Arbitration in the Courts

March 2020 | Vol. 2
Where Advocacy Meets Business

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

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

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

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

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

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

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

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

Read the court’s full decision here.

 

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

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

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

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

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

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

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

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

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

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

Read the court’s full decision here.

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

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

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

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

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

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

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

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

Read the court’s full decision here.

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

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

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

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

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

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

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

Read the court’s full decision here.

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

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

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

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

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

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

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

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

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

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

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

Read the court’s full decision here.


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

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

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

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

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

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

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

Read the court’s full decision here.


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

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

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

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

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

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

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

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

Read the court’s full decision here.


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

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

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

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

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

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

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

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

Read the court’s full decision here.

Chaffetz Lindsey Promotes Five Team Members

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

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

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

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

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

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

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

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

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

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

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

Chaffetz Lindsey Launches “Arbitration in the Courts” Report

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Read the court’s full decision here.

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

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

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

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

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

Read the court’s full decision here.

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

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

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

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

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

Read the court’s full decision here.

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

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

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

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

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

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

Read the court’s full decision here.

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

Insurance/Reinsurance Report, August 2019
(Vol. 6)

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Fifth Circuit holds that “conformity to statute” provision does not incorporate state anti-arbitration statute because the New York Convention preempts it …

On an issue that may find its way to the US Supreme Court for final resolution, the Fifth Circuit holds that the New York Convention is an international treaty rather than an “Act of Congress” and is therefore not reverse preempted under McCarran-Ferguson by state law prohibiting arbitration of insurance disputes.

McDonnel Group, L.L.C. v. Great Lakes Ins. SE, UK Branch, 923 F.3d 427 (5th Cir. 2019)

The McCarran-Ferguson Act preserves the state system of insurance regulation.  Its key provision states:  “No Act of Congress shall be construed to invalidate, impair, or supersede any law enacted by any State for the purpose of regulating the business of insurance . . . unless such Act specifically relates to the business of insurance.”  15 U.S.C. § 1012(b).  In Volume 4, we reported on the Eastern District of Missouri’s decision in Foresight Energy, LLC v. Certain London Market Insurance Companies (2018 WL 1942222), which held that a Missouri law prohibiting arbitration of insurance disputes reverse preempted Chapter 2 of the Federal Arbitration Act (FAA), which implements the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention) governing international arbitration agreements.  In so holding, the Foresight court relied on the Second Circuit’s decision in Stephens v. American International Insurance Co., 66 F.3d 41 (2d Cir. 1995).

In McDonnel, the Fifth Circuit reaffirmed its 2009 decision in Safety Nat’l Cas. Corp. v. Certain Underwriters at Lloyd’s (587 F.3d 714) holding the opposite – McCarran-Ferguson notwithstanding, the New York Convention preempts state laws invalidating arbitration clauses in insurance policies issued by foreign insurers.

The policyholder in McDonnel purchased a builder’s risk insurance policy from a group of foreign insurers, covering a construction project in Louisiana.  After the insurers denied its claim for coverage, the policyholder sued.  The insurers moved to dismiss, invoking the policy’s arbitration provision.

The policyholder argued that the policy’s “conformity to statute” provision amended the arbitration clause out of the contract.  The provision stated, “[i]n the event any terms of this Policy are in conflict with the statutes of the jurisdiction where the Insured Property is located, such terms are amended to conform to such statutes.”  The policyholder claimed that the policy’s arbitration clause conflicted with a Louisiana statute that prohibits arbitration agreements in insurance contracts covering property located in the state.  La. Rev. Stat. § 22:868(A).

The court rejected the policyholder’s argument, holding that the Louisiana statute did not conflict with the policy because it was preempted by the New York Convention.  Accordingly, the statute was inapplicable for purposes of the “conformity to statute” provision.  In so holding, the court rejected the policyholder’s argument that Louisiana’s anti-arbitration law reverse-preempted the New York Convention under the McCarran-Ferguson Act.  McCarran-Ferguson only bars an “Act of Congress” from preempting state insurance law, and the Convention is an international treaty, not an “Act of Congress.”  Accordingly, McCarran-Ferguson did not apply.

