To Be Argued By:
JEFFREY E. GLEN
CLIFFORD G. TSAN
ALEXANDER D. HARDIMAN
Time Requested: 30 Minutes
APL-2014-00271
New York County Clerk’s Index Nos. 102187/11, 651960/11 and 652366/10
Court of Appeals
STATE OF NEW YORK
Index No. 102187/11
In the Matter of the Application of
MONARCH CONSULTING, INC., ELITE MANAGEMENT, INC., BRENTWOOD
TELEVISION FUNNIES, INC., PROFESSIONAL EMPLOYER OPTIONS, INC.,
RECURRENT SOFTWARE SOLUTIONS, AHILL, INC., THE ACCOUNTING GROUP,
LLC and PES PAYROLL, IA, INC.,
Respondents,
(Caption continued on inside cover)
BRIEF FOR RESPONDENTS
JEFFREY E. GLEN
EDWARD J. STEIN
RENE F. HERTZOG
ANDERSON KILL, P.C.
1251 Avenue of the Americas
New York, New York 10020
Telephone: (212) 278-1000
Facsimile: (212) 278-1733
NICHOLAS ROXBOROUGH
(admitted pro hac vice)
ROXBOROUGH, POMERANCE, NYE
& ADREANI, LLP
5820 Canoga Avenue, Suite 250
Woodland Hills, California 91367
Telephone: (818) 992-9999
Facsimile: (818) 992-9991
Attorneys for Respondent
Priority Business Services, Inc.,
f/k/a Inland Valley Staffing Services,
f/k/a Maintenance Match, Inc.,
d/b/a Priority Staffing
April 3, 2015
ALEXANDER D. HARDIMAN
PILLSBURY WINTHROP SHAW
PITTMAN LLP
1540 Broadway
New York, New York 10036
Telephone: (212) 858-1000
Facsimile: (212) 858-1500
Attorneys for Respondent
Source One Staffing, LLC
CLIFFORD G. TSAN
SUZANNE M. MESSER
BOND, SCHOENECK & KING PLLC
One Lincoln Center
110 West Fayette Street
Syracuse, New York 13202
Telephone: (315) 218-8000
Facsimile: (315) 218-8100
Attorneys for Respondents
Monarch Consulting, Inc., Elite
Management, Inc., Brentwood
Television Funnies, Inc.,
Professional Employer Options,
Inc., Recurrent Software
Solutions, Ahill, Inc., The
Accounting Group, LLC and
PES Payroll, IA, Inc.
For an Order and Judgment Staying the Arbitration Commenced by
NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA,
on behalf of itself and each of the related insurers that
provided insurance coverage to Petitioners,
Appellant.
Index No. 651960/11
In the Matter of the Application of
NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA,
on behalf of itself and each of the related insurers that
provided insurance coverage to Respondents,
Appellant,
—against—
PRIORITY BUSINESS SERVICES, INC., f/k/a INLAND VALLEY STAFFING
SERVICES, f/k/a MAINTENANCE MATCH, INC., d/b/a PRIORITY STAFFING,
Respondent.
Index No. 652366/10
NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA,
on behalf of itself and each of the related insurers that
provided insurance coverage to Respondent,
Appellant,
—against—
SOURCE ONE STAFFING, LLC,
Respondent.
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RESPONDENT MONARCH CONSULTING, INC.'S
DISCLOSURE STATEMENT PURSUANT TO RULE § 500.1(f)
Monarch Payroll, Inc., formerly known as Monarch Consulting, Inc.,
has the following affiliates: Neleyrac, LLC; My Paymaster Liquidating, Inc.,
formerly known as My Paymaster, Inc.; and ACME Payroll, Inc. AHILL, Inc. is a
wholly-owned subsidiary of Monarch Payroll, Inc.
Elite Management, Inc. has no parents, subsidiaries or affiliates.
Brentwood Television Funnies, Inc. was merged into Monarch
Payroll, Inc.
Professional Employer Options, Inc. has no parents, subsidiaries or
affiliates.
Recurrent Software Solutions has no parents, subsidiaries or affiliates.
AHILL, Inc. is a wholly-owned subsidiary of Monarch Payroll, Inc.
The Accounting Group Liquidating, LLC, formerly known as The
Accounting Group, LLC, has no parents, subsidiaries or affiliates.
PES Payroll IA, Inc. has no parents, subsidiaries or affiliates.
ii
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RESPONDENT PRIORITY BUSINESS SERVICES, INC.'S
DISCLOSURE STATEMENT PURSUANT TO RULE § 500.1(f)
Priority Business Services, Inc. discloses the following affiliates:
Workforce, Inc.
Workforce Outsourcing, Inc.
Geneva Staffing, Inc.
LL1 Staffing, Inc.
3JR Financial, Inc.
Stafflow, Inc.
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RESPONDENT SOURCE ONE STAFFING, LLC'S
DISCLOSURE STATEMENT PURSUANT TO RULE § 500.1(f)
Source One Staffing, LLC has no parents or subsidiaries, and has the
following affiliates: Rally Management Services, LLC and Source One South
Services, LLC.
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TABLE OF CONTENTS
Page
RESPONDENT MONARCH CONSULTING, INC.'S DISCLOSURE
STATEMENT PURSUANT TO RULE § 500.1(f) ........................................ i
RESPONDENT PRIORITY BUSINESS SERVICES, INC.'S
DISCLOSURE STATEMENT PURSUANT TO RULE
§ 500.1(f) ........................................................................................................ ii
RESPONDENT SOURCE ONE STAFFING, LLC'S DISCLOSURE
STATEMENT PURSUANT TO RULE § 500.1(f) ...................................... iii
PRELIMINARY STATEMENT ...............................................................................1
QUESTIONS PRESENTED......................................................................................6
SUMMARY OF THE ARGUMENT ........................................................................7
STATEMENT OF FACTS ........................................................................................9
Monarch Consulting, Inc., et al. v. National Union Fire Insurance
Company of Pittsburgh, PA.............................................................................9
A. The National Union Workers’ Compensation Insurance
Policies And National Union’s Subsequent Side
Agreements............................................................................................9
B. Monarch’s Dispute With Specialty Risk Services ..............................10
C. National Union’s Demand For Arbitration .........................................12
National Union Fire Insurance Company of Pittsburgh, PA v.
Priority Business Services, Inc. .....................................................................14
A. The Priority Insurance Policies And Payment
Agreements..........................................................................................14
B. The California Settlement Agreement ................................................16
C. National Union Demands Arbitration Pursuant To The
Payment Agreement Instead Of The CSA ..........................................18
TABLE OF CONTENTS (Cont'd)
Page
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D. The Proceedings Below.......................................................................19
Source One Staffing, LLC v. National Union Fire Insurance Co. of
Pittsburgh, PA................................................................................................20
A. The Underlying Dispute ......................................................................20
B. The Insurance Program and the Payment Agreement.........................22
C. The Instant Litigation ..........................................................................24
The Zurich OSC/Settlement......................................................................................26
ARGUMENT ...........................................................................................................29
I. CALIFORNIA INSURANCE LAW AND REGULATION
REQUIRES FILING AND PRE-APPROVAL OF
ARBITRATION PROVISIONS IN WORKERS’
COMPENSATION INSURANCE AGREEMENTS....................................29
A. The California Regulatory Scheme .....................................................29
B. The Payment Agreements Are Endorsements That Must
Be Filed Pursuant To Applicable California Workers’
Compensation Insurance Law For Arbitration Provisions
To Be Enforceable...............................................................................31
1. The Appellate Division Correctly Held That The
Payment Agreements Must Be Filed As A Pre-
Condition To Enforcing An Arbitration Provision...................31
2. Refusing To Enforce The Arbitration Provisions
Of The Payment Agreements Is The Appropriate
Remedy For Non-Filing............................................................36
3. The CDI Requires That The Payment Agreements
Be Filed As A Pre-Condition To Enforcing An
Arbitration Provision. ...............................................................40
TABLE OF CONTENTS (Cont'd)
Page
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4. The Appellate Division Dissent Erroneously
Refuses To Recognize California Insurance Law,
As Interpreted By The California Courts And The
CDI, That Denies Enforcement To Arbitration
Provisions In Unfiled Payment Agreements.............................44
II. MCCARRAN-FERGUSON PRESERVES CALIFORNIA’S
REGULATORY SCHEME FROM FAA PRE-EMPTION
INCLUDING CALIFORNIA REGULATIONS THAT
RENDER UNENFORCEABLE ARBITRATION
REQUIREMENTS CONTAINED IN UNFILED AND
UNAPPROVED INSURANCE AGREEMENTS ........................................48
A. The Controlling United States Supreme Court Authority...................48
B. The Relevant California Authority......................................................54
C. The Relevant New York Authority .....................................................56
III. EVEN WERE THE FAA APPLICABLE HERE, THE
DETERMINATION OF WHETHER THE ARBITRATION
PROVISIONS OF THE PAYMENT AGREEMENTS ARE
ENFORCEABLE WOULD BE FOR THE COURT, AND NOT
THE ARBITRATORS, TO DECIDE............................................................58
IV. ALTERNATIVELY, CALIFORNIA’S STRONG PUBLIC
POLICY ESTABLISHING THE CDI AS THE GATEWAY
AGENCY FOR ANY USE OF ARBITRATION IN
WORKERS’ COMPENSATION POLICIES IS PRESERVED
UNDER THE SAVINGS CLAUSE OF SECTION 2 OF THE
FAA ...............................................................................................................65
CONCLUSION........................................................................................................69
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TABLE OF AUTHORITIES
Page(s)
CASES
Allstate Ins. Co. v. Stolarz,
81 N.Y.2d 219 (1993) .........................................................................................35
AT&T Mobility LLC v. Concepcion,
131 S. Ct. 1740 (2011)..................................................................................51, 68
Beatie & Osborn LLP v. Patriot Scientific Corp.,
431 F. Supp. 2d 367 (S.D.N.Y. 2006) ................................................................35
Buckeye Check Cashing, Inc. v. Cardegna,
546 U.S. 440 (2006)................................................................................51, 60, 62
Cap Gemini Ernst & Young, U.S., L.L.C. v. Nackel,
346 F.3d 360 (2d Cir. 2003) ...............................................................................34
Ceradyne, Inc. v. Argonaut Ins. Co.,
G039873, 2009 Cal. App. Unpub. LEXIS 4375
(Cal. Ct. App. June 2, 2009) ........................................................................passim
Corcoran v. Ardra Ins. Co.,
156 A.D.2d 70 (1st Dep't), aff’d, 77 N.Y.2d 225 (1990)..............................56, 57
Diamond Waterproofing Sys., Inc. v. 55 Liberty Owners Corp.,
4 N.Y. 3d 247 (2005) ..........................................................................................51
Farmers Ins. Exch. v. Superior Court,
826 P.2d 730 (Cal. 1992) ..............................................................................42, 43
First Options of Chicago, Inc. v. Kaplan,
514 U.S. 938 (1995)............................................................................................58
Franco v. Arakelian Enters., Inc.,
234 Cal. App. 4th 947 (Cal. Ct. App. 2015).......................................................67
Grove Lumber & Building Supply, Inc. v. Argonaut Insurance Co., SA
CV07-1396 AHS (RNBX), 2008 U.S. Dist. LEXIS 51752
(C.D. Cal. July 7, 2008) ......................................................................................46
TABLE OF AUTHORITIES (Con’t)
Page(s)
viii
nydocs1-1047137.5
Howsam v. Dean Witter Reynolds, Inc.,
537 U.S. 79 (2002)..............................................................................................59
Hubbard v. SoBreck, LLC,
554 F.3d 742 (9th Cir 2009) ...............................................................................47
Humana Inc. v. Forsyth,
525 U.S. 299 (1999)..........................................................................45, 49, 50, 56
Imbler v. PacifiCare of California, Inc.,
126 Cal. Rptr. 2d 715 (Cal. Ct. App. 2002)..................................................54, 55
In re Marriage of Fell,
64 Cal. Rptr. 2d 522 (Cal. Ct. App. 1997)..........................................................67
In re Sthran,
327 S.W.3d 839 (Tex. Ct. App. 2010)................................................................48
Iskanian v. CLS Transportation Los Angeles, LLC,
327 P.3d 129 (Cal. 2014), cert. denied, 135 S. Ct. 1155 (2015) .................passim
Knickerbocker Agency, Inc. v. Holz,
4 N.Y.2d 245 (1958) ...........................................................................................57
Lynch v. Cruttenden & Co.,
22 Cal. Rptr. 2d 636 (Cal. Ct. App. 1993)..........................................................61
Matter of Monarch Consulting, Inc. v. Nat’l Union Fire Ins. Co. of
Pittsburgh, PA,
123 A.D.3d 51 (1st Dep’t 2014)1 .................................................................passim
1 Respondents cite the decision below, Matter of Monarch Consulting, Inc. v. National Union
Fire Ins. Co. of Pittsburgh, PA, 123 A.D.3d 51 (1st Dep't 2014), as required by CPLR Rule
5529(e), to the official reports. Appellant confusedly cites to the slip opinion, reproduced at very
substantial length in the Appendix, although its brief was filed January 15, 2015, and at least by
11:22 am on January 16, 2015, when counsel for Respondents accessed the opinion through
LEXIS, the official report, as well as the case in the New York Supplement system, was
immediately available.
