Seventh Circuit Permits Reinsurance Arbitration To Proceed, Rules Arbitrator Is Disinterested As Required By Contracts

On Monday, the U.S. Court of Appeals for the Seventh Circuit reversed a lower court ruling that enjoined an arbitration from proceeding on the theory that one of the arbitrators was not "disinterested" because of knowledge gained from a prior confidential arbitration between the parties.  See Trustmark Ins. Co. v. John Hancock Life Ins. Co., No. 09-3682 (January 31, 2011).  In holding that the arbitration should proceed, the Court of Appeals issued an opinion that is likely to have significant implications for companies faced with consecutive arbitrations involving the same issues and parties. 

In the opinion, the Court concluded that the injunction was not warranted because delay and out-of-pocket costs are not "irreparable injury."  Given this, a challenge to a party's arbitrator must wait until the conclusion of the arbitration.  Although the Court could have ended its opinion there, it went on to address the substantive issues in the case and opined on two additional issues of import to the arbitration community:  (1) it addressed what constitutes a disqualifying "interest" and held that the arbitrator in question was properly "disinterested," notwithstanding his knowledge of a past proceeding; and (2) the Court held that, because a panel has the authority to resolve ancillary questions that affect its task, it was well within the panel's authority to construe a confidentiality agreement and give preclusive effect to an earlier award. 

More specifically, the underlying dispute arose out of reinsurance contracts issued by Trustmark to John Hancock ("Hancock") and Hancock's cession of a particular type of business that Trustmark claimed was not covered under the contracts.  In 2002, after Trustmark refused to pay Hancock's billings under the contracts, Hancock initiated arbitration proceedings and appointed Mark Gurevitz as its party-appointed arbitrator.  As part of this arbitration (the "First Arbitration"), the parties and arbitrators signed a confidentiality agreement.  In 2004, after a two-week hearing on the merits, the arbitration panel issued an award in Hancock's favor, which Hancock subsequently confirmed in court. 

Following the First Arbitration, Hancock submitted a new billing to Trustmark under the contracts, which Trustmark again refused to pay.  As a result, Hancock initiated a second arbitration (the "Second Arbitration") and again appointed Mr. Gurevitz as its arbitrator.  At the organizational meeting for the Second Arbitration, Trustmark expressed some concern about Mr. Gurevitz's service and his ability to honor the confidentiality agreement from the First Arbitration.  For his part, Mr. Gurevitz agreed to abide by confidentiality, but noted that he might find it "hard to segregate" his knowledge from the First Arbitration.  680 F. Supp. 2d 944, 946 (N.D. Ill. 2010).  Notwithstanding this disclosure, Trustmark ultimately accepted the panel with Mr. Gurevitz on it.  

During the Second Arbitration, per Hancock's request and over Trustmark's objections, the umpire and Mr. Gurevitz issued interim decisions authorizing the use of materials from the First Arbitration and prohibiting Trustmark from relitigating certain matters that were resolved in the First Arbitration.  Before the Second Arbitration went to a hearing on the merits, however, Trustmark filed suit in the U.S. District Court for the Northern District of Illinois seeking to enjoin the arbitration from going forward.  As grounds for its request for an injunction, Trustmark argued that (1) disputes over the confidentiality agreement from the First Arbitration were not arbitrable and therefore could not be resolved by the panel in the Second Arbitration and (2) Mr. Gurevitz breached the confidentiality agreement from the First Arbitration when he deliberated on the interim awards and thus was no longer a "disinterested" arbitrator as required under the contracts' arbitration clause.  The district court agreed with Trustmark and enjoined the parties' participation in the Second Arbitration with Mr. Gurevitz on the panel.   

On appeal, the Seventh Circuit first considered whether the district court erred in granting equitable relief, which requires that a party show it will be irreparably injured absent the issuance of an injunction.  Although the lower court had determined that Trustmark should not be forced to arbitrate issues that it did not agree to arbitrate, the Seventh Circuit found such reasoning unpersuasive for two reasons.  One, the Court noted that Trustmark did agree to arbitrate the question of whether the contracts provide reinsurance for certain risks, "[y]et the district court blocked rather than enforced that contractual undertaking."  Slip Op. at 5.  Two, the Court noted that going forward with an arbitration, even if one party believes the proceeding flawed, does not constitute irreparable injury.  Indeed, in labeling Trustmark's argument as "frivolous," the Court noted that "[l]ong ago the Supreme Court held that the delay and expense of adjudication are not ‘irreparable injury' -- if they were, every discovery order would cause irreparable injury."  Id. (citations omitted).

Although acknowledging that its determination that there was no "irreparable injury" was sufficient to dismiss the injunction, the Court went on to add that the district court also erred on the merits.  Believing that the lower court's decision left "a cloud over this arbitration and the reputation of arbitrator Gurevitz," the Court affirmatively concluded that Mr. Gurevitz did not have any disqualifying interest in the outcome of the Second Arbitration.  Id. at 6.  The Court specifically recognized the fact that Mr. Gurevitz has a "reputational" interest in the arbitration, but determined that this is true of any privately appointed arbitrator and an interest in potential future employment as an arbitrator is not a disqualifying event.  Additionally, the Court rejected the idea that Mr. Gurevitz's knowledge of the First Arbitration is a prohibited interest that would disqualify him from serving in the Second Arbitration.  Comparing Mr. Gurevitz with the lower court judge, the Court asserted:

[P]rivate parties often select arbitrators precisely because they know something about the controversy. . . .  Arbitration need not follow the pattern of jury trials, in which a factfinder's ignorance is a prime desideratum.  Nothing in the parties' contract requires arbitrators to arrive with empty heads.  Federal judges, of all people, should not confuse knowledge with a disqualifying "interest." . . . If knowing about what happened in [the First Arbitration] is an impermissible "interest," or makes the person a "fact witness" about what had occurred in [the First Arbitration], then the district judge [who confirmed the first award] should have stepped aside from the current suit.  Yet that was not required.  Knowledge acquired in a judicial capacity does not require disqualification. Likewise with knowledge acquired in arbitration. 

Id. at 7 (internal citations omitted).  Accordingly, the Seventh Circuit determined that when one party is entitled to choose its own arbitrator and follows all its contractual requirements to do so, "a court ought not abet the other side's strategy to eject its opponent's choice."  Id. at 8.

Finally, the Court discussed whether the panel in the Second Arbitration was entitled to construe and interpret the confidentiality agreement from the First Arbitration.  While the confidentiality agreement itself did not contain an arbitration clause, the Court noted that the parties did agree to arbitrate their disputes about reinsurance.  Moreover, the Court found that arbitrators are entitled "to resolve ancillary questions that affect their task" and "to decide for themselves those procedural questions that arise on the way to a final disposition, including the preclusive effect (if any) of an earlier award."  Id. at 8-9.  Thus, in light of the arbitrators' authority to manage the arbitration and because 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," the Court concluded that the arbitrators can construe the confidentiality agreement.  Id. 

Click here for a copy of the Court's opinion.