United States Court of Appeals
For the First Circuit
No. 05-1505
NATIONAL CASUALTY COMPANY,
Petitioner, Appellant,
v.
FIRST STATE INSURANCE GROUP,
Respondent, Appellee.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Mark L. Wolf, U.S. District Judge]
Before
Lynch, Circuit Judge,
Stahl, Senior Circuit Judge,
and Lipez, Circuit Judge.
Natasha C. Lisman, with whom Susan A. Hartnett was on brief,
for appellant.
Lloyd A. Gura, with whom Lawrence S. Greengrass, Sanjit
Shah, Mound Cotton Wollan & Greengrass, and Prince, Lobel,
Glovsky & Tye LLP were on brief, for appellee.
December 2, 2005
STAHL, Senior Circuit Judge. When a dispute arose
between the National Casualty Company and the First State Insurance
Group over the amount of a reimbursement the former owed the latter
under a reinsurance contract, the parties undertook to arbitrate
it. During the arbitration proceedings, National Casualty sought
certain documents in discovery, but First State refused to produce
them despite an order from the arbitration panel to do so.
Ultimately, the arbitrators reached a decision in First State's
favor despite First State's failure to produce the desired
documents. Frustrated, National Casualty brought suit in federal
District Court seeking to overturn the decision of the arbitration
panel. The district judge denied all relief, and this appeal
followed. We affirm.
I. BACKGROUND
Appellant National Casualty and appellee First State were
parties to a set of contracts under which National Casualty served
as a reinsurer to First State on a number of First State's
insurance obligations. The arbitration agreement and proceedings
at issue in this case relate only to the reinsurance contracts, but
the argument between the parties over their obligations under the
reinsurance contracts will be more intelligible if we relate some
background information relevant to the First State policies for
which National Casualty was the reinsurer. We use the term
"underlying policies" to designate the policies First State issued
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to its insureds. The "reinsurance contracts" or simply "the
contracts" will refer to the reinsurance contracts at issue in the
case. There is no dispute over the facts, so we relate them as
represented by the parties, with certain supplemental information
gleaned from the record.
First State was required under the underlying policies to
cover some portion of its insureds' liability for so-called
asbestos non-product liability claims.1 The equipment-installation
and facilities-maintenance firms typically exposed to these claims
generally carry what is called "operations" insurance. Where
insurance for product liability claims is often hard-capped at a
fixed sum, operations insurance, by contrast, usually repays a
certain maximum amount for each incident giving rise to liability.
The per-incident coverage means that, if an insured had a given
amount, for example, $1 million, of liability, and First State
offered per-incident coverage of $100,000, First State's obligation
to the insured could be determined only in light of the source of
the liability. If the $1 million in liability arose from one
1
"Asbestos non-product liability claims" are a relatively
recent category of asbestos-related claims. The earlier class of
claims known as "asbestos product liability claims," claims pressed
against asbestos manufacturers, are now rare: the pool of funds
available to cover this type of claim was largely depleted by the
1990s as the asbestos manufacturers went bankrupt. In the late
1990s, claims were increasingly brought against firms which had
been responsible for installing or servicing products containing
asbestos. These new claims are referred to in the industry as
"non-product liability claims."
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incident, First State would owe its per-incident amount only once,
and pay $100,000, while if $1 million was the insured's total
liability on three claims, First State would pay $300,000. Under
the policies at issue, therefore, First State would pay a smaller
share of a given amount of a policyholder's liability to third
parties if that liability was based on a single incident, and a
greater share if the underlying liability was based on multiple
incidents.
National Casualty was First State's reinsurer for these
policies. It was obligated to reimburse First State for some
portion of the latter's payments to its insureds. Briefly put, the
structure of the reinsurance contracts was such that, if First
State settled its underlying claims on a single-occurrence basis,
National Casualty would reimburse it for a greater amount, and if
it settled those claims on a multiple-occurrence basis, National
Casualty would pay less.
First State settled a number of contested claims under
the underlying policies, and looked to National Casualty for
reimbursement. It asserted to National Casualty that the
underlying claims had been settled on a single-occurrence basis and
that it was therefore entitled to a high level of reimbursement.
