many of our greatest successes.  Our clients benefit from their rich experience and leadership on the complex matters the firm handles.  We are very pleased to promote them to a new position that recognizes their contribution.”

Since joining Chaffetz Lindsey in 2013, J.D. has represented individual and corporate clients in disputes in state and federal court and in arbitration proceedings. His strong research and analytical skills have made him a key team member in a succession of complex disputes.  He is also a go-to lawyer for anything related to e-discovery.  J.D. earned his BA and MA degrees from Northeastern State University and his JD from Harvard.  He began his career at Paul Weiss.

Karen started her career at Clifford Chance and was one of the original seven attorneys when Chaffetz Lindsey opened for business in 2009.  She has been a mainstay of the firm’s insurance and reinsurance practice, and has experience in international arbitration, with a focus on construction disputes.  Karen has keen quantitative skills, which she enjoys using to help organize and understand complex data that other lawyers often find daunting.  Karen received her JD from Hofstra University School of Law where she was Articles Editor of the Hofstra Law Review and graduated summa cum laude.  Previously she earned both BA and BS degrees from the University of Richmond.

Ted has represented clients in a wide range of complex litigation and arbitration matters, including representing insurers, reinsurers, corporations, and individuals in commercial litigation, arbitration, and mediation.  Ted’s clients recognize his steady leadership, in-depth analytical capabilities, and exemplary case management.  A graduate of St. Johns Law School (JD) and Columbia College (BA), Ted began his career at Simpson Thacher & Bartlett LLP before joining Chaffetz Lindsey in 2011.

Chaffetz Lindsey Launches “Arbitration in the Courts” Report

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November 2019 – The initial installment of Chaffetz Lindsey’s Arbitration in the Courts report is now available. Recent case summaries to keep you informed on new developments, and reminded of old ones. For our full report and copies of the decisions, click here.

Federal Court in New York Refuses to Recognize Foreign Arbitral Award Set Aside at the Seat

Nigerian court’s decision to set aside award is entitled to comity.

Sixth Circuit Holds That U.S. Courts May Order Discovery for Use in Foreign Arbitration

Private arbitral tribunals constitute a “foreign or international tribunal” under statute authorizing discovery in aid of foreign proceedings..

The D.C. Federal Court Gracefully Avoids the Achmea-Mania

European Court of Justice’s Achmea decision does not preclude enforcement of arbitration award under Romania-Sweden BIT where claims concerned events pre-dating Romania’s accession to the EU.

Fifth Circuit Holds Court Decides Whether Claims are Arbitrable Despite Arbitration Clause’s Incorporation of the AAA Rules

Incorporation of institutional rules not sufficient to delegate arbitrability to the arbitrators where clause clearly carves-out claims for injunctive relief.

Illustrations by Hank Blaustein
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Arbitration in the Courts, November 2019
(Vol. 1)

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Federal Court in New York Refuses to Recognize Foreign Arbitral Award Set Aside at the Seat: Nigerian court’s decision to set aside award is entitled to comity.

Esso Expl. & Prod. Nigeria Ltd. v. Nigerian Nat’l Petroleum Corp., 397 F. Supp. 3d 323 (S.D.N.Y. 2019)

Article V(e) of the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention”) provides that an enforcing court may refuse recognition and enforcement of an award if it “has been set aside” by a court at the seat.  In its seminal decision in Corporacion Mexicana De Mantenimiento Integral, S. De R.L. De C.V. v. Pemex-Exploracion y Produccion, 832 F.3d 92 (2d Cir. 2016) (“Pemex”), the Second Circuit Court of Appeals (the “Second Circuit”), whose decisions are binding on federal courts in New York, confirmed that principles of international comity ordinarily require that a U.S. court refuse to enforce an award that has been set aside by a court at the arbitral seat.  Pemex, however, also recognized that in extraordinary circumstances, the foreign court’s set-aside judgment may be so repugnant to U.S. public policy that it should not be recognized.  In Pemex, the Second Circuit enforced a Mexican arbitral award against a state-owned oil company, despite a Mexican court order setting it aside.  The Mexican court’s decision was based on a retroactive change in Mexican law, which had been adopted after the petitioner had obtained the award, and purported to render the petitioner’s claims not only non-arbitrable, but also subject to a brief, by then already-expired, statute of limitations.  Because, among other reasons, the change in Mexican law left the petitioner with no forum at all to resolve its claims, the Second Circuit found that the Mexican court’s annulment was repugnant to U.S. public policy, and enforced the award.

