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A Risky Strategy: The Seventh Circuit Reverses a Decision Enjoining an Ongoing Reinsurance Arbitration

by ~ John Love (Email) (Web Site) ~ and ~ Melissa D’Alelio (Email) (Web Site)

As Winston Churchill once said, “however beautiful the strategy, you should occasionally look at the results. Perhaps Trustmark Insurance Company (“Trustmark) could have used this advice when it attempted to disqualify a party-appointed arbitrator in an effort to stop an ongoing reinsurance arbitration in its tracks. The strategy did not get Trustmark very far—and it may not get others interested in halting arbitrations and ejecting an opponent’s choice of arbitrator very far, either, after the Seventh Circuit’s recent decision in Trustmark Insurance Co. v. John Hancock Life Insurance Co., 631 F.3d 869 (7th Cir. 2011). There, the Court of Appeals issued a unanimous opinion rebuking a trial court for departing for the judicial norm of non-interference in pending arbitrations, and for granting Trustmark’s request for an injunction to stop the arbitration.

John Hancock Life Insurance Company (“Hancock) ceded a mix of retrocessional and direct insurance risks to Trustmark using multiple reinsurance contracts, all containing arbitration provisions. Heated billing disputes under the retrocessional contracts later arose, which the parties submitted to arbitration. In March 2004, a tripartite panel was selected and a confidentiality agreement was executed. The panel ruled—to Hancock’s delight—that the retrocessional business was covered and properly ceded. The district court confirmed the award.

Trustmark was dissatisfied and refused to pay bills Hancock later sent, on the view that the award did not govern all of the parties dealings. This led to Hancock commencing a new arbitration in October 2004. Hancock appointed the same person who had served as its arbitrator in the first arbitration, while Trustmark nominated an arbitrator who had not participated in the earlier proceeding. The two party-chosen arbitrators then selected an umpire. During the course of this second arbitration, Hancock requested that information from the first arbitration be admitted into evidence to avoid re-litigating the same issues. A dispute erupted as to whether the confidentiality agreement from the first arbitration would permit this disclosure. Hancock’s arbitrator did not recuse himself from the deliberations and was part of a 2-1 decision that extended the confidentiality agreement from the first arbitration to the second, and consequently barred Trustmark from re-litigating several issues.

Before the panel commenced its hearing on the merits, Trustmark commenced suit seeking a preliminary injunction to stop the second arbitration from proceeding so long as Hancock’s purportedly “interested arbitrator remained a member of the panel, on grounds that the contracts required all three arbitrators to be “disinterested. Trustmark asserted that Hancock’s arbitrator was not “disinterested because he knew what happened in the first arbitration. The district court agreed with Trustmark and issued an injunction. Hancock appealed.

In reversing the district court’s decision, the Seventh Circuit had a few choice words for Trustmark—and the district court. First, the Court emphasized a lack of irreparable injury to Trustmark, a necessary threshold for any party seeking to secure the equitable remedy of an injunction. The Court explained that Trustmark did agree to arbitrate the question whether the contracts provided reinsurance for certain risks, noting that the district court blocked, rather than enforced, that contractual obligation. The Court next emphasized that the district court’s proposition that an arbitration “unalterably deprives the party of its right to select the forum was downright false. The Court explained that Trustmark was not unalterably deprived of any rights because, under the Federal Arbitration Act, Trustmark had the right to commence a post-arbitration judicial proceeding to vacate an award on the grounds that the arbitrators exceeded their authority. The Court also noted that delay and expense of litigation do not constitute irreparable injury.

The Court explained that, while it could end its analysis there, the district court’s decision “leaves a cloud over this arbitration and the reputation . . . [of Hancock’s arbitrator], a reputation that Trustmark seems determined to tarnish. The Seventh Circuit, therefore, proceeded to hold that the district court “erred on the merits in addition to mistakenly believing that Trustmark had established irreparable injury. According to the appeals court, the requirement of “disinterest means that an arbitrator lacks “a financial or other personal stake in the outcome. The Court determined that Hancock’s arbitrator was not “interested, despite his knowledge of the dispute from his participation in the first arbitration and despite his possible interest in potential future employment by Hancock. It explained that Hancock’s arbitrator’s interest in reemployment cannot be properly deemed a disqualifying event.

The Court reasoned that “the interest in potential future employment is endemic to [party-appointed] arbitration, and, thus, not grounds for a showing of “interest. The Court further noted that Hancock’s arbitrator’s “knowledge cannot be a form of prohibited “interest. With a wagging finger, it observed that “federal judges, of all people, should not confuse knowledge with a disqualifying interest. The appeals court noted in passing that, if knowledge of earlier proceedings demonstrated an “interest, then the district judge should have recused himself because he presided over confirmation of the first arbitration.

Finally, the Seventh Circuit held that the district court erred in concluding that the panel could not interpret the parties confidentiality agreement because that agreement lacked an arbitration clause. The Court reasoned that the confidentiality agreement was “closely related to the substance of the first arbitration and presumptively within the scope of the reinsurance contracts comprehensive arbitration clauses, which cover all disputes arising out of the original dispute.

In closing, the Court of Appeals particularized Churchill’s sage advice, warning: “When one party is entitled to choose its own arbitrator, and in doing so follows all contractual requirements, a court ought not abet the other side’s strategy to eject its opponent’s choice.

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John Love can be reached at Melissa D’Alelio can be reached at
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