National Casualty, suspecting that First State had misrepresented
the bases on which the underlying claims had been settled in an
effort to maximize its reimbursement, compelled arbitration, as it
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was entitled to do under the contracts' binding and mandatory
arbitration clauses.2 The parties selected an arbitration panel
under the terms of their agreement, which permitted each side to
choose one member of the panel, with a third panel member selected
by the two unilaterally appointed members.
During the arbitration, National Casualty requested that
First State provide it with certain documents that detailed First
State's internal legal assessments of the claims for which it was
requesting reinsurance payments. National Casualty claimed that
these documents, and these documents only, would reveal the basis
on which First State had settled the underlying claims, and that
production of the documents was therefore necessary in order to
determine National Casualty's obligations to First State. The
panel ordered First State to produce the documents, warning that,
if it did not, the panel would draw whatever negative inferences it
deemed appropriate. First State, claiming that the documents were
privileged attorney-client communications or attorney work-product,
2
The broad arbitration clauses in each of the reinsurance
contracts read: "If any dispute shall arise between the Reinsured
and the Reinsurer, either before or after the termination of this
Contract, with reference to the interpretation of this Contract or
the rights of either party with respect to any transaction under
this Contract, the dispute shall be referred to three arbitrators,
one to be chosen by each party and the third by the two so chosen.
. . . The arbitrators shall consider this Contract an honorable
engagement rather than merely a legal obligation; they are relieved
of all judicial formalities and may abstain from following the
strict rules of law. The decision of a majority of the arbitrators
shall be final and binding on both the Reinsured and the
Reinsurer."
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declined to produce the documents out of fear, it said, of waiving
any privilege in future dealings with its insureds.
National Casualty immediately protested First State's
failure to produce the documents. It requested that the
arbitration panel delay its hearings in order to give the parties
time to brief the prejudicial effect of the withholding of the
documents, but the panel denied the request. National Casualty
then filed a claim in the District Court for the District of
Massachusetts, asking the court to enjoin further arbitral
proceedings. While the claim before the District Court was
pending, the panel ruled in favor of First State, and National
Casualty paid First State the balance owed as determined by the
panel. The issuance of a final order by the arbitration panel
rendered National Casualty's initial claims for an injunction
against continuation of the arbitration moot, but National Casualty
then amended its complaint. In the amended complaint, National
Casualty argued that the court should overturn the arbitration
award in First State's favor because First State's failure to
comply with the arbitration panel's production order constituted a
breach of contract, voiding the arbitration clause and terminating
the arbitration panel's jurisdiction. It also moved to have the
district court vacate the arbitration panel's award for procedural
deficiencies under sections 10(a)(1) and (3) of the Federal
Arbitration Act (FAA), 9 U.S.C. §§ 10(a)(1) & (3). First State
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requested dismissal of the complaint, challenged the motion for
vacatur, and moved for sanctions. The district court denied the
motion to vacate and dismissed National Casualty's complaint, but
declined First State's request that it impose sanctions on National
Casualty. National Casualty timely appealed.
II. DISCUSSION
On this appeal, National Casualty urges that the district
court was wrong to deny its motion to vacate under its various FAA
theories and to dismiss its breach of contract claim. We discuss
each issue in turn.
A. FAA
The district court treated National Casualty's complaint
requesting vacatur of the arbitration panel's final award as a
motion to vacate the award under 9 U.S.C. § 10.3 We review the
disposition of a motion to vacate under FAA § 10 de novo. Bull HN
Info. Sys., Inc. v. Hutson, 229 F.3d 321, 330 (1st Cir. 2000). We
are, however, bound, as the district court was, by the rule that
court review of arbitral awards is "extremely narrow and
exceedingly deferential," id. (quoting Wheelabrator Envirotech
3
National Casualty made its original request for vacatur under
the FAA in its complaint. The general rule under the FAA, however,
is that challenges brought under its provisions follow the rules of
motion practice. See O.R. Securities, Inc. v. Professional
Planning Associates, Inc., 857 F.2d 742, 745-46 (11th Cir. 1988);
9 U.S.C. § 6. The district court therefore treated the portions of
the complaint brought under the FAA as if they had been raised by
motion. This appears to have been proper and in any event, because
the issue is not raised by the parties, we will assume that it was.