In Esso, the petitioners invoked Pemex in seeking recognition and enforcement of a foreign award that had been set aside at the seat in Nigeria.  The case involved a petition to enforce a $1.8 billion award issued in an ad hoc arbitration seated in Nigeria.  The dispute arose out of a production sharing agreement between affiliates of Shell and ExxonMobil (together, “Esso”) and Nigeria’s state-owned oil company, NNPC, to develop and extract oil from a field off the coast of Nigeria.  The agreement provided for the allocation of oil to the parties in four tranches, one of which was “Tax Oil,” which was allocated to NNPC to cover tax payments to the Nigerian government.  After oil production began, NNPC lifted more oil than Esso had allocated, because it determined that Esso’s allocations of “Tax Oil” were insufficient to satisfy the parties’ tax obligations.  Complaining that NNPC’s extractions breached the parties’ agreement, Esso initiated arbitration in Nigeria and was ultimately awarded $1.8 billion in monetary damages and other declaratory relief.  Esso then sought to confirm the award in Nigeria, while NNPC, who had objected from the outset to the arbitral tribunal’s jurisdiction, moved to set it aside.  The Nigerian trial court granted NNPC’s set aside motion.  The Nigerian Court of Appeal upheld certain portions of the award, but affirmed the set aside of the award of monetary relief, finding that tax disputes were not arbitrable under Nigerian law.

Relying principally on Pemex, Esso sought to confirm the annulled award in the United States on the ground that the Nigerian Court of Appeal’s decision violated U.S. public policy.  The district court rejected this argument, and declined to confirm the award.  The court distinguished Pemex on three grounds.  First, because it was arguable that the dispute was not arbitrable under Nigerian law and NNPC, unlike the petitioner in Pemex, disputed the tribunal’s jurisdiction from the outset of the arbitration, the court concluded that “it cannot be said that the parties agreed to arbitrate this dispute.”  Second, in setting aside the award, the Nigerian court applied existing Nigerian law in a reasoned decision, unlike the retroactive legislation that served as the basis for annulment in Pemex. Finally, Esso was not left without a forum to assert its claims because its appeals were pending in Nigeria.  Moreover, because Esso knew from the outset that NNPC contested the tribunal’s jurisdiction, it could have pursued its claims through litigation.  Given these facts, the court held that the case did not present the extraordinary circumstances that would warrant denying comity to the Nigerian court’s decision setting aside the award.

Full disclosure: Chaffetz Lindsey LLP represents Respondent Nigerian National Petroleum Corp. (NNPC) in this case, which is currently on appeal to the Second Circuit.

Read the court’s full decision here.

Sixth Circuit Holds That U.S. Courts May Order Discovery for Use in Foreign Arbitration: Private arbitral tribunals constitute a “foreign or international tribunal” under statute authorizing discovery in aid of foreign proceedings.

Abdul Latif Jameel Transportation Co. v. FedEx Corp. (In re Application to Obtain Discovery for Use in Foreign Proceedings), 939 F.3d 710 (6th Cir. 2019)

28 U.S.C. § 1782(a) authorizes federal district courts to order discovery “for use in a proceeding in a foreign or international tribunal” upon application by “any interested person.”  In Abdul Latif Jameel Transportation, the Sixth Circuit, which has jurisdiction over federal courts sitting in Tennessee, held that a privately-constituted arbitral tribunal is a “foreign or international tribunal” under Section 1782.  Accordingly, the court held, the statute permits a party to obtain third-party discovery from parties residing in the United States for use in a private commercial arbitration seated abroad. The Second and Fifth Circuit Courts of Appeal had previously held that Section 1782 discovery is not available in connection with private arbitration proceedings because the statutory phrase “foreign or international tribunal” refers only to “state-sponsored” tribunals.  See National Broadcasting Co., Inc. v. Bear Stearns & Co., Inc., 165 F.3d 184 (2d Cir. 1999); Republic of Kazakhstan v. Biedermann Int’l, 168 F.3d 880 (5th Cir. 1999). The Sixth Circuit’s decision in this case sets up a Circuit split that could very well make its way to the Supreme Court for final resolution.

The case arose in connection with a dispute between a Saudi courier services company and FedEx International over a delivery-services partnership in Saudi Arabia.  After the Saudi company commenced arbitration against FedEx International in Dubai, it then sought discovery under Section 1782 from FedEx International’s Tennessee-based parent company for use in the arbitration.  The district court denied the application, holding that discovery under Section 1782 was unavailable because a private arbitration tribunal was not a “foreign or international tribunal” for purposes of the statute.

The Sixth Circuit reversed, finding that the plain meaning of “tribunal,” as used in the statute, was broad enough to include private international arbitration.  In reaching its conclusion, the Sixth Circuit criticized the Second and Fifth Circuits’ holdings that only “state-sponsored” proceedings fall within Section 1782’s scope as too reliant on legislative history, which it found inappropriate in light of what it deemed the plain meaning and longstanding usage of the word “tribunal.”

Read the court’s full decision here.

The D.C. Federal Court Gracefully Avoids the Achmea-Mania:  European Court of Justice’s Achmea decision does not preclude enforcement of arbitration award under Romania-Sweden BIT where claims concerned events pre-dating Romania’s accession to the EU. 

