Arbitration law is replete with presumptions and other rules that favor one outcome or another depending on whether one thing or another is or is not clear and unmistakable. Put differently, outcomes often turn on the presence or absence of contractual ambiguity.
There are three presumptions that relate specifically to
questions arbitrability, that is, whether or not an arbitrator or a court gets
to decide a particular issue or dispute:
The Moses Cone Presumption of Arbitrability: Ambiguities in the scope of the arbitration agreement itself must be resolved in favor of arbitration. Moses H. Cone Memorial Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24-25 (1983). Rebutting this presumption requires clear and unmistakable evidence of an intent to exclude from arbitration disputes that are otherwise arguably within the scope of the agreement.
The First Options Reverse Presumption of Arbitrability: Parties are presumed not to have agreed to arbitrate questions of arbitrability unless the parties clearly and unmistakably agree to submit arbitrability questions to arbitration. First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 942-46 (1995)
The Howsam/John Wiley Presumption of Arbitrability of Procedural Matters: “‘[P]rocedural’ questions which grow out of the dispute and bear on its final disposition are presumptively not for the judge, but for an arbitrator, to decide.” Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 84 (2002) (quoting John Wiley & Sons, Inc. v. Livingston, 376 U.S. 543, 557 (1964)) (internal quotation marks omitted). To rebut this presumption, the parties must clearly and unmistakably exclude the procedural issue in question from arbitration.
These presumptions usually turn solely on what the contract has to say about the arbitrability of a dispute, not on what the outcome an arbitrator or court would—or at least should—reach on the merits of the dispute.
Some U.S. Circuit Courts of Appeal, including the Fifth Circuit, recognized an exception to the First Options Reverse Presumption of Arbitrability called the “wholly groundless exception.” Under that “wholly groundless exception,” courts could decide “wholly groundless” challenges to arbitrability even though the parties have clearly and unmistakably delegated arbitrability issues to the arbitrators. The apparent point of that exception was to avoid the additional time and expense associated with parties being required to arbitrate even wholly groundless arbitrability disputes, but the cost of the exception was a judicial override of the clear and unmistakable terms of the parties’ agreement to arbitrate.
Earlier this year the U.S. Supreme Court in Schein v. Archer & White Sales, Inc., 586 U.S. ___, slip op. at *1 (January 8, 2019) abrogated the “wholly groundless” exception. Schein, slip op. at *2, 5, & 8. “When,” explained the Court, “the parties’ contract delegates the arbitrability question to an arbitrator, the courts must respect the parties’ decision as embodied in the contract.” Schein, slip op. at 2, 8. The “wholly groundless” exception, said the Court, “is inconsistent with the statutory text and with precedent[,]” and “confuses the question of who decides arbitrability with the separate question of who prevails on arbitrability.” Schein,slip op. at 8.
But since Schein both the Second and Fifth Circuits have decided First Options Reverse Presumption of Arbitrability cases by effectively conflating the question of who gets to decide an arbitrability issue with the separate question of who should prevail on the merits of that arbitrability issue. The Courts in both cases determined whether the parties clearly and unmistakably agreed to arbitrate arbitrability questions by considering, as part of the clear and unmistakable calculus, the merits of the arbitrability question.
These two cases suggest a trend toward what might (tongue-in-cheek) be called a “Clear and Unmistakable Outcome Exception” to the First Options Reverse Presumption of Arbitrability. But the problem with that trend is that it runs directly counter to the Supreme Court’s decision in Schein, and thus contravenes the Federal Arbitration Act as interpreted by Schein.
In Part I of this post we discuss the Second Circuit and Fifth Circuit decisions. In Part II we analyze and discuss how— and perhaps why — those courts effectively made an end run around Schein.
Back in 2009 the Author wrote an article on the United States Supreme Court’s decision in 14 Penn Plaza LLC v. Pyett, 556 U.S. 247 (2009), which held “that a collective-bargaining agreement that clearly and unmistakably requires union members to arbitrate ADEA claims is enforceable as a matter of federal law.” 559 U.S. at 274. (See Loree Reins. & Arb. L. Forum Posthere.)
On July 2, 2019, the U.S. Court of Appeals for the Second Circuit reversed a district court decision that erroneously applied the Pyett clear and unmistakable standard to the question whether an arbitration clause in a collective bargaining agreement (the “CBA”) was mandatory or permissive. Finding that the CBA imposed mandatory arbitration, the Second Circuit ruled that the clear and unmistakable standard applied only to the question whether the Employee’s statutory claims were within the scope of the CBA’s arbitration agreement (the “Arbitration Agreement”), and not to the mandatory versus permissive question. Abdullayeva v. Attending Homecare Servs. LLC, ___ F.3d ____, No. 18-0651, slip op. at *8-10 (2d Cir. July 2, 2019).
