Seventh Circuit Court of Appeals Commentary : In Their Opinion : Lawyer & Attorney Michael E. Rigney : Kelley Drye & Warren Law Firm

BLUE CROSS BLUE SHIELD OF MASSACHUSETTS, INC. V. BCS INSURANCE CO. (December 16, 2011)

BCS Insurance Co. is a captive insurer owned by the various state Blue Cross Blue Shield plans. The contract between BCS and the state plans requires arbitration if BCS declines a state plan’s request for reimbursement. After a number of healthcare providers filed class actions against the state plans, twelve state plans sought a defense and indemnification from BCS. BCS declined and the plans demanded arbitration as a group. When the plans' arbitrator and BCS' arbitrator could not agree on a third, several of the plans requested the district court to make the appointment under § 5 of the Federal Arbitration Act. BCS cross-petitioned to compel individual, rather than consolidated, arbitration. It argued that the consolidated versus individual arbitration issue was a question for the district court, rather than one for the arbitrator. Judge Lefkow (N.D. Ill.) denied BCS' cross-petition and BCS appealed. Before the Seventh Circuit acted on the appeal, Chief Judge Holderman (N.D. Ill.) appointed the third arbitrator. BCS again appealed, arguing that the district court lost its jurisdiction to act on the plans' request at the time of the first appeal. The appeals were consolidated.

In their opinion, Seventh Circuit Chief Judge Easterbrook and Judge Cudahy and District Judge Pratt dismissed the first appeal for want of jurisdiction and affirmed on the second appeal. The Court first turned to whether it had appellate jurisdiction of the first, interlocutory appeal. The Federal Arbitration Act allows an appeal from an order denying a request for arbitration. BCS argues that its petition was just that – a motion to compel arbitration. Since it was denied, an appeal is proper. The Court disagreed. It noted that, notwithstanding the pleading’s title, BCS was not seeking arbitration. Arbitration was already ongoing. What BCS wanted was for a federal judge to order an arbitration panel to proceed in a particular way. Since the first order did not deny a request for arbitration, the Court dismissed it want of jurisdiction. With respect to the second appeal, the district court was well within its rights to appoint the third arbitrator. BCS does not even assert otherwise. Though it could have stopped there, he Court went on to address the underlying dispute -- whether a court or the arbitration panel rules on the consolidated versus individual arbitration debate. The Court stated that the district court should have allowed the arbitration panel to decide that question, under the Court's Wausau decision. The only question for court is whether the parties have agreed to arbitrate and here they have.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

AFFYMAX v. ORTHO-MCNEIL-JANSSEN PHARMACEUTICALS (October 3, 2011)

Affymax and Ortho-McNeil-Janssen Pharmaceuticals created a joint venture in 1992 to develop peptide compounds. Their agreement assigned ownership based on development efforts. If a compound was jointly developed, it was jointly owned. If a compound was solely developed by either company, that company owned it. The parties also agreed to arbitrate all ownership disputes. Affymax brought suit in 2004 with respect to the ownership of the so-called '940 family and '078 family. After arbitration, a panel concluded that Ortho owned the ‘078 family and that the parties jointly owned the ‘940 family. Judge Kennelly (N.D. Ill.) confirmed most of the arbitration ruling but vacated the award with respect to its conclusion that Ortho owned the foreign patents in the ‘078 family. Ortho appeals (Affymax also appealed, but to the Federal Circuit).

In their opinion, Seventh Circuit Chief Judge Easterbrook and Judges Wood and Tinder reversed. The Court first addressed appellate jurisdiction. Patent controversies that arise over a contractual dispute, as this one does, arise under the contract, not the patent. Therefore, the Federal Circuit's jurisdiction over patent disputes has not been triggered. The Court concluded that it was the proper forum, with jurisdiction over the district court's order vacating a part of the panel's award. On the merits, the Court noted that the Federal Arbitration Act gives four reasons a district court may rely on in vacating an arbitration award. The reason given by the district court here – the panel’s disregard of law -- is not one of those four reasons. The court's order was therefore error, if in fact that was the only basis for its conclusion. Before finding error, the Court considered whether the panel exceeded its powers, which is one of the four reasons permitting the vacation of an award, and is somewhat related to the district court's rationale. The Court concluded that the panel resolved the dispute pursuant to the 1992 contract’s directions and did not exceed its powers in doing so.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