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Operating Servs. Inc. v. Mass. Laborers Dist. Council Local 1144,
88 F.3d 40, 43 (1st Cir. 1996)), with the result that "[a]rbitral
awards are nearly impervious to judicial oversight," id. (quoting
Teamsters Local Union No. 42 v. Supervalu, Inc., 212 F.3d 59, 61
(1st Cir. 2000)).
National Casualty limited its FAA claims on the motion to
vacate to claims of procedural irregularity. Specifically, it
claims that the award was procured by undue means in violation of
section 10(a)(1), and that the arbitrators were guilty of
misconduct under section 10(a)(3).4 Our review of the procedures
that an arbitrator has implemented is, under the statute, extremely
narrow. We turn now to identifying the scope of our review under
each section and to evaluating the claims themselves.
4
9 U.S.C. § 10(a)(1) permits a court to vacate "where the
award was procured by corruption, fraud, or undue means." 9 U.S.C.
§ 10(a)(3) permits vacatur "where the arbitrators were guilty of
misconduct in refusing to postpone the hearing, upon sufficient
cause shown, or in refusing to hear evidence pertinent and material
to the controversy; or of any other misbehavior by which the rights
of any party have been prejudiced." National Casualty complains
that the district court applied the wrong legal standard in
evaluating its claims under these provisions. The district court
quoted our opinion in Wonderland Greyhound Park, Inc. v. Autotote
Sys., Inc., 274 F.3d 34, 35 (1st Cir. 2001), and said that "[a]n
arbitration award must be enforced if it is in any way plausible."
(alteration in original). National Casualty suggests that the
district court did not properly evaluate its claims under section
10, because it satisfied itself that the award was generally
plausible, and so did not scrutinize the procedures the arbitrators
employed for compliance with the FAA. Nothing in Wonderland
suggests that it meant to make our review of arbitral decisions
narrower than it had been before, or to preclude review under the
FAA or under any other source of authority. The district court
evidently understood this, and committed no error.
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1. Arbitrator Misconduct
Section 10(a)(3) of the FAA lists three separate grounds
for vacatur: it is appropriate "[w]here the arbitrators were guilty
of misconduct in refusing to postpone the hearing, upon sufficient
cause shown, or in refusing to hear evidence pertinent and material
to the controversy; or of any other misbehavior by which the rights
of any party have been prejudiced." 9 U.S.C. § 10(a)(3). National
Casualty urges an argument based on the second ground: it complains
that the panel refused to hear pertinent and material evidence, and
that the refusal amounted to "misconduct."
In this case, the arbitrators, who had been selected by
the parties under the terms of a contract into which each freely
entered, attempted at the behest of National Casualty to compel
First State to produce the documents in question, but those
documents were not ultimately produced. What is more, the
arbitrators determined that they could reach a fair result if they
drew an inference adverse to First State as to the contents of the
withheld documents on the basis of First State's failure to produce
them. National Casualty's claim is that this determination, that
the case could be fairly resolved with a negative inference rather
than with the evidence sought, constituted misconduct.
We may vacate under 10(a)(3) when an arbitrator has been
"guilty of misconduct in refusing to hear evidence pertinent and
material to the controversy." 9 U.S.C. § 10(a)(3). Not all
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refusals to hear evidence are misconduct, of course. We have held
instead that, under section 10(a)(3), "[v]acatur is appropriate
only when the exclusion of relevant evidence 'so affects the rights
of a party that it may be said that he was deprived of a fair
hearing.'" Hoteles Condado Beach, La Concha and Convention Center
v. Union De Tronquistas Local 901, 763 F.2d 34, 40 (1st Cir. 1985)
(quoting Newark Stereotypers' Union No. 18 v. Newark Morning
Ledger Co., 397 F.2d 594, 599 (3rd Cir. 1968)). Our evaluation of
whether a deprivation of a right to present evidence rendered a
hearing unfair does not take place in a vacuum, but will be
informed by the parties' understanding of what constituted a fair
hearing when they entered into their contract. Here, the relevant
contract provisions not only relieved the arbitrators of any
obligation to follow "the strict rules of law," but also released
the arbitrators from "all judicial formalities." In the face of a
clause that broad, which makes no mention of the production
obligations of the parties or of the discovery procedures to be
followed, and which so fully signs over to the arbitrators the
power to run the dispute resolution process unrestrained by the
strict bounds of law or of judicial process, a party will have
great difficulty indeed making the showing, requisite to vacatur,
that their rights were prejudiced.