TABLE OF AUTHORITIES (Con’t)
Page(s)
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nydocs1-1047137.5
Montano v. Wet Seal Retail, Inc.,
182 Cal. Rptr. 3d 220 (Cal. Ct. App. 2015)........................................................68
National Union Fire Ins. Co. v. Personnel Plus, Inc.,
954 F. Supp. 2d 239 (S.D.N.Y. 2013) ................................................................46
New York City Council v. City of New York,
4 A.D.3d 85 (1st Dep’t 2004) .............................................................................42
Ortiz v. Hobby Lobby Stores, Inc.,
No. 2:13-CV-01619, 2014 U.S. Dist. LEXIS 140552
(E.D. Cal. Oct. 1, 2014) ......................................................................................68
Pagarigan v. Superior Court,
126 Cal. Rptr. 2d 124 (Cal. Ct. App. 2002)........................................................55
Preston v. Ferrer,
552 U.S. 346 (2008)............................................................................................51
Prima Paint Corp. v. Flood & Conklin Mfg. Co.,
388 U.S. 395 (1967)................................................................................51, 60, 62
Rent-A-Center, W., Inc. v. Jackson,
561 U.S. 63 (2010)............................................................................51, 60, 61, 62
Rodriguez v. Blue Cross of California,
75 Cal. Rptr. 3d 754 (Cal. Ct. App. 2008)..........................................................55
Securitas Sec. Servs. USA, Inc. v. Superior Court of San Diego Cnty.,
234 Cal. App. 4th 1109 (Cal. Ct. App. 2015)...............................................66, 67
Securities & Exchange Commission v. National Securities, Inc.,
393 U.S. 453, 460 (1969)..............................................................................49, 54
Smith Barney Shearson Inc. v. Sacharow,
91 N.Y.2d 39 (1997) ...........................................................................................58
Smith v. PacifiCare Behavioral Health of California, Inc.,
113 Cal. Rptr. 2d 140 (Cal. Ct. App. 2001)..................................................54, 55
TABLE OF AUTHORITIES (Con’t)
Page(s)
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St. Paul Fire & Marine Ins. Co. v. Courtney Enterprises, Inc.,
270 F.3d 621 (8th Cir. 2001) ........................................................................47, 48
Stephens v. American Int’l Ins. Co.,
66 F.3d 41 (2d Cir. 1995) ...................................................................................53
Stolt–Nielsen S.A. v. AnimalFeeds Int’l Corp.,
559 U.S. 662 (2010)............................................................................................51
United States Dept. of Treasury v. Fabe,
508 U.S. 491 (1993)............................................................................................53
United States v. South-Eastern Underwriters Assoc.,
322 U.S. 533 (1944)............................................................................................52
Yamaha Corp. v. State Bd. of Equalization,
960 P.2d 1031 (Cal. 1998) ..................................................................................42
Zolezzi v. Pacificare of California,
129 Cal. Rptr. 2d 526 (Cal. Ct. App. 2003)........................................................55
STATUTES
9 U.S.C. § 1, et seq............................................................................................passim
15 U.S.C. § 1011, et seq....................................................................................passim
10 Cal. Code Reg. § 2268 (2015) ............................................................................31
Cal. Bus. & Prof. Code § 17000, et seq. ..................................................................42
Cal. Civil Code § 1668.............................................................................................66
Cal. Civil Code § 3513.............................................................................................67
Cal. Health and Safety Code § 1363.1.....................................................................54
Cal. Ins. Code §§ 1861.02, 1861.05.........................................................................42
Cal. Ins. Code § 11658......................................................................................passim
Cal. Ins. Code § 11735.............................................................................................43
TABLE OF AUTHORITIES (Con’t)
Page(s)
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CPLR § 5601(a) ...........................................................................................14, 20, 26
OTHER AUTHORITIES
Restatement [Second] of Conflict of Laws § 188 [2] ..............................................35
nydocs1-1047137.5
PRELIMINARY STATEMENT
Appellant, National Union Fire Insurance Company of Pittsburgh, PA
(“National Union” or “Appellant”), seeks to negate California’s explicit
requirement that any arbitration provision contained in insurance policies sold to
Californians must first be filed with, and approved by, the California Department
of Insurance (the “CDI”) in order for the arbitration clause to be enforceable. The
Appellate Division, respecting the mandate of the McCarran-Ferguson Act and the
strong California public policy protecting its citizens, applied clear California
insurance law and denied National Union’s attempt to require Respondents to
arbitrate their disputes with the carrier in New York. National Union’s further
appeal should be rejected, and the Appellate Division should be affirmed.
Respondents, California companies that provide temporary help to
large numbers of clients in California, bought their workers’ compensation
insurance coverage from the Appellant. As required by California insurance law,
National Union filed its form insurance policies with the California Workers’
Compensation Insurance Rating Bureau (the “WCIRB”), which in turn sent these
policies to the CDI for review and pre-clearance. None of these form policies
contained arbitration provisions.
Months after selling the policies, National Union sent each of the
respondents a set of additional agreements, known in the trade as “Payment
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Agreements,” which specified how much and when each policyholder had to pay
for its coverage. These Payment Agreements contain arbitration provisions, but
National Union never submitted them to the WCIRB. Thus, the CDI never
reviewed or approved the Payment Agreements.
In 2011, the CDI, having learned of the Payment Agreements, issued a
directive (A-458-60) (the “2011 Directive”) to the WCIRB that reiterated its long
held position that Payment Agreements, like the insurance policies that they
implement, must be filed with the WCIRB so they can be vetted by the CDI; if
unfiled, and thus not reviewed and approved, any arbitration provisions contained
in them are considered “unenforceable” by the CDI.
It is incontestable that the cornerstone of California’s regulation of
workers’ compensation insurance is its filing requirement. In its 2011 Directive,
the CDI says so, the Appellate Division in the cases now before this Court also
says so, and the California Legislature, which has the final word, has enacted a
statute requiring the workers’ compensation insurance policy forms to be
submitted for approval to the WCIRB. See Cal. Ins. Code § 11658 (the “California
Filing Statute”). It necessarily follows that unless an insurance policy, or its
ancillary agreements, contains an arbitration provision that was filed with the
WCIRB and pre-cleared by the CDI, or unless the parties to the insurance policy
expressly agreed to an arbitration provision “at the time the policy was issued” –
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which no one can or does contend is the case here – such an arbitration provision is
unenforceable under California law.
While National Union makes a half-hearted attempt, in a single page
of its brief, to claim that California’s ban on enforcing unfiled arbitration
provisions in workers’ compensation insurance agreements is not the regulation of
insurance, its argument is fundamentally that the California regulatory scheme is
pre-empted by the Federal Arbitration Act, 9 U.S.C. § 1, et seq. (the “FAA”). This
argument was conclusively and correctly rejected by the Appellate Division in a
wide-ranging and persuasive opinion by Justice Moskowitz. See Matter of
Monarch Consulting, Inc. v. Nat’l Union Fire Ins. Co. of Pittsburgh, Pa., 123
A.D.3d 51, 65 (1st Dep’t 2014) (hereinafter “Monarch”). It should likewise be
rejected here.
Because enforcing arbitration provisions in unfiled California
workers’ compensation insurance agreements would directly “frustrate”
California’s “declared state policy” of forbidding arbitration unless pre-cleared by
the State or agreed to by the parties at the time the policy is bought, and would thus
“interfere with” California’s “administrative regime,” the FAA is reverse pre-
empted by the McCarran-Ferguson Act, 15 U.S.C. §§ 1011-1015. Monarch, 123
A.D.3d at 65. The federal policy that favors the private selection of arbitration
generally is not absolute. Under the McCarran-Ferguson Act, it is clearly
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subordinate to the federal policy that state law governs the business of insurance,
unless there is a specific federal statute directed explicitly at insurance that
controverts state regulation. And no one argues that the FAA is a statute that
regulates insurance.
The issue and the necessary conclusion are eloquently expressed by
the Appellate Division:
[T]he policy in favor of arbitration must yield to the primacy of
California state law and to California’s prerogative to regulate
its own insurance practices.
Id. at 74.
National Union argued below, and continues to argue here, that
because the Payment Agreements call for arbitration, disputes over the arbitration
provisions of the Payment Agreements are themselves to be arbitrated. This
argument is fatally flawed: even if arbitrability were a question for the arbitrators
under the FAA, no arbitrator can be appointed without violating the reverse pre-
emption required by McCarran-Ferguson because arbitration, absent filing and pre-
clearance, is contrary to California insurance regulation. But the argument should
not even be reached: the attack here is only on the arbitration provisions and not on
the Payment Agreements themselves, and thus even under the FAA, such a dispute
would be for the courts and not for the arbitrators. In any event, the Payment
Agreements do not clearly and unmistakably delegate disputes over arbitrability to
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the arbitrators, and thus under controlling Supreme Court law the decision on
arbitrability is for the courts.
The Appellate Division dealt masterfully with each and every
argument posited by National Union. Moreover, National Union sold insurance to
Californians to insure the working men and women of California. It is unseemly
for National Union to try to undermine the policy of California by disobeying its
laws and then seeking succor from the courts of New York. No New York court
ought to be asked to interfere with California’s method of protecting its injured
citizens, especially here, where the California insurance regulators have undertaken
their task with zeal and addressed directly through their own enforcement
mechanisms the precise requirement that National Union seeks to upset, and where
the only California appellate decision on point is completely supportive of those
regulatory efforts. The Appellate Division so held, and this Court should affirm.
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QUESTIONS PRESENTED
1. Does California insurance law and regulation require filing and
pre-approval of arbitration provisions in workers’ compensation insurance
agreements in order to render such provisions enforceable against policyholders?
The Appellate Division properly held Yes.
2. Does the McCarran-Ferguson Act preserve California’s
regulatory scheme that renders unenforceable arbitration requirements contained in
unfiled and unapproved insurance agreements from FAA pre-emption?
The Appellate Division properly held Yes.
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SUMMARY OF THE ARGUMENT
There are two critical issues presented by this appeal. The first is
whether an insurance company selling workers’ compensation coverage to
California companies can negate the heart of California’s regulatory system by
enforcing an arbitration requirement contained in Payment Agreements that the
carrier withheld from California regulatory authorities, in contravention of the
filing and pre-approval requirements of California’s workers’ compensation
insurance regulations. National Union argues that whether it can eviscerate
California’s explicit filing requirement is itself a question to be determined by the
arbitration panel whose very existence is precluded by National Union’s failure to
file and obtain pre-approval of its arbitration clause with the CDI.
In Point One of this brief, Respondents demonstrate that filing and
pre-approval are the sine qua non of an enforceable arbitration provision under
California’s workers’ compensation insurance program. California statute,
regulation, and judicial authority all confirm that the obligation to file and obtain
pre-approval is not debatable, nor is it a question for arbitration; filing and pre-
approval are a precondition to arbitration itself. The Appellate Division, in an
extensive and well-reasoned opinion, so held. And while not essential to
affirmance here, the striking of the arbitration clause from the unfiled Payment
Agreements is not only the remedy decreed by the CDI and approved by California
8
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appellate courts, but it is fair, equitable, and to be respected and followed by the
courts of New York.
The second critical issue is whether the FAA overrides California’s
requirements for filing and pre-approval of arbitration provisions in insurance
agreements. The Appellate Division, agreeing with California jurisprudence, held
that it does not because the McCarran-Ferguson Act explicitly exempts the States’
power to regulate insurance from FAA pre-emption. Respondents do not contest
the general proposition that the FAA expresses a strong national preference for the
enforcement of private arbitration agreements; rather they argue, in Points Two
through Four of this brief, that this preference yields to the fundamental decision of
Congress, directly overruling contrary Supreme Court statutory interpretation, that
the regulation of insurance must be left to the States unless explicitly enacted by
federal insurance law. Thus, to enforce arbitration provisions contained in
insurance agreements that contravene state insurance regulation is not to follow
federal law, but to subvert it.
Respondents respectfully request that the holding of the Appellate
Division be affirmed, for all the reasons so eloquently written therein.
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STATEMENT OF FACTS
Because this joint brief is submitted by Respondents in a consolidated
appeal involving three separate entities, the facts in each action below are set out
separately.
Monarch Consulting, Inc., et al. v. National Union Fire Insurance Company of
Pittsburgh, PA
A. The National Union Workers’ Compensation Insurance Policies
And National Union’s Subsequent Side Agreements
Monarch Consulting, Inc., Elite Management, Inc., Brentwood
Television Funnies, Inc., Professional Employer Options, Inc., Recurrent Software
Solutions, Ahill, Inc., The Accounting Group, LLC, and PES Payroll, Inc.
(collectively “Monarch”) are corporate citizens of the State of California. (A-136-
37, ¶¶ 1-8.) Pursuant to California law, Monarch is required to procure and
maintain workers’ compensation insurance policies to cover its employees in the
event that they are unable to work because of an injury. (A-138, ¶ 14.) Beginning
in or around October 2003, Monarch procured workers’ compensation insurance
coverage from National Union under large deductible policies (the “Monarch
Policies”), wherein Monarch was responsible to pay the first $350,000 spent on
any individual workers’ compensation claim filed by any of its employees. (A-
137-39, ¶¶ 12, 14.) Monarch continued to renew the Monarch Policies with
National Union until 2010. (A-138-39, ¶ 14.)