JANIGA v. QUESTAR CAPITAL CORP. (August 2, 2010)

Alfred Janiga has lived and worked in the United States for over 20 years since his arrival from Poland. However, he still understands very little English. His brother, Weislaw Hessek, operates Hessek Financial Services and is a registered representative of Questar Capital Corp. After much prodding from Hessek, Janiga agreed to open a Questar account. He signed one piece of paper and claims that he never saw any of the documents related to his account. Just above his signature, however, in large letters, was a reference to an arbitration agreement in the contract and an admission that he had received a copy. Janiga was originally content with his investment. In fact, he increased his investment after a few months. After about a year, Janiga filed a complaint against his brother and Questar. His complaint included counts of securities violations, negligence, fraud, and others. The defendants moved to stay the proceedings and order arbitration. Judge Shadur (N.D. Ill.) denied the motions without prejudice until he determined whether a contract had even been formed. The defendants appeal.

In their opinion, Judges Wood, Evans, and Sykes reversed and remanded. The Court first commented on its appellate jurisdiction. Although the decision of the district court was not a final decision, the Federal Arbitration Act allows for an interlocutory appeal of the district court's refusal to stay and order arbitration. The Court turned to the merits -- whether the threshold question of the existence of a contract is a question for the court or the arbitrator. The Supreme Court has distinguished between challenges to the validity of an arbitration agreement and challenges to the validity of a contract. A court decides the former; the arbitrator decides the latter. At the time of the district court’s opinion (and even oral argument), the Supreme Court had not decided which decided the contract formation issue. On June 24, 2010, in the Granite Rock Co. case, the Supreme Court held that a courts, not an arbitrator, should decide issues of contract formation. The district court was therefore correct in not referring that issue to arbitration. The Court did take issue with the lower court's hesitation to decide the issue. The district court focused on issues such as Janiga's language barriers, whether he understood or read or even saw the contract, and whether the contract was valid under state law. But these are enforceability issues, said the Court. The fundamental point is that Janiga signed the contract and both parties performed under it for a year. Janiga clearly intended to open a brokerage account and his admittedly voluntary signature is evidence of his assent to the agreement. Contract formation has been established -- other questions may remain for the arbitrator. The Court was less confident of the resolution of the formation issue with respect to Hessek. If Hessek is an agent of Questar and the claims asserted are within the scope of that agency, he may receive the benefit of the arbitration agreement. Since the district court never addressed that issue, the Court remanded for further consideration.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

SHERWOOD v. MARQUETTE TRANSPORTATION CO. (November 23, 2009)

Bluegrass Marine employs Michael Sherwood as a deckhand on one of its Mississippi River vessels. Sherwood alleged that he was injured during his employment. He brought suit under the Jones Act. Bluegrass sought a stay in favor of arbitration, invoking a clause in Sherwood's employment contract that required all disputes to be arbitrated under the Illinois Uniform Arbitration Act. The court denied the stay, concluding that the Federal Arbitration Act (which does not apply to seamen) preempted the Illinois Act. Bluegrass appealed.

In their opinion, Chief Judge Easterbrook and Judges Evans and Williams dismissed for want of jurisdiction. The Court noted that Bluegrass relied on § 16 of the FAA, which authorizes interlocutory review of a refusal to stay an action under § 3 of the FAA. The Court concluded that § 16 could not provide a basis for jurisdiction since the FAA does not apply to seamen and because Bluegrass never sought or was denied a stay under § 3 of the Act. The Court also rejected Bluegrass' reliance on both the collateral order doctrine and § 1292 (as the denial of an injunction) as bases for an appeal. Although the Court denied the appeal, it did express its doubt regarding the correctness of the district court's preemption conclusion.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

