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Archive for July, 2010

A Very Brief Look at the Arbitration-Related Provisions of the Dodd-Frank Act

July 30th, 2010 Uncategorized Comments Off on A Very Brief Look at the Arbitration-Related Provisions of the Dodd-Frank Act

On July 21, 2010 President Barack Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) (here).  Title X of the Dodd-Frank Act created the Bureau of Consumer Financial Protection (the “Bureau”), which has jurisdiction over consumer contracts for the sale of financial products and services. 

Section 1028 of the Dodd-Frank Act directs the Bureau to study mandatory, pre-dispute arbitration in contracts under its jurisdiction and report back to Congress.  The agency will then be authorized to either ban or regulate pre-dispute arbitration clauses in contracts under its jurisdiction, provided that the “Bureau finds that such prohibition or imposition of conditions or limitations is in the public interest and for the protection of consumers.”  The Bureau’s findings must “be consistent” with its study. 

Section 921 of the Dodd-Frank Act likewise authorizes the Securities and Exchange Commission (“SEC”) to “prohibit, or impose conditions or limitations on the use of, agreements that require customers or clients of any broker, dealer, or municipal securities dealer to arbitrate any future dispute between them arising under the Federal securities laws, the rules and regulations hereunder, or the rules of a self-regulatory organization if it finds that such prohibition, imposition of conditions, or limitations are in the public interest and for the protection of investors.’’ Section 921 also authorizes the SEC to ban or regulate pre-dispute arbitration in contracts between “customers or clients of any investment adviser.” 

In addition, Section 1414 of the Dodd-Frank bans pre-dispute arbitration in residential mortgages and home-equity loans, and Section 922 renders unenforceable pre-dispute agreements to arbitrate whistleblower claims.

Announcing a New LinkedIn Group: Reinsurance Claims

July 30th, 2010 ADR Social Media, Reinsurance Claims, Reinsurance Social Media Comments Off on Announcing a New LinkedIn Group: Reinsurance Claims

Readers know that I own and co-manage with other ADR professionals LinkedIn’s Commercial and Industry Arbitration and Mediation Group.  (See most recent post here.)   For some time, however, I have been planning to start a LinkedIn group that focused on reinsurance-related matters, and on July 28, 2010, my good friends Nigel Shepherd and Robert Bear and I took the plunge and formed Reinsurance Claims. 

After being in existence for only two days, the group has grown to 38 members, and our good friends Marc Lanzkowsky, Theresa Hajost and George Simpson, IV have  graciously agreed to join Nigel, Robert and me on the co-management team.  We intend to publish a shortly an article discussing the backgrounds and credentials of our very talented and diverse team. 

The group is a forum for the open discussion of issues and sharing of information concerning ceded and assumed reinsurance claims in the U.S. and overseas markets.  Topics of discussion may include, but are not limited to the presentation, adjustment, processing, settlement and payment of ceded and assumed reinsurance claims; claims dispute resolution, including litigation, arbitration, mediation and other forms of ADR; commutation; handling claims for a company in run-off; handling claims for an active writer; collections, including collections from companies in run off; comparative claims practices and procedures (e.g., London versus U.S. market); claims issues pertinent to insurance insolvencies; and coordination between the claims department and other departments of the company.  The group welcomes members from both the U.S. and international community.

Persons who should consider joining the group include in-house claims professionals; in-house and outside counsel; claims consultants and experts; actuaries; reinsurance arbitrators and mediators; brokers with claims responsibilities; and anyone genuinely interested in learning more about the subject.  The purpose of the group is information sharing and professional networking.  

The group welcomes new members, and encourages (but does not require) active participation.  The only requirement for membership is a bona fide interest in reinsurance claims.  The group is not a forum for, and does not permit, advertising or blatant self-promotion, so our members need not be concerned about being subject to sales pitches and the like. 

If you are already a member of LinkedIn, please click here to apply for membership in the group.  If you are not a LinkedIn member, click here, and you will be guided through the process of creating a profile (which does not need to be completed in one step).  Once your profile is started, and you have a log-in name and password, you can click here to apply for membership in the group.  Joining LinkedIn is free, as is joining the group. 

We hope you’ll join up!

