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WellPoint, Inc., et al. v. John Hancock Life Insurance Company

Issue Discussed: Replacing an Arbitrator/Umpire

Submitted by Robert W. DiUbaldo

Date Promulgated: August 7, 2009

 

WellPoint, Inc., et al. v. John Hancock Life Insurance Company, 576 F.3d 643 (7th Cir. 2009)

Court: U.S. Court of Appeals for the Seventh Circuit

Issues Decided: (1)Whether resignation of a party-appointed arbitrator in the midst of a proceeding requires an arbitration to begin anew under the Federal Arbitration Act, where the relevant arbitration provision is silent on the issue (2) whether, under such circumstances, Section 5 of the FAA provides a mechanism for addressing the vacancy and replacing the arbitrator.

WellPoint Health Networks and affiliated companies (collectively “WellPoint”) agreed to purchase various Group Business Operations (“GBO”) of John Hancock Life Insurance Company (“Hancock”).  The GBO transaction was facilitated through various agreements between the parties.  Each of the agreements contained a provision mandating that any dispute thereunder be resolved through arbitration.

A dispute arose between the parties on whether WellPoint was required to make certain payments to Hancock concerning books of business that were encompassed by the GBO transaction.  Arbitration followed, and each party appointed their respective arbitrators.  The party-appointed arbiters could not agree on an umpire and, pursuant to the relevant arbitration clause, the American Arbitration Association (“AAA”) appointed the umpire.

Several years into the arbitration, and after the panel was called upon to resolve discovery disputes and other procedural issues, WellPoint requested that its party arbitrator resign for undisclosed reasons.  Hancock objected to the request, but the panel accepted the resignation.  Ultimately, utilizing a procedure suggested by Hancock’s party-arbitrator, the parties agreed that the remaining two panel members would name possible replacements to fill the vacancy.  A retired judge was chosen to act as WellPoint’s party-appointed arbitrator and the arbitration went forward, although Hancock maintained its objections to the previous arbitrator’s resignation.

The panel issued an award directing WellPoint to pay a small amount of the damages alleged by Hancock.  WellPoint petitioned the U.S. District Court for the Northern District of Illinois to confirm the award under the Federal Arbitration Act (“FAA”).  Hancock cross-petitioned  to vacate the panel’s award on the grounds that the panel was not selected in accordance with the operative arbitration agreement.  The District Court confirmed the award, finding that the panel was properly constituted under the subject arbitration clause, irrespective of the fact that WellPoint’s initial arbitrator resigned and was replaced during the proceeding.  Applying a de novo review, the U.S. Court of Appeals for the Seventh Circuit affirmed the District Court’s decision in WellPoint’s favor.  The circuit court rejected Hancock’s argument that the panel exceeded its authority under Section 10(a)(4) of the FAA by accepting the resignation of WellPoint’s initial arbitrator and allowing its replacement, rather than starting the arbitration anew.  Although the relevant arbitration clause was silent on the issue, the Seventh Circuit held that Section 5 of the FAA prescribes a mechanism to address the “mid-stream loss of an arbitrator” by permitting the vacancy to be filled, instead of recommencing the process from square one.  In support of its finding, the court noted that the replacement was selected using a method proposed by Hancock’s party-arbitrator, and that it had acknowledged the replacement was qualified to serve.  Thus, the court ruled that Hancock was estopped from challenging the process to fill the vacancy.  Further, because Section 5 expressly gives a federal district court the authority to resolve any issue related to arbitrator vacancy, the Seventh Circuit found that Hancock’s failure to “use that tool” when the issue first arose resulted in the forfeiture of its right to challenge the replacement under the circumstances of the case.

 

 

[1] Rob DiUbaldo is a Partner at Carlton Fields Jorden Burt, whose practices focuses on insurance, reinsurance and commercial litigation and arbitration.