Applying ordinary contract principles to the question whether the Arbitration Agreement was mandatory or permissive, the Court held that it was mandatory. Slip op. at *10-13. Applying Pyett‘s clear and unmistakable standard to the scope question, it held that the Employee’s statutory claims under the Fair Labor Standards Act (“FLSA”) and New York’s Labor Law (“NYLL”) were within the scope of the arbitration clause. Slip op. at *13-14.
Finally, the Court held that the arbitration clause did not deny the Employee of due process of law, rejecting the Employee’s argument that it was deprived of due process because it did not personally participate in the selection of the arbitrator named in the arbitration clause. Slip op. at *14-16.
Background
The Employer is a provider of home health care services which employs health and personal care workers that serve elderly clients. The Employee was a member of that staff.
The Employee was required to join a Union of home
health care workers (the “Union”).
At or about the time when the Employee began work for
Employer, the Union and Employer entered into a collective bargaining agreement
(the “CBA”).
The CBA contained an “Adjustment of Disputes” provision (the
“Arbitration Agreement”) that provided, in pertinent part:
B. The parties [the Union and Attending] further agree a goal of this Agreement is to ensure compliance with all federal, state, and local wage hour law and wage parity statutes. Accordingly, to ensure the uniform administration and interpretation of this Agreement in connection with federal, state, and local wage-hour and wage parity statutes, all claims brought by either the Union or Employees, asserting violations of or arising under the Fair Labor Standards Act . . . , New York Home Care Worker Wage Parity Law, or New York Labor Law (collectively, the “Covered Statutes”), in any manner, shall be subject exclusively, to the grievance and arbitration procedures described below.
1) The statute of limitations to file a grievance concerning the Covered Statutes shall be consistent with the applicable statutory statute of limitations. All such claims if not resolved in the grievance procedure, including class grievances filed by the Union, or mediation as described below shall be submitted to final and binding arbitration before Elliott Shriftman. . . .
. . . .
4) In the event an Employee has requested, in writing, that the Union process a grievance alleging a violation of the Covered Statutes and the Union declines to process a grievance regarding alleged violations of the Covered Statutes, through the grievance/mediation process or to arbitration following the conclusion of mediation, an Employee solely on behalf of himself/herself, may submit their individual claim to mediation, or following the conclusion of mediation, to arbitration. . . .
Slip op. at *3-4 (quoting Arbitration Agreement; emphasis supplied by Court).
On her own behalf, and on behalf of all similarly situated employees, Employee sued Employer in the U.S. District Court for the Eastern District of New York, alleging that Employer had violated the Fair Labor Standards Act (“FLSA”) and provisions of New York’s Labor Law by, among other things, “willfully fail[ing] to pay its workers overtime and spread-of-hours pay. . . .” Slip op. at *4-5.
The Employer moved to compel arbitration, but the
district court denied the motion. The district court ruled that the CBA did not
require that the Employee’s claims be resolved in arbitration.
The district court reached that conclusion on two alternative grounds. First, the district court ruled that the arbitration agreement “violated the Employer’s due process rights due process rights because the arbitrator had been preselected by the Union and [the Employer] without any input from [the Employee].” Slip op. at *5.
Second, and in any event, the district court held that the arbitration agreement was not mandatory, and that accordingly, the Employer was entitled to bring its claims in federal district court. To that end the district court determined that the Arbitration Agreement was “‘at best ambiguous,’ and does not satisfy the clear and unmistakable test applicable to the assessment of purported waivers of union members’ right to bring statutory claims in court when such waivers are part of a collective bargaining agreement’s arbitration provisions.” Slip op. at *5 (quoting district court decision; other quotation omitted).
The Employer appealed.
The Second
Circuit’s Decision
Thurgood Marshall U.S. Courthouse, 40 Centre Street, New York, NY 10007
The Second Circuit began by explaining that motions to compel arbitration “ordinarily” present courts with four questions:
(1) whether the parties agreed to arbitrate; (2) the “scope” of the arbitration agreement; (3) whether the plaintiff’s federal statutory claims are “nonarbitrable”; and (4) if some, but not all of the claims in the case are arbitrable, whether to stay the balance of the proceedings pending arbitration.
Slip op. at *6.
But this case presented only the first two questions—whether the parties agreed to arbitrate, and if so, what they agreed to arbitrate. Slip op. at *6.
The “clear and unmistakable” standard for determining whether parties to a collective-bargaining agreement agreed to arbitrate statutory claims was a standard that applied only to the second question, that is, the scope of the arbitration agreement. Slip op. at *8-10. According to the Second Circuit, “[t]he district court framed the sole relevant inquiry as whether ‘[a] clause purporting to require arbitration of a [FLSA] claim that is contained in a collective bargaining agreement’ clearly and unmistakably requires arbitration.” Slip op. at *8 (quoting district court decision).
