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The Fifth Circuit’s PoolRe Decision: Captives, Insurance, Reinsurance, Arbitration, Multiple Parties, Multiple Contracts, Conflicting Arbitration Agreements: Does it Get any Better than this?! (Part II)

April 21st, 2015 Appellate Practice, Arbitration Agreements, Arbitration as a Matter of Consent, Arbitration Practice and Procedure, Arbitration Provider Rules, Arbitration Risks, Arbitrator Selection and Qualification Provisions, Authority of Arbitrators, Awards, Captive Insurance Companies, Grounds for Vacatur, Judicial Review of Arbitration Awards, Making Decisions about Arbitration, Managing Dispute Risks, Practice and Procedure, Small and Medium-Sized Business Arbitration Risk, Small Business B-2-B Arbitration, United States Court of Appeals for the Fifth Circuit Comments Off on The Fifth Circuit’s PoolRe Decision: Captives, Insurance, Reinsurance, Arbitration, Multiple Parties, Multiple Contracts, Conflicting Arbitration Agreements: Does it Get any Better than this?! (Part II) By Philip J. Loree Jr.

Part II

Analysis of the Pool Re Decision

If you read Part I you know the arbitration program in PoolRe case was, to put it mildly, inadequate to meet the needs of the multi-party, multi-contract dispute that arose out of the parties’ legal relationships. Perhaps the saving grace is that the both the district court and the Fifth Circuit Court of Appeals vacated the award, which is what Sections 5 and 10 of the  Federal Arbitration Act require.

yay-12688786 - WavebreakmediaThe Fifth Circuit addressed whether the district court erred by: (a) vacating the arbitration award on the ground the arbitrator exceeded his powers; (b) vacating the entire award; and (c) denying the motion to compel arbitration of the Phase II Claims. Finding no error, the Fifth Circuit affirmed the district court’s judgment in its entirety.

The District Court Correctly Concluded that the Arbitrator Exceeded his Powers

 

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The Fifth Circuit held that the arbitrator exceeded his powers because the Arbitrator: (a) was not properly appointed under the terms of the Reinsurance Agreement’s arbitrator selection provisions, which required him to be “selected by the Anguilla, B.W.I. Director of Insurance;” and (b) decided the dispute under the American Arbitration Association’s rules when the Reinsurance Agreement required arbitration under International Chamber of Commerce (“ICC”) Rules.

Arbitrator not Selected as Required by the Reinsurance Agreement’s Arbitrator Selection Provisions

 

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The district court held vacatur was required  because the Arbitrator “was not ‘the actual decisionmaker that [PoolRe and the Captives] selected as an integral part of their agreement.'” Slip op. at 9 (quoting district court). The Fifth Circuit held that “the district court properly vacated the arbitrator’s award with regard to the claims against PoolRe[,]” because the Arbitrator “was appointed in the manner provided in the [Engagement Agreement’s] Billing Guidelines — to which PoolRe was not a party — but was appointed in a manner contrary to that provided in the Reinsurance Agreements between PoolRe and the Captives, which required ‘select[ion] by the Anguilla, B.W.I. Director of Insurance.'” Slip op. at 10-11. The Capstone Entities “submitted [their] original arbitration demand to [the Arbitrator][,]” but “PoolRe,” said the Court, “only intervened in that arbitration after [the  Anguilla Financial Services Commission] notified Pool Re that no Director of Insurance existed.” Slip op. at 10-11. The Arbitrator thus “had not been ‘selected according to the contract specified method’.  .  .  when he  decided the dispute between Pool Re and the Captives.” Slip op. at 11 (quoting Bulko v. Morgan Stanley DW Inc., 450 F.3d 622, 625 ((5th Cir. 2006)).

The Fifth Circuit’s decision is fully consistent with the Federal Arbitration Act, under which “arbitration is a matter of consent, not coercion.” Stolt-Nielsen, S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662, 678-80 (2010) (citation and quotations omitted). Courts are supposed to enforce arbitration agreements according to their terms, and among the most important terms of an arbitration agreement are those concerning arbitrator selection. See Lefkovitz v. Wagner, 395 F.3d 773, 780 (2005) (Posner, J.) (“Selection of the decision maker by or with the consent of the parties is the cornerstone of the arbitral process.”); see, e.g., 9 U.S.C. § 5 (“If in the agreement provision be made for a method of naming or appointing an arbitrator or arbitrators or an umpire, such method shall be followed.  .  .  .”); Convention on the Recognition and Enforcement of Foreign Arbitral Awards, Art. V(1)(d), June 10, 1958, 21 U.S.T. 2519, T.I.A.S. No. 6997 (a/k/a the “New York Convention”) (implemented by 9 U.S.C. §§ 201, et. seq.) (award subject to challenge where “[t]he composition of the arbitral authority or the arbitral procedure was not in accordance with the agreement of the parties”); Stolt-Nielsen, 559 U.S. at 668, 670 (one of the FAA’s “rules of fundamental importance” is parties “may choose who will resolve specific disputes”) (emphasis added; citations omitted); Encyclopaedia Universalis S.A. v. Encyclopaedia Brittanica, Inc., 403 F.3d 85, 91-92 (2d Cir. 2005) (vacating award by panel not convened in accordance with parties’ agreement); Cargill Rice, Inc. v. Empresa Nicaraguense Dealimentos Basicos, 25 F.3d 223, 226 (4th Cir. 1994) (same); Avis Rent A Car Sys., Inc. v. Garage Employees Union, 791 F.2d 22, 25 (2d Cir. 1986) (same).