Read the court’s full decision here.


Is the phrase “occurrence not covered by” ambiguous? Northern District of New York says “No” — and then “Yes” …

Twice this year, the NDNY ruled on whether the phrase “occurrence not covered by” in reinsured umbrella policies covered expenses in excess of liability limits for occurrences for which the primary policy coverage was exhausted. The court gave inconsistent answers

Utica Mut. Ins. Co. v. Munich Reins. Am., Inc., 381 F. Supp. 3d 185 (N.D.N.Y. 2019); Utica Mut. Ins. Co. v. Clearwater Ins. Co., 6:13-cv-1178 (GLS/TWD), 2019 WL 3340644 (N.D.N.Y. July 25, 2019).

In the 1990s, Goulds Pumps, Inc. faced mounting personal injury liabilities from alleged exposure to asbestos in its products.  Goulds sought defense and indemnity coverage for these liabilities under various primary and umbrella policies Utica Mutual Insurance Company issued to Goulds between 1955 and 1986.  In 2007, Utica reached a settlement with Goulds, agreeing to pay in excess of $300 million for Goulds’s asbestos liabilities and related defense expenses.  Utica allocated defense and indemnity for each claim to its policies on a pro rata basis.  Litigation between Utica and its reinsurers over facultative coverage for losses allocated to several of its Goulds umbrella policies ensued.

Utica Mut. Ins. Co. v. Munich Reins. Am., Inc., 381 F. Supp. 3d 185 (N.D.N.Y. 2019), concerned Munich facultative certificates covering Utica’s umbrella policies for the 1973 and 1977 policy years.  The parties’ disputed whether Munich was also obligated to pay a share of the defense and loss adjustment expenses Utica allocated to these policies in excess of the certificates’ liability limits.  Following a ten-day bench trial, the court found that Munich was not obligated to pay these expenses under the 1973 certificate, but it was also not entitled to reimbursement of expenses it voluntarily paid under the 1977 certificate.

The umbrella policies provided that “[w]ith respect to any occurrence not covered by the underlying policy(ies) of insurance . . . but covered by terms and conditions of this policy,” Utica shall pay Goulds’s defense expenses “in addition to the applicable limit of liability of this policy.”  The court’s decision with respect to the 1973 certificate turned on the interpretation of the phrase “occurrence not covered by.”  Notably, the court found that the facultative certificates did not contain a follow-the-settlements obligation, and that none could be implied.  Therefore, Utica’s interpretation of the “occurrence not covered by” language did not bind Munich.

On summary judgment, the court found the “occurrence not covered by” language ambiguous.  Following the trial, however, the court reconsidered its prior determination, and found that it was unambiguous.  It did not refer, as Utica contended, to occurrences that the primary policy no longer covered because its limits had been exhausted.  Rather, an “occurrence not covered by” the primary policy could only mean an occurrence that was altogether outside the scope of coverage provided by the underlying policies.  Here, the primary policy covered the asbestos losses.  Accordingly, the umbrella policy, and therefore the facultative certificate, did not cover defense expenses related to those losses outside the liability limits.

On the other hand, the court held that the voluntary payment doctrine barred Munich’s claim for reimbursement of the expenses in excess of limits it had previously paid under the 1977 facultative certificate.  That doctrine “precludes a plaintiff from recovering payments ‘made with full knowledge of the facts’ and with a ‘lack of diligence’ in determining his contractual rights and obligations.”  The court found that Munich had previously paid Utica’s billing for defense expenses under the 1977 certificate, despite knowing that “none of the documentation Utica had sent revealed any language indicating that the 1977 Umbrella [policy] was expense-supplemental.”