The district court therefore conflated the first two questions and applied the “clear and unmistakable” standard to both. The district court erred in doing so, said the Second Circuit, because “the clear and unmistakable standard does not reflect disfavor of union-negotiated arbitration agreements[,]” but instead “ensures that employees’ right to bring statutory claims in court is not waived by operation of confusing, “very general” arbitration clauses[,]” which, for example, might be reasonably construed to be limited to claims concerning the construction or application of a collective bargaining agreement, even though they might also be reasonably construed to encompass both contract and statutory claims. Slip op. at *9 (citations and quotations omitted).
The Second Circuit said “we ask not whether the parties clearly and unmistakably agreed to arbitrate, but whether, once we have established that an agreement exists, that agreement clearly and unmistakably encompasses the plaintiff’s statutory claims.” Slip op. at *9-10. “The clear and unmistakable standard,” the Court explained, is “therefore. . . specific to the scope question and has no bearing on whether there is an agreement to arbitrate in the first instance.” Slip op. at *10.
Having clarified how the clear and unmistakable standard is supposed to be applied, the Court addressed whether the arbitration agreement was permissive or mandatory, and if mandatory, whether statutory claims were clearly and unmistakably within its scope. The Court held that the arbitration agreement was mandatory and clearly and unmistakably encompassed the statutory claims. Slip op. at *9.
Collective Bargaining Agreement’s Arbitration Clause is Mandatory
The Court
concluded that “[t]he Union was legally authorized to negotiate collective
bargaining agreements on [the Employee’s] behalf[,]” citing 29 U.S.C. § 159(a),
which provides that unions “selected for purposes of collective bargaining by
the majority of the employees shall be the exclusive representatives of all the
employees. . . for the purposes of collective bargaining. . . .” 29 U.S.C. §
159(a). The Employee was, accordingly, bound by the CBA, including the Arbitration
Agreement.
The Court next determined that the Arbitration Agreement, when construed as a whole, unambiguously imposed mandatory arbitration on the Employee, not simply an option to arbitrate or litigate. That provision, said the Court, “states that its goal is to ‘ensure the uniform administration and interpretation of [the CBA],’ and that the means by which it will achieve that goal is to require that all claims under the Covered Statutes, brought by the Union or employees, ‘be subject exclusively . . . to the grievance and arbitration procedures described below.” Slip op. at *11 (quoting Arbitration Agreement; emphasis added by Court). The Provision further “states that ‘all [claims under the Covered Statutes,] if not resolved in the grievance procedure, . . . shall be submitted to final and binding arbitration.’” Slip op. at *11-12. “On its face,” said the Court, “this language simply does not allow an employee to choose to proceed in a judicial forum.” Slip op. at *12.
The Court explained why it concluded the district court’s interpretation of the arbitration agreement was incorrect. The district court had “focused on subsection (4) of [the Arbitration Agreement][,]” which “states that where an employee has requested that ‘the Union process a grievance alleging a violation of the Covered Statutes,’ but the Union has declined to process that grievance, the employee ‘may submit [this] individual claim to mediation, or following the conclusion of mediation, to arbitration.’” Slip op. at *12 (quoting Arbitration Agreement; emphasis supplied by Court). The district court interpreted “‘may’. . . to mean that employees can ‘choose whether to arbitrate’ or pursue their claims in court.” Slip op. at *12 (quoting district court decision).
But the Second Circuit disagreed. Subsection (4) of the Dispute Resolution Provision, said the Court, “is best read as clarifying that when the Union declines to process particular grievances on employees’ behalf, aggrieved employees have two options[:]” “They ‘may’ either (1) submit their claims to meditation and arbitration or (2) abandon the claims entirely.” Slip op. at *12.
The Court said that its interpretation of “may” “makes sense of the provision in isolation but also in the context of the entire agreement.” Slip op. at *12-13 (quotation and citations omitted).
Interpreting “may” differently “is to bring subsection (4) into conflict with the rest of Article 8(B), which. . . manifestly reflects an intent to require arbitration.” Slip op. at *13. The district court’s interpretation, said the Court, “makes little sense in light of [subsection 1 of the Arbitration Agreement]’s requirement that ‘all [claims under the Covered Statutes,] if not resolved in the grievance procedure . . . shall be submitted to final and binding arbitration” Slip op. at *13 (quoting Arbitration Agreement; emphasis supplied by Court).
Having concluded the arbitration agreement was mandatory, the Court turned to whether the Employee’s statutory claims were within the scope of that agreement. The Court held that the Arbitration Agreement clearly and unmistakably encompassed those claims, and consequently, the Employee was required to arbitrate those claims.
The Second Circuit explained “that both this Circuit and other sister circuits have interpreted the clear and unmistakable standard to require specific references in the [collective bargaining agreement] either to the statutes in question or to statutory causes of action generally.” Slip op. at *13 (quotation and citation omitted).
