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Consolidation decision is for arbitrator

What the court held

Case: Employers Ins. Co. of Wausau v. Century indemnity Co., No. 05-3437.

Issue: Should an arbitrator or a court decide whether an arbitration agreement allows for consolidation of arbitrations?

Holding: The arbitrator. Procedural questions should be considered in the first instance in arbitration.

An arbitrator, rather than a court, should determine whether an arbitration agreement allows consolidation of the proceedings.

In reaching that holding on April 4, however, the Seventh Circuit attached no precedential value whatsoever to the U.S. Supreme Court decision in Green Tree Financial Corp. v. Bazzle, 539 U.S. 444, 123 S.Ct. 2402 (2003), which addressed a similar issue.

Century Indemnity Company is an insurance company that entered into reinsurance agreements with a number of reinsurers, including two with Employers Insurance Company of Wausau. The reinsurance agreements contain mandatory arbitration provisions, but are silent as to consolidated arbitration.

After Century paid money to its insureds, it sought reimbursement from Wausau and other reinsurance companies.

When payment was contested, Century demanded that all the reinsurers participate in a consolidated arbitration. Wausau acknowledged that it must arbitrate the dispute, but objected to the consolidation of arbitration of its two policies, and to arbitration involving any other insurers.

Wausau then filed suit in the Western District of Wisconsin, seeking a declaration that the arbitrations not be consolidated. Both Wausau and Century moved for summary judgment.

Judge John C. Shabaz granted summary judgment in part, holding that the arbitrator, not the court, should decide whether consolidation is permitted, citing Green Tree.
Wausau appealed, but the Seventh Circuit affirmed in a decision by Judge Joel M. Flaum, although it cited different precedent.

The court relied on Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 84 (2002), in which the Supreme Court found that only two types of disputes are proper for the court to consider, rather than the arbitrator: 1) a dispute regarding “whether the parties are bound by a given arbitration clause”; and 2) “a disagreement about whether an arbitration clause in a concededly binding contract applies to a particular type of controversy.”

Procedural questions, on the contrary, are for the arbitrator to decide in the first instance. Id.

Applying Howsam, the Seventh Circuit held, “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.”

After noting that its position was consistent with other circuits that have considered the issue, the court added, “the only question is the kind of arbitration proceeding their Agreements allow. This comes down to a matter of contract interpretation, which the arbitrator is well qualified to address.”

Finally, the court noted its position was consistent with federal policy favoring arbitration.

Accordingly, the court affirmed the district court’s order that the case proceed to arbitration.

Before concluding, however, the court addressed Green Tree, the decision on which Judge Shabaz relied.

In Green Tree, the issue was whether a court or an arbitrator should decide whether an arbitration agreement permitted arbitration of a class action, where the agreement was silent on the issue.

Four justices concluded, in an opinion by Justice Breyer, that the arbitrator should decide the underlying issue — whether the Federal Arbitration Act (FAA) allows class arbitration. The Breyer opinion reversed the Supreme Court of South Carolina, and remanded with directions to further remand the case to the arbitrator.

Justice Stevens concurred in the judgment, but only to produce a controlling judgment. Stevens concluded that the FAA allows class arbitration, and since that was the holding of the South Carolina court, there is no reason to go back to the arbitrator.

Three justices dissented, in an opinion by Chief Justice Rehnquist, concluding that the FAA pre-empts class-action arbitration unless the agreement provides for it.

Finally, Justice Thomas dissented, concluding that the FAA does not apply to proceedings in state courts.

Related Links

7th Circuit Court of Appeals

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Case Analysis

Looking at the lead opinion by Breyer and the concurrence of Stevens, the Seventh Circuit concluded, “Taking these two opinions together, we cannot identify a single rationale endorsed by a majority of the Court. … The Justices’ rationales do not overlap.”

The court acknowledged that the Fifth Circuit has held that the narrowest ground for the decision in Green Tree was that the validity of class arbitration is to be decided by the arbitrator, absent evidence that the parties intended the court to resolve the issue. Pedcor Management Co., Inc. Welfare Benefit Plan v. Nations Personnel of Texas, Inc., 343 F.3d 355 (5th Cir. 2003).

However, the Seventh Circuit disagreed: “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. … Although it may be likely that Justice Stevens agreed with the plurality that an arbitrator should be the first to interpret the agreements, Justice Stevens argued that the Court should not have addressed the issue, since it was not raised by the parties. We choose not to identify the controlling rationale of Green Tree by presuming how Justice Stevens would have decided the issue if the parties had actually raised it.”

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David Ziemer can be reached by email.

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