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Subsequent to issuing the Monarch Policies, National Union
forwarded to Monarch certain endorsements, addenda, and “Payment
Agreements.” (A-139-40, ¶ 17.) The Payment Agreements were not, however,
provided to Monarch until months after the Monarch Policies’ inception dates, and
after the workers’ compensation programs were up and running. (A-139-41, 147-
48, 150-51, ¶¶ 17, 21-22, 41, 43, 50.)
The concept of arbitration is not found anywhere within the Monarch
Policies. It is only within these Payment Agreements that arbitration is mentioned
at all. (A-140-42, ¶¶ 19, 21-23.)
B. Monarch’s Dispute With Specialty Risk Services
Monarch contracted with a third-party administrator, Specialty Risk
Services (“SRS”), to administer the handling of Monarch’s workers’ compensation
files. (A-142, ¶ 25.) In December 2009, Monarch conducted a claim review with
SRS at which time it determined that SRS had engaged in substantial claims
mishandling of Monarch’s workers’ compensation files, resulting in systematic
over-charging. (A-143, ¶ 26.) On or about January 7, 2010, Monarch sent a letter
to SRS, copied to National Union, identifying the areas that Monarch believed led
to the claim fee dispute with SRS. Three days later, on January 11, 2010, Monarch
received a letter from SRS stating that Monarch had five days to respond to an
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audit and pay the amount that SRS claimed was due and owing. (A-143, ¶¶ 26-
27.)
On January 15, 2010, Monarch requested that SRS perform a claims
review and audit of the payments and charges made on Monarch’s workers’
compensation files. (A-143, ¶ 28.) On March 10, 2010, SRS cancelled its
agreement with Monarch, effective immediately. (A-143, ¶ 29.) National Union
soon thereafter issued its own cancellation notice to Monarch, based on Monarch’s
dispute with and refusal to pay SRS for overpayments on its workers’
compensation claims. Shortly thereafter, National Union and SRS withdrew their
bad faith notices of cancellation. (A-143, ¶ 29.)
On April 2, 2010, National Union acknowledged receipt of Monarch’s
January 15, 2010 letter to SRS and accepted the letter as a notice of dispute.
National Union’s letter further stated that Monarch has failed to pay
“$1,067,715.45.” (A-143-44, ¶ 30.)
On April 30, 2010, Monarch filed a Complaint against SRS in the
United States Central District Court of California for the mishandling of
Monarch’s workers’ compensation claims (the “California Monarch Litigation”).
(A-144, ¶ 31.) In May 2010, Monarch again notified National Union that it
disputed the outstanding payments that SRS requested from Monarch. National
Union subsequently acknowledged the dispute between Monarch and SRS, but
12
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demanded additional collateral to cover what appeared to be the disputed amounts
owed. (A-145, ¶ 32.) On August 9, 2010, Monarch disputed National Union’s
request for further security on the Monarch Policies. (A-144, ¶ 33.)
Despite the position that National Union has taken in this litigation
that arbitration has always been required under the Payment Agreements, at no
time from Monarch’s initial notice of disputed amounts to the subsequent letters
relating to an ongoing dispute did National Union submit the dispute to arbitration,
as (National Union claims) is purportedly required under the Payment Agreements.
After August 2010, Monarch and SRS agreed to stay the California Monarch
Litigation to pursue mediation, at which time Monarch dismissed its Complaint
without prejudice and entered into a “tolling agreement” with SRS. (A-145, ¶ 35.)2
C. National Union’s Demand For Arbitration
Notwithstanding the ongoing correspondence between Monarch, SRS
and National Union, with no warning, on February 2, 2011, National Union served
its Demand for Arbitration (the “Demand”) on Monarch. (A-145, ¶ 37.) In its
Demand, National Union alleged that Monarch had refused to provide security in
the amount of $3,221,188. National Union’s Demand was served five months after
2 Monarch and SRS conducted a mediation session in Los Angeles in November 2010. SRS
claimed, however, that it could not continue the mediation without the presence and involvement
of National Union. For the next several months, SRS was purportedly working with National
Union to schedule a second mediation. However, without any notice from SRS or National
Union, National Union served Monarch with the Demand for Arbitration here at issue in
February 2011. (A-145, ¶ 36.)
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its last response to Monarch and nearly ten months after its first response to
Monarch regarding disputed amounts owed and demands for additional security.
(A-145, ¶ 37.)
In support of its Demand, National Union relied on an arbitration
clause contained in its 2003 Payment Agreement, which was not executed until
four months after the inception of the 2003 policy. (A-153, ¶ 53, A-157-65.)
On February 22, 2011, Monarch petitioned the New York County
Supreme Court to stay National Union’s Demand. (A-135-156.) Monarch argued,
inter alia, that the arbitration clause relied upon by National Union is void and
unenforceable because it sought to modify or supersede the provisions of the
Monarch Policies, and had not been filed with the WCIRB or the CDI as required
by California Insurance Code § 11658. (A-140-142, ¶¶ 18, 21-23.)
The trial court denied Monarch’s Petition, and granted National
Union’s cross-petition to compel arbitration. (A-81-83.) Despite noting on the
record that he struggled with his decision, the trial court judge gave great weight to
the fact that the Monarch Policies and Payment Agreements had been executed for
seven consecutive years and found that there was therefore an express agreement
to arbitrate disputes under the Monarch Policies. (A-81-83.)
Monarch appealed the trial court’s decision to the Appellate Division,
First Department. The First Department reversed the denial of Monarch’s Petition,
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and refused to compel arbitration. (A-9-61.) National Union appealed to this
Court pursuant to CPLR § 5601(a). (A-3-4.)3
National Union Fire Insurance Company of Pittsburgh, PA v.
Priority Business Services, Inc.
A. The Priority Insurance Policies And Payment Agreements
Priority Business Services, Inc. (“Priority”) supplies temporary
workers to employers primarily in California. In order to do so, Priority must
provide workers’ compensation insurance coverage for claimed injuries to the
employees. Priority purchased insurance for this purpose from National Union
covering the period from November 26, 2004 until November 26, 2008 (the
“Priority Policies”). (A-382.) Months after purchasing the Priority Policies,
National Union required that Priority enter into two payment agreements in
November 2004 and November 2007 (the “Payment Agreements”). Additionally,
three addenda relate back to the November 2004 Payment Agreement. (A-359-68.)
Two additional addenda relate to the 2007 Payment Agreement. (RA-5-8.)4
Pursuant to the Payment Agreements, Priority must provide significant collateral,
3 National Union comments in its brief (at n.1) that Monarch commenced an action against it in
federal district court in California, and infers that such action in some way concedes the validity
of the Payment Agreements. To the contrary, the commencement of an action against National
Union in federal court is entirely consistent with Monarch’s position in this litigation that,
because the arbitration provisions were contained in unfiled Payment Agreements, the
appropriate forum in which to address disputes under the Payment Agreements is in a court, and
not before an arbitrator.
4 Citations to “RA__” refer to the Respondents’ Appendix, filed contemporaneously herewith.
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to be calculated in part based on Priority’s loss history, for claims that did not
exceed the Priority Policies’ deductible. (A-349-68; A-369-78; RA-3-8.)
The 2004 Payment Agreement contains an arbitration provision as
well as a provision allowing either party to petition a court in New York County to
compel arbitration of disputes concerning the Payment Agreements. (A-361, 364,
367.) The 2007 Payment Agreement contains an arbitration provision stating that
disputes regarding payment obligations and any other disputes arising out of the
agreement “must be submitted to arbitration.” (A-376.) That agreement also
contains a non-exclusive jurisdiction provision:
If You or we refuse or neglect to appoint an arbitrator within 30
days after written notice from the other party requesting it to do
so, . . . either party may make an application to a Justice of the
Supreme Court of the State of New York, County of New York
and the Court will appoint the additional arbitrator or
arbitrators.
(A-376.) The 2007 Payment Agreement states that it applies to “Policies”
specified in an attached “Schedule” but there is no schedule associated with the
November 2007 Payment Agreement. The final addendum to the 2004 Payment
Agreement was signed on March 7, 2008, the same day as the 2007 Payment
Agreement. (A-365, 378.) However, that addendum and its Schedule refer to the
2004 Payment Agreement, not the 2007 Payment Agreement. (A-363-65.)
No arbitration provisions were contained in the insurance policies that
National Union issued to Priority. To the contrary, the Priority Policies included
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dispute resolution provisions in a section captioned “Actions Against Us,” which
refers to a “right of action” against the insurer with no suggestion of any arbitration
requirement. (RA-93.) An endorsement provides an additional “Dispute Process”
with regard to increased premiums and rating systems, which entails an internal
complaint to the insurance company, followed by administrative review by the
California Department of Insurance, again with no reference to any arbitration
requirement. (RA-126-27.)
National Union submitted the Priority Policies to the WCIRB, but it is
uncontested that National Union did not submit Priority’s Payment Agreements to
the WCIRB and that the WCIRB never approved Priority’s Payment Agreements.
(RA-85.)
B. The California Settlement Agreement
On or about June 30, 2008, while the Priority Policies and Payment
Agreements were in effect, National Union entered into a settlement with Priority’s
CEO John Porrello and others in connection with certain litigation pending in
California (the “CSA”). In the CSA, National Union specifically released all
claims, known or unknown, against Priority as well as Mr. Porrello individually.
(RA-37.) The CSA was conditioned upon obtaining a good faith determination by
the California Superior Court. (RA-39.) Porrello and the other defendants in the
California litigation moved for such a determination, which was granted, and the
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CSA was so-ordered on September 16, 2008. (RA-49-51.) Accordingly, the CSA
took effect upon the California Superior Court’s September 16, 2008 order. (RA-
39.)
The CSA contains a choice-of-law clause providing that the
“Settlement Agreement shall, in all respects, be interpreted, construed and
governed by and under the domestic laws of the State of California.” (RA-39.) It
also contains an arbitration provision that reads: “Should a dispute arise out of this
Settlement Agreement, the Parties agree that said dispute be submitted to JAMS
arbitration (in Orange, California) for full and final resolution . . . .” (Id.)5
The CSA contains a general release which reads:
National Union . . . hereby releases and forever discharges
Defendants and their agents, representatives, family members,
past and present employers, affiliated corporations and
partnerships (including but not limited to Priority Business
Services, Inc.), from any and all claims, contracts, charges,
complaints, damages, liabilities, obligations, promises,
agreements, controversies, actions, causes of action, suits,
rights, attorney’s fees, demands, costs, losses liens, debts,
interest or expenses (including attorney’s fees and costs)
whenever and however arising, known or unknown, including
but not limited to any claims arising from the Defendants’
employment with the Headway Entities or any allegations that
were made or could have been made in the Superior Court
Action or Arbitration. The foregoing release does not apply to
either James Dow or Lamberto “Bert” Dalmacio.
(RA-37 (emphasis added).)
5 JAMS is a private alternative dispute resolution provider headquartered in Irvine, California.
See www.jamsadr.com/aboutus.
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C. National Union Demands Arbitration Pursuant To The Payment
Agreement Instead Of The CSA
In April of 2011, three years after the execution of the CSA, National
Union served an arbitration demand on Priority, claiming that $4,333,496 was due
under the Payment Agreements. (A-379-81.) Priority refused to pay, noting that
any obligation would amount to only $420,495.44, (RA-31), less than a tenth of
National Union’s demand. Priority also disputed that it had any obligation to
arbitrate, in light of the express general release contained in the CSA. (RA-33-34.)
Ignoring the CSA’s arbitration requirement of JAMS in California,
National Union instead filed a petition in New York Supreme Court on July 18,
2011 to compel arbitration, relying on the Payment Agreements. (A-337-47.)
Pursuant to the CSA, Priority in turn filed a Demand for Arbitration before JAMS
on July 26, 2011, requesting a declaration that the CSA’s arbitration provision
controls, and that its release provision applies to all existing contracts and
obligations between the parties as of the date the CSA became effective. (RA-52-
53.)
On August 2, 2011, JAMS sent a Notice of Intent to Initiate
Arbitration to the parties. (RA-77-81.) The Notice reflects the receipt from
Priority of the $400 initial case management fee. (RA-79.) On information and
belief, National Union never responded to the Demand, nor paid its $400 initial
case management fee required by the CSA.
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D. The Proceedings Below
Priority moved to dismiss National Union’s petition to compel
arbitration in New York on August 12, 2011. (RA-47.) On March 16, 2012, the
trial court denied Priority’s motion and granted National Union’s petition to
compel arbitration, ordering Priority to proceed to arbitration pursuant to the
Payment Agreement and to choose an arbitrator. Justice Kornreich found that the
FAA preempted the California Filing Statute because in her view there is no
“inherent and direct conflict between the [California statute] and arbitration as a
dispute resolution mechanism.” (A-94 (citation omitted).) The Court also found
that Priority’s argument that the instant dispute was not arbitrable due to National
Union’s failure to file the Payment Agreements with the WCIRB pursuant to the
California Filing Statute allegedly “challenges the validity of the Payment
Agreements as a whole,” which is an “issue [that] must be decided by the
arbitration panel.” (A-96 (citations omitted).) With respect to the issue of release
pursuant to the CSA, Justice Kornreich determined that it was for the arbitrators to
determine in the arbitration compelled under the Payment Agreements. (A-98.)