The Court explained that a “vague directive” such as “‘any disputes . . . shall be subject to’ a grievance and arbitration procedure. . .” does not suffice, but that, here, the Arbitration Agreement “specifically cites. . . statutes. . . .” including “the FLSA, the New York Home Care Worker Wage Parity Law, and [New York’s Labor Law], and requires claims under those statutes to proceed pursuant to [the Arbitration Agreement]’s grievance and arbitration procedures.” Slip op. at *14 (citations and quotations omitted). The Arbitration Agreement thus clearly and unmistakably required arbitration of those statutory claims.
The Employee’s brought claims under the FLSA and the NYLL, those claims are clearly and unambiguously within the scope of the Arbitration Agreement, and consequently, the Employee was required to arbitrate those claims. Slip op. at *14.
The Arbitration Agreement does not Deny the Employee
Due Process of Law
The district court concluded that the Arbitration Agreement denied the Employee “due process because ‘the worker apparently has no part in the selection of the arbitrator.’” Slip op. at *14-15. The Second Circuit disagreed.
The Employee was a member of the Union, and under applicable law, including 29 U.S.C. § 159(a), the “Union had authority to negotiate on behalf of Abdullayeva, and so the fact that she did not personally participate in the selection of the arbitrator does not violate due process.” See slip op. at *15. As the U.S. Supreme Court explained in Pyett, “unions ‘may agree to the inclusion of an arbitration provision in a collective-bargaining agreement in return for other concessions from the employer.’” Slip op. at *15 (quoting Pyett, 556 U.S. at 257). And “‘courts must rigorously enforce arbitration agreements according to their terms, including terms that specify with whom [the parties] choose to arbitrate their disputes.’” Slip op. at *15 (quoting American Exp. Co. v. Italian Colors Restaurant, 570 U.S. 228, 233 (2013) (emphasis in original; citation omitted).
The Union was the Employer’s representative “authorized to negotiate ‘conditions of employment,’ including arbitration clauses, with the Employer on behalf of [the Employer’s employees].” The Arbitration Agreement, “including its proviso that ‘claims. . . shall be submitted to final and binding arbitration before Elliot Shriftman,’ was the product of the Union’s negotiation with [the Employer].” Slip op. at *15-16.
New York law requires that “arbitration procedures must generally conform to the ‘due process right of notice and opportunity to defend.’” Slip op. at *16 (quoting Beckman v. Greentree Sec., Inc., 87 N.Y.2d 566, 570 (1996)). But the Employee did “not argue that [the Arbitration Agreement’s] procedures are lacking in notice, or that the selected arbitrator is biased or would conduct arbitration proceedings in bad faith.” Slip op. at *16.
Thus, “the challenged portion of the [Arbitration Agreement], which simply ‘specifies with whom’ arbitration will be conducted in accordance with established Supreme Court precedent, does not violate due process.” Slip op. at *16 (quoting American Exp. Co., 570 U.S. at 233).
Photo Acknowledgements
The photos featured in this post were licensed from Yay Images and are subject to copyright protection under applicable law.
Today we look at federal appellate jurisdiction over orders compelling arbitration and staying litigation.
Sections 3 and 4 of the Federal Arbitration Act (the “FAA”) provide remedies for a party who is aggrieved by another party’s failure or refusal to arbitrate under the terms of an FAA-governed agreement. FAA Section 3, which governs stays of litigation pending arbitration, requires courts, “upon application of one of the parties,” to stay litigation of issues that are “referable to arbitration” “until arbitration has been had in accordance with the terms of the parties’ arbitration agreement, providing [the party applying for a stay] is not in default in proceeding with such arbitration.” 9 U.S.C. § 3. Faced with a properly supported application for a stay of litigation of an arbitrable controversy, a federal district court must grant the stay. 9 U.S.C. § 3.
Section 4 of the FAA authorizes courts to make orders “directing arbitration [to] proceed in the manner provided for in [the [parties’ written arbitration] agreement[,]” and sets forth certain procedures for adjudicating petitions or motions to compel arbitration. 9 U.S.C. § 4. It provides that when a court determines “an agreement for arbitration was made in writing and that there is a default in proceeding thereunder, the court shall make an order summarily directing the parties to proceed with the arbitration in accordance with the terms thereof.” 9 U.S.C. § 4 (emphasis added). Just as courts must grant properly supported applications for relief under Section 3, so too must they grant properly supported applications for relief under Section 4. See 9 U.S.C. §§ 3 & 4.
