International Arbitration & Federal Court Jurisdiction

On Thursday, the Fifth Circuit handed down an opinion in a complicated case (link is to .pdf of opinion) which implicates, in part, the Federal Arbitration Act, to the extent it codifies the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (we blogged on the New York Convention and its roots back in June). In any event, while Thursday’s case is not really about arbitration, an international arbitration is at its root, and it provides a detailed discussion of a complicated procedural situation involving removal and the res judicata effect of a prior arbitral award.

The case itself is an insurance coverage dispute, I think. The web of related disputes began with a CompUSA policy to contract with a third party, Warrantech, to administer the warranties it sells along with the consumer electronics it retails (someone’s probably tried to pressure you into buying one of these). Pursuant to that contract, Warrantech was required to obtain an insurance policy to cover the potential claims; Warrantech did so through a carrier called Houston General. Houston General, in turn, reinsured a portion of the risk with Certain Underwriters at Lloyds, London (“Underwriters”).

Anyhoo, after about a year, the Underwriters decided that Warrantech was paying unauthorized claims, and they told Houston General that they would not reinsure the claims. Houston General did not take that lying down, and it fired up an international arbitration against the Underwriters pursuant to the New York Convention. The arbitration took five weeks, the panel eventually awarded Houston General $39 Million, and a federal court in New York confirmed the award.

A month after the award, Underwriters filed a Texas state court lawsuit directly against Warrantech, asserting as damages the reinsurance award that Houston General had won in the arbitration. Underwriters made claims for fraud and misrepresentation, via its right to subrogate for claims it had to pay Houston General. Warrantech asserted counterclaims against Underwriters and removed the case to federal court pursuant to Section 205 of the Federal Arbitration Act (our prior blog post we linked to earlier is all about Section 205 removal, for those so inclined). Warrantech argued that res judicata and collateral estoppel barred the Underwriters’ claims.

Underwriters moved for summary judgment on Warrantech’s counterclaims, got them dismissed, and then moved for remand, saying that with the counterclaims’ dismissal the link to the foreign arbitration award (and hence the basis for the Section 205 removal) was severed. The district court remanded, Warrantech appealed to the Fifth Circuit, and Underwriters moved to dismiss the appeal for lack of appellate jurisdiction.

We’ll leave it to you to read the opinion and watch the Fifth Circuit sort it all out. The opinion really does not have much to do with arbitration, ultimately, but it is an excellent example of the FAA and the interplay between courts and arbitrators and foreign countries and warranties and insurance carriers and reinsurers.

Certain Underwriters at Lloyd’s vs. Warrantech, ___ F.3d ___ (5th Cir. 2006) (Cause No. 04-11168).

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