Utica Mut. Ins. Co. v. Clearwater Ins. Co., 6:13-cv-1178 (GLS/TWD), 2019 WL 3340644 (N.D.N.Y. July 25, 2019), concerned Utica’s reinsurance coverage for the Goulds asbestos settlement under facultative certificates issued by Clearwater covering the 1978-81 Utica umbrella policies.  This time, a different judge in the Northern District of New York found the phrase “occurrence not covered by” ambiguous.

The court had previously granted Clearwater’s motion for partial summary judgment, finding that the liability limits in the facultative certificates capped Clearwater’s obligations for both liability and expenses.  In September 2018, the Second Circuit reversed and remanded, finding that, pursuant to the facultative certificates’ follow-the-form clause, “[b]ecause the underlying policies are expense-supplemental, the Clearwater certificates are likewise expense-supplemental.”  906 F.3d 12.  The Second Circuit also found that the facultative certificates did not contain a follow-the-settlements clause.  It therefore remanded the matter to the district court to determine whether the reinsured umbrella policies covered expenses in addition to liability limits.  As in Munich, coverage under the facultative certificates depended on the interpretation of the “occurrence not covered by” language in the umbrella policies.

On remand, the district court found that the language “does not unambiguously state whether it is referring to compensation that does not occur because it is outside the scope of the underling primary policies’ coverage grant or because the underlying policy has been exhausted.”  Rather, the court held, “it appears that this provision could apply to either or both situations.”  The court therefore ordered the parties to trial to resolve this ambiguity.

In refusing to follow the Munich court’s holding that the language was unambiguous, the court noted that that court had initially found the language ambiguous at summary judgment, and only determined that the language was unambiguous after a ten-day trial.  The court also found that the 1973 umbrella policy at issue in Munich contained “materially different language” from the 1978-81 umbrella policies at issue in this case.  While not specifically identifying this different language, the court found that it “changes the context of the agreement as a whole.”

Read the court’s full decision on Utica Mut. Ins. Co. v. Munich Reins. Am., Inc. here.

Read the court’s full decision on Utica Mut. Ins. Co. v. Clearwater Ins. Co. here.


Federal court reverses its own decision to find that firearms exclusion in CGL policy unambiguously bars coverage …

Federal court admits it was wrong to rewrite policy to create coverage. On reconsideration of its own decision, the court applied the policy’s broad and unambiguous firearm exclusion.

Hudson Specialty Ins. Co. v. Snappy Slappy LLC, No. 18-cv-104-TES, 2019 WL 1938801 (M.D. Ga. May 1, 2019).

A patron’s estate sued a bar owner for wrongful death after the patron was shot on its premises.  The bar owner sought coverage under its commercial general liability policy.  The insurer denied coverage based on the policy’s “Firearms Exclusion.”  The provision excluded coverage for bodily injury “arising out of the manufacture, importation, sales, distribution, gunsmithing, ownership, maintenance, or use of firearms or weapons.”

The policyholder argued that the exclusion could not bar coverage because it was ambiguous.  The court initially agreed, finding that the exclusion was ambiguous because it “does not limit or specify to whom it applies.”  However, following the insurer’s motion for reconsideration, the court reversed course, and entered judgment for the insurer.

On reconsideration, the court held that the exclusion was unambiguous because it permitted only one reasonable interpretation.  The initial order “effectively changed the language of the Firearms Exclusion and inserted modifying language not otherwise present in the exclusion agreed upon by the parties.”  The insurer’s “decision not to limit the word ‘use’ to certain persons means that it applies to anyone’s use of a firearm.”   While the exclusion was broad, “breadth does not equate to ambiguity.”

Read the court’s full decision here.

Legal 500 USA Recognizes Chaffetz Lindsey’s International Arbitration and Insurance Practices

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June 2019 – Legal 500 recently published their 2019 USA rankings, and Chaffetz Lindsey continues to rank highly in International Arbitration and Insurance (advice to insurers). Several of the firm’s lawyers from these practice areas were individually highlighted as well, including David Lindsey, James Hosking, and Yasmine Lahlou for International Arbitration, and Peter Chaffetz, Steven Schwartz, and Andrew Poplinger for Insurance.