Micula v. Gov’t of Romania, 2019 WL 4305533 (D.D.C. Sept. 11, 2019)

Starting in 2014, the Micula brothers, dual Swedish-Romanian nationals, sought to enforce in the United States an award issued in their favor against Romania. In the meantime, however, in March 2018, the European Court of Justice (the “ECJ”) ruled in Slovak Republic v. Achmea that all arbitration agreements included in bilateral investment treaties (BIT) between EU states were invalid, because granting tribunals the authority to enforce EU law unduly encroaches upon the ECJ’s authority to interpret and apply that law, as envisioned by the EU treaties.

Romania’s principal argument against enforcement of the Micula award was that the district court did not have subject matter jurisdiction to enforce the award under the Foreign Sovereign Immunities Act (FSIA).  Under the FSIA’s arbitration exception (28 U.S.C. § 1605(a)(6)), foreign sovereigns are not entitled to immunity in cases seeking to enforce foreign arbitral awards governed by international conventions, such as, in this case, the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (commonly referred to as the  ICSID Convention).  But Romania argued that, under Achmea, the arbitration clause in the Sweden-Romania BIT was invalid.

The court rejected Romania’s objections and held that the FSIA’s arbitration exception applied.  Achmea did not preclude arbitration under the BIT, because the claims in the arbitration concerned actions taken before Romania’s accession to the EU.  Accordingly, the arbitral tribunal was not bound by and did not interpret or apply EU law.

Read the court’s full decision here.

Fifth Circuit Holds Court Decides Whether Claims are Arbitrable Despite Arbitration Clause’s Incorporation of the AAA Rules:  Incorporation of institutional rules not sufficient to delegate arbitrability to the arbitrators where clause clearly carves-out claims for injunctive relief.

Archer & White Sales, Inc. v. Henry Schein, Inc., 935 F.3d 274 (5th Cir. 2019)

The Federal Arbitration Act does not per se incorporate the principle (known as “competence-competence”) that arbitrators should determine their own jurisdiction in the first instance.  Rather, under U.S. law, it is presumptively for a court to decide in the first instance whether the parties’ dispute falls within the scope of their arbitration agreement.  However, the United States Supreme Court has also held that if the parties “clearly and unmistakably” agree to delegate this question to the arbitrators, their agreement will be respected, and the arbitrators should in that case determine in the first instance whether a particular dispute falls within the scope of the parties’ arbitration agreement.  Applying this rule, most federal courts have recognized that the agreement to arbitrate under institutional rules granting the arbitrators jurisdiction to determine their own jurisdiction (such as the American Arbitration Association’s Commercial and International Rules), constitutes a clear and unmistakable delegation of the issue to the arbitrators.

In Archer, the arbitration provision in the parties’ agreement provided, in relevant part, that “[a]ny dispute arising under or related to this Agreement (except for actions seeking injunctive relief . . .), shall be resolved by binding arbitration in accordance with the arbitration rules of the American Arbitration Association [AAA].” (Emphasis added).  The plaintiff commenced a court action seeking both money damages and injunctive relief for alleged violations of federal and state antitrust laws.  The defendant moved to compel arbitration.

The defendant argued that, by incorporating the AAA Rules into their agreement, the parties had delegated to the arbitrators the authority to determine whether the claims were subject to arbitration.  The defendant accordingly argued that the court should refer the matter to arbitration for the tribunal to consider this threshold jurisdictional question.  The court disagreed, finding that the carve-out language in the arbitration clause for actions seeking injunctive relief precluded arbitration.  Specifically, the court held that the “plain language incorporates the AAA rules—and therefore delegates arbitrability—for all disputes except those under the carve-out.”  Thus, the parties did not clearly and unmistakably delegate all questions of jurisdiction to the arbitrators, and whether plaintiff’s claims fell within the carve-out, and therefore outside the scope of the agreement to arbitrate, was a question for the court in the first instance.

The court went on to hold that the plaintiff’s claims were not arbitrable.  It rejected the defendant’s argument that because the arbitration carve-out specified only “injunctive relief,” the plaintiff’s money damages claims must be arbitrated.  Rather, by its plain terms, the arbitration provision carved out “actions seeking injunctive relief,” not “actions seeking only injunctive relief” or merely “claims for injunctive relief.”  Although the Court recognized that the plaintiff could avoid arbitration merely by adding a request for injunctive relief, it held that it was no reason to rewrite the clause the parties had chosen.

Read the court’s full decision here.

EDITORS
Yasmine Lahlou
PARTNER
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Andrew Poplinger
COUNSEL
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CONTRIBUTORS
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Illustrations by Hank Blaustein

This blog post is a service to our clients and friends. It is designed only to give general information on the developments actually covered. It is not intended to be a comprehensive summary of recent developments in the law, treat exhaustively the subjects covered, provide legal advice, or render a legal opinion.

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