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

May 25th, 2010 Arbitrability, Arbitration Practice and Procedure, Authority of Arbitrators, Awards, Class Action Arbitration, Class Action Waivers, Consolidation of Arbitration Proceedings, Grounds for Vacatur, Practice and Procedure, Reinsurance Arbitration, United States Court of Appeals for the Second Circuit, United States Supreme Court Comments Off on How Will Stolt-Nielsen, S.A. v. Animalfeeds Int’l Corp. Change Reinsurance Arbitration Practice?

Part I

A.     Introduction 

Shortly before the United States Supreme Court decided Stolt-Nielsen, S.A. v. AnimalFeeds Int’l Corp., ___ U.S. ___, slip op. (April 27, 2010), we wrote about the implications the case might have on reinsurance arbitration practice.  (See our post here.)  But since then, you have not heard much from us, other than our brief report (here) about the Supreme Court vacating and remanding to the United States Court of Appeals for the Second Circuit the American Express Merchants’ Litigation judgment for further consideration in light of Stolt-Nielsen.   One — but by no means the only — reason is that after Stolt-Nielsen was decided, we wrote a comprehensive article on it, which will be published in a subscription-only publication in June. 

But that article – while comprehensive in scope – is directed at folks interested in the Federal Arbitration Act in general, not necessarily those interested in reinsurance arbitration in particular.  And that’s what we want to cover in this multi-part series:  Stolt-Nielsen’s implications on reinsurance arbitration practice. 

Stolt-Nielsen affects reinsurance arbitration in two very important ways.   First, it has set a fairly liberal standard of review that now applies to commercial arbitration awards in cases where a party asserts that the arbitrators exceeded their powers under Federal Arbitration Act Section 10(a)(4) because of the award’s outcome.  That, as we shall see, has all sorts of implications for persons involved in reinsurance arbitrations.

Second, it has changed the rules applicable to consolidated-reinsurance-arbitration practice – or at least it requires a wholesale reevaluation of those rules.  That, too, has a number of important implications for reinsurance-arbitration practice.   

This Part I of the series explains why the standard for challenging an award based on its outcome is important in reinsurance arbitration practice.  And, after briefly reviewing pre-Stolt-Nielsen law on outcome-based standards of review, it explains how Stolt-Nielsen has established for the lower courts a fairly searching standard of review.  Part II (here) will delve into what the implications of that standard of review will likely be. 

Part III (here) will provide the background necessary to understand how Stolt-Nielsen affects the law applicable to consolidated reinsurance arbitration.  Part IV (here) will delve into the details of how Stolt-Nielsen changes – or at least requires reconsideration of – the legal status quo in this area.  And Part V will discuss the implications of all of this.   

We do not set out to discuss the background of Stolt-Nielsen in any detail or to provide a play-by-play of how the Court decided the case.  If you are a regular reader you probably already know the background in detail, and our upcoming article does a pretty good job of mapping out the Court’s reasoning.  Instead, we focus our attention on the aspects of the decision that are relevant to the two key subjects of discussion. 

But before we delve into what Stolt-Nielsen has to say about the standard of review, we pause briefly to address why the standard of review applicable to an outcome-based challenge is so important in reinsurance and other forms of commercial arbitration.  Continue Reading »

United States Supreme Court Vacates Judgment in American Express Merchants’ Litigation

May 12th, 2010 Arbitration Practice and Procedure, Authority of Arbitrators, Class Action Arbitration, Class Action Waivers, Consolidation of Arbitration Proceedings, United States Court of Appeals for the Second Circuit, United States Supreme Court Comments Off on United States Supreme Court Vacates Judgment in American Express Merchants’ Litigation

The Supreme Court has issued a summary order in the American Express Merchants’ Litigation that suggests that it believes that Stolt-Nielsen, S.A. v. AnimalFeeds Int’l Corp., 559 U.S. ___ , slip op. (2010)  renders class arbitration waivers enforceable despite public policy and other challenges.  Readers may recall that on May 29, 2009 American Express filed a petition for a writ of certiorari in the American Express Merchants’ Litigation, in which the United States Court of Appeals for the Second Circuit held that a provision in an arbitration agreement forbidding class action arbitration was invalid and unenforceable under federal public policy grounds in the circumstances presented by the case.  See Re American Express Merchants’ Litigation, 554 F.3d 300 (2d Cir. 2009), vacated and remanded sub. nom., American Express Co. v. Italian Colors Restaurant, No. 08-1473 (May 3, 2010). 