Chaffetz Lindsey’s International Arbitration practice ranked in Tier 3. David Lindsey and James Hosking were listed as “Leading Lawyers” and Yasmine Lahlou is listed as a “Next Generation Lawyer. The practice area is noted to be “’building a stellar reputation’ across commercial and investment disputes.”

The Insurance practice also ranked in Tier 3. Peter Chaffetz and Steven Schwartz were recognized as “Leading Individuals: Insurance: Advise to insurers: reinsurance,” and Andrew Poplinger was noted as a “Next Generation Lawyer.” The team is distinguished as a “’High-Profile’ New York disputes firm that has a ‘very good national reputation’, ‘great depth of knowledge and experience in reinsurance, as well as a team of accessible and attentive partners’.”

To view the firm’s entire profile, please visit the Legal 500 USA website. For 32 years, Legal 500 USA has served as an independent guide on legal practices across the United States, which conducts research based on interviews with clients and peer lawyers. 

SDNY Rules in Favor of Chaffetz Lindsey Client IBM

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April 2019 –Chaffetz Lindsey’s client, International Business Machines Corporation, recently won judgment on the pleadings terminating a software licensing dispute with defendants Robert Simon and MGV Holdings Inc.  Manhattan federal Judge J. Paul Oetken issued the ruling.

The dispute related to software the defendants had developed many years ago for retail point-of-sales systems IBM sold at the time.  Notwithstanding the parties’ prior settlement of a dispute over the calculation of royalties, defendants alleged that IBM had misallocated revenue between royalty-bearing software licenses and non-royalty-bearing hardware and technical services.  They further claimed that this conduct supported rescission of the previous settlement.  Defendants claimed they were entitled to more than $16 million dollars in allegedly underpaid royalties.

Judge Oetken agreed with Chaffetz Lindsey’s arguments that defendants had no basis to rescind the prior settlement agreement and that the release in that agreement barred the present claims.

The Chaffetz Lindsey team included Peter Chaffetz, Drew Poplinger, David Byowitz and Luke Muhammed (paralegal).  The full order and judgment can be found here.

Insurance/Reinsurance Report, March 2019
(Vol. 5)

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Second Circuit joins other courts in recognizing an exception to functus officio where the award is ambiguous …

If final award is ambiguous, arbitrators may clarify it.

Gen. Re Life Corp. v. Lincoln Nat’l Life Ins. Co., 909 F.3d 544 (2d Cir. 2018).

The functus officio doctrine provides that, absent agreement of the parties, once the arbitrators have issued a final award, they no longer have the authority to modify it. But what if a panel’s award is ambiguous, and the parties require further guidance? The Second Circuit has now joined the Third, Fifth, Sixth, Seventh, and Ninth Circuits in recognizing an exception to functus officio where the arbitrators are asked to clarify an ambiguity in the award.

The underlying dispute concerned a life reinsurance treaty that permitted the reinsurer to raise premiums based on a change in anticipated mortality. In the event of a premium increase, the treaty allowed the cedent to recapture the business and cancel the reinsurance.

The cedent challenged the premium increase in an arbitration, arguing that the increase was not based on a change in mortality. The panel issued a “Final Award” upholding the increase. Importantly, the award also stated that, if the cedent opted to recapture, the recapture would be retroactive as of the date of the premium increase. In that case, the award required that premium and claim transactions after that date would be “unwound.”

The parties, however, disagreed as to the meaning of the award’s recapture provision. The reinsurer argued that it could keep all premiums paid before the recapture date – including unearned premiums – but was not required to pay claims after that date. The cedent contended that the award required the reinsurer to refund premiums that were unearned as of the recapture date.