There is much to be said about the many issues that may arise out of applications to stay litigation, compel arbitration, or both, but our focus here is on the appellate jurisdiction of the U.S. Circuit Courts of Appeals over appeals from the grant or denial of such applications. Before a U.S. Circuit Court of Appeals can hear an appeal on the merits of a federal district court’s order and judgment, it must be satisfied that: (a) the federal district court had original subject matter jurisdiction (e.g., diversity jurisdiction or federal question jurisdiction); (b) there is still a “case or controversy” within the meaning of Article III of the U.S. Constitution (e.g., the controversy has not become moot by settlement or otherwise); and (c) the order or judgment appealed from is one over which it has appellate jurisdiction.
Appellate Jurisdiction
and the FAA
Appellate jurisdiction refers to a Circuit Court of Appeals’ power to review, amend, vacate, affirm, or reverse the orders and judgments of the district courts within the judicial circuit over which the Court of Appeals presides. Generally, and outside the context of injunctions and the certification procedure of 28 U.S.C. § 1292(b), U.S. Courts of Appeal have jurisdiction to review only “final decisions” of district courts. See 28 U.S.C. §§ 1291, 1292. A “final decision” “is a decision that ends the litigation on the merits and leaves nothing more for the court to do but execute the judgment.” Green Tree Financial Corp. v. Randolph, 531 U.S. 79, 86 (2000) (citations and quotations omitted).
But Federal Arbitration Act litigation is quite different from ordinary litigation from both a substantive and procedural prospective, and so it comes as no surprise that the FAA features its own set of appellate jurisdiction rules.
One advantage of arbitration is that parties can define and delineate the scope of disputes they agree to submit to arbitration, the basis on which disputes can or must be resolved and the scope of the arbitrator’s remedial powers. If parties impose clear limits on an arbitrator’s authority (usually by expressly excluding certain matters from arbitration or expressly providing that an arbitrator cannot or must grant certain remedies), then courts and arbitrators are supposed to enforce those limitations. See, e.g., Stolt-Nielsen S.A. v. Animalfeeds Int’l Corp., 559 U.S. 662, 680-81 (2010).
Far too frequently, parties simply agree to a broad arbitration agreement that places no limitations on arbitral power, and when they end up on the wrong-end of an award they didn’t expect, they discover to their dismay that they have no judicial remedy. Whether or not they understood that at the time they agreed to arbitrate is, of course, irrelevant. The only relevant consideration is whether their agreement could be reasonably construed to grant the arbitrator that authority, even if it could also be reasonably construed to withhold it. See, e.g., Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52, 62 (1995) (“when a court interprets such provisions in an agreement covered by the FAA, due regard must be given to the federal policy favoring arbitration, and ambiguities as to the scope of the arbitration clause itself resolved in favor of arbitration”) (quotation and citation omitted).
But suppose the parties take the time to consider whether they desire to limit arbitral authority, and their arbitration agreement unambiguously expresses an intention to limit arbitral authority to resolve certain disputes or impose certain remedies, or to expressly require that the arbitrators grant certain types of relief, such as fee shifting to a prevailing party. Should a court vacate the award if the arbitrator does not abide by the parties’ unambiguously expressed intentions? Continue Reading »
Does New York Law on Implied or Constructive Conditions
Provide a Basis for Stronghold’s Conclusion?
New York’s six-year statute of limitations for breach of contract does not begin to run until the obligee has satisfied all express conditions to the obligor’s duty to perform. (See Parts I and II.)Part III.B explained why we believe the Second Circuit in Continental Cas. Co. v. Stronghold Ins. Co. did not correctly interpret and apply New York law when it concluded that a garden-variety notice-of-loss provision in an excess-of-loss reinsurance contract was an express condition to the extent it required the cedent to notify reinsurers of paid-loss claims and demand payment. That (we believe) erroneous conclusion enabled the Second Circuit to hold that the cedent’s breach-of-contract claims were not barred by New York’s six-year statute of limitations, even though they were based on settlements the cedent had concluded with its insureds more than six-years before the cedent commenced its action. (See Part III.A.)
At the conclusion of Part III.Bwe raised the question whether Stronghold might make sense under the law of implied or constructive conditions, that is, if we were to interpret it as having construed the notice-of-loss provision as an implied or constructive condition. But Stronghold fails even if it is reconceptualized that way. Continue Reading »
Continental Cas. Co. v. Stronghold: Did the Court Correctly Apply New York Law?
Welcome to Part III.B of our multi-part reinsurance statute of limitations feature. (Links to previous installments are listed at the end of this post.)
If you’ve been following this series, then you already know that under New York law, the six-year statute of limitations begins to run on a reinsurance claim once it is settled and the cedent has the right to demand payment. This is the general rule that applies to other contracts of indemnity, including insurance contracts, but it is subject to an exception: when an insurance or reinsurance contract expressly conditions the reinsurer’s duty to perform its obligations on the presentation of a claim, the statute of limitations generally does not begin to run any earlier than the date the cedent presents the claim.