Arbitrator Exceeded his Powers by Deciding the Disputes between Pool Re and the Captives under the AAA Rules Rather than under the ICC Rules

 

 

The Fifth Circuit also held that the Arbitrator exceeded his powers by deciding the disputes between Pool Re and the Captives under the AAA Rules because the Reinsurance Agreements required “all disputes [to] ‘be submitted for biding, final, and nonappealable arbitration to the [ICC] under and in accordance with its then prevailing ICC Rules of Arbitration.'” Slip op. at 10-11. The Court explained that it “interpret[s] clauses providing for arbitration in accordance with a particular set of rules as forum selection clauses.” Slip op. at 10-11 (quotation and citations omitted). And “[i]f the parties’ agreement specifies that the laws and procedures of a particular forums shall govern any arbitration between them, that forum-selection clause  is an important part of the arbitration agreement, and, therefore, the court need not compel arbitration in a substitute forum if the designated forum becomes unavailable.” Slip op. at 11 (quotations and citations omitted). By applying the “the AAA rules [instead  of the ICC Rules] to the dispute[,]” the Arbitrator “acted contrary to an express contractual provision,” and therefore exceeded his powers within the meaning of Section 10(a)(4) of the Federal Arbitration Act. Slip op. at 11 (quotation, citation and brackets omitted).

District Court Properly Vacated the Entire Award

 

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PoolRe, the Capstone Entities and the Feldman Firm argued that the district court was not authorized to vacate the award in its entirety, an  argument the Fifth Circuit rejected for three reasons.

First, while the Court acknowledged that prior Fifth Circuit precedent authorized a court to vacate an award in part, the Court explained that “a district court does not have to vacate in part and confirm in part just because it may do so.” Slip op. at 13.

Second, the Court pointed out that the district court had found that “PoolRe’s involvement [in the arbitration] had tainted the entire process.” Slip op. at 13. Simply excising the portion of the award in favor of PoolRe would not address that problem.

Third, the award was not easily divisible, as the Arbitrator simply awarded a lump sum and left it to the parties to allocate among themselves as they chose.  “Nothing in the statute or our cases,” explained the Court, “suggests that a district court errs by failing to vacate in part, particularly where the arbitrator awarded a lump sum ‘to be divided among the parties as they see fit.” Slip op. at 13-14.

District Court did not Err by Not Granting Motion to Compel Phase II Arbitration

 

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The claims the service provider companies asserted against OSI in Phase II arbitration demand concerned intellectual property disputes, which were predicated on OSI’s alleged breach of its agreements with the service providers, as well as on the assumption that the arbitrator had the authority to determine those claims. The district court had denied the motion to compel because its order vacating the first arbitration award “‘precludes the relief requested in the second arbitration[,]'” and “[b]ecause [the Fifth Circuit] affirm[ed] the vacatur of the Phase I arbitration award, [it] also affirm[ed] the district court’s denial of the motion to compel.” Slip op. at 14.

PoolRe Take Home Points.  .  .  .

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  1. Arbitration can yield benefits that may make it an attractive alternative to litigation, provided (among other things) the parties understand its risks and consequences, and structure their arbitration agreement or arbitration program in a way that manages that risk effectively.
  2. If an arbitration agreement or program is not structured or drafted properly, then there’s a substantial risk that arbitration will not only fail to yield the benefits it otherwise might have yielded, but add substantial time and monetary costs to the dispute resolution process that could have been avoided had the parties not agreed to arbitrate and resolved their dispute through the default method of dispute resolution: the courts.
  3. Parties, even practicing lawyers (recall that the service provider entities were owned by the Feldman Firm’s name partner), should not assume that arbitration is a one-size-fits-all, self-implementing and self-correcting  form of dispute resolution, whose benefits can be realized simply by inserting pretty much any arbitration clause into the contract—or any number of different arbitration clauses into any number of related contracts.
  4. Parties who are contemplating entering into a significant transaction that will or may include one or more agreements to arbitrate, but are not well-versed in arbitration law, and are not already working with attorneys who substantial experience with Federal Arbitration Act litigation and representing parties in arbitration proceedings, are generally well-advised to seek the advice of a skilled and experienced arbitration attorney to assist them in designing and drafting an arbitration agreement or program that is tailored to their needs and expectations.  Having a corporate or business attorney advise on the arbitration agreement is not necessarily enough (unless that person also happens to be an arbitration lawyer with substantial FAA litigation experience, as well as significant experience representing clients before arbitration panels).
  5. If your goal is efficiency and reduced overall costs, then do not make “penny wise,” but “pound foolish” cost-management decisions. Consider how much money the parties must have spent litigating the FAA issues in the PoolRe case. The nature of the disputes and the stakes made that litigation pretty much unavoidable, unless one of the parties was prepared to basically surrender, and that, of course, is rarely the case. The arbitrator’s attorney fee award was more than $450,000,000.00, even before the parties incurred the full extent of their FAA-litigation-related attorney fees, so it is probably fair to estimate that the parties have, by now, incurred hundreds of thousands of dollars in legal fees associated with FAA litigation, as well as a very substantial amount of fees associated with arbitrating the dispute on the merits. And, as we said in Part I, the parties are basically back where they started. We think it is highly unlikely that any of this would have transpired had the parties entered into a sensible arbitration agreement, some thing that presumably could have been avoided had at least one of the parties invested the modest sum that would have been required to engage an arbitration lawyer.

 

Photo Acknowledgements:

All photos used in the text portion of this post are licensed from Yay Images and are subject to copyright protection under applicable law. Text has been added to images 2 through 7 (counting from top to bottom), and text and a shape were added to image number 7. Hover your mouse pointer over any image to view the Yay Images abbreviation of the photographer’s name.

         

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