Trustmark Insurance v. John Hancock Life Insurance

In the

United States Court of Appeals
For the Seventh Circuit

No. 09-3682

T RUSTMARK INSURANCE C O .,
Plaintiff-Appellee,
v.

JOHN H ANCOCK L IFE INSURANCE C OMPANY (U.S.A.),

Defendant-Appellant.

Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 09 C 3959—James B. Zagel, Judge.

A RGUED JANUARY 6, 2011—D ECIDED JANUARY 31, 2011

Before E ASTERBROOK, Chief Judge, and C UDAHY and
R OVNER, Circuit Judges.
E ASTERBROOK, Chief Judge. Two insurance companies
agreed in 1997 that Trustmark would reinsure some
risks underwritten by John Hancock. The details of the
parties’ multiple contracts are unimportant for our pur-
poses. It is enough to say that the insurers disagree
about the meaning of “London Market Retrocessional
Excess of Loss business”, which Trustmark need not
2 No. 09-3682

reinsure. The parties submitted their dispute to arbitra-
tion under the contracts’ broad arbitration clauses. In
March 2004 a tripartite panel (one arbitrator selected by
each side, and these two selecting a third, called the
umpire) made its award, supporting Hancock’s view of
Trustmark’s obligations. The award was confirmed by
a district court. 2004 U.S. Dist. L EXIS 11370 (N.D. Ill.
June 17, 2004).
Trustmark was dissatisfied and refused to pay the
bills that Hancock sent on the view that the confirmed
award governed all of the parties’ dealings. This led
Hancock to commence a new arbitration in October 2004.
Trustmark responded by arguing (among other things)
that Hancock had secured the March 2004 award by
failing to disclose four documents during arbitral dis-
covery, an omission that Trustmark labeled “fraud.”
Hancock named as its arbitrator Mark S. Gurevitz, who
had participated in the first arbitration as well.
Trustmark picked a person who had not participated
in the earlier proceeding. The two party-chosen
arbitrators selected a neutral umpire. One of the first
issues the three-person panel had to tackle was what
weight to give the 2004 decision. Hancock contended
that it was largely dispositive; Trustmark contended
that it should be ignored and the proceedings restarted
from scratch. Consideration of this point was com-
plicated by a confidentiality agreement that the
parties had reached during the first proceeding. This
agreement—which did not include its own arbitration
clause—prevented Trustmark and Hancock from dis-
closing the evidence, proceedings, and award. The
No. 09-3682 3

parties debated whether this agreement covered all dis-
closures, even to lawyers and successor arbitrators, or
only disclosures to the outside world (such as the firms’
business rivals and the press). Gurevitz and the umpire
concluded that the arbitrators themselves (and the par-
ties’ lawyers) are entitled to know and consider the
evidence presented, and the results reached, in the
first arbitration.
Before the panel commenced its hearing on the merits,
Trustmark launched this suit under the diversity juris-
diction. The suit, filed in 2009, initially asked the court
to vacate the decision that had confirmed the 2004
award. That request is so obviously untimely—the time
to appeal the district judge’s decision had expired five
years earlier, and Fed. R. Civ. P. 60(b) does not allow
that decision to be reopened—that Trustmark soon re-
formulated its principal contention, asking the court
to enjoin further arbitration as long as Gurevitz remains
a member of the new panel. The contracts require all
three arbitrators to be “disinterested”. Trustmark con-
tended that Gurevitz is not, because he knows what
happened in the first arbitration. It also insisted
that the new arbitral panel is not entitled to form or act
on any view about the meaning of the confidentiality
agreement, because that agreement does not include an
arbitration clause. Only a judge, Trustmark insisted, can
determine what the confidentiality agreement requires.
The district court agreed with Trustmark and issued
an injunction. 680 F. Supp. 2d 944 (N.D. Ill. 2010). The
judge wrote that Gurevitz is not “disinterested” because
4 No. 09-3682

he knows what happened during the first arbitration
and could be called as a fact witness about those pro-
ceedings. The judge also ruled that the second panel
is not entitled to consider the decision made by the
first panel. The injunction stopped the arbitration in its
tracks. Hancock has appealed.
Equitable relief depends on irreparable injury, and the
first question we must address is whether Trustmark
showed any. Here is the district court’s entire discus-
sion of that subject:
Trustmark cannot be forced to arbitrate issues
that it did not agree to arbitrate. See AT&T Technol-
ogies v. Communications Workers of America, 475
U.S. 643, 648 (1986). “Forcing a party to arbitrate
a matter that the party never agreed to arbitrate,
regardless of the final result through arbitration
or judicial review, unalterably deprives the
party of its right to select the forum in which it
wishes to resolve disputes[,]” causing irreparable
harm. Chicago School Reform Bd. of Trustees v. Diver-
sified Pharmaceutical Services, Inc., 40 F. Supp. 2d
987, 996 (N.D. Ill. 1999). This is a harm faced
uniquely by Trustmark if it is denied relief and
such harm tips the scale in favor of granting in-
junction. This irreparable harm, coupled with
Trustmark’s success on the merits, militates in
favor of granting an injunction in this case.
680 F. Supp. 2d at 949. There are two principal problems
with this understanding.
No. 09-3682 5