InPart III.Awe summarized the facts and holding of the United States Court of Appeals for the Second Circuit’s decision in Continental Cas. Co. v. Stronghold Ins. Co., 77 F.3d 16 (2d Cir. 1996), which concluded that a garden-variety notice of loss provision in a reinsurance contact was an express condition to the extent that it required notice of paid loss, which the Court seemed to think was more important to reinsurers than prompt notice of the original insureds’ reported losses losses and their development over time. Stronghold essentially created an express condition out of whole cloth by placing a strained interpretation on a timely notice provision identical in all material respects to one that New York’s highest court, in North River Ins. Co. v. Unigard Sec. Ins. Co., 79 N.Y.2d 576 (1992) (“Unigard I”), had held was not an express condition. And it relied on that interpretation to justify delaying the accrual of the statute of limitations on claims that were settled more than six-years before the Cedent commenced its action against the Reinsurers.
This Part III.B explains why we believe Stronghold misconstrued the notice provision, misapprehended its purpose and misapplied New York law on express conditions. Continue Reading »
Continental Casualty Co. v. Stronghold Ins. Co.: Background
In Part II (here) we reviewed New York law pertinent to express conditions and how they can delay the accrual of the statute of limitations if the plaintiff has not satisfied them.
Now let’s turn to the U.S. Court of Appeals for the Second Circuit’s decision inContinental Cas. Co. v. Stronghold Ins. Co., 77 F.3d 16 (2d Cir. 1996), a case that features a fairly comprehensive recitation of New York’s reinsurance-related statute-of-limitations accrual rules as they existed in 1996, but did not apply New York’s express-condition rules consistently with controlling, New York Court of Appeals authority. This Part III.A summarizes what transpired in Stronghold and Part III.B will explain why we think the case not correctly decided.
The Stronghold Facts
Stronghold was a dispute between a United States cedent (the “Cedent”) and its London-Market reinsurers (the “London Reinsurers”) that arose under certain excess-of-loss treaties reinsuring medical malpractice liability policies the Cedent had issued to its hospital insureds.
In the 1980s the Cedent settled several medical malpractice liability claims on behalf of its insureds, but did not notify London Reinsurers of the underlying losses that resulted in the settlements, or present their reinsurance claims to the London Reinsurers, until sometime after the underlying claims were settled. The record apparently did not specify the date or dates on which the Cedent first notified the London Reinsurers of the settlements and demanded payment from the London Reinsurers.
The excess-of-loss treaties (the “Reinsurance Contracts”) provided that the London Reinsurers were “liable only for the excess of loss” incurred by the Cedent in excess of specified retentions of “ultimate net loss.” The contracts defined “ultimate net loss,” as “the sums actually paid in cash in settlement of losses [for] which [the Cedent] is liable.” They also featured notice of loss provisions that said “Loss, if any, under” a policy is “to be reported to [the London Reinsurers] as soon as practicable.”
The London Reinsurers denied each of the reinsurance claims during the period 1987-1990, and in 1991 the Cedent commenced an action for breach of contract in the United States District Court for the Southern District of New York. The London Reinsurers defended on late notice and statute-of-limitations grounds.
As respects the date on which the statute of limitations began to run on each reinsurance claim, the London Reinsurers argued that each claim accrued when the Cedent settled the claim with its insured. Each claim was settled more than six years before the Cedent commenced its action. According to the London Reinsurers, the Cedent was entitled to indemnity immediately upon payment of each settlement, even thought it did not demand payment from the London Reinsurers until a much later date. Alternatively, the London Reinsurers argued that even if their indemnity obligation was conditioned on the Cedent’s presentation of a reinsurance claim for payment, each of the Cedent’s individual breach of contract of contract claims accrued on the date it became entitled to demand payment from the London Reinsurers, and that occurred each time the Cedent settled an underlying claim.
The Cedent argued that the claims accrued when the London Reinsurers allegedly breached the reinsurance contracts by refusing to pay the claims. Since the London Reinsurers did not refuse to pay the claims any earlier than 1987, and the Cedent commenced its lawsuit in 1991, the lawsuit would not be barred by the statute of limitation under the Cedent’s date-of-accrual theory.
Back in 1991, as some readers may recall, the New York Court of Appeals had not yet decided whether a reinsurer could successfully defend on late notice grounds without establishing prejudice. But in 1992, the London Reinsurers’ litigation strategy was dealt a painful blow when the New York Court of Appeals held, in Unigard Sec. Ins. Co. v. North River Ins. Co., 79 N.Y.2d 576 (1992), that unless a late notice provision expressly conditions a reinsurer’s liability for the claim on timely notice—i.e., the late notice provision is an express condition, not simply a promise—a reinsurer must establish prejudice to be relieved of liability based on the cedent’s failure to provide timely notice of a claim or occurrence.