On May 3, 2010 the United States Supreme Court issued a summary order in American Express Co. v. Italian Colors Restaurant, No. 08-1473 granting certiorari, summarily vacating the judgment of the United States Court of Appeals for the Second Circuit, and remanding it “for further consideration in light of” Stolt-Nielsen.   Justice Sonia M. Sotomayor “took no part in the consideration or decision” of the petition.   Italian Colors, No. 08-1473 (May 3, 2010) (summary disposition). 

It will be interesting to see what the Second Circuit does with the case on remand.

The United States Supreme Court Decides Stolt-Nielsen, S.A. v. AnimalFeeds Int’l Corp.!

April 27th, 2010 Arbitrability, Authority of Arbitrators, Class Action Arbitration, Consolidation of Arbitration Proceedings, Grounds for Vacatur, United States Supreme Court Comments Off on The United States Supreme Court Decides Stolt-Nielsen, S.A. v. AnimalFeeds Int’l Corp.!

As we predicted in prior posts, the United States Supreme Court reversed the judgment of the United States Court of Appeals for the Second Circuit in Stolt-Nielsen, S.A. v. AnimalFeeds Int’l Corp., holding (5-3) that it was inconsistent with the Federal Arbitration Act to impose class arbitration on parties whose agreements were concededly silent on that point.  We are in the process of analyzing the decision (copy here), and intend to post a comprehensive, critical analysis soon.

Stolt-Nielsen, S.A. v. AnimalFeeds Int’l Corp.: What are the Implications for Reinsurance Arbitration?

April 18th, 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 Stolt-Nielsen, S.A. v. AnimalFeeds Int’l Corp.: What are the Implications for Reinsurance Arbitration?

We have written extensively on Stolt-Nielsen, S.A. v. AnimalFeeds Int’l Corp., No. 08-1198, a case pending before the United States Supreme Court in which a decision is expected in the not too distant future.  Stolt-Nielsen presents the question whether a court or arbitration panel may, consistent with the Federal Arbitration Act, impose class arbitration on a party whose arbitration agreements are silent on that subject.  The answer to that question will likely answer a related question that is of special concern to those involved in reinsurance arbitration:  Can a panel or court impose consolidated arbitration on a party whose arbitration agreements are silent on that subject?  You can read our prior posts on Stolt-Nielsen here,  here, here, here, here, here, here, here,  here, here, here, here, here and here.  (Certain of these posts contain links to articles on Stolt-Nielsen we wrote for Karl Bayer’s Disputing blog.)   

But those posts principally concern the legal issues raised by the case, discuss various ways it might be decided, and argue that the correct answer to the question is that a court or arbitration panel cannot, consistent with the Federal Arbitration Act, impose class or consolidated arbitration in the face of silence.  To date we have not discussed in any detail the practical implications that the case may have on reinsurance arbitration, if any.  So today let’s look at what those implications may be.  Continue Reading »

The Agency Model of Arbitral Power: University of Chicago Law School Law and Economics Professor Tom Ginsburg Explains Why Deferential Review Does Not Necessarily Make Arbitration an Effective Substitute for Adjudication

April 7th, 2010 Authority of Arbitrators, Awards, Grounds for Vacatur, United States Court of Appeals for the Seventh Circuit, United States Supreme Court Comments Off on The Agency Model of Arbitral Power: University of Chicago Law School Law and Economics Professor Tom Ginsburg Explains Why Deferential Review Does Not Necessarily Make Arbitration an Effective Substitute for Adjudication

In George Watts & Son v. Tiffany & Co., 248 F.3d 577 (7th Cir. 2001), then Circuit Judge (now Chief Judge) Frank H. Easterbrook of the United States Court of Appeals for the Seventh Circuit said:   “What the parties may do, the arbitrator as their mutual agent may do.”  248 F.3d at 581.   Chief Judge Easterbrook made this statement in the course of defining the “manifest disregard” standard of review.  Applying his “agency model,” he concluded that “the ‘manifest disregard’ principle is limited to two possibilities:  an arbitral order requiring the parties to violate the law.  .  . , and an arbitral order that does not adhere to the legal principles specified by contract, and hence unenforceable under § 10(a)(4).”   Id. 

Chief Judge Easterbrook’s “agency” model of arbitral authority is instructive.  Just as agents derive their authority by the consent of the principal (subject to the rules of apparent and implied authority), arbitrators derive their authority from the parties via the arbitration agreement and the submission.  Subject to any restrictions in the arbitration agreement, the arbitrators’ powers to resolve a dispute under a broad arbitration agreement are arguably co-extensive with those of the parties that appointed them. 