The cedent asked the arbitration panel to resolve this dispute over its award. The reinsurer objected, arguing that the panel had no authority to modify the award. Rejecting this objection, that panel issued a clarification stating that the reinsurer was entitled to keep the unearned premium, but would also be required to pay the associated claims.

The reinsurer petitioned for confirmation of the original award, arguing that functus officio barred the panel from issuing the clarification. Ruling for the cedent, the Second Circuit upheld confirmation of the clarified award. The court joined five other circuits in recognizing an “ambiguity” exception to functus officio. The exception applies where: (1) the initial award is ambiguous; (2) the subsequent award does not substantively modify the initial award; and (3) the subsequent award comports with the parties’ intent as set forth in the governing agreement. The Second Circuit concluded that all three conditions had been met.

Read the court’s full decision here.


Second Circuit affirms coverage in priest sexual abuse case …

The assault and battery exclusion does not bar coverage where diocese did not actually commit or direct assault.

Hartford Roman Catholic Diocesan Corp. v. Interstate Fire & Cas. Co., 905 F.3d 84 (2d Cir. 2018).

The Hartford Archdiocese sought coverage after its excess insurer refused to indemnify it for sexual abuse claims involving the diocese’s priests. After a bench trial, the district court found that the diocese was entitled to coverage.

On appeal, the insurer argued first that the claims were barred by the policy’s assault and battery exclusion. Under the exclusion, the coverage did not apply “to any Assured for assault and battery committed by or at the direction of such Assured.” Rejecting the insurer’s argument, the Second Circuit held that the exclusion barred coverage only for an Assured that actually committed or directed the assault. Thus, even if the priests could be considered “assureds,” the exclusion did not bar coverage for the Archdiocese.

Next, the insurer argued that, with respect to one of the claims, there had not been an “occurrence” under the policy. The policy defined an occurrence as “[a]n accident or a happening or event … which unexpectedly and unintentionally results in personal injury….” The insurer contended that, because the Archdiocese was aware of one priest’s proclivities, it could not meet this condition to coverage.

The Court disagreed. Notably, the court ruled that whether an injury is expected or intended must be determined under a subjective standard. Advocating an objective standard, the insurer had argued there was no occurrence because the diocese should have known that the priest was likely to commit further assaults. But the Court found that the diocese’s reliance on a physician’s contrary opinion was dispositive. Based on the doctor’s opinion, the diocese did not subjectively expect the priest to commit more abuse. Accordingly, the Court concluded that there was an occurrence, and therefore coverage.

Read the court’s full decision here.


SNDY enforces arbitrators’ subpoenas of non-party documents and testimony …

Arbitrators’ subpoenas are enforceable if they seek evidence and testimony rather than mere pre-hearing discovery.

Washington Nat’l Life Ins. Co. v. Obex Grp. LLC, No. 18 CV 9693 (VM), 2019 WL 266681 (S.D.N.Y. Jan. 18, 2019).

In a reinsurance arbitration, the cedent sought documents from two non-parties, the reinsurer’s broker and its principal (the “respondents”). After the respondents produced documents, the cedent discovered that the production was incomplete. Upon the cedent’s application, the panel issued subpoenas ordering the respondents to appear at a hearing and bring additional documents. When the respondents failed to comply, the cedent petitioned the court to compel compliance, and the non-parties cross-moved to quash.

In granting the petition, the Court followed a line of cases holding that FAA § 7 permits a court within the district where the panel is sitting to enforce an arbitrator’s “summons” issued to a non-party, as long as it seeks the presentation of evidence to the arbitrators rather than pre-hearing discovery. Whether a subpoena seeks pre-hearing discovery is determined under a three-part test: (1) whether the witness was ordered to appear for a deposition held outside the arbitrators’ presence; (2) whether the arbitrators would hear directly from the witness and rule on evidentiary issues; and (3) whether the testimony would become part of the arbitration record.

Applying these factors, the court enforced the subpoenas because: (1) the respondents were ordered to appear at a hearing before the arbitrators; (2) the arbitrators were prepared to rule on any evidentiary issues; and (3) a court reporter was ready to record the proceedings for the arbitration record.