Despite so finding, Justice Kornreich further noted that “[i]t appears that the
Settlement and Release does not apply to the controversy at issue here.” (A-98.)
Justice Kornreich did not determine whether the Payment Agreements were part of
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the insurance policies at issue such that National Union must file the Payment
Agreements with the California WCIRB. (A-90-98.)
On May 1, 2012, Priority filed a Notice of Appeal to the First
Department and sought to stay the enforcement of Justice Kornreich’s judgment
pending appeal. (RA-1.) The Appellate Division granted Priority’s request, and
further directed the Clerk “to calendar this appeal with the related appeal entitled
National Union Fire Insurance Co. v. Source One Staffing, Inc. (Sup. Ct. N.Y.
County [Bransten, J.], Index No. 652366/10).” (RA-330.) These two appeals
subsequently were consolidated with the related appeal in Monarch Consulting,
Inc. et al. v. National Union Fire Insurance Co. (Sup. Ct. N.Y. County [Oing, J.],
Index No. 102187/11).
The First Department reversed the grant of National Union’s petition
to compel arbitration on September 11, 2014. (A-9-61.) The First Department did
not, however, address the issues raised by the CSA. National Union appealed to
this Court pursuant to CPLR § 5601(a). (A-5-6.)
Source One Staffing, LLC v. National Union Fire Insurance Co. of
Pittsburgh, PA
A. The Underlying Dispute
National Union began selling workers’ compensation policies in
California to Source One in 2004 (the “Source One Policies”). (A-424, ¶ 26.) The
Source One Policies have a very substantial per-claim deductible, so that Source
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One was responsible for loss on each claim within the deductible (as high as
$500,000). (A-425, ¶ 30.) As part of the insurance program, National Union
required Source One to enter into a Payment Agreement under which Source One
provided collateral to cover losses on claims under the policies within the
deductible and the collateral was to be calculated in part based on Source One’s
loss history for claims under the Source One Policies. (A-425, ¶ 32.)
National Union also assumed the task of administering claims against
Source One under the Source One Policies. (A-425-26, ¶¶ 33-35.) Source One
was entitled to select, with National Union’s consent, a third-party administrator to
adjust claims against Source One, but National Union insisted that Source One use
Broadspire Services, Inc. and Crawford & Company, Inc. (the “BS Parties”) to
carry out those duties. (A-426, ¶¶ 36-37.) National Union and the BS Parties
entered into a contract for the handling of Source One’s claims, although the BS
Parties were not a party to the Payment Agreement. (A-426-27 ¶ 38.)
National Union and the BS Parties failed to adjust claims against
Source One under the policy reasonably, damaging Source One in various respects,
and engaged in other objectionable practices in violation of California’s Unfair
Competition Law. (A-427-28, ¶¶ 41–43.) National Union also made demands that
Source One increase its collateral under the Payment Agreement even though it
was the improper and tortious conduct of National Union and the BS Parties that
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unnecessarily inflated Source One’s loss history, causing the premiums and
collateral requirements to increase. (A-428, ¶¶ 44-45.) Based on National Union
and the BS Parties’ negligence, breaches, and unfair business practices, on
December 8, 2010, Source One filed a lawsuit in the California Superior Court for
the County of Los Angeles6 against National Union and Broadspire Services, Inc.
and Crawford & Company, Inc. (the “California Source One Lawsuit”).7 (A-420-
35.)
B. The Insurance Program and the Payment Agreement
Part of the insurance program that National Union sold to Source
Once included a “Payment Agreement for Insurance and Risk Management
Services,” which National Union drafted, with an effective date of October 1,
2004. (A-403-12 (emphasis added).) The Payment Agreement also includes a
2004 Addendum, (A-413-16), and a 2006 Addendum, (A-417-19). As evidenced
by several provisions of the Payment Agreement itself, National Union treated the
Payment Agreement and the Source One Policies as part of the same collective
agreement.
6 The California Source One Lawsuit was subsequently removed to the United States District
Court for the Central District of California, and then subsequently remanded back to the Los
Angeles Superior Court. The California Source One Lawsuit is now stayed pending a decision in
these proceedings.
7 These issues as against the BS Parties are presented in the California Source One Lawsuit, but
not in the instant litigation, nor are they subject in any event to the void arbitration provision to
which only Source One and National Union are parties.
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First, a section captioned “WHAT HAVE YOU AND WE AGREED
TO?” states:
We have agreed to the following:
• to provide You insurance and services according to the Policies and
other agreements; and
• to extend credit to You by deferring our demand for full payment of
the entire amount of Your Payment Obligation if You make partial
payments according to this Agreement.
To induce us to agree as above
You have agreed to do the following:
• to pay us all Your Payment Obligations and to perform all Your
other obligations to this Agreement and Schedule for all entities
covered by the Policies;
• to provide us with collateral according to this Agreement and
Schedule;
(A-405 (emphasis added).)
Second, a section captioned “ARE YOU AUTHORIZED TO MAKE
THIS AGREEMENT” was amended in a 2006 Addendum to state:
This Agreement together with the Schedules, Addenda, Policies
and any related agreement between You and Us, constitute the
basis for a program of insurance coverage. We would not have
entered into any of them without your agreement on all of them.
For that reason, you should review all such documents together
when making any accounting, tax or legal determinations
relating to the insurance program.
(A-419 (emphasis added).)
Third, the sections of the Payment Agreement on “WHAT IS
DEFAULT?” and “WHAT MAY WE DO IN CASE OF DEFAULT” grant
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National Union the right to cancel or withhold payment of benefits under the
Policies, if Source One defaulted under the Payment Agreement. (A-409-10.)
C. The Instant Litigation
Although the California Source One Lawsuit was already on file,
National Union filed a Petition to Compel Arbitration in Supreme Court, New
York County on December 22, 2010. (A-391-97.) Source One opposed the
petition, (A-436-55), and on July 27, 2011 the trial court entered a decision and
order denying National Union’s petition to compel (“Source One I”). (RA-147-
57.) The trial court held that National Union failed to show that the FAA preempts
the California Insurance Code so as to mandate arbitration of the dispute. (RA-
153.) The trial court, while concluding that National Union had failed to show that
the Payment Agreement was not a policy within the meaning of the California
Insurance Code, granted National Union leave to replead on the limited issue of
“[w]hether the Payment Agreement and 2004 Addendum are policies or
components of policies within the meaning of the Insurance Code.” (RA-155-56.)
On September 1, 2011, National Union filed a First Amended Verified
Petition to Compel Arbitration. (RA-158.) National Union also filed a motion to
reargue that part of the trial court’s July 27, 2011 decision holding that McCarran-
Ferguson prohibited the FAA from preempting the California Insurance Code.
(RA-171.) In support of reargument, National Union argued that the trial court
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misapplied governing law when it concluded that National Union failed to show
how mandating arbitration would not invalidate, impair or supersede the California
Insurance Code. (RA-173-201.) Source One argued in opposition that, as the trial
court held in Source One I, McCarran-Ferguson is the applicable federal law here
and refuted National Union’s arguments that the Payment Agreement was not a
part of the Policies subject to the filing requirements. (RA-202-29.) Source One
submitted supplemental briefing pursuant to a stipulation between the parties to
present to the court Senate Bill No. 684 (“SB 684”), which had recently been
passed by the California legislature and also to provide the testimony of CDI
Senior Staff Counsel Christopher Citko, Esq., to explain to the trial court the
review of policy documents under the California regulatory scheme. (RA-230-51.)
National Union filed its reply memorandum on December 12, 2011. (RA-257.)
The Court heard argument on February 28, 2012.
On July 25, 2012, the trial court denied National Union’s amended
motion to compel arbitration as well as the motion to reargue (“Source One II”).
(A-107-23.) The trial court held that National Union failed to demonstrate that the
Court had overlooked or misapplied any controlling law when it denied National
Union’s prior petition to compel arbitration and thus reargument was not
warranted. (A-111-12.) On the motion to compel arbitration, while rejecting
Source One’s arguments that the court should defer jurisdiction of the matter to the
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California court pursuant to the doctrines of first-to-file and forum non conveniens,
the Court agreed with Source One that the Payment Agreement formed a part of
the Source One Policies and was subject to the filing requirements of the California
Insurance Code. (A-112-23.) The trial court concluded that because National
Union failed to file the documents as required by California law, the arbitration
and forum selection clauses were void and unenforceable. (A-118.)
National Union appealed the trial court’s decision to the Appellate
Division, First Department, which appeal was consolidated with the appeals from
the Monarch and Priority Business appeals. The First Department held that the side
agreements are not enforceable because National Union failed to file them and,
thus, dismissed National Union’s petition to compel arbitration and granted the
petition to stay arbitration. (A-9-61.) National Union appealed to this Court
pursuant to CPLR § 5601(a). (A-7-8.)
The Zurich OSC/Settlement8
In the Monarch case below, on October 31, 2012, the Monarch
Respondents moved the Appellate Division to take judicial notice of an Order to
Show Cause (“OSC”) filed by the CDI in a proceeding before the Insurance
Commissioner of the State of California against Zurich Insurance Company
(“Zurich”), a large insurer similar to the Appellant herein. (RA-331-51.)
8 The Zurich proceedings are equally relevant to the disputes between all three Respondents and
National Union.
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In the OSC, the CDI sought to prosecute Zurich for wrongfully using
side agreements containing arbitration provisions, just like National Union’s
Payment Agreements, without first having filed those agreements in California.
(RA-339-42.) The CDI sought an order from the Insurance Commissioner
declaring the agreements to be unenforceable. (RA-350.) The CDI also sought an
order requiring Zurich to cease and desist from continuing to issue those
agreements without filing them, in violation of California law. (RA-349-50.)
In response to Monarch’s motion for judicial notice of the CDI’s OSC
against Zurich, National Union stipulated to Monarch’s request and the parties
agreed to also request that the Appellate Division take judicial notice of Zurich’s
answer to the OSC. (RA-352-98.) The Appellate Division granted the stipulated
motion by Order, dated December 13, 2012. (RA-420.)
On July 12, 2013, Monarch filed another motion with the Appellate
Division, requesting that the court take judicial notice of the CDI’s settlement with
Zurich. (RA-401-20.) Source One and Priority filed similar motions on July 15,
2013. (RA-421-48; A-480-501.)
In the settlement, the CDI made clear that Zurich’s side agreements –
just like National Union’s Payment Agreements – must be filed with the CDI and
the WCIRB going forward. Specifically, as part of the settlement, Zurich agreed
on a prospective basis “to make the filings” and to comply with the relevant
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statutes that are an issue for this Court. (See RA-408, ¶ 4.) Additionally, in
recognition of its statutory duties, Zurich expressly stated in the settlement that it
had already started to file their side agreements with the CDI and WCIRB, as
required by California law. (See RA-412-13, ¶¶ 15, 16 and 17.) Finally, the
settlement confirmed CDI’s expectation that carriers like National Union must file
side agreements containing arbitration clauses:
The Department of Insurance further agrees that its rules and
requirements regarding Deductible Agreements would be
applied evenly to Zurich and its competitors on a level playing
field basis…
(See RA-410, ¶ 12 (emphasis added).)
The settlement also reflects CDI’s requirement that all of “Zurich’s
competitors,” such as National Union, must comply with paragraphs 12 through 14
therein – viz., providing California Employers (such as Respondents) with the
“option” of having their dispute with the insurer litigated “in a California Civil
Proceeding, without prejudice to any parties rights to commence or remove such
proceeding in or to a Federal Court in California.” (See RA-411, ¶14.) This
paragraph specifically, and the settlement generally, shows that the CDI expects
any workers compensation carrier that did not file its Side Agreements in
California (like National Union) will be unable to enforce its arbitration clause.
National Union is thus incorrect to argue, in reference to the Zurich/CDI
settlement, that “California law does not impose a categorical ban on the
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enforcement of unfiled arbitration agreements subject to Section 11658.”
Appellant’s Brief, at 67. Respondents have made clear in this appeal that their
“option” is to litigate this dispute with National Union “in a California civil
proceeding.” Id.
In the decision below, the Appellate Division granted Respondents’
request and took judicial notice of the Zurich/CDI settlement. Monarch, 123
A.D.3d at 66. The court stated: “We note that the CDI order to show cause and
settlement make clear that the CDI does, in fact, believe that side agreements are
subject to regulatory statutes, and therefore, that those agreements are void if
insurers fail to file them.” Id. The court observed that the prospective nature of
Zurich’s obligations was “likely attributable to the fact that it was fashioned to
make sure that Zurich did not have to pay fines.” Id., n.4.