But the model is not perfect.  First, unlike agents, arbitrators are not subject to the control of their principals and owe them no fiduciary duties.  Second, analogizing arbitrators as agents of the parties in the way Chief Judge Easterbrook does effectively empowers arbitrators not only to decide cases, but to negotiate settlements that the parties could have entered into.  It therefore does not require arbitrators to even arguably interpret the contract or apply the law:  As long as the arbitrators do not require the parties to violate the law, and as long as the arbitrators are at least arguably faithful to the parties’ expressed choice-of-law, if any, they can reach whatever decision they wish, whether by application of facts to legal norms or by a compromise settlement that may or may not be rooted in the parties’ agreement.    That arguably does not comport with the parties’ presumed, legitimate expectations.  For the arbitrator’s job is to decide cases; settlement is a matter for the parties, and should be subject to the parties’ control. 

University of Chicago Law School Professor Tom Ginsburg has written an excellent white paper that argues that the deferential standard of review espoused by Watts and other courts does not necessarily make arbitration an attractive substitute for litigation.  See Tom Ginsburg, John M. Olin Law & Economics Working Paper No. 502 (2d Series), The Arbitrator as Agent: Why Deferential Review Is Not Always Pro-Arbitration  (Dec. 2009) (copy available here).  He argues that a more searching standard of review would make the market for arbitrators more transparent, and thus more effective.  He advocates using Chief Judge Easterbrook’s agency model as an analytical framework for allowing parties to choose whether they prefer a very deferential standard of review, like that prescribed in Watts; something akin to de novo review, like that available in litigation; or something in between the two.  Professor Ginsburg is in the process of publishing in the University of Chicago Law Review an article based on his white paper. Continue Reading »

When Do Cost Provisions in an Arbitration Agreement Effectively Deny a Party a Forum in Which to Vindicate Statutory Rights?

April 6th, 2010 Arbitrability, Authority of Arbitrators, Employment Arbitration, New York Court of Appeals, United States Supreme Court Comments Off on When Do Cost Provisions in an Arbitration Agreement Effectively Deny a Party a Forum in Which to Vindicate Statutory Rights?

Introduction

Under the federal Federal Arbitration Act statutory claims are generally arbitrable if they fall within the scope of the arbitration agreement, but arbitrator and arbitration-service-provider fees that may impose undue financial burdens on employees or other individuals seeking to vindicate those rights.   Cost provisions in arbitration agreements allocate these fees and costs, and even when the allocation is 50-50, disputes may arise concerning whether they are so burdensome as to effectively deny one of the parties a forum in which to pursue his or her claims.   

In Green Tree Financial Corp v Randolph, 531 U.S. 79 (2000), the United States Supreme Court acknowledged that “the existence of large arbitration costs could preclude a litigant from effectively vindicating her federal statutory rights in the arbitral forum.”  531 U.S. at 90.  And it said that “where, a party seeks to invalidate an arbitration agreement on the ground that arbitration would be prohibitively expensive, that party bears the burden of showing the likelihood of incurring costs that would deter the party from arbitrating the claim.”  531 U.S. at 92.   While the Court did not purport to enunciate the standards courts should apply in evaluating challenges to cost provisions, it held that the “risk” of  “prohibitive costs is too speculative to justify the invalidation of an arbitration agreement.”  531 U.S. at 91. Continue Reading »

International Institute for Conflict Prevention and Resolution Newsletter Features Philip J. Loree Jr. Cover Story on Rent-A-Center and Granite Rock

March 16th, 2010 Arbitrability, Authority of Arbitrators, Labor Arbitration, United States Court of Appeals for the Ninth Circuit, United States Supreme Court Comments Off on International Institute for Conflict Prevention and Resolution Newsletter Features Philip J. Loree Jr. Cover Story on Rent-A-Center and Granite Rock

The March 2010 issue of Alternatives to the High Cost of Litigation, the excellent newsletter of the International Institute for Conflict Prevention and Resolution (“CPR”), featured as its cover story an article I wrote on Rent-A-Center West v. Jackson, No. 09-497, and Granite Rock Co. v. Int’l Brotherhood of Teamsters, No. 08-1214, two of the three cases pending before the United States Supreme Court this term.  The article is entitled “It’s Time for Doctrines: The Supreme Court Wrestles with ‘Severability’ and the ‘Clear and Unmistakable’ Standard.” 