The court also rejected the respondents’ argument that the court could not compel compliance because two of the arbitrators had business addresses outside New York and the panel was therefore not “sitting” in the district. The Court concluded that, for purposes of FAA § 7, the location of the hearing rather than the arbitrators’ addresses determined where the panel was “sitting.”

Read the court’s full decision here.

Drew Poplinger Published in ICC Dispute Resolution Bulletin (2018, Issue 3)

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December 2018 – Drew Poplinger, Counsel at Chaffetz Lindsey, recently provided an analysis of the Second Circuit’s decision in Certain Underwriting Members at Lloyd’s of London v. Florida Department of Financial Services regarding the standard for establishing ‘evident partiality’ of a non-neutral party-appointed arbitrator. The article appeared in the third issue of the 2018 ICC Dispute Resolution Bulletin.

The ICC is a market leader in Dispute Resolution services and resources. Click here to read Drew’s article in the publication.

 © International Chamber of Commerce (ICC). Reproduced with kind permission of ICC. ICC Publications are available at http://store.iccwbo.org/ and included in the ICC Digital Library.

Insurance/Reinsurance Report, August 2018
(Vol. 4)

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New York Court of Appeals Rejects the “Unavailability Exception” …

Where pro rata allocation applies, the policyholder is responsible for uninsured periods – even if insurance was unavailable.

Keyspan Gas East Corp. v. Munich Reinsurance America, Inc., 96 N.E.3d 209 (N.Y. 2018).

One of the main distinctions between pro rata and “all sums” allocation of long-tail claims is that, under pro rata allocation, the policyholder is responsible for periods in which it did not purchase insurance. By contrast, under “all sums” allocation, any triggered policy is potentially responsible for the entire loss, regardless of whether the policyholder bought coverage in all triggered periods.

In some states, however, courts have created an “unavailability exception” to pro rata allocation. Under the “unavailability exception,” the policyholder does not assume its pro rata share of the loss for years in which insurance for the risk – typically asbestos or environmental liability – was unavailable.

In Keyspan, the New York Court of Appeals joined courts that have rejected the “unavailability exception.” The policyholder in Keyspan was a utility seeking coverage for environmental liability arising out of decades of contamination. During several years when the pollution was ongoing, environmental liability coverage was unavailable. The policyholder therefore argued that the court should apply the “unavailability exception.”

The Court of Appeals rejected this approach. According to the Court, “the unavailability exception” would “ignore the very premise underlying pro rata allocation.” The court explained that the exception “would effectively provide insurance coverage to policyholders for years in which no premiums were paid and in which insurers made the calculated choice not to assume or accept premiums for the risk in question.”

To be sure, the Court of Appeals is guided by policy language in deciding how to allocate losses. Depending on policy language, the Court has applied either “all sums” or pro rata allocation. Here, however, because the policy language pointed toward pro rata allocation, the Court held that the language was inconsistent with an “unavailability exception.”

Read the court’s full decision here.


Excess policy not triggered where settlement did not exhaust underlying policy limits …

Where excess policy requires exhaustion through “payment . . . by the insurers,” exhaustion cannot be shown if underlying carrier pays less than its limit.

Cooper v. Certain Underwriters at Lloyd’s, London, 716 Fed.Appx. 735 (9th Cir. 2018).

In Cooper, assignees of an excess policy sought coverage. The excess policy provided that it was triggered only if the underlying coverage had been exhausted “by reason of the payment … by the insurers of the Underlying Policies.” Prior litigation against the policyholder had been settled, with the insurer of an underlying $5 million policy paying $3.47 million, and an additional $1.65 million contribution from the policyholder.

