Certain Underwriters at Lloyd’s, London v. Cravens Dargan & Co.

Issue Discussed: Consolidation / Bifurcation / Class Arbitration

Submitted by Jennifer R. Devery, Michelle A. Jones

Date Promulgated: August 14, 2006

Issue Addressed: Whether arbitration panel or court should determine whether to consolidate reinsurance disputes into a single arbitration

In Certain Underwriters at Lloyd’s, London v. Cravens Dargan & Co., the U.S. Court of Appeals for the Ninth Circuit held that the arbitration panel, not the court, should determine whether a reinsurance dispute involving multiple reinsurers and reinsurance contracts could be consolidated into a single arbitration.

Cravens Dargan initially sent its reinsurers, Certain Underwriters at Lloyd’s, London, an arbitration demand after payment disputes arose regarding asbestos-related reinsurance billings. In response to the demand, the Underwriters petitioned the United States District Court for the Central District of California to compel Cravens Dargan to arbitrate the dispute on a contract-by-contract basis. The Underwriters based their argument on the fact that the dispute involved both multiple reinsurers and multiple reinsurance contracts that did not provide for a consolidated arbitration. The district court denied the Underwriters’ petition, stating that it was declining to set the terms of the arbitration. Thereafter, upon separate petition from Cravens Dargan and after the Underwriter’s filing of a notice of appeal in connection with their petition, the district court ordered the Underwriters to appoint a single arbitrator and present their “multiple arbitrations” theory to the single arbitration panel appointed in response to Cravens Dargan’s demand.

On appeal, the Ninth Circuit affirmed the district court’s orders. As a threshold matter, the court rejected the Underwriters’ jurisdictional argument that, because they had filed a notice of appeal of the district court’s prior denial of their petition to compel multiple arbitrations, the court lacked jurisdiction to rule on Cravens Dargan’s petition to compel a single arbitration. The Ninth Circuit concluded that Underwriters had waived any objection to jurisdiction by responding to and opposing the petition. The court further noted that “[t]he divestment rule … is a rule of judicial economy and not one that strips the district court of subject matter jurisdiction.” The rule applies after a matter is on appeal to prohibit the lower court from making further rulings in the case that might be inconsistent with the order or judgment being appealed. Thus, the Ninth Circuit found that, because the lower court’s orders were entirely consistent with one another, the district court was not divested of jurisdiction.

The Ninth Circuit then turned to the consolidation issue. Quoting the Supreme Court decision of Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79 (2002), the court held that, under the FAA, courts may only decide “certain gateway matters, such as whether the parties have a valid arbitration agreement at all or whether a concededly binding arbitration clause applies to a certain type of controversy.” Thus, the specific terms of the arbitration, including whether or not consolidation was appropriate, was a question to be addressed by the panel. (Citing Green Tree Fin. Corp. v. Bazzle, 539 U.S. 444 (2003); Weyerhaeuser Co. v. W. Seas Shipping Co., 743 F.2d 635 (1984)). Finally, the court explained that because “[b]oth parties agree that there exists a valid agreement to arbitrate, and neither party challenges the validity of either the arbitration clause or the overall agreement,” it saw “no reversible error in the district court’s decision not to establish the terms of the arbitration procedure, but to leave that question to the arbitrator.”

A concurring opinion found additional support for the court’s holding in opinions rendered by three sister circuits that considered analogous issues. See Employers Insurance Co. of Wausau v. Century Indemnity Co., 443 F.3d 573 (7th Cir. 2006); Dockser v. Schwartzberg, 433 F.3d 421 (4th Cir. 2006);Shaw’s Supermarkets, Inc. v. United Food & Commercial Workers Union, Local 791, AFL-CIO, 321 F.3d 251 (1st Cir. 2003).

* Jennifer R. Devery and Michelle A. Jones are both counsel in the insurance/reinsurance group of Crowell & Moring. They each represent cedents and reinsurers in disputes involving a broad spectrum of issues.