Guest Post Part I | The Seventh Circuit Issues a Landmark Reinsurance Arbitration Opinion in Trustmark Ins. Co. v. John Hancock Ins. Co. (U.S.A.)

by Philip J. Loree Jr.

Chief Judge Frank H. Easterbrook of 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 Act is 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.

The Chief Judge’s latest contribution to Federal Arbitration Act jurisprudence is Trustmark Ins. Co. v. John Hancock Ins. Co. (U.S.A.), No. 09-3682, 2011 WL 285156 (7^th Cir. Jan. 31, 2011), and it is a welcome one. In a characteristically terse and well-written ten-page opinion, the Chief Judge articulated at least eight Federal Arbitration Act rules pertinent to reinsurance and other forms of commercial and industry arbitration. A few of these have been set forth before, while others are new:

1. For the purposes of enjoining an arbitration proceeding, a party does not suffer “irreparable harm” simply because it must await the arbitration’s outcome before obtaining judicial resolution of arbitrability or arbitrator-qualification questions, see slip op. at 5-6;
2. An arbitration agreement requiring arbitrators to be “disinterested” means the arbitrators must lack a “financial or other personal stake in [the arbitration’s] outcome,” see slip op. at 6;
3. An “arbitrator’s interest in reemployment created” by an arbitration clause that allows parties to choose their own arbitrators is not a “personal stake in the outcome” disqualifying an arbitrator, see slip op. at 6-7;
4. An arbitrator’s “knowledge about the dispute” is not a “disqualifying interest” in the arbitration’s outcome, see slip op. at 7-8;
5. Courts should not “abet [a party’s] . . . strategy to eject the other party’s chosen arbitrator when that party is entitled to choose its own arbitrator, and in doing so follows all contractual requirements. . . .,” see slip op. at 8;
6. Under the procedural-arbitrability doctrine, an arbitration panel in a subsequent arbitration has the authority to interpret and apply the terms of a confidentiality agreement reached during a prior arbitration proceeding, even if the confidentiality agreement does not contain an arbitration clause, see slip op. at 8-10;
7. Arbitrators have the authority to determine “the preclusive effect (if any) of an earlier [arbitration award,” see slip op. at 9-10; and
8. The question whether arbitrators exceeded their powers based on the outcome of an award is not whether they interpreted the contract correctly, but whether they interpreted it at all. See slip op. at 10.

Senior Circuit Judge Richard D. Cudahy and Circuit Judge Ilana Diamond Rovner joined in the Chief Judge’s opinion.

Trustmark’s implications are many, particularly on the often interrelated topics of arbitrator qualifications and evident-partiality standards. The author believes the Chief Judge’s opinion should influence the outcome of pending appeals of two district court decisions vacating awards on the ground one or more arbitrators allegedly did not disclose (or fully disclose) service on a prior arbitration panel involving similar issues and contracts, or the same witness. One of these is the appeal of the controversial decision 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), which is pending in the United States Court of Appeals for the Second Circuit, and which was fully briefed and argued before Trustmark was decided. The other is the recently-filed appeal of Dealer Computer Svcs., Inc. v. Michael Motor Co., No. H-10-2132, 2010 WL 5464266 (S.D. Tex. December 29, 2010), which is pending in the United States Court of Appeals for the Fifth Circuit.

Trustmark strongly suggests that the Second and Fifth Circuits should reverse the district court decisions in both Scandinavian Re and Dealer Computer. In each of those cases the district court vacated an award because one or more arbitrators, through their service in other cases, had access to information or ruled on issues that were allegedly relevant to the proceedings that led to the challenged award.

Trustmark undermines the district courts’ reasoning in Scandinavian Re and Dealer Computer because it demonstrates that even had the arbitrators in those cases been federal judges — and therefore subject to more onerous neutrality requirements than those applicable to arbitrators — the knowledge and experience they obtained from hearing cases involving the same or similar issues or a common witness would not have rendered them “interested” in the outcome, partial to one of the parties, or otherwise unfit to serve. And if they could have served as federal judges in those matters, then the district courts unquestionably erred by holding that they lacked the requisite neutrality to serve as arbitrators.

Scandinavian Re and Dealer Computer involved alleged non- or incomplete disclosure of arbitrator service on arguably similar or related matters, while Trustmark did not. But the disclosure issue is a red herring. Trustmark, construed in conjunction with Sphere Drake Insurance Ltd. v. All American Life Insurance Co., 307 F.3d 617, 622 (7th Cir. 2002), reh’g denied, Nov. 4, 2002, cert. denied, 538 U.S. 961 (2004) (Easterbrook, J.) – a case which the Chief Judge relied heavily on in Trustmark – demonstrates that the arbitrators in Scandinavian Re and Dealer Computer were not required to disclose their service in other arbitrations allegedly involving similar issues or a common witness.

To fully understand the implications of Trustmark on other cases, one must first understand the background of, and rationale for, the decision. Part II of this post will therefore discuss in some detail what transpired in Trustmark, and Part III will explain in more detail why, in light of Trustmark the Second and Fifth Circuits should reverse the district court judgments in Scandinavian Re and Dealer Computer.

[Editor’s Note: The author is also publishing a materially identical version of this post in his firm’s blog, the Loree Reinsurance and Arbitration Law Forum.]

Technorati Tags: law, ADR, arbitration

Philip J. Loree Jr. is a partner in the Manhasset, New York based firm of Loree & Loree, which focuses its practice on commercial and business-to-business litigation and arbitration; insurance- and reinsurance-related matters; and state and federal arbitration law. Prior to forming Loree & Loree, Mr. Loree was a partner in the Litigation Department of New York City’s Cadwalader, Wickersham & Taft LLP, the oldest continuous law partnership in the United States and one of the world’s leading financial service firms. He was also a partner in the Insurance and Reinsurance Department of Rosenman & Colin LLP (now Katten Muchin Rosenman LLP), and a shareholder in the Litigation Department of Stevens & Lee, P.C.

He frequently writes about arbitration and reinsurance law at his firm’s blog, the Loree Reinsurance and Arbitration Law Forum, and for various trade and legal publications. His comments and written work have also been quoted or cited in trade and legal press articles written by others. He is owner and co-founder of LinkedIn’s Commercial and Industry Arbitration and Mediation Group, which provides an open forum for the discussion of commercial, industry and consumer ADR, and owns and co-manages with other reinsurance professionals LinkedIn’s Reinsurance Claims group, which focuses on reinsurance claims issues.