Of course, the archetypical case in which we will
consider a 10(a)(3) challenge is the one most clearly contemplated
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by the statute, in which an arbitrator declines to take evidence
proffered by a party. National Casualty directs us to no case in
which an arbitrator's failure in its attempt to compel discovery
constituted misconduct, and one might quibble that the term
"refuse" could never apply to a case such as this, where the
arbitrators did not refuse but rather sought to hear the evidence
at issue. That literal interpretation, however, has not been the
one adopted by the circuits that have had occasion to apply the
law, which have taken section 10(a)(3) to authorize review for
evidentiary failures broader than a simple refusal to consider
evidence. See, e.g., Robbins v. Day, 954 F.2d 679 (11th Cir. 1992)
(court willing to consider claim that failure to compel testimony
constituted refusal to hear evidence under section 10(a)(3)),
overruled on other grounds by First Options of Chicago v. Kaplan,
514 U.S. 938 (1995); Gulf Coast Indus. Workers Union v. Exxon Co.,
USA, 70 F.3d 847 (5th Cir. 1995) (arbitrator refused to hear
evidence where it misled party into thinking it need not present
certain evidence).
We assume arguendo that, as in our sister circuits, the
law in this circuit permits a party to seek vacatur under 10(a)(3)
where the arbitrator has not refused to hear evidence, but has
instead merely failed in its efforts to bring certain evidence into
the proceedings. Even so, we find no violation of the statute
here, because any failure to hear evidence did not "'so affect[]
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the rights of a party that it may be said that he was deprived of
a fair hearing.'" The arbitrators ruled that as a result of First
State's refusal to produce the requested documents, they would draw
inferences against First State as to what those documents would
show. This is a routine remedy, well within the arbitrator's
powers. The drawing of an inference against First State in this
case offset any unfairness to National Casualty that resulted from
holding a hearing without giving National Casualty access to the
actual documents it sought.
We make this evaluation in light of the contract between
the parties, which, as we have noted, contemplated broad power in
the arbitrator to conduct the arbitral proceedings. We note also
that we have no reason here to suspect coercion or fraud in the
inducement on the part of the parties, who appear to be
sophisticated and capable of negotiating their business contracts
in advance to protect themselves from the potential folly of any
arbitrator they elect to subject their disputes to. In these
circumstances, we have no difficulty holding that the procedural
device the arbitration panel implemented, offering a party the
choice between production and a negative inference, was well within
the discretion committed to it by the parties under the FAA.
National Casualty's secondary argument is its assertion
that the arbitrators could not have reached the results they
reached if they had drawn the promised negative inference. There
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are several problems with this analysis, apart from the fact that
its premise is false. First, this is simply an attack on the
merits of the award, which National Casualty has eschewed. Second,
courts do not generally review what weight arbitrators give to a
single piece of evidence. Finally, arbitrators need not give
specific reasons for the decisions they reach. For all of these
reasons, this argument has no merit.
2. Undue Means
National Casualty also argues that the arbitration
panel's decision should be vacated as the product of "undue means."
Section 10(a)(1) permits vacatur "[w]here the award was procured by
corruption, fraud, or undue means." 9 U.S.C. § 10(a)(1). While
this circuit has never confronted a claim for vacatur for "undue
means," our sister circuits sensibly read the clause in a way that
bars National Casualty's claim. The phrase "undue means" in the
statute follows the terms "corruption" and "fraud." It is a
familiar principle of statutory construction that a word should be
known by the company it keeps. See Jarecki v. G. D. Searle & Co.,
367 U.S. 303, 307 (1961). The best reading of the term "undue
means" under the maxim noscitur a sociis is that it describes
underhanded or conniving ways of procuring an award that are
similar to corruption or fraud, but do not precisely constitute
either. See PaineWebber Group, Inc. v. Zinsmeyer Trusts P'ship,
187 F.3d 988, 991 (8th Cir. 1999) ("The term 'undue means' must be
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read in conjunction with the words 'fraud' and 'corruption' that
precede it in the statute."); Am. Postal Workers Union, AFL–CIO v.
