National Casualty Co. v. First State Insurance Group

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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