First, Trustmark did agree to arbitrate the question
whether the contracts provide reinsurance for certain
risks. Yet the district court blocked rather than en-
forced that contractual undertaking.
Second, the proposition that going forward with an
arbitration “unalterably deprives the party of its right to
select the forum”—a proposition for which the court
did not cite any statute or appellate decision—is false.
Once the arbitration ends, a party that believes the pro-
ceeding flawed because the arbitrators exceeded their
remit has a simple remedy: a proceeding under the
Federal Arbitration Act to deny enforcement to the
award. See 9 U.S.C. §10(a)(4) (award may be set aside
“where the arbitrators exceeded their powers”). If the
award should be set aside, litigation in the proper
forum would ensue.
The only potential injury from waiting until the ar-
bitrators have made their award is delay and the out-of-
pocket costs of paying the arbitrators and legal counsel.
Long ago the Supreme Court held that the delay
and expense of adjudication are not “irreparable in-
jury”—if they were, every discovery order would cause
irreparable injury. See, e.g., Petroleum Exploration, Inc.
v. Public Service Commission, 304 U.S. 209, 222 (1938);
Renegotiation Board v. Bannercraft Clothing Co., 415 U.S. 1, 24
(1974); FTC v. Standard Oil Co., 449 U.S. 232, 244 (1980).
We held in PaineWebber Inc. v. Farnam, 843 F.2d 1050 (7th
Cir. 1988), and Graphic Communications Union v. Chicago
Tribune Co., 779 F.2d 13 (7th Cir. 1985), that the sort of
argument Trustmark advances in its effort to establish
“irreparable injury” is frivolous.
6 No. 09-3682

We could stop here, but the district court’s decision
leaves a cloud over this arbitration and the reputation
of arbitrator Gurevitz, a reputation that Trustmark
seems determined to tarnish. We therefore add that the
district court erred on the merits in addition to mis-
takenly believing that Trustmark has established irrep-
arable injury.
The contracts require all three arbitrators to be “disin-
terested.” When used with respect to adjudication, this
word means lacking a financial or other personal stake
in the outcome. See generally Caperton v. A.T. Massey
Coal Co., 129 S. Ct. 2252 (2009). Norms of insurance-indus-
try arbitration track this understanding. ARIAS•U.S.,
Practical Guide to Reinsurance Arbitration Procedure §2.3
(rev. ed. 2004) (“disinterest” means no financial stake in
the outcome and not being under a party’s direct control).
Gurevitz does not have any stake in the outcome of
this arbitration. Like any other privately appointed arbi-
trator, he does have a reputational interest: if his deci-
sion disappoints the person who put him on the panel,
he is less likely to be selected as an arbitrator in the
future. Federal judges, by contrast, serve during good
behavior and need not worry about how their decisions
may affect their careers. But the interest in potential
future employment is endemic to arbitration that
permits parties to choose who will decide. See Sphere
Drake Insurance Ltd. v. All American Life Insurance Co., 307
F.3d 617, 622 (7th Cir. 2002) (“evident partiality” for
arbitrators means acts that simultaneously show support
for one side and disregard the rules; party-appointed
No. 09-3682 7

arbitrators can’t be dismissed on the ground that they
are inclined to support the party who named them).
Sometimes parties agree that arbitrators will be named
by independent entities, such as the American Arbitra-
tion Association, but Trustmark and Hancock reserved
the power of appointment. A court cannot properly deem
the interest in reemployment created by this arrange-
ment a disqualifying event.
Instead of asking whether Gurevitz had a financial or
other personal stake in the outcome, the district judge
asked whether he had knowledge about the dispute.
Answering yes, the judge deemed the knowledge a form
of prohibited “interest.” As we observed in Sphere
Drake, however, private parties often select arbitrators
precisely because they know something about the contro-
versy. 307 F.3d at 620. 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.” For judges regularly
hear multiple suits arising from the same controversy.
The district judge who resolved this very dispute also
entered the order enforcing the 2004 award. If knowing
about what happened in 2004 is an impermissible “inter-
est,” or makes the person a “fact witness” about what had
occurred in 2004, then the district judge should have
stepped aside from the current suit. Yet that was not
required. Knowledge acquired in a judicial capacity
does not require disqualification. See Liteky v. United
States, 510 U.S. 540 (1994). Likewise with knowledge
acquired in arbitration.
8 No. 09-3682

