Q&A on SCOTUS and Arbitration

Insurance & Reinsurance Newsletter
May 2016

Q: Why has the Supreme Court of the United States taken more cases involving disputes over arbitration over the past decade or so and what does it mean for the insurance and reinsurance industry?

Arbitration law used to involve non-ideological contract and statutory interpretation questions that rarely reached the Supreme Court. In the past decade or two, however, many different consumer-facing businesses have come to rely on arbitration and class arbitration waiver provisions in their contracts as a means of managing their consumer litigation exposures. This trend has put the law of arbitration in the middle of a battleground between advocates of consumer rights that tend to be anti-arbitration and advocates of free markets and freedom of contract that tend to be pro-arbitration. The insurance and reinsurance industry can no longer count on the Supreme Court to remain on the sidelines or view arbitration cases as mere contract and statutory interpretation questions. Instead, the industry must expect constant challenges to the strong federal policy in favor of enforcing arbitration agreements.

Q: What cases involving arbitration law are currently under review by the U.S. Supreme Court?

Two cases from the battleground state of California involving arbitration law are before the U.S. Supreme Court for the 2015– 16 Term. In Zaborowski v. MHN Government Services, Inc., 601 Fed. App’x 461 (9th Cir. 2014), the Court will determine whether the Federal Arbitration Act (FAA) pre-empts California common law allowing judges to declare an entire arbitration agreement to be unenforceable whenever the court finds multiple terms in an arbitration agreement to be unconscionable. The case focuses on the tension between the strong federal policy favoring enforcement of arbitration agreements and broad state laws that allow courts to declare contracts unenforceable if they are substantively unconscionable.

In December, the Court issued its opinion in DIRECTV, Inc. v. Imburgia, 136 S. Ct. 463 (2015). In a 6-3 decision, the Court held that the Federal Arbitration Act required the enforcement of an arbitration agreement despite references in the arbitration agreement to enforceability under California state laws that were found to be pre-empted by the FAA in AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011). DIRECTV, 136 S. Ct. at 467–71. Most of the more conservative justices on the Court supported this pro-business, pro-arbitration outcome.

Q: Why does it matter that the circuits are split as to whether to stay or dismiss an action after compelling arbitration?

Whether a court stays or dismisses an action after compelling arbitration greatly impacts what parties can do after the order to compel is issued. In jurisdictions that follow the “must stay” approach, where the court requires the suit be stayed until the conclusion of the arbitration, the parties are unable to appeal the order and must proceed to arbitration. The Second, Third, Seventh, and Tenth Circuit follow the “must stay” approach. For the “may dismiss” approach, the First, Fifth, Sixth, and Ninth Circuits have determined that it is within the court’s discretion to dismiss if all of the issues are sent to arbitration. Under this approach, a party can immediately appeal the order to compel arbitration, and the parties may find themselves litigating the appeal at the same time they are arbitrating the case.

Q: What is the current state of the “manifest disregard” standard?

The circuit courts are currently split on the use of the “manifest disregard of the law” standard in vacating an arbitration award. In Hall Street Associates, L.L.C. v. Mattel, Inc., 552 U.S. 576, 585 (2008), the Supreme Court cast doubt on whether an arbitration award could be vacated based on a “manifest disregard of the law.” After Hall Street, the circuit courts have split on the continuing use of the “manifest disregard” standard. The Fifth, Eighth, and Eleventh Circuits do not recognize the “manifest disregard” standard because it is not listed as one of the four grounds for vacating an award in Section 10 of the Federal Arbitration Act. The Second, Fourth, Seventh, Ninth, and Tenth Circuits continue to use the standard as a “judicial gloss” on the four grounds. The First, Third, and Sixth Circuits have noted the split of authority but have not ruled on the issue. Whatever the Circuit, although the courts have described the standards differently, they have continued to recognize the same type of misconduct (i.e., arbitrators deliberately disregarding the law) as grounds for vacating an award. As such, insurers and reinsurers should continue to raise any such misconduct through a motion to vacate.

The above topics cover just a few of the areas where the Supreme Court and Circuits have recently ruled. We expect the insurance and reinsurance industry to continue to be affected by the Supreme Court’s more active engagement in the law of arbitration.