ARGUMENT
I. CALIFORNIA INSURANCE LAW AND REGULATION
REQUIRES FILING AND PRE-APPROVAL OF
ARBITRATION PROVISIONS IN WORKERS’
COMPENSATION INSURANCE AGREEMENTS
A. The California Regulatory Scheme
As the Appellate Division wrote, Section 11658 of the California
Insurance Code (i.e., the “California Filing Statute”) “requires workers’
compensation carriers, before issuing a workers’ compensation insurance policy, to
file copies of their insurance policies, endorsements and forms with WCIRB,”
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which “then sends the filed documents to the CDI for approval.” If the insurance
policy or endorsement is not filed, it “shall not be issued” until it is filed for the
consideration of the Insurance Commissioner. Should the CDI reject the
documents, “it is unlawful for the insurer to issue any policy or endorsement in that
form.” Monarch, 123 A.D.3d at 55, 57 (quoting from § 11658 (emphasis added by
the Court)).9
The same point is made in the only California appellate decision
dealing with arbitration provisions in unfiled workers’ compensation Payment
Agreements, Ceradyne, Inc. v. Argonaut Ins. Co., G039873, 2009 Cal. App.
Unpub. LEXIS 4375 (Cal. Ct. App. June 2, 2009) (“Ceradyne”): a workers’
compensation insurer is obligated “to disclose and seek pre-approval from the
9 The California Filing Statute states in full:
(a) A workers' compensation insurance policy or endorsement shall not be issued by an insurer to
any person in this state unless the insurer files a copy of the form or endorsement with the rating
organization pursuant to subdivision (e) of Section 11750.3 and 30 days have expired from the
date the form or endorsement is received by the commissioner from the rating organization
without notice from the commissioner, unless the commissioner gives written approval of the
form or endorsement prior to that time.
(b) If the commissioner notifies the insurer that the filed form or endorsement does not comply
with the requirements of law, specifying the reasons for his or her opinion, it is unlawful for the
insurer to issue any policy or endorsement in that form.
(c) The withdrawal of a policy form or endorsement by the commissioner pursuant to this section
shall not affect the status of the policyholder as having secured payment for compensation or
affect the substitution of the insurer for the policyholder in workers' compensation proceedings
as set forth in the provisions of Chapter 4 (commencing with Section 3700) of Part 1 of Division
4 of the Labor Code during the period of time in which the policy form or endorsement was in
effect.
(d) This section shall not apply to limited policies submitted for approval to the commissioner
pursuant to Section 11657.
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[California] Insurance Commissioner and the WCIRB of the insurance plan being
purchased.”10
Unfiled side agreements are ineffective in this context. California
workers’ compensation insurance regulations state that “[n]o collateral agreements
modifying the obligation of either the insured or the insurer shall be made unless
attached to and made a part of the policy, provided, however, that if such
agreements are attached and in any way restrict or limit the coverage of the policy,
they shall conform in all respects with these rules.” Cal. Code Regs. (“CCR”) tit.
10, § 2268 (2015). This regulation has been implemented, and unfiled arbitration
provisions are explicitly invalidated by the 2011 Directive (A-458). See Point
I.B.2, infra.
B. The Payment Agreements Are Endorsements That Must Be Filed
Pursuant To Applicable California Workers’ Compensation
Insurance Law For Arbitration Provisions To Be Enforceable
1. The Appellate Division Correctly Held That The Payment
Agreements Must Be Filed As A Pre-Condition To
Enforcing An Arbitration Provision.
The Appellate Division readily and correctly held that the Payment
Agreements were endorsements (see Point I.B.2, infra), which had to be filed
10 Ceradyne, which barred enforcement of an arbitration agreement in unfiled Payment
Agreements essentially identical to those used by National Union, is an unpublished decision of
the California Court of Appeals. As the Appellate Division explained at length below, New
York courts may give appropriate weight to unpublished California decisions. Monarch, 123
A.D.3d at 67. Noting that Ceradyne is “directly on point,” the Appellate Division wrote that
“[a]t the very least … we find that Ceradyne is persuasive authority, and we will consider its
reasoning without relying on it as controlling authority.” Id. at 68.
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under the California Filing Statute. As the Court wrote, “whether the agreements
were more than mere financial documents was the least controversial” of the fact
questions before the trial courts here. Monarch, 123 A.D.3d at 68. Agreeing with
the trial courts in Monarch and Source One, the Appellate Division noted the
plethora of substantive insurance provisions stated only in the Payment
Agreements, including National Union’s right after an insured’s default to change
the terms of the insurance plans to non-deductible with consequent higher premium
payments, and adding to the payment obligation any payment made by National
Union to a claimant. “[W]here, as here, a contract alters large and important parts
of the policies’ scheme as it was originally issued, it qualifies as an endorsement
even if the contract purports to be merely a loan agreement.” Id. at 69 (citations
omitted). And the Appellate Division specified the arbitration requirement is itself
a modification of the parties’ obligations “in a significant way.” Id.
The Ceradyne court made the same point: “If dispute resolution by
arbitration was intended to be part of the ‘insurance program’ with [an employer],
we conclude the provision required review and approval by the Insurance
Commissioner and the WCIRB.” Ceradyne, 2009 Cal. App. Unpub. LEXIS 4375,
at *31-32. Absent such filing, “[t]he arbitration clause is void.” Id. at *32
(emphasis in original). Notably, the court came to this conclusion through
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traditional textual analysis, without the benefit of the CDI’s subsequent
clarification of precisely the same position in its 2011 Directive.
In the Source One holding affirmed below, Supreme Court Justice
Bransten echoed the Ceradyne conclusion in striking terms:
[T]he Payment Agreement is intrinsically linked to the Policies,
and the broad language of the arbitration provision … purports
to require arbitration for any disputes about payment
obligations, “as well as any other unresolved dispute arising
out of this Agreement.” Accordingly, petitioner’s failure to
comply with Section 11658 renders the arbitration and forum
selection clauses void and unenforceable.
(A-118.)
In sum, the Appellate Division correctly concluded that the Payment
Agreements substantially modify the parties’ obligations and therefore constitute
policy endorsements. The court also correctly noted that, in the absence of the
Payment Agreements, California law would govern any dispute between the
parties, which would be brought in a California forum. Monarch, 123 A.D.3d at
69. “By contrast, under the payment agreements, the parties are obliged to raise
those same disputes in New York and under New York law, even though the
insureds are all California employers whose employees are predominantly
California residents.” Id.
National Union contends, at considerable length, that the majority’s
statement was in error because the Payment Agreements do not expressly select
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New York law, and the Payment Agreements’ forum selection clause is supposedly
limited to any motion to compel arbitration. See Appellant’s Brief, at 14 n.3, 62-
63 & n.18. The argument is disingenuous, however, as National Union’s demands
to the Respondents for arbitration include a venue selection of New York that is
expressly predicated upon the forum selection clause in the Payment Agreements.
(See A-165; A-402.) Moreover, the arbitrators would be free to apply New York
or any other law if they so choose, and there is every reason to believe that New
York-based arbitrators would be inclined to apply New York law.
The Appellate Division was therefore correct to highlight the
unfairness of depriving these California policyholders of the protections of
California law, including its bar against arbitration of disputes under workers’
compensation policies unless pre-approved by the CDI. Even under the FAA, an
arbitration agreement can be directly challenged under the applicable state law
governing contracts. “[I]n evaluating whether the parties have entered into a valid
arbitration agreement, the court must look to state law principles.” Cap Gemini
Ernst & Young, U.S., L.L.C. v. Nackel, 346 F.3d 360, 364 (2d Cir. 2003). Here,
California law should apply under New York’s own rules for the choice-of-law
analysis:
In contract cases, New York courts apply a “center of gravity”
or “grouping of contacts” approach to decide choice-of-law
questions. See Lazard Freres & Co. v. Protective Life Ins. Co.,
108 F.3d 1531, 1539 (2d Cir. 1997) (citing Babcock v. Jackson,
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12 N.Y.2d 473, 240 N.Y.S.2d 743, 191 N.E.2d 279, 283–84
(1963)). Using this approach, “courts may consider a spectrum
of significant contacts, including the place of contracting, the
places of negotiation and performance, the location of the
subject matter, and the domicile or place of business of the
contracting parties.” Id. (citing In re Allstate Ins. Co. &
Stolarz, 81 N.Y.2d 219, 597 N.Y.S.2d 904, 613 N.E.2d 936,
940 (1993)).
Beatie & Osborn LLP v. Patriot Scientific Corp., 431 F. Supp. 2d 367, 379
(S.D.N.Y. 2006). As this Court has previously explained, there are “five generally
significant contacts in a contract case: the place of contracting, negotiation and
performance; the location of the subject matter of the contract; and the domicile of
the contracting parties (see Restatement [Second] of Conflict of Laws § 188 [2]).”
Allstate Ins. Co. v. Stolarz, 81 N.Y.2d 219, 227 (1993).
Here, each of those five contacts centers in whole or at least in part
upon California. That state is where National Union negotiated and contracted
with the Respondent California employers for workers’ compensation insurance.
Indeed, National Union conducts its workers’ compensation insurance business in
California under a license by the CDI, which can be revoked by the CDI for
National Union’s violation of California’s insurance code. (RA-368-69.)
California is where the Respondents’ businesses and their employees are located,
making it the place of contract performance, the location of the subject matter, and
the domicile of all contracting parties, save National Union. (See Respondents’
addresses at A-157, A-379, A-398.) Because these California contacts more than
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predominate in both number and substance, clearly California state law should
govern any analysis of the validity of the arbitration clause in the Payment
Agreements. Thus, the majority below was correct to apply California law – in
particular, the Ceradyne case, and the California Filing Statute and related
regulations – in its holding, and the court correctly applied that law.
2. Refusing To Enforce The Arbitration Provisions Of The
Payment Agreements Is The Appropriate Remedy For Non-
Filing.
The arbitration provisions are themselves endorsements that should
have been filed under Section 11658, and agreements that alter the obligations of
the parties under 10 CCR § 2268. Because these provisions so substantially
modify the rights and responsibilities of the insurer and the policyholders under
California contract law, the appropriate remedy is to preserve the substantive
contractual rights of the policyholders to coverage and of the insurer to premium
payments, while voiding the procedural mechanism of dispute resolution through
arbitration.
The arbitration provisions (and addenda) create obligations between
the parties to the insurance contract to arbitrate disputes arising from workers’
compensation insurance and provides for New York jurisdiction over its
enforcement. (A-178, 191, 194, 207, 220, 233, 246, 361, 364, 367, 415, 418.)
They alter the Policies by materially changing the manner of resolving insurance
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disputes, and removing matters of interpreting policy endorsements from the
California courts – even though the Policies are heavily regulated by California’s
uniquely stringent insurance regulatory framework.
The arbitration provisions are themselves policy endorsements
because they add to the insurance policies an agreement to arbitrate any dispute
over premium. The arbitration provisions specifically require arbitration “[i]f You
disagree with us about any amount of Your Payment Obligation… .” (See, e.g., A-
173 (italics in original signifying defined terms).) “Your Payment Obligation,” as
incorporated into the Payment Agreement, is “the amount that You must pay us for
the insurance and services in accordance with the terms of the Policies...Such
amounts shall include…the premiums and premium surcharges… .” (See, e.g., A-
169 (italics in original, underline added).)
By placing the arbitration requirements in unfiled Payment
Agreements rather than in the filed Policies, National Union is attempting to force
its policyholders to arbitrate, inter alia, their premium disputes. As alleged in one
of National Union’s Arbitration Demands, “[s]pecifically, Respondent [Monarch]
has failed and refused to pay $104,050 in premium. Attached as Exhibit C is a
copy of a premium invoice showing this amount.” (A-162, see also A-380, A-
400.)
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In short, National Union seeks to be able to try to enforce all its
supposed claims under its Policies and Payment Agreements by way of arbitration,
while avoiding the risk that California courts will hold it to the requirements of
contract law.11 The most appropriate remedy for National Union’s purposeful
refusal to obey the California filing requirements is to void the arbitration
provisions. And this is the remedy that the Appellate Division, following the
Ceradyne court, imposed.
The Appellate Division included a discussion of the remedy for failure
to file. Monarch, 123 A.D.3d at 70. It “turned for guidance” to the 2011
Directive, and to the Ceradyne holding that “noncompliance with the mandatory
review and pre-approval process renders the arbitration provision in the [payment
agreement] unenforceable,” id. (quoting Ceradyne, 2009 Cal. App. Unpub. LEXIS
4375, at *32), to find that refusal to enforce the contractual arbitration provision
was the appropriate remedy. Referencing the California case law on arbitration
clauses in health service agreements, which is discussed below in Point II.B, the
11 That arbitration is unlikely to produce a trier of fact and law that has the neutrality one expects
in a judge of the trial courts of general jurisdiction in a state of the sophistication of California is
exemplified by the criteria for selecting arbitrators that National Union imposed in the Payment
Agreements. Under the “Arbitration Procedures” paragraph (see, e.g., A-173), “Unless you and
we agree otherwise, all arbitrators must be executive officers or former executive officers of
property or casualty or reinsurance companies or insurance brokerage companies, or risk
management officials in an industry similar to Yours…” Regardless of whatever social merit
there may be in providing a full employment program for insurance industry alumni, it is
unlikely to result in a panel with broad experience in such fields as vindication of economic and
civil rights or consideration of universally applicable tenets of contract and equity law.
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Appellate Division found no support for the position that denying enforcement to
an arbitration provision in an unfiled Payment Agreement is “too harsh a remedy
for failing to file the agreements.” Id. at 72.
It is unclear from its brief whether National Union continues to argue
that denying enforcement to such an arbitration provision is too “harsh,” or rather
that the trier of fact ought to decide on a case-by-case basis whether it is overly
“harsh” to require litigation of each particular dispute. Appellant’s Brief, at 66-69.