These two cases involve, to some degree, the Buckeye Check Cashing/Prima Paint doctrine of severability—a/k/a “separability.”  Rent-A-Center also examines the “clear and unmistakable doctrine,” under which arbitrators can decide arbitrability questions if the parties clearly and unmistakably so agree. 

Rent-a-Center, which arises under the Federal Arbitration Act,  raises the question whether courts or arbitrators get to decide whether an arbitration agreement is unconscionable if the parties clearly and unmistakably agree to submit arbitrability questions to arbitration.  (See our prior posts here, here and here.)   Granite Rock, which arises under Section 301 of the Labor Management Relations Act, concerns whether, on the facts presented, arbitration must go forward and what it should encompass.  (See our prior post here.)

In the article I argue that both cases were wrongly decided by the Court of Appeals for the Ninth Circuit, and that, in Granite Rock, the Ninth Circuit reached the right result (an order compelling arbitration) for the wrong reasons.  I predict that the United States Supreme Court will reverse the Rent-A-Center decision and vacate the Granite Rock decision.

Alternatives to the High Cost of Litigation is a subscription-only publication.   Anyone interested in obtaining a copy of the article can request one at this page.  Subscription information is available at that page, too, as well as publisher John Wiley & Sons, here.

I would like to take this opportunity to thank CPR, and Russ Bleemer, Editor of Alternatives, for their kind assistance and support in featuring my article.  Russ is not only a keen, professional editor, but a pleasure to work with as well.

Fourth Circuit Vacates Securities Arbitration Award: Raymond James Financial Services, Inc. v. Bishop

March 2nd, 2010 Arbitrability, Authority of Arbitrators, Awards, Grounds for Vacatur, Securities Arbitration, United States Court of Appeals for the Fourth Circuit 1 Comment »

I.  Introduction

Arbitration is not a perfect process for resolving disputes, but neither is court adjudication.  One advantage of court adjudication is a fairly rigorous standard of review:  appellate courts generally review the trial court’s factual findings for clear error and legal conclusions de novo.  By contrast, courts review arbitration awards under the very deferential standards of review prescribed by Sections 10 and 11 of the Federal Arbitration Act.  The trade-off is one of informality, speed and reduced expense for a heightened risk that the decision maker will commit unreviewable legal and factual errors — even some pretty egregious ones.   

But every so often an arbitration award can be so far off the mark that one of the parties is deprived of the benefit of the bargain it made when it agreed to arbitrate.  These are not cases where the arbitrators merely did a shoddy job, but ones where the arbitrators did not do the job the parties asked them to do.  These are the cases that Section 10(a)(4) of the Federal Arbitration Act was designed to address:  ones where “the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final award on the subject matter was not made.” 

Today we take a brief look at Raymond James Financial Serv., Inc. v. Bishop, ___ F.3d ___, No. 09-1038, slip op. (4th Cir. Feb. 22, 2010), a recent example of one of those rare cases.  And we’ll see how how confusion about the scope of Section 10(a)(4) resulting – quite unintentionally – from the United States Supreme Court decision in Hall Street Assoc., L.L.C. v. Mattel , Inc, 552 U.S. ___, slip op. at __ (March 25, 2008) apparently motivated the United States Court of Appeals for the Fourth Circuit to decide the case solely on the ground that the arbitrators were not authorized to rule on the claim on which they admittedly based their award.  (See, generally, “Hall Street Meets Pearl Street: Stolt-Nielsen and the Federal Arbitration Act’s New Section 10(a)(4).”)

The Court reached the right result, but its decision is of limited utility in future cases.  For under many broad arbitration agreements and submissions the arbitrators have authority to rule on pretty much any claim that is related to the subject matter of the  parties’ dispute.  Abitrators may have the authority to resolve a claim, but may do so in a way that has not even a barely colorable justification under the law and facts.   