What to Make of the Second Circuit Voiding a Class Action Waiver Under California’s Discover Bank Rule?

July 23rd, 2010 Arbitration Practice and Procedure, California State Courts, Class Action Arbitration, Class Action Waivers, Practice and Procedure, United States Court of Appeals for the Ninth Circuit, United States Court of Appeals for the Second Circuit, United States Supreme Court Comments Off on What to Make of the Second Circuit Voiding a Class Action Waiver Under California’s Discover Bank Rule?

After deciding Stolt-Nielsen, S.A. v. AnimalFeeds, Inc. and Rent-A-Center West v. Jackson, the United States Supreme Court left federal arbitration law at a crossroads.  In both cases the Court adhered quite faithfully to its prior Federal Arbitration Act jurisprudence, under which it enforces arbitration agreements according to their terms, without regard to other considerations.  In Rent-A-Center the Court implicitly reaffirmed that these pro-enforcement rules apply equally to contracts of adhesion. 

We will find out whether the Court intends to continue down the same path when it decides AT&T Mobility v. Concepcion next term, a case that raises the question whether California’s Discover Bank  unconscionability rule is pre-empted by the Federal Arbitration Act.  That rule deems unconscionable under California law class-action or class-arbitration waivers where:  (a) “the waiver is found in a consumer contract of adhesion in a setting in which the disputes between the contracting parties predictably involve small amounts of damages”; and (b) “it is alleged that the party with the superior bargaining power has carried out a scheme to deliberately cheat large numbers of consumers out of individually small sums of money.  .  .  .”  Discover Bank v. Superior Court, 36 Cal. 4th 148, 162-63 (2005) (citing Cal. Civ. Code § 1668). 

The Discover Bank rule is grounded in a California-law principle – embodied in Cal. Civ. Code § 1668 – that “contracts which have for their object, directly or indirectly, to exempt anyone from responsibility for his own fraud.  .  .  are against the policy of the law.”   See Cal. Civ. Code § 1668.  If a company is allegedly engaging in fraudulent acts designed to cheat numerous consumers out of small amounts of money, a class action or class arbitration waiver may, if enforced, effectively act as an exculpatory provision that insulates the company from the consequences of its small scale, but widespread fraud, because the individual, allegedly defrauded consumers have little incentive to pursue separate actions or arbitrations to recoup trivial amounts of damages.  See Discover Bank, 36 Cal. 4th at 162-63.  Any contract that had that effect – whether it is a class action waiver in an arbitration clause, an exculpatory agreement or a contract that simply forbids class actions  — would be unconscionable under the rule.  

In Fensterstock v. Education Finance Partners, No. 09-1562-cv, slip op. (2d Cir. July 12, 2010), the United States Court of Appeals for the Second Circuit suggested one path that the United States Supreme Court might take on Discover Bank preemption.  In an interesting opinion, Senior Circuit Judge Amalya Lyle Kearse, joined by Circuit Judges José A. Cabranes and Chester J. Straub, held that the Discover Bank rule was not preempted by the Federal Arbitration Act.  According to the Second Circuit, California’s  Discover Bank rule “’places arbitration agreements on the exact same footing as contracts that bar class action litigation outside the context of arbitration,’” and for that reason the rule is not preempted by the Act.  Slip op. at 16-17 (quoting Shroyer v. New Cingular Wireless Serv., Inc., 498 F.3d 976, 990 (9th Cir. 2007) (emphasis in original)). 

On first blush the Second Circuit’s decision seems reasonable.  But there are some important issues lurking beneath the surface that the Supreme Court will need to address when it decides AT&T MobilityContinue Reading »

How Will Stolt-Nielsen, S.A. v. Animalfeeds Int’l Corp. Change Reinsurance Arbitration Practice?

July 20th, 2010 Arbitration Practice and Procedure, Consolidation of Arbitration Proceedings, Practice and Procedure, Reinsurance Arbitration, United States Supreme Court Comments Off on How Will Stolt-Nielsen, S.A. v. Animalfeeds Int’l Corp. Change Reinsurance Arbitration Practice?