Answering a question certified to it by the United States Court of Appeals for the Second Circuit, New York’s highest Court explained that, to be express conditions, contractual provisions must unambiguously evidence the parties’ intent to make performance of a duty conditional.[1] The New York Court of Appeals also held that the notice provision before it—which required “[p]rompt notice . . . of any occurrence or accident which appears likely to involve this reinsurance’”—was not an express condition, and that accordingly, the reinsurer in that case could not be relieved of liability for the cedent’s late notice of the loss or losses sustained and reported by the insureds, unless the reinsurer could prove it suffered prejudice as a result of the late notice.
Not too long after the New York Court of Appeals’ landmark reinsurance-law decision answering the Second Circuit’s certified question, the Second Circuit issued its own landmark decision in the Unigard case, holding, among other things, that the reinsurers were unable to establish either prejudice—i.e., “economic injury”—resulting from late notice or that the cedent acted in bad faith in failing to provide timely notice (which would have relieved the reinsurer from liability even without a showing of prejudice).[2]
The London Reinsurers apparently concluded that they could not establish the requisite prejudice to prevail on their late notice defense, a decision which apparently prompted the parties to enter into a stipulation designed to facilitate summary judgment on the merits in favor of one party or the other on the statute of limitations issue. To that end the London Reinsurers agreed to waive their late notice and all other defenses other than statute of limitations, and stipulated with the Cedent that: (a) New York law governed; (b) New York’s six-year statute of limitations applied; (c) the Cedent satisfied all conditions of the Reinsurance Contracts; (d) the Cedent had settled its claims with its insureds more than six years prior to commencing the action; and (e) the Cedent had commenced the action within six-years of the London Reinsurers’ earliest denial of any of the claims.
The parties cross-moved for summary judgment, and the district court ruled in favor of the Cedent, holding that no breach of the Reinsurance Contracts occurred until the London Reinsurers refused to pay the Cedent’s claims. The district court granted summary judgment in favor of the Cedent, holding that the Cedent’s causes of action did not accrue until the London Reinsurers denied the Cedent’s claims.
The London Reinsurers appealed to the United States Court of Appeals for the Second Circuit, which affirmed the district court’s judgment. Continue Reading »
Part I (here) briefly discussed Chief Judge Frank H. Easterbrook’s decision in Trustmark Ins. Co. v. John Hancock Life Ins. Co. (U.S.A.), No. 09-3682, slip op. (7th Cir. Jan. 31, 2011), and its implications on the pending Second and Fifth Circuit appeals in Scandinavian Reinsurance Co. v. Saint Paul Fire & Marine Ins. Co, No. 09 Civ. 9531(SAS), 2010 WL 653481 (S.D.N.Y. Feb. 23, 2010), and Dealer Computer Svcs., Inc. v. Michael Motor Co., No. H-10-2132, slip op. (S.D. Tex. December 29, 2010). This Part II examines in some detail Trustmark’s background and rationale, and Part III will focus on Trustmark’s implications on the Scandinavian Re and Dealer Computer appeals.
II. Trustmark Background
The following facts were gleaned from both the district court and Seventh Circuit opinions (the district court opinion is reported at 680 F. Supp. 2d 944 and can be found here): Continue Reading »
Chief Judge Frank H. Easterbrookof the United States Court of Appeals for the Seventh Circuit is not only a brilliant judge, writer and law professor, but a master of (among many other things) arbitration law. He understands better than most judges how commercial arbitration is supposed to work, what the Federal Arbitration Actis supposed to achieve, and how to implement the Act to ensure the parties get not only what they bargained for, but also the potential to realize the benefits that private, voluntary dispute resolution can offer. His arbitration-law opinions are clearly written, imbued with common and commercial sense, and seem purposely designed to make sometimes elusive concepts readily understandable to courts, arbitrators, parties and counsel. They tend to ensure that the objective, reasonable expectations of the parties are enforced, not frustrated. Continue Reading »
Each involved a dispute about the existence of an arbitration agreement. In UBS Securities United States District Judge Denise L. Coteof the United States District Court for the Southern District of New York entered a declaratory judgment that certain Swiss investors could not compel UBS to arbitrate their securities fraud claims, and permanently enjoined the Swiss investors from pursuing their claims in arbitration. Affirming the district court, the Second Circuit held that UBS satisfied the three requisites of permanent injunctive relief: 1) success on the merits; 2) lack of an adequate remedy at law; and 3) irreparable harm.
As respects success on the merits, the Court held that UBS was not obligated to arbitrate with the Swiss investors, and therefore had succeeded on the merits. Financial Industry Regulatory Authority(“FINRA”) Code Rule 12200 provides that members can be compelled to arbitrate only 1) pursuant to a written agreement; or 2) where a customer requests arbitration. FINRA R. 12200. There was no written agreement to arbitrate between UBS and any of the Swiss investors and the Swiss investors were not customers of UBS. See UBS Securities, slip op. at 3.