We would have liked to see the Court rule not only on the authority issue, but also on two other grounds relied upon by the district court:  manifest disregard of the law and the award’s failure to “draw its essence” from the parties’ agreements.  As we have said before, we believe that those grounds are statutorily permitted by Section 10(a)(4), and that they provide a useful safety valve for addressing those (thankfully) rare cases where the arbitrators resolve a dispute within the scope of their authority, but do so in a way that completely deprives one of the parties of the benefit of its arbitration agreement.    Continue Reading »

Professor Aaron Bruhl’s Analysis of Rent-A-Center, West v. Jackson (No. 09-497)

February 24th, 2010 Arbitrability, Authority of Arbitrators, United States Court of Appeals for the Ninth Circuit, United States Supreme Court Comments Off on Professor Aaron Bruhl’s Analysis of Rent-A-Center, West v. Jackson (No. 09-497)

Professor Aaron Bruhl, an Assistant Professor of Law at the University of Houston Law Center, recently published in PrawfsBlawg a thought-provoking and insightful article on Rent-A-Center West v. Jackson (No. 09-497).  (Post here)  Regular readers no doubt remember that the United States Supreme Court recently granted certiorari in Rent-A-Center, and will be hearing argument on April 26, 2010.  (See our prior posts here and here).

Professor Bruhl points out that, in addition to being of interest to those practicing employment, consumer or plain old arbitration law, Rent-A-Center “is just as interesting for those who study federal courts and judicial politics.”   He reminds us that one of the few remaining “safety valves” for challenging arbitration agreements is unconscionability:     

In the last few years, as other routes for challenging arbitration have been closed off, unconscionability has become a surprisingly common and surprisingly effective way of attacking arbitration agreements.  The challenges do not attack arbitration per se – federal law favors arbitration – but instead target various aspects of a particular arbitration process:  a given clause might forbid class arbitrations, bar punitive damages or otherwise restrict remedies, sharply curtail discovery, require a consumer to pay hefty arbitrator’s fees, etc.  There have been many cases on these topics in recent years, and a good number of them sustain the challenge to the arbitration clause.

He notes that the United States Supreme Court has consistently denied certiorari in cases where lower courts have invalidated arbitration agreements on state-law unconscionability grounds and the question is whether the invalidation offended the Federal Arbitration Act.  He suspects “the Court has avoided these cases because it feels ill-equipped to resolve whether a lower court is discriminating against arbitration:” 

First, unconscionability analysis often requires a fact-intensive inquiry.  Second, and more important, determining whether a lower court is using unconscionability differently when it comes to arbitration requires an engagement with the details of state law and a comparison of lots of prior unconscionability cases.  Third, and maybe most important of all, a holding that the lower court is applying unconscionability unfairly, especially when the lower court says it is applying the same analysis it applies elsewhere, carries with it some serious expressive baggage.  Essentially, it requires the Supreme Court to say that the lower court is being dishonest.  That happens, but when it does so, it is a big deal (think cases like Bush v. Gore or the cases from the 50s/60s rejecting supposed procedural defaults in the state courts).

 But the Court granted certiorari in Rent-A-Center, a case involving not the merits of a state law unconscionability challenge, but the question who gets to decide unconscionability when the parties clearly and unmistakably submit it to the arbitrators.  Professor Bruhl believes certiorari was granted because addressing the “who” question, and resolving it in favor of arbitration, will cleanly dispose of the unconscionability problem from the standpoint of the federal courts, at least in cases where the parties clearly and unmistakably agreed to arbitrate arbitrability: 

That doesn’t require diving into the weeds of state law and the record. If the Court assigns the issue to the arbitrator, that will be a very easy rule to monitor for compliance (unlike deciding whether the lower court applied unconscionability correctly).  All of those unconscionability cases out there will instantly become not wrong but irrelevant – because courts won’t be deciding the issue anymore.  And it won’t matter whether some lower courts can be trusted to apply unconscionability correctly, because they will be cut out of the picture. Continue Reading »

SCOTUS Oral Argument in Jackson v. Rent-A-Center West, Inc. Set for April 26, 2010

February 17th, 2010 Arbitrability, Authority of Arbitrators, Practice and Procedure, United States Court of Appeals for the Ninth Circuit, United States Supreme Court Comments Off on SCOTUS Oral Argument in Jackson v. Rent-A-Center West, Inc. Set for April 26, 2010

The United States Supreme Court has set for April 26, 2010 oral argument in Jackson v. Rent-A-Center West, Inc., ___ F.3d ___, slip op. (9th Cir. Sept. 9, 2009), petition for cert. granted  Jan. 15, 2010 (No. 09-497) (oral argument calendar here).  Jackson addresses the question who decides unconscionability of an arbitration agreement when the agreement clearly and unmistakably says arbitrators decide arbitrability.  The Ninth Circuit said the court decides the question, but we think there is a reasonable chance the United States Supreme Court will reverse.   We touched on some of the reasons why in prior posts, here and here. 

We shall keep readers apprised of further developments as and when they occur.  .  .  .

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