National Union appears to claim that, because CDI did not seek in its settlement
with Zurich to void already completed arbitrations, the CDI left open a window
through which some current disputes can still reach arbitration. National Union’s
claim is just wrong; in each and every “Current Dispute” – defined in the Zurich
Settlement as a dispute that has not reached a final decision before May 1, 2013 –
each and every “California Employer” may elect either to arbitrate or litigate. (A-
492-94.) As the Appellate Division wrote:
[T]he policy in favor of arbitration must yield to the primacy of
California state law and to California’s prerogative to regulate
its own insurance practices. This conclusion holds particularly
true given the CDI’s position, as demonstrated in the Zurich
Action and the settlement of that Action, that any workers’
compensation carrier that fails to file a side agreement in
California is foreclosed from enforcing any arbitration clause
contained in that agreement.
Monarch, 123 A.D.3d at 74 (emphasis added).
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In any event, the Appellate Division accurately encapsulated the CDI
view on the link between filing and enforcing the arbitration provisions in Payment
Agreements, and it properly adopted the CDI view as a highly persuasive
expression of interpretation by the agency charged by statute with administering a
complex regulatory scheme.
3. The CDI Requires That The Payment Agreements Be Filed
As A Pre-Condition To Enforcing An Arbitration Provision.
That filing is a pre-condition to the validity of arbitration provisions in
particular is a specific concern of the CDI. As the Appellate Division noted, the
CDI, in directing the WCIRB to enforce the filing requirement for side agreements,
like the Payment Agreements, which were not attached to filed policies, wrote:
The Department is particularly concerned with arbitration
provisions contained in unattached collateral agreements and
considers such terms unenforceable unless the insurer can
demonstrate that the arbitration agreement was expressly agreed
to by the insured at the time the policy was issued.
Monarch, 123 A.D.3d at 57 (quoting the 2011 Directive).
The CDI’s interpretation of California’s Insurance Code and
Regulations is strong evidence that the CDI views the Payment Agreement and
arbitration provisions as subject to the foregoing regulatory statutes and therefore
void if not filed. Also, the CDI views the requirement to arbitrate as an
amendment of “material matters,” requiring approval under the State’s regulatory
framework. (RA-365, ¶ I.)
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The CDI’s interpretation of the Insurance Code, as expressed in both
its 2011 Directive and its enforcement action against Zurich, is given great weight
in California. As Justice Bransten explained in her second decision in the
underlying Source One matter:
Under California law, when an administrative agency is
charged with enforcing a particular statute, its interpretation of
the statute will be accorded great respect by the courts “and will
be followed if not clearly erroneous.” Judson Steel Corp. v.
Workers' Comp. Appeals Bd., 22 Cal. 3d 658, 668, 150 Cal.
Rptr. 250, 256 (1978); Yamaha Corp. of Am. v. State Bd. of
Equalization, 19 Cal. 4th 1, 7, 78 Cal. Rptr. 2d 1 (1998)... .
(A-119-20.)
In this regard, National Union misrepresents the record, setting up a
straw man by claiming that the First Department viewed the CDI’s “directive” as
compelling its ultimate conclusion. Appellant’s Brief, at 66. In fact, the First
Department found the 2011 Directive persuasive and gave it due deference:
We further note that the CDI's interpretation of the Insurance
Code receives weight under both California and New York law
(see State Farm Mut. Auto. Inc. Co. v. Quackenbush, 77 Cal.
App. 4th 65, 71, 91 Cal. Rptr. 2d 381 [Cal. Ct. App. 1999];
Matter of New York Pub. Interest Research Group Inc. v. New
York State Dept. of Ins., 66 N.Y.2d 444, 448, 497 N.Y.S.2d
645, 488 N.E.2d 466 [1985]).
Monarch, 123 A.D.3d at 66. This Court should do the same.
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Where, as here, the interpretation of a regulation involves a complex
regulatory scheme, the deference due to the regulatory agency’s interpretation is
heightened:
“[A]n administrative agency’s interpretation of the statute it is
charged with implementing is entitled to varying degrees of
judicial deference depending upon the extent to which the
interpretation relies upon the special competence the agency is
presumed to have developed in its administration of the statute”
(Matter of Gruber, 89 N.Y.2d 225, 231, 652 N.Y.S.2d 589, 674
N.E.2d 1354). …[W]here…“the interpretation of a statute or its
application involves knowledge and understanding of
underlying operational practices” (Kurcsics v. Merchants
Mutual Ins. Co., 49 N.Y.2d 451, 459, 426 N.Y.S.2d 454, 403
N.E.2d 159 (1980)), courts routinely defer to the agency's
construction of a statute it administers.
New York City Council v. City of New York, 4 A.D.3d 85, 96-97 (1st Dep’t 2004).
California law maintains the same substantive approach. Great respect is accorded
to an agency’s view or interpretation of a statute or regulation because the
Commissioner “has expertise and technical knowledge, especially where the legal
text to be interpreted is technical, obscure, complex, open-ended, or entwined with
issues of fact, policy, and discretion.” Yamaha Corp. v. State Bd. of Equalization,
960 P.2d 1031, 1037 (Cal. 1998).
In particular, National Union’s Payment Agreements implicate
matters of “rate making,” which California courts have already found to lie within
the particular expertise of the CDI. Farmers Ins. Exch. v. Superior Court, 826
P.2d 730 (Cal. 1992), concerned a suit against various insurers for unfair practices
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(California Bus. & Prof. Code § 17000 et seq.) based on their alleged violation of
California Insurance Code §§ 1861.02 and 1861.05, for their refusal to offer a
“Good Driver Discount policy” to all eligible applicants. See 826 P.2d at 732-33.
The California Supreme Court noted the necessary deference to the rate making
authority as follows:
[C]ourts have observed that questions involving insurance rate
making pose issues for which specialized agency fact-finding
and expertise is needed in order to both resolve complex factual
questions and provide a record for subsequent judicial review.
As noted in Karlin v. Zalta (1984) 154 Cal. App. 3d 953, 986
[201 Cal. Rptr. 379], “[the Insurance Commissioner's]
determination with respect to controverted rates could not only
be of inestimable value to a court should trial be inevitable, but
might eliminate the need for a trial, or might resolve major
elements of dispute.”
Id. at 743 (emphasis added).
Farmers Insurance Exchange’s rationale for deferring matters of “rate
making” to the Insurance Commissioner is particularly applicable here. In its OSC
issued to Zurich, the CDI expressly alleged that Zurich Insurance’s Payment
Agreement implicates and affects “rate making.” This is no minor matter.
According to the Notice of Hearing: “Rate information is submitted directly to the
Commissioner pursuant to Insurance Code § 11735.” (RA-360.) And the Payment
Agreement directly affects rates and is subject to California Insurance Code
§ 11735:
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The agreement to enter into an LDA [i.e., a Payment
Agreement] materially affects the rates and premium charged
by the insurer for a Workers' Compensation insurance policy.
The CDI is informed and believes that the inclusion of an LDA
in a Workers' Compensation insurance policy results in a
reduction in the premium that the insured would otherwise pay
for the policy.
(RA-361.) Thus, the Administrative Hearing concerns matters of “rate making”
within the special competency of the CDI; it is a complicated regulatory matter of
immense significance, with implications for all insurers that issue Payment
Agreements.
4. The Appellate Division Dissent Erroneously Refuses To
Recognize California Insurance Law, As Interpreted By
The California Courts And The CDI, That Denies
Enforcement To Arbitration Provisions In Unfiled Payment
Agreements.
The parenthetical note of the dissenters below that “California law
does not restrict the power of an arbitrator to address whether the Payment
Agreements in these cases were required to be filed …” (Monarch, 123 A.D.3d at
79), ignores the fact that the Ceradyne court and the CDI have explicitly stated to
the contrary. As counsel for the CDI informed the trial courts, the Payment
Agreements that National Union compelled the Respondents to sign in order to
obtain insurance coverage are “Insurance agreements” that must be filed. (RA-
139-40 (stating that Ins. Code Section 11658 “require[s] all policy forms and
endorsements to be filed with the Commissioner before they are used in
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California” and that there is a “prohibition against using unfiled policy forms and
endorsements”); RA-140-41 (stating that the California regulation at 10 CCR
§ 1363 requires side agreements to be filed with the WCIRB); RA-142 (stating that
“side agreements must be attached to the policy” and that the CDI “may take
enforcement action against insurers that attempt to enforce unfiled side
agreements”); accord A-330-35; RA-240-47 (identical or similar statements in the
Monarch and Source One cases).) If an insurance agreement reached by Section
11658 is not filed, its provisions are not binding on the policyholder; this is the
stick with which California polices its regulatory scheme. (RA-139-40, 145.)
The dissent below is fundamentally mistaken because the CDI,
regulating workers’ compensation insurance in California, has established that
without filing and pre-clearance, arbitration provisions in side agreements are
forbidden, and under Humana Inc. v. Forsyth, 525 U.S. 299 (1999), discussed
below at Point III, contractual arbitration provisions that interfere with a State’s
administrative regime governing insurance are not saved by the FAA.
Purporting to support their argument, one essential to their position,
that California leaves to an arbitrator – rather than to the CDI – the decision as to
whether a side agreement containing an arbitration provision absent from the
original insurance policy needs to be filed, the dissenters reference a decision of
the Southern District of New York, a Federal decision from California that pre-
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dated Ceradyne, and an opinion from the Eighth Circuit misconstruing Texas
insurance law.
The cases cited by the dissenters fail to assist their point. In National
Union Fire Insurance Co. v. Personnel Plus, Inc., 954 F. Supp. 2d 239, 248
(S.D.N.Y. 2013), the court did not opine that the need to file Payment Agreements
was an issue that could contractually be given to an arbitrator, but rather that the
statute was silent on how it was to be enforced. Relying on the now reversed trial
court decision in Priority, the Personnel Plus court took the view that statutory
silence meant that the choice of arbitration to decide the effect of a failure to file
did not impair or supersede an insurance law. However the CDI has filled that
arguable lacuna, and the bar on arbitration in an unfiled side agreement is no
longer an open question; allowing contractual arbitration to trump the regulatory
bar is definitional invalidation or impairment of California insurance law.
Next, the dissenters cite Grove Lumber & Building Supply, Inc. v.
Argonaut Insurance Co., SA CV07-1396 AHS (RNBX), 2008 U.S. Dist. LEXIS
51752 (C.D. Cal. July 7, 2008). Grove Lumber was decided not only before
Ceradyne, but before the 2011 Directive that clarified and made explicit that filing
side agreements is an essential precondition of an effective arbitration provision
governing disputes arising out of underlying workers’ compensation insurance
policies. In any event, the affirmance of the trial court in Ceradyne nullifies any
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precedential effect of Grove Lumber. As the Ninth Circuit Court of Appeals has
made abundantly clear, “[d]ecisions of the California Courts of Appeals are to be
followed by a federal court where the Supreme Court of California has not spoken
on the question… .” Hubbard v. SoBreck, LLC, 554 F.3d 742, 745 (9th Cir 2009).
The dissenters also cite St. Paul Fire & Marine Insurance Co. v.
Courtney Enterprises, Inc., 270 F.3d 621, 625 (8th Cir. 2001). That case does not
purport to leave to arbitrators the decision on whether any particular side
agreement must be filed; rather it sets up a bright line rule that unless a state
insurance statute prohibits arbitration, it is preempted by the FAA. In that
decision, which denied enforcement of a Texas statute that, like California,
required filing and approval of insurance agreements in order to establish
enforceable consent to arbitration, the Court wrote “[i]f the Texas insurance laws
forbid the arbitration of insurance disputes, that is a defense to arbitrability and the
Federal Arbitration Act would be ‘inversely preempted’ by the McCarran-
Ferguson Act.”12
Not only does St. Paul Fire stand alone in so drastically narrowing
McCarran-Ferguson, it misread the law of Texas in doing so. The Texas Court of
12 St. Paul Fire stands unique among reported decisions that approve FAA pre-emption where
the bar on arbitration in unfiled side agreements is regulatory rather than statutory. The cases
cited by National Union at page 54 of its brief as supporting St. Paul Fire all involve states in
which there was no filing requirement purporting to regulate the inclusion of arbitration
provisions in insurance policies.
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Appeals has held that failure of a health care services provider to comply with the
Texas disclosure requirements for arbitration agreements between providers and
members invalidated and rendered unenforceable the arbitration agreement in the
plan. In re Sthran, 327 S.W.3d 839, 843-46 (Tex. Ct. App. 2010). In doing so,
Texas used the same reasoning that California courts have applied in similar cases
(see Point II.B, infra). In brief, in both Texas and California, where there is a
violation of strict disclosure requirements for arbitration provisions in such
insurance contracts, the arbitration provisions are categorically unenforceable –
just as the Appellate Division and the Ceradyne court held regarding the unfiled
arbitration provisions at issue here. Thus, were the St. Paul Fire court to apply
Texas law as construed by the Texas Court of Appeals, it would find, in its words,
“inverse preemption.” In the more recent Sthran decision, the Texas Court of
Appeals held squarely that McCarran-Ferguson reverse preempts the FAA with
regard to the Texas notice requirement. In re Sthran, 327 S.W.3d at 845-46.
