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Arbitration: The Seventh Circuit, Interprets Supreme Court's Howsam/Green Tree Cases (Web)

Consolidate? Or not?

The Seventh U.S. Circuit Court of Appeals says it is the arbitrator’s choice, affirming a Wisconsin federal district court decision in Employers Insurance Co. of Wausau v. Century Indemnity Co., No. 05-3437 (7th Cir. April 4, 2006)(available at ).

In a case pitting an insurance company against one of its reinsurers, Seventh Circuit Chief Judge Joel M. Flaum, writing for a unanimous panel, found that the companies’ two agreements don’t specify the source of a decision on consolidating arbitrations under the agreements, and between Century, reinsurer Wausau, and Century’s other reinsurers.

Therefore, Flaum concludes, “questions regarding consolidation are presumptively for the arbitrator.” The reinsurer “is free to argue at the arbitration that separate arbitrations . . . are required under the contracts’ terms. If the arbitration panel agrees, it can require the parties to proceed as it deems appropriate.”

The case bases its analysis on Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79 (2002), but also adds judicial interpretation for Green Tree Financial Corp. v. Bazzle, 539 U.S. 444 (2003), a confusing U.S. Supreme Court case that produced four opinions on determining the arbitrability of class actions.

The Seventh Circuit declines to find a rule based on the Green Tree Financial opinions, and focuses on the Howsam holding.

The Employers Insurance facts were simple: Century, a unit of Philadelphia-based insurance company ACE INA, was liable on an asbestos bodily injury insurance claim from a policy for Aqua-Chem Inc., a Milwaukee-based company that sells and services industrial boilers. Century paid the claims, but “several reinsurers,” the Flaum opinion notes, didn’t pay Century.

The insurer demanded a consolidated arbitration with the reinsurers. Wausau agreed that it was subject to arbitration under the two applicable excess agreements it had with Century.

But the excess insurance agreements’ arbitration clauses didn’t mention consolidating matters with other reinsurers.   Wausau, of Wausau, Wis., argued that the reinsurance agreements were separate contracts, “and contain no language expressing Wausau’s consent to participate in one arbitration involving both contracts or any arbitration involving other reinsurers.”

Wausau filed suit asking for separate arbitrations for the two reinsurance agreements, and a bar on consolidation with other reinsurers’ arbitrations.

Citing Green Tree Financial, the federal district court found that absent evidence of the parties’ contrary agreement, procedural issues like consolidation go to the arbitrator.

But it also ordered separate arbitration panels for Wausau and another reinsurer that had intervened in the case. Wausau appealed, because, in part, the district court said the separate arbitration panels could consider the consolidation issue.

Wausau argued in the Seventh Circuit that arbitrability must be addressed by the court. Century countered that consolidation is a procedural issue for the arbitrator since the contract doesn’t address the issue.

Invoking Howsam’s view that arbitrability questions are narrow gateway questions decided by courts when parties wouldn’t have expected the issue to be arbitrated, Seventh Circuit Chief Judge Flaum wrote that Wausau “incorrectly characterizes the consolidation question as a question of arbitrability.” He wrote:
We find based on Howsam that the question of whether an arbitration agreement forbids consolidated arbitration is a procedural one, which the arbitrator should resolve. It does not involve whether Wausau and Century are bound by an arbitration clause or whether the arbitration clause covers the Aqua-Chem policies. Instead, the consolidation question concerns grievance procedures—i.e., whether Century can be required to participate in one arbitration covering both the Agreements, or in an arbitration with other reinsurers.

The opinion analyzes, and agrees with, the views on procedural questions in arbitration of the First and Fourth Circuit Courts.

Flaum also addresses the district court’s decision focusing on Green Tree Financial, a case where a Supreme Court plurality ruled that a determination allowing a class action arbitration should go to an arbitrator, not a court. The Seventh Circuit opinion, again invoking Howsam’s view of arbitrability, says that the Wausau-Century dispute isn’t an arbitrability question into which courts’ intervention is necessary.

The issue for the Seventh Circuit is that Green Tree Financial wasn’t sufficient for the panel’s holding. “We acknowledge, however, that there is debate regarding the precedential effect—if any—of the plurality opinion in Green Tree,” Flaum writes. “We are therefore hesitant to base our decision on it.”

The Seventh Circuit opinion then analyzes the narrowest basis of the plurality decision in an attempt to apply it, following Supreme Court and circuit precedents. It looks at the Green Tree Financial procedural history; Supreme Court Justice Stephen G. Breyer’s plurality opinion, and a concurrence by Justice John Paul Stevens.

“Taking these two opinions together,” wrote Flaum, “we cannot identify a single rational endorsed by a majority of the Court. . . . The Justices’ rationales do not overlap.”

The appellate court then discounts Pedcor Management Co. Inc. Welfare Benefit Plan v. Nations Personnel of Texas Inc., 343 F.3d 355 (5th Cir. 2003), a Fifth Circuit case that concluded that the narrowest Green Tree Financial holding emanated from Stevens’ opinion.

Flaum writes: “We cannot conclude, as the Fifth Circuit did, that Justice Stevens agreed that the arbitrator should be the first to interpret the parties’ agreements to determine if they allow class arbitration.” Flaum continues:

Fortunately, in this case we need not rely on Green Tree. The Supreme Court made clear in Howsam, 537 U.S. at 84, that procedural issues are presumptively for the arbitrator to decide. Consolidation is a procedural issue. . . . Thus, Wausau now has the burden to show that the Agreements require the court, rather than the arbitrator, to address the consolidation issue. . . . Wausau has not met its burden. The Agreements make no mention of consolidation, as Wausau necessarily concedes.

–Russ Bleemer, Editor, Alternatives