The issue was whether the payments by the underlying carrier and the policyholder – which together exceeded the underlying policy’s $5 million limit – were sufficient to trigger the excess policy. The trial court held that the excess policy was not triggered because “the $1.65 million that insureds [paid] was not made ‘by the insurers of the Underlying Policies.’” 2015 WL 1276511 (C.D. Ca. Sept. 30, 2015). The court also distinguished cases involving different excess policy language.

The Ninth Circuit affirmed. Like the District Court, the Ninth Circuit found that “[t]he excess policy unambiguously requires exhaustion of underlying policy limits ‘by reason of the payment … by the insurers of the Underlying Policies.’” 716 Fed. Appx. 735, 736. This language, said the court, “forecloses the possibility of exhaustion through payment by parties other than the underlying insurers.” Thus, the policyholder’s payment could not serve to trigger the excess policy.

Read the court’s full decision here.


Under the McCarran-Ferguson Act, state anti-arbitration law reverse preempts the FAA …

Missouri statute precluding arbitration of insurance disputes deprived federal court of jurisdiction over action governed by the New York Convention.

Foresight Energy, LLC v. Certain London Market Insurance Companies, 2018 WL 1942222 (E.D. Mo. 2018).

The McCarran-Ferguson Act, 15 U.S.C. § 1011-1015, was enacted to preserve the state system of insurance regulation. Its key provision states that: “No Act of Congress shall be construed to invalidate, impair or supersede any law enacted by any state for the purpose of regulating the business of insurance . . . unless such Act specifically relates to the business of insurance.” Under this language, state laws that regulate the business of insurance have been held to “reverse preempt” inconsistent federal laws – including the Federal Arbitration Act, 9 U.S.C. § 1 et seq.

In Foresight, the court held that a Missouri law prohibiting arbitration of insurance disputes reverse preempted Chapter 2 of the FAA, which implements the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention).

The issue arose when a policyholder, a mining company, commenced an insurance coverage action in Missouri state court. One insurer removed the case to federal court based on FAA § 205. Section 205 permits removal of an action to enforce an arbitration agreement governed by the Convention. The policyholder, however, moved to remand the action to state court, arguing that under the McCarran-Ferguson Act, the Missouri anti-arbitration statute reverse preempted the FAA.

The court agreed with the policyholder. The insurers, relying on Fifth Circuit precedent, had argued that, because the Convention is a treaty rather than an “Act of Congress,” it cannot be reverse-preempted under McCarran-Ferguson. The court, reyling on conflicting authority from the Second Circuit, rejected this logic and found that the relevant federal law was Chapter 2 of the FAA, not the Convention (which is not self-executing). The FAA, said the court, is subject to reverse preemption because it is an “Act of Congress” that does not specifically relate to the business of insurance. As the court explained, “Missouri’s anti-arbitration provision falls squarely within the realm of traditional state responsibility over insurance matters as recognized by Congress in enacting the McCarran-Ferguson Act.” Thus, because removal was based solely on Section 205 of the FAA, the court’s conclusion that the statute was reverse-preempted led it to remand the action to state court.

Read the court’s full decision here.

Party-appointed arbitrators held to less stringent standards of partiality …

The Second Circuit sets a higher bar to vacate an award based on the “evident partiality” of non-neutral arbitrators.

Certain Underwriting Members of Lloyds of London v. Florida, Department of Financial Services, 892 F.3d 501 (2d Cir. 2018).

Under the Federal Arbitration Act, one of the grounds for vacating an arbitration award is the “evident partiality” of an arbitrator. But what happens when – as often happens in reinsurance arbitrations – the party-appointed arbitrators are expected to be pre-disposed?

In the last issue, we reported on the District Court’s decision in the above-captioned case. There, the court vacated a reinsurance arbitration award based on the evident partiality of a party-appointed arbitrator. The court held that the arbitrator’s failure to disclose his connections with one of the parties met the standard for evident partiality. In reaching that conclusion, the court expressly declined to draw a distinction between neutral and non-neutral arbitrators.

The Second Circuit, however, has now reversed. In an important decision, the court “join[ed] the circuits that distinguish between party-appointed and neutral arbitrators in considering evident partiality.”