As respects the lack of an adequate remedy at law and irreparable harm, the Court explained that under Merrill Lynch Inv. v. Optibase, Ltd., 337 F.3d 125, 129 (2d Cir. 2003), “[b]eing forced to arbitrate a claim one did not agree to arbitrate constitutes an irreparable harm for which there is no remedy at law.” Slip op. at 3. Because UBS was not legally obligated to arbitrate, and because “the lack of an injunction would result in UBS effectively being required to do so, UBS satisfie[d] the ‘irreparable harm’ and ‘lack of an adequate remedy at law’ requirements for an injunction.” Slip op. at 3.
Dedon concerned the familiar rule that disputes about the existence of a contract containing an arbitration agreement must be decided by the court (absent a clear and unmistakable post-dispute submission of that issue to arbitration). Janus sought to compel arbitration before the International Chamber of Commerce(“ICC”) of an exclusive-distribution-agreement dispute, contending 1) the parties had agreed to arbitrate “as evidenced by a draft exclusive distribution agreement or the standard terms and conditions that accompanied each purchase;” and 2) Dedon had “waived its right to arbitrate through its conduct before the ICC” in London. Slip op. at 2. United States District Judge Colleen McMahonof the United States District Court for the Southern District of New York denied the motion to compel and declined to stay the proceedings pending an ICC determination of the contract formation issue, holding that the dispute concerned the existence of an arbitration agreement and that Dedon had not unreservedly submitted the contract formation issue to ICC arbitration.
The Court held that Dedon had not waived its right to court determination of the contract formation issue. The Court said that “Dedon’s submissions to the ICC were replete with statements that Dedon disputed the ICC’s jurisdiction; such repeated objections to ICC jurisdiction prevent a finding of waiver. . . .” Slip op. at 5 (citing First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 946 (1995); Opals on Ice, 320 F.3d at 368).
The Court also rejected Janus’ argument that an agreement to arbitrate “may be found in the terms and conditions that accompanied each purchase order between Dedon and Janus.” Slip op. at 5:
On their face, the terms and conditions in those purchase orders govern the particular exchange of goods occurring with that purchase order — “[a]ll contractual and extra-contractual disputes arising out of or in connection with contracts to which these International Terms and Conditions apply, shall be finally resolved by arbitration” (emphasis added) — and do not purport to create or refer to any exclusive distribution relationship between the parties, which is the sole focus of the present suit.
Janus also argues that the exclusive distribution agreement should be encompassed within the meaning of ‘pre-contractual and collateral obligations’ to the purchase orders. Janus would thus have this court find that “any dispute related to any obligation arising prior to or outside of the contract formed by each shipment of goods” is governed by the purchase orders’ terms and conditions. (emphasis in original) We decline to adopt Janus’s broad reading of that contractual language, as it ignores the plain language of the purchase order, and we agree with the district court that the terms and conditions do not provide an alternative basis for compelling arbitration.
Slip op. at 5-6 (emphasis in original).
Dedon — the party who prevailed in the district court — argued that the district court should have denied the motion to compel with prejudice. Dedon relied on Kahn Lucas Lancaster, Inc. v. Lark Int’l Ltd., 186 F.3d 210, 218 (2d Cir. 1999), partially abrogated on other grounds by Sarhank Group v. Oracle Corp., 404 F.3d 657, 660 n.2 (2d Cir. 2005), which held that under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, arbitration agreements, to be enforceable, “must be signed by the parties or contained within an exchange of letters or telegrams.” 186 F.3d at 218) (quoting Article II of the Convention). But Dedon did not raise that argument before the district court, and so the Court said “the parties will have the opportunity to argue this issue at the trial on the existence of a contact.” Slip op. at 6-7. The Court also noted that the district court may “consider what effect, if any, [the Court’s] holding in Kahn Lucas has on any renewed motion to compel.” Slip op. at 7.
[EDITOR’S NOTE: (Summary orders “filed on or after January 1, 2007 may be cited in a document filed” with the Second Circuit, subject to Rule 32.1 of the Federal Rules of Appellate Procedure and Local Rule 32.1.1. See Second Circuit Local Rule 32.1.1(b)(1) ; Fed. R. App. P. 32.1. “[A] party must cite either the Federal Appendix or an electronic database (with the notation ‘summary order)[,]” and “must serve a copy of it on every party not represented by counsel.” Second Circuit Local Rule 32.1.1(c) & (d).]
Attorney Advertising Notice: Prior results do not guarantee a similar outcome.
Please see also the information and links set forth on each footer page of the The Loree Law Firm website of which this blog is a part (http://www.loreelawfirm.com), and in the disclaimer that appears in the bottom right corner of each post page of this blog.
Disclaimer: The content of this blog is not intended to be legal advice and should not be construed as such. The views expressed in this blog are solely those of the author and do not necessarily reflect those of The Loree Law Firm or any of its current or former clients.