II. MCCARRAN – FERGUSON PRESERVES CALIFORNIA’S
REGULATORY SCHEME FROM FAA PRE-EMPTION
INCLUDING CALIFORNIA REGULATIONS THAT RENDER
UNENFORCEABLE ARBITRATION REQUIREMENTS
CONTAINED IN UNFILED AND UNAPPROVED INSURANCE
AGREEMENTS
A. The Controlling United States Supreme Court Authority
The FAA pre-empts state regulation of arbitration in a variety of
circumstances, but it does not pre-empt state regulation of insurance. As the
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Supreme Court wrote in Securities & Exchange Commission v. National Securities,
Inc., “[s]tatutes aimed at protecting or regulating this relationship [between the
insurance company and the policyholder], directly or indirectly are laws regulating
the ‘business of insurance.’” 393 U.S. 453, 460 (1969) (emphasis added). As
such, and as the language of the McCarran-Ferguson Act makes clear, no federal
act – other than an act specifically regulating insurance – prevails over state
regulation of insurance, if applying the federal act would change the result. And
not even National Union contends that the FAA specifically regulates insurance.
The key decision is Humana Inc. v. Forsyth, 525 U.S. 299, 310
(1999). As the Appellate Division wrote, quoting from Humana and adding its
own emphasis,
When federal law does not directly conflict with state
regulation, and when application of the federal law would not
frustrate any declared state policy or interfere with a State's
administrative regime, the McCarran-Ferguson Act does not
preclude its application.
Monarch, 123 A.D.3d at 65.
The question before the Supreme Court in Humana was whether a
federal law (RICO), which prohibits the same conduct as the state law at issue but
provides for a different remedy, “impairs” state law within the meaning of
McCarran-Ferguson. Humana, 525 U.S. at 305. The Supreme Court considered
the various possible interpretations of “impair” and looked for guidance to the
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dictionary, which defined the term as “‘to weaken, to make worse, to lessen in
power, diminish, or relax, or otherwise affect in an injurious manner.’” Humana,
525 U.S. at 309-10. The Court concluded that to “‘impair’ a law is to hinder its
operation or ‘frustrate [a] goal’ of that law.” Humana, 525 U.S. at 311. In
Humana, because the availability of RICO for recourse to the policy beneficiaries
served to advance Nevada’s interest in addressing insurance fraud and did not
frustrate the state’s similar law, the Court held that McCarran-Ferguson did not
apply. Humana, 525 U.S. at 314. Here, National Union has not even attempted to
argue that the FAA in any way advances California’s insurance laws.
Far from “aiding or enhancing” California’s statutory scheme or
interest in protecting California policyholders, here, invoking the FAA to mandate
arbitration of this dispute would both hinder the operation of and frustrate the goals
of California law and regulations relating to workers’ compensation insurance.
The fundamental requirement of the California workers’ compensation insurance
regulations is that policy forms and endorsements must be filed, so that the CDI
can determine whether a particular arbitration provision furthers California’s
public policy regarding this type of insurance. To take this regulatory oversight
away from the CDI under the guise of the FAA would contravene the clear intent
of Congress to preserve state insurance regulation.
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National Union continues to suggest that FAA pre-emption
jurisprudence compels enforcement of the arbitration provisions in the Payment
Agreements, at least as far as compelling the appointment of arbitrators who are
themselves to decide whether the parties’ claims are arbitrable. Appellant’s Brief,
at 31. But none of the cases cited by National Union involve challenges to state
regulation of insurance, nor does any one of them address the applicability of
McCarran-Ferguson. See AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740,
1744 (2011) (concerning arbitration provision found in cell phone sale and
servicing agreement); Stolt–Nielsen S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662,
666-67 (2010) (concerning arbitration provision found in charter party); Rent-A-
Center, W., Inc. v. Jackson, 561 U.S. 63, 64 (2010) (concerning arbitration
provision found in an employment contract); Preston v. Ferrer, 552 U.S. 346
(2008) (concerning arbitration provision found in talent agency contract); Buckeye
Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 442-43 (2006) (concerning
arbitration provision found in check-cashing agreement); Prima Paint Corp. v.
Flood & Conklin Mfg. Co., 388 U.S. 395, 397 (1967) (concerning arbitration
provision in “consulting agreement” entered into in connection with purchase of
paint business); Diamond Waterproofing Sys., Inc. v. 55 Liberty Owners Corp., 4
N.Y. 3d 247, 250 (2005) (concerning arbitration provision in construction
contract).
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National Union argues that the FAA applies because “the Payment
Agreement governs payment obligations between entities from different states
(Pennsylvania and California)” and therefore “affect[s] interstate commerce.”
Appellant’s Brief, at 31. National Union’s argument, however, ignores that the
very purpose of the enactment of McCarran-Ferguson was to restore the supremacy
of the states in insurance regulation. Congress declared that
the continued regulation and taxation by the several States of
the business of insurance is in the public interest, and that
silence on the part of the Congress shall not be construed to
impose any barrier to the regulation of taxation of such business
by the several States.
15 U.S.C. § 1011 (“Declaration of policy”). Thus,
The business of insurance, and every person engaged therein,
shall be subject to the laws of the several States which relate to
the regulation or taxation of such business…No Act of
Congress shall be construed to invalidate, impair, or supersede
any law enacted by any State for the purposes of regulating the
business of insurance…unless such Act specifically relates to
the business of insurance…
15 U.S.C. § 1012(a)-(b).
As the First Department aptly noted (see Monarch, 123 A.D.3d at 59),
the McCarran-Ferguson Act was enacted in the wake of United States v. South-
Eastern Underwriters Assoc., 322 U.S. 533 (1944), in which the Supreme Court
held that insurance transactions that crossed state lines involved interstate
commerce and were therefore subject to regulation under the Commerce Clause.
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The Supreme Court later explained that the McCarran-Ferguson Act “did not
simply overrule South-Eastern Underwriters and restore the status quo.” United
States Dept. of Treasury v. Fabe, 508 U.S. 491, 507 (1993). Rather,
[the McCarran-Ferguson Act] transformed the legal landscape
by overturning the normal rules of pre-emption. Ordinarily, a
federal law supersedes any inconsistent state law. The first
clause of § 1012(b) reverses this by imposing what is, in effect,
a clear-statement rule, a rule that state laws enacted ‘for the
purpose of regulating business of insurance’ do not yield to
conflicting federal statutes unless a federal statute specifically
requires otherwise.
Id. at 507 (emphasis added). Thus, the McCarran-Ferguson Act “gives the states a
dominant role in the regulation of insurance.” Monarch, 123 A.D.3d at 60 (citing
Fabe, 508 U.S. at 500).
The fact that the Payment Agreement may involve interstate
commerce does not require the application of the FAA. To the contrary, this is the
very type of dispute that Congress sought to resolve through the McCarran-
Ferguson Act, and requires a holding that the provisions of the California
Insurance Code, which without question “regulate the business of insurance,” are
not preempted by the FAA, regardless of whether interstate commerce is affected
by the Payment Agreement. See, e.g., Stephens v. American Int’l Ins. Co., 66 F.3d
41 (2d Cir. 1995) (finding that the Kentucky Insurers Rehabilitation and
Liquidation Law, which contained a statutory prohibition against compelling a
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liquidator to arbitrate, is a state statute enacted for the purpose of regulating the
business of insurance, and is therefore not preempted by the FAA).
B. The Relevant California Authority
California cases considering the interplay between California
regulations, the FAA and McCarran-Ferguson have found that McCarran-Ferguson
applied to prevent preemption of the California regulations by the FAA. Foremost
among them and directly on point is Ceradyne, discussed extensively in Point I,
supra. In addition, there is a plethora of California decisions applying reverse
preemption to a California insurance statute regulating arbitration agreements in
health care service plans.
California Health and Safety Code § 1363.1 permits a health care
service provider, like an HMO, to require its subscribers to arbitrate disputes in
connection with the health care service plan, but only if the plan as supplied to the
subscriber contains details of the arbitration provision and meets substantial
requirements for how the agreement to arbitrate is to be stated and displayed. See
Imbler v. PacifiCare of California, Inc., 126 Cal. Rptr. 2d 715, 723 (Cal. Ct. App.
2002).
In a number of cases, health care providers sought to compel
arbitration with subscribers where there were alleged failures to meet the strict
requirements of the disclosure statute, claiming that the FAA preempted the
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statute. Holding that the statute protected or regulated the relationship between
insurer and insured within the meaning of SEC v. National Securities, supra, the
California courts, starting with the Second District Court of Appeals in Smith v.
PacifiCare Behavioral Health of California, Inc., 113 Cal. Rptr. 2d 140, 155 (Cal.
Ct. App. 2001), held that the disclosure requirement imposed on HMOs that want
to use mandatory arbitration “is plainly an effort to protect insureds, hence the state
has exercised its power to protect or regulate the relationship between the HMO
and its members.” Having found that the disclosure statute regulates insurance by
conditioning the use of arbitration, failure to comply with such conditions
“forecloses” compelling arbitration. Id. at 155.
Smith was specifically approved by other California Courts of Appeal
in Imbler, supra, at 717-23, Pagarigan v. Superior Court, 126 Cal. Rptr. 2d 124
(Cal. Ct. App. 2002), and Zolezzi v. PacifiCare of California, 129 Cal. Rptr. 2d
526 (Cal. Ct. App. 2003).13 By 2008, the point was so well established that health
care services were no longer arguing for FAA preemption. See Rodriguez v. Blue
Cross of California, 75 Cal. Rptr. 3d 754, 757 n.2 (Cal. Ct. App. 2008) (“On
appeal, Blue Cross no longer invokes the Federal Arbitration Act.”).
13 The Appellate Division recognized the continued import and effectiveness of this line of cases,
see Monarch, 123 A.D.3d at 71-72, as supporting a declination to enforce arbitration provisions
where there has not been compliance with insurance regulations.
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For all the reasons set forth in Point I, supra, to enforce arbitration
provisions in the face of California’s filing and pre-clearance requirement is, by
definition, to invalidate, impair or supersede California’s regulation of the
insurance industry. Under the Smith-Imbler line of cases, even arbitration
provisions that are merely insufficiently disclosed, without any requirement of pre-
clearance by the CDI, cannot survive an FAA pre-emption challenge because they
violate the California regulatory scheme. It follows a fortiori that the California
ban on arbitration must be upheld when the source of the ban is a filing and pre-
clearance requirement under the State’s insurance law and regulations.
C. The Relevant New York Authority
While California law should control, New York courts have ruled
consistently with the California authorities discussed above. Foremost, of course,
is the Appellate Division opinion in this very case, which relied on Humana to
invoke reverse pre-emption where, as here, “enforcing the FAA would, in fact,
impair the California Insurance Code, as it would require the courts to enforce a
provision that had not, contrary to California law, been filed with the WCIRB and
the CDI.” Monarch, 123 A.D.3d at 65. This determination follows well-
established New York law.
In Corcoran v. Ardra Insurance Co., 156 A.D.2d 70 (1st Dep’t), aff’d,
77 N.Y.2d 225 (1990), the Appellate Division affirmed a trial court’s denial of a
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motion brought by reinsurers seeking to dismiss an action by the Superintendent of
Insurance, as liquidator of an insolvent insurance company, based on a broad
arbitration clause in each of the reinsurance contracts. The reinsurers sought to
compel arbitration under the Convention on the Recognition and Enforcement of
Foreign Arbitral Awards, implemented as a chapter of the FAA. The Appellate
Division agreed that arbitration was improper under New York state law, as stated
in Knickerbocker Agency, Inc. v. Holz, 4 N.Y.2d 245 (1958), and accordingly
rejected the reinsurers’ reliance on the FAA, reasoning:
The invocation of the Federal Arbitration Act does not require a
different result. The McCarran-Ferguson Act specifically
provides, in pertinent part: “No Act of Congress shall be
construed to invalidate, impair, or supersede any law enacted by
any State for the purpose of regulating the business of insurance
... unless such Act specifically relates to the business of
insurance.” 15 U.S.C. § 1012(b). Certainly, the liquidation
provisions of the Insurance Law were enacted “for the purpose
of regulating the business of insurance” and thus, in accord with
McCarran–Ferguson, are not invalidated or impaired by the
provisions of the Federal Arbitration Act.
Corcoran, supra, 156 A.D.2d at 73 (citations omitted).
This Court affirmed on the ground that the Superintendent’s claims
fell within the exception to the convention on foreign arbitral awards for matters
that are not arbitrable under state law, observing that “[i]n the United States
statutes provide that insurance is generally a matter of State concern and … the
laws of the individual States govern.” Corcoran v. Ardra Ins. Co., 77 N.Y.2d 225,
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232 (1990) (citing McCarran-Ferguson Act, 15 U.S.C. §§ 1011, 1012[b])
(emphasis added).