Arbitrator Gurevitz is as “disinterested” as the district
judge himself and just as entitled to participate. That
Gurevitz signed the confidentiality agreement does not
affect this conclusion; he signed as an adjudicator. The
district judge himself implemented the confidentiality
agreement, in a similar adjudicatory capacity, when
confirming the first panel’s award. 2004 U.S. Dist. L EXIS
11370 at *4–5. If there is any difference between the two
adjudicators, Gurevitz has the stronger entitlement to
participate in this second round, because as we stressed
in Sphere Drake it takes more to disqualify an arbitrator
than to disqualify a judge. 307 F.3d at 621. See also
Merit Insurance Co. v. Leatherby Insurance Co., 714 F.2d 673
(7th Cir. 1983). No party in federal court is entitled to
pick his judge, but contracts allowing parties to choose
their arbitrators are common; these parties’ arrangement
instantiates the practice. 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.
The district judge also erred in concluding that the
arbitrators are powerless to construe the confidentiality
agreement. True, that agreement lacks its own arbitra-
tion clause, but the parties did agree to arbitrate their
disputes about reinsurance. Arbitrators who have been
appointed to resolve a commercial dispute are entitled
to resolve ancillary questions that affect their task. See
Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 84 (2002).
What’s more, the confidentiality agreement—a standard
form in insurance arbitration, signed while the arbitra-
tion was under way—is closely related to the substance
No. 09-3682 9

of the first arbitration and presumptively within the
scope of the reinsurance contracts’ comprehensive ar-
bitration clauses, which cover all disputes arising out of
the original dispute. Cf. Sweet Dreams Unlimited, Inc. v.
Dial-A-Mattress International, Ltd., 1 F.3d 639, 642 (7th
Cir. 1993).
Suppose that Trustmark and Hancock had agreed to
use the procedural rules of the American Arbitration
Association, but had not included a separate arbitration
clause in that contract. The panel could interpret and
apply the AAA’s rules; a party dissatisfied by a pro-
cedural ruling could not run to a federal district court
and get review in mid-arbitration, one ruling at a time,
just because neither the AAA’s rulebook nor the contract
adopting them had a freestanding arbitration clause.
So, too, with the terms of the Federal Arbitration Act.
Several parts of this statute govern the management of
arbitration. For example, §7 says that arbitrators may
summon witnesses and require them to bring documents.
9 U.S.C. §7. The Act is a statute; naturally it does not
contain an arbitration clause; yet no one supposes (at
least, no one should suppose) that every time an arbitrator
summons (or doesn’t summon) a witness, or decides
which documents the parties must produce, one or both
of the contestants can get immediate review in a federal
district court. That would be the end of arbitration as a
speedy and (relatively) low-cost alternative to litigation.
Arbitrators are entitled to decide for themselves those
procedural questions that arise on the way to a final
disposition, including the preclusive effect (if any) of an
10 No. 09-3682

earlier award. Consolidation Coal Co. v. United Mine
Workers, 213 F.3d 404, 407 (7th Cir. 2000); Chicago Typo-
graphical Union v. Chicago Sun-Times, Inc., 860 F.2d
1420, 1424 (7th Cir. 1988). If in doing so the arbitrators
exceed their powers, the court may vacate the award at
the end of the proceeding. 9 U.S.C. §10(a)(4). But among
the powers of an arbitrator is the power to interpret
the written word, and this implies the power to err; an
award need not be correct to be enforceable. See, e.g.,
Major League Baseball Players Ass’n v. Garvey, 532 U.S. 504
(2001). It is enough if the arbitrators honestly try to
carry out the governing agreements. “[T]he question
for decision by a federal court asked to set aside an arbi-
tration award . . . is not whether the arbitrator or arbitra-
tors erred in interpreting the contract; it is not whether
they clearly erred in interpreting the contract; it is not
whether they grossly erred in interpreting the contract;
it is whether they interpreted the contract.” Hill v.
Norfolk & Western Ry., 814 F.2d 1192, 1194–95 (7th Cir.
1987). See also, e.g., Operating Engineers Local 139 v. J.H.
Findorff & Son, Inc., 393 F.3d 742 (7th Cir. 2004). When
this arbitration resumes, the panel is entitled to follow
its own view about the meaning of the confidentiality
agreement; it need not knuckle under to the district
judge’s prematurely announced understanding.
R EVERSED

1-31-11