Part V.C

A.   Introduction

As was evident from Parts V.A and V.B (here and here), Stolt-Nielsen has dramatically changed the legal landscape on consolidated arbitration.  In this Part V.C. we explore the practical and strategic implications of that change.

B.   Reinsurers Will Likely Regain the Tactical Advantage They Had Pre-Bazzle   

For the last several years since Bazzle, cedents and reinsurers have treated consolidation of arbitration proceedings largely as a given.  Courts would usually delegate the consolidation question to the arbitrators, and, in turn, arbitrators would usually order consolidation.  After a while, consolidation became something that the parties frequently agreed upon, because in most cases there was little or no point in opposing it.  (See Part III, here.) 

The advent of large, consolidated proceedings redounded mostly to the cedents’ benefit.   In the consumer-class-arbitration context, the theme is usually the many against the one — the consumers versus the company.  But in reinsurance arbitration the tables are turned, and the theme is usually the one against the many – the cedent versus the reinsurers participating in one or more treaties.   

Consolidated arbitration allowed a cedent to, among other things, aggregate its claims against several reinsurers participating in a multi-year treaty program.  Without consolidated arbitration the dollar amounts associated with each claim might be too small to warrant a serious collection effort.  But the ability to aggregate ensured that even relatively small balances could be pursued. 

Collections were fairly straightforward, and reinsurers who might otherwise have multiple chances before multiple panels to assert certain defenses were forced to make their arguments before a single arbitration panel.    The ability of cedents to compel consolidated arbitration probably contributed to reinsurers settling certain claims that they might otherwise have disputed. 

Now that courts may be the gatekeepers when a party demands consolidated arbitration, and now that the Supreme Court has imposed some fairly strict standards for establishing consent to class or consolidated arbitration, reinsurers probably have regained the tactical advantage.  And the strategy adapted may well be of the “divide and conquer” variety – reinsurers may in appropriate cases force the cedent to commence multiple proceedings and, among other things, obtain multiple bites at the apple on their defenses before multiple panels.  Continue Reading »

How Will Stolt-Nielsen, S.A. v. Animalfeeds Int’l Corp. Change Reinsurance Arbitration Practice?

July 14th, 2010 Arbitrability, Arbitration Practice and Procedure, Authority of Arbitrators, Class Action Arbitration, Consolidation of Arbitration Proceedings, Reinsurance Arbitration, United States Supreme Court Comments Off on How Will Stolt-Nielsen, S.A. v. Animalfeeds Int’l Corp. Change Reinsurance Arbitration Practice?

Part V.B

A.   Introduction

In Part V.A of our Stolt-Nielsen reinsurance-arbitration practice series (here), we said that after Stolt-Nielsen courts will likely get to decide in the first instance whether the parties consented to consolidated arbitration.  If we are correct, that will be a fundamental change because courts will presumably construe the terms of the parties’ contracts more strictly than many arbitrators might, and those constructions will be subject to appellate review. 

In this Part V.B we consider what a party will likely need to show to persuade a court to consolidate arbitrations, and explain why we believe that courts will not frequently order consolidation.  In Part V.C. we shall explain the strategic and practical implications of the changes that Stolt-Nielsen will likely bring about in consolidated reinsurance-arbitration practice.      Continue Reading »

The Second Circuit Says an Arbitration Must Commence Anew When An Arbitrator Dies — But Not When One Resigns

July 10th, 2010 Arbitration Practice and Procedure, Arbitrator Vacancy Comments Off on The Second Circuit Says an Arbitration Must Commence Anew When An Arbitrator Dies — But Not When One Resigns

I.   Introduction

The United States Court of Appeals for the Second Circuit has held that, “absent special circumstances,” a new panel must be convened when a party-appointed arbitrator dies before the panel renders a final award.  See Marine Products Export Corp. v. M.T. Globe Galaxy, 977 F.2d 66, ___ (1992).   But in Insurance Co. of North Am. v. Public Serv. Mut. Ins. Co., ___ F.3d. ___, slip op. (2d Cir. June 23, 2010) the Court held that when a vacancy is caused by an arbitrator’s resignation, a new panel need not be convened and the trial court may either appoint an arbitrator pursuant to 9 U.S.C. § 5, or direct one of the parties to do so.  Continue Reading »