WELLPOINT, INC. V. JOHN HANCOCK LIFE INSURANCE COMPANY (AUGUST 7, 2009)

In 1996, WellPoint and John Hancock Life Insurance Company (Hancock) entered into a complex business transaction. The transaction was documented with a series of contracts, each of which contained an express arbitration clause. A dispute arose. WellPoint and Hancock both demanded arbitration. Pursuant to the arbitration procedure agreed upon, each appointed its own party arbitrator. When the party arbitrator’s could not agree on a third arbitrator, the AAA made the appointment, again as provided in the agreements. After over two years of extensive discovery and procedural disputes, WellPoint's party arbitrator resigned. Hancock objected but the panel, including Hancock's party arbitrator, approved the resignation. Hancock again objected when WellPoint proposed specific names for the vacancy. Hancock's party arbitrator proposed a compromise that WellPoint accepted -- and Hancock supported. Under the proposal, the panel suggested several candidates from which WellPoint could choose. Again, Hancock objected but also agreed that the replacement arbitrator met the prerequisites for service. The panel awarded WellPoint almost $30 million. WellPoint filed a petition to confirm the award -- Hancock cross-petitioned to vacate the award. The district court confirmed the award. Hancock appeals.

In their opinion, Judges Bauer, Ripple and Wood affirmed. The Court rejected Hancock's argument that the panel "exceeded their powers" under § 10(a)(4) of the Federal Arbitration Act when they selected a third arbitrator in a manner not provided for in the agreement. Although the Court conceded that the party's agreements did not provide a process for filling a vacancy, it noted that § 5 of the Act does. Section 5 expressly provides that a district court can appoint an arbitrator in the event of a vacancy were no provision exists in the party's agreement. Given the express remedy in § 5, the Court was unwilling to interpret the act in a way that would allow a party to forgo its § 5 remedy but get the same relief under § 10 after the arbitration is complete -- and it loses. Hancock's failure to avail itself of the remedy under § 5 amounts to a forfeiture of its challenge to the third arbitrator.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

 UNITED FOOD AND COMMERCIAL WORKERS v. ILLINOIS-AMERICAN WATER COMPANY (June 26, 2009)

Glenn Williams was a wastewater treatment operator for Illinois-American Water Company ("IAWC"). IAWC discovered that Williams was operating without a required Illinois EPA license. Because it was Williams' second offense, it was punishable by termination. Instead of firing Williams, however, IAWC offered him a Last Chance Agreement ("LCA"). Under the LCA, Williams was suspended without pay for 30 days, he was required to obtain his license within six months, and he was required to repay the extra compensation he received as a result of IAWC's belief that he was licensed properly. The LCA also provided that failure to comply would result in Williams' immediate termination and any disputes regarding the agreement would be resolved through the collective bargaining agreement’s arbitration procedure. The United Food and Commercial Workers Union, which represented Williams, filed a grievance contesting the LCA's validity. When Williams failed to make repayment arrangements, IAWC terminated his employment. The union filed a second grievance. The grievances were consolidated and brought before an arbitrator. The arbitrator ruled against the union on the validity of the LCA but ordered Williams reinstated. He concluded that the termination was improper because of the pending, good faith challenge to the LCA itself. On review, the district court confirmed the arbitration award. The union appeals.

In their opinion, Judges Posner, Kanne and Wood affirmed. The Court identified its limited role in reviewing arbitrator's awards. As long as an arbitrator bases his decision on an interpretation of the agreement, the court will enforce the award. Here, the arbitrator confronted a situation that he thought was not covered by the agreement. One provision gave IAWC the absolute right to terminate Williams' employment. Another provision gave the union the right to challenge the validity of the LCA. The arbitrator concluded that the agreement contained an implied term – that Williams' employment could not be terminated during the pendency of a good faith grievance over the validity of the agreement itself. Since his award was based on an interpretation of the agreement, the Court affirmed.

• Email This
• Print
• Comments
• Trackbacks
• Share Link