III. EVEN WERE THE FAA APPLICABLE HERE, THE
DETERMINATION OF WHETHER THE ARBITRATION
PROVISIONS OF THE PAYMENT AGREEMENTS ARE
ENFORCEABLE WOULD BE FOR THE COURT, AND NOT
THE ARBITRATORS, TO DECIDE
As the Supreme Court has held, “[c]ourts should not assume that the
parties agreed to arbitrate arbitrability unless there is ‘clear and unmistakable’
evidence that they did so.” First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938,
940 (1995) (citations omitted). This Court has expressly agreed, holding that
arbitrators have the power to decide arbitrability only when the arbitration
agreement “clearly and unmistakably so provide[s].” Smith Barney Shearson Inc.
v. Sacharow, 91 N.Y.2d 39, 46 (1997) (quoting AT&T Techs. v. Commc’ns
Workers, 475 U.S. 643, 649 (1986)) (emphasis added by this Court). As National
Union concedes (Appellant’s Brief, at 14, n.3), the Payment Agreements provide,
in their addenda, that “any action or proceeding concerning arbitrability, including
motions to compel or to stay arbitration, may be brought only in a court of
competent jurisdiction in the City, County and State of New York” (emphasis
added). This language unambiguously assigns the Court exclusive jurisdiction
over arbitrability, and appears in each and every “Addendum to Payment
Agreement.” (A-178, 191, 194, 207, 220, 233, 246, 361, 364, 367, 415, 418.)
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Each Respondent entered into multiple Payment Agreements with
National Union (A-175, 189, 205, 218, 231, 244, 358, 378, 412), and with each
new Payment Agreement came a new Addendum confirming the Court’s
jurisdiction over matters of arbitrability. (A-179, 192, 195, 208, 221, 234, 247,
362, 365, 368, 416, 419.) Moreover, regardless of the years in which the Addenda
were entered, they carry retroactive Effective Dates, back to National Union’s first
Policy and Payment Agreement with each of the Respondents. (A-219, 232, 245,
359, 363, 366, 413, 417.) This leaves no doubt that the Addenda govern the entire
length of National Union’s relationship with each of the Respondents.
Under law, the Court decides arbitrability by default, unless National
Union presents “clear and unmistakable” evidence that the Parties agreed to
arbitrate arbitrability:
The question whether the parties have submitted a particular
dispute to arbitration, i.e., the “question of arbitrability,” is “an
issue for judicial determination [u]nless the parties clearly and
unmistakably provide otherwise.”
Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 83 (2002) (emphasis added)
(quoting AT&T Techs., Inc. v. Commc’ns Workers, 475 U.S. 643, 649, 106 S.Ct.
1415 (1986)).
National Union relies on language appearing in the Payment
Agreements for its claim that the Respondents assigned arbitrability to the
arbitrator. Appellant’s Brief, at 43-45. But as demonstrated above, each Payment
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Agreement was concurrently entered with an Addendum that expressly assigned
arbitrability to the Court. These conflicting provisions create an ambiguity that by
definition cannot constitute clear and unmistakable evidence that the parties agreed
to arbitrate arbitrability. Thus, by default, the Court must decide arbitrability.
Furthermore, the Supreme Court has made it abundantly clear that an
attack limited to an agreement to arbitrate, although contained in a broader
contract, is to be decided by a court and not the arbitrators, in the absence of a clear
and unmistakable delegation of this otherwise judicial task to the arbitrators. “If a
party challenges the validity under § 2 [of the FAA] of the precise agreement to
arbitrate at issue, a federal court must consider the challenge before ordering
compliance with that agreement under § 4 [of the FAA].” Rent-A-Center, supra,
561 U.S. at 71. The choice as to what to seek to invalidate is that of the party
seeking relief. If a party wishes to contest whether it is bound at all by the
underlying contract – for example, in an action to void a contract for fraud in the
inducement (Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395
(1967)) or to void a contract as illegal because it is usurious (Buckeye Check
Cashing, Inc. v. Cardegna, 546 U.S. 440 (2006)), then the determination as to
whether the contract as a whole is unenforceable is for the arbitrators. If, on the
other hand, the attack is limited to seeking to excise the arbitration provision from
the substantive terms of the entire agreement, then the determination is judicial, as
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the Supreme Court held in Rent-A-Center. The issue was eloquently stated by a
California Court in a case where both the surrounding contract and the arbitration
clause were procured by fraud:
That the misrepresentation may go to some or even all of the
clauses of the contract as well as the arbitration clause does not
mean that fraud in the making of the agreement for arbitration
is not in issue. Prima Paint does not stand for the proposition
that a fraudulently induced arbitration agreement becomes valid
and enforceable if the fraud also goes to other parts of the
contract. Prima Paint simply interpreted section 4 of the
Federal Arbitration Act as requiring the arbitration provision of
the contract to be treated as a separate agreement for the
purpose of determining whether it is enforceable.
Lynch v. Cruttenden & Co., 22 Cal. Rptr. 2d 636, 641 (Cal. Ct. App. 1993)
(emphasis added).
National Union attempts to distort these same Supreme Court
decisions, such as Rent-A-Center, to support its argument that the question of
arbitrability is for arbitrators, not this Court, to decide. See generally Appellant’s
Brief, at 32-44. The Supreme Court’s holding in Rent-A-Center did not, however,
change the well-established rule that where a party challenges the validity of the
arbitration provision alone under section 2 of the Federal Arbitration Act, and not
the validity of the entire agreement, it is the Court that decides arbitrability.
In Rent-A-Center, the Court discussed the validity of the gateway
provision of arbitrability, i.e., a provision in the agreement that gave the arbitrator
the right to decide the issue of arbitrability in the first instance. While finding such
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a provision proper, the Court found that the District Court had correctly determined
that the respondent challenged the validity of the contract as a whole, noting that
“[n]owhere in his opposition to Rent-A-Center’s motion to compel arbitration did
he even mention the delegation provision.” Rent-A-Center, 561 U.S. at 72. The
Court further noted statements in the respondent’s briefing and at oral argument
taking issues with the validity of “the entire agreement”; asserting that the “entire
arbitration agreement,14 including the delegation clause, was unconscionable”; and
arguing that “the arbitration agreement as a whole is substantively
unconscionable.” Id. at 73. Only in the briefing before the Supreme Court did
Jackson contest the delegation provision specifically, and the Court then declined
to consider it because it was “too late.” Id. at 75.
Similarly, in Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388
U.S. 395 (1967), the Supreme Court affirmed the lower court’s decision that a
claim for fraud in the inducement of the entire contract is one properly determined
by the arbitrators. In Buckeye, the party resisting arbitration asserted that the
agreement in which the arbitration provision was contained was void for illegality,
not just the arbitration provision. See Buckeye Check Cashing, 546 U.S. at 442-43.
Seeking to turn these inapposite Supreme Court decisions to its favor,
National Union blatantly mischaracterizes Respondents’ challenge to its arbitration
14 In Rent-A-Center, the underlying contract was itself an arbitration agreement.
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demand as an attack on validity of the Payment Agreements as a whole, rather than
opposition to the enforcement of the arbitration provisions alone. National Union
even contends that the Appellate Division construed Respondents’ position this
way, too: “[T]he First Department majority acknowledged that Respondents’ sole
ground for avoiding arbitration was that the Payment Agreements as a whole were
not filed with the CDI. See, e.g., slip op. at 21 (A-31).” Appellant’s Brief, at 29-
30 (emphasis added). This is a remarkable assertion, because on page 20 of the
slip opinion—i.e., the immediately preceding page—the First Department majority
wrote: “Monarch argues that McCarran-Ferguson is irrelevant because Monarch is
challenging the arbitration clause directly—that is, Monarch does not argue that
the payment agreement itself is void, but rather, argues that § 11658 directly
applies to the arbitration endorsement itself. Thus, Monarch concludes, the FAA is
of no moment.” See Monarch, 123 A.D.3d at 63. As the First Department further
described:
Monarch argues [] the arbitration clause is unenforceable
whether or not the FAA applies because Monarch's
challenge runs directly against the arbitration
agreement—that is, § 11658 directly applies to the
arbitration agreement itself because that section mandates
the pre-approval of endorsements. Hence, Monarch is
not requesting that we find the arbitration agreement void
by virtue of its appearance in a larger, void contract.
Id. at 64, n.2.
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Likewise, the record is clear that Source Once challenges only the
validity of the arbitration clause (and the forum selection clause) and not the
Payment Agreement as a whole. In its briefing below, Source One was consistent
in its assertion that it challenged only the arbitration provision and not the contract
as a whole. (See, e.g. A-443 (“SOS is challenging the arbitration provision only,
and not the contract as a whole”); RA-207 (“the forum selection clause in the
Payment Agreement, like the arbitration provision, is unenforceable because it was
not filed with the California Department of Insurance”; RA-207 (“the Court . . .
should find . . . that the arbitration provision and forum selection clauses . . . are
void”); RA-207 (“failure to comply with the Insurance Code renders the arbitration
and forum selection clauses void and unenforceable”); RA-211 (“The Payment
Agreement has an arbitration agreement that is unenforceable”). Indeed, in Source
One I, the trial court made the factual finding that “[Source One] does not
challenge the validity of the Payment Agreement, generally . . . .” (A-130.)
Similarly, Priority also challenged below only the validity of the
arbitration provision, and not the entire Payment Agreement. In its briefing to the
trial court, Priority argued that because National Union failed to obtain approval
for the Payment Agreements, “the arbitration provision in the PAs is unenforceable
under California law.” (RA-292; see also RA-298-301.) Priority requested that
the trial court “should find that the arbitration clauses which National Union seeks
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to enforce here are void and dismiss National Union’s Petition on that basis.”
(RA-316.) Priority relied on the analysis of the courts in the Source One and
Ceradyne cases, which found the arbitration clauses unenforceable. (RA-320 (“the
arbitration clauses in the PAs are unenforceable because they were not approved
by the WCIRB”); RA-321 (“Since National Union has admitted its failure to
submit the PAs to the WCIRB, the PAs’ arbitration provisions are unenforceable
here and National Union’s Petition must be dismissed.”).)
In short, contrary to National Union’s misrepresentation of the record,
the Respondents’ challenge herein lies solely against the enforceability of the
arbitration provisions of the Payment Agreements, and that is the narrow issue
before this Court. Whether the other provisions of the Payment Agreements would
also stand or fall is simply irrelevant to that issue.
IV. ALTERNATIVELY, CALIFORNIA’S STRONG PUBLIC
POLICY ESTABLISHING THE CDI AS THE GATEWAY
AGENCY FOR ANY USE OF ARBITRATION IN WORKERS’
COMPENSATION POLICIES IS PRESERVED UNDER THE
SAVINGS CLAUSE OF SECTION 2 OF THE FAA
Recent decisions from California courts indicate that restrictions on
arbitration, where the dispute is between the government and private parties, are
not displaced by a contractual agreement to arbitrate private disputes. In Iskanian
v. CLS Transportation Los Angeles, LLC, 327 P.3d 129 (Cal. 2014), cert. denied by
135 S. Ct. 1155 (2015), the California Supreme Court addressed the question of
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whether waivers of the right to prosecute Private Attorney General Act (PAGA)
claims are enforceable under state law, and if they are not, whether the FAA
preempts the state-law prohibition of enforcement of such waivers. Iskanian, 327
P.3d at 145. The California Supreme Court acknowledged that such a rule could
be preempted if it stood in the way of the FAA's objectives, but reasoned that the
FAA was aimed only at ensuring the efficient resolution of private disputes, while
PAGA actions involved disputes between an employer and the state Labor and
Workforce Development Agency. Id. at 149. The Court noted that in all but one
case, the U.S. Supreme Court's cases interpreting the FAA involved disputes only
involving the parties' own rights and obligations, rather than those of a public
enforcement agency. See id. at 150-51. In view of the nature of a PAGA claim,
the court held: “[W]here, as here, an employment agreement compels the waiver of
representative claims under the PAGA, it is contrary to public policy and
unenforceable as a matter of state law.” Id. at 149; see also Securitas Sec. Servs.
USA, Inc. v. Superior Court of San Diego Cnty., 234 Cal. App. 4th 1109, 1119
(Cal. Ct. App. 2015).
The California court further explained that, because the rights asserted
in an action under the PAGA are those of the State rather than the plaintiff-
employee, the right to prosecute such an action cannot be waived by private
agreement. Such an agreement would violate two important provisions of law,
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which are themselves derived from public policy. California Civil Code Section
1668 forbids enforcement of any contract that has as its direct or indirect object the
exemption of parties from their violations of law. Iskanian, 327 P.3d at 148; In re
Marriage of Fell, 64 Cal. Rptr. 2d 522, 526 (Cal. Ct. App. 1997). California Civil
Code Section 3513 provides that “a law established for a public reason cannot be
contravened by a private agreement.” Iskanian, 327 P.3d at 149. PAGA is “a law
established for a public reason,” i.e., for the benefit of all employees. See Cal. Civ.
Code § 3513; Iskanian, 327 P.3d at 149. For that reason, it is contrary to policy
and the law of the state for an employment agreement to contain a pre-dispute
waiver of the right to bring a PAGA action, and such a waiver that requires
arbitration is unenforceable. Iskanian, 327 P.3d at 149.
Further, Iskanian observed that the rule against PAGA waivers did not
frustrate the FAA's objectives because “[t]here is no indication that the FAA was
intended to govern disputes between the government in its law enforcement
capacity and private individuals.” Id. at 150; Securitas, supra, 234 Cal. App. 4th at
1120. Iskanian and its reasoning has been upheld and followed at least a dozen
times by the California Courts of Appeal, including: Securitas, supra; Franco v.
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Arakelian Enters