The Second Circuit emphasized that non-neutral party-appointed arbitrators “are expected to serve as de facto advocates.” The court noted that this point is particularly “salient in the reinsurance industry, where an arbitrator’s professional acuity is valued over stringent impartiality.” For such arbitrators, it makes little sense to apply the same standards that would govern a neutral arbitrator.

Nevertheless, the court observed that “a party-appointed arbitrator is still subject to some baseline limits to partiality.” Although the court did not catalogue all such limits, it did note two: (1) a failure to disclose a relationship “is material if it violates the arbitration agreement;” and (2) “an undisclosed fact is material … if the party opposing the award can show that the party-appointed arbitrator’s partiality had a prejudicial effect on the award.” On the other hand, the fact that “a reasonable person (or court) could speculate or infer bias” will not suffice.

The Second Circuit remanded the case to the district court to determine if the arbitrator’s failure to disclose “either violate[d] the qualification of disinterestedness [in the arbitration agreement] or had a prejudicial impact on the award.”

Read the court’s full decision here.

Wolters Kluwer Publishes “Enforcement of Foreign Arbitral Awards and Judgments in NY”

by

June 2018 – Chaffetz Lindsey lawyers Andreas Frischknecht, Yasmine Lahlou, Gretta Walters, and Andrew Poplinger are delighted to announce that Enforcement of Foreign Arbitral Awards and Judgments in New York has been published by Wolters Kluwer and is now available for purchase.

More thoroughly than any other source, this book shows practitioners how to navigate the enforcement landscape in New York. A favorable arbitral award or judgment at the end of a dispute holds little value unless the prevailing party is able to enforce it, and this book provides an in-depth analysis of all aspects of enforcement and execution, covering U.S. civil procedure, statutes, and case law on enforcement of foreign arbitral awards and judgments, the nuances of the New York courts’ interpretations of the New York and Panama Conventions on arbitral award enforcement, and the practicalities of ultimately obtaining payment on a foreign award or judgment. New York is a leading global financial center known for its pro-enforcement policies and the powerful discovery tools it makes available to creditors. No other resource explores the current state of the law in New York as comprehensively as this book.

In fact, David Spector (Partner at Schiff Hardin) says of the book, “It fills a deep need, both for the legal profession generally and for my practice in particular.  It is a very impressive job.”

What’s in this book:Frischknecht_EFAA (9789041186249)_Final cover

Beyond its sheer practical significance given the likelihood of debtors having assets in (or routing U.S. dollar transactions through) New York, this book provides creditors and their counsel with the critical information they need to define their global enforcement strategy and facilitate their enforcement efforts not only in New York but potentially worldwide. Among the issues and topics that the book tackles are the following:

  • review of the fundamentals of U.S. practice and procedure for non–New York practitioners;
  • easy to understand, jargon-free explanation of the often daunting state and federal procedures for enforcement;
  • up-to-date, clear presentation of the relevant case law, including key state and federal decisions;
  • explanation of how state and federal laws intersect with international law;
  • review of significant recent developments impacting a creditor’s ability to reach foreign defendants and their assets outside the U.S. in post-judgment execution proceedings; and
  • comprehensive advice on the practicalities of executing a judgment.
  • In a broader sense, this book aims to become the go-to resource for creditors and debtors (and their counsel) contemplating potential enforcement proceedings in New York—a key global enforcement jurisdiction.

How this will help you:

Given the critical role, New York plays in a host of cross-border transactions and its status as a hub for worldwide judgment and award enforcement, the demand to better understand the laws and judicial system within the state has never been higher. This comprehensive yet practical guide to navigating award and judgment enforcement in New York provides the understanding of both the basics and the nuances in this area that is critical for any domestic or international practitioner when advising a client as to the likelihood of collection in or through New York.

For more information, or to purchase a copy of Enforcement of Foreign Arbitral Awards and Judgments in New York, click here.

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