U.S. Postal Serv., 52 F.3d 359, 362 (D.C.Cir. 1995) ("undue means"
refers to conduct "equivalent in gravity to corruption or fraud,
such as a physical threat to an arbitrator").
Nothing appellant has argued suggests that First State
acted in a manner amounting to the kind of intentional malfeasance
that justifies vacatur under the statute. Here, one party was
offered a choice between producing documents or having to contend
with an inference about their content. This, as we have just
discussed, was a choice that was within the arbitrator's power to
offer. To hold that the arbitrator may offer choice A or choice B
to a party, but that the party's selection of choice B would
invalidate the arbitrator's award, would defy common sense, and we
will not do it. We therefore affirm the district court's holding
that First State did not procure the arbitrator's award by undue
means.
B. Breach of Contract
The district court dismissed National Casualty's claims
for breach of contract under Federal Rule of Civil Procedure
12(b)(6) for failure to state a claim. We review 12(b)(6)
dismissal de novo. Centro Medico del Turabo, Inc. v. Feliciano de
Melicio, 406 F.3d 1, 5 (1st Cir. 2005).
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National Casualty contends that First State's failure to
comply with the arbitration panel's production order constituted
breach of contract and thus terminated the panel's jurisdiction.
The question of breach, however, is not ours to decide. The terms
of the contract before us, read in light of the language of the FAA
and Congress' evident intent in passing it, preclude our review of
National Casualty's claim. Indeed, to consider ourselves empowered
to undertake that review would be to jeopardize the national policy
in favor of arbitration.
National Casualty's argument is based in part on First
Options, 514 U.S. 938, in which the Supreme Court held that
threshold questions of arbitrability are for the courts.
Arbitrability questions are questions about who is the proper
decision-maker in certain classes of cases. The default rule, in
the absence of express contractual terms to the contrary, is that
it is for the court to decide the validity and scope of an
arbitration clause, and for the arbitrator to decide all matters
within the scope of a valid clause. Id. When a substantive
question falls within the scope of an arbitration clause,
procedural questions ancillary to the substantive one are by
default for the arbitrator to decide. See Marie v. Allied Home
Mortgage Corp., 402 F.3d 1, 9-11 (1st Cir. 2005); Richard C. Young
& Co., Ltd. v. Leventhal, 389 F.3d 1, 3-5 (1st Cir. 2004);
PaineWebber Inc. v. Elahi, 87 F.3d 589, 599 (1st Cir. 1996) ("if
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the parties have (1) entered into a valid arbitration agreement, .
. . and (2) the arbitration agreement covers the subject matter of
the underlying dispute between them, . . . then we will presume
that the parties have made a commitment to have an arbitrator
decide all the remaining issues necessary to reach a decision on
the merits of the dispute.").
This is not a case of two parties contesting whether a
certain matter is within the ambit of an arbitration agreement.
This is not a case where an arbitrator has stated that failure to
comply with a certain order would terminate the arbitrator's
jurisdiction. This is not even a case where a party has blatantly
defied an arbitrator's order. Rather, National Casualty insists
that it may seek a court hearing on the effect of another
arbitrating party's selection among procedural options offered by
an arbitrator, during a discovery dispute, in the course of an
arbitration both parties agreed to enter. This seems to us the
very essence of a procedural matter. National Casualty has not
provided, and we have not found, any authority that would license
the district court to resolve the dispute involved. The question
whether failure to comply with the arbitral order at issue here
constituted breach and entitled National Casualty to any sort of
remedy was for the arbitrator, and the district court rightly
dismissed National Casualty's complaint.
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III. CONCLUSION
For the reasons stated above, we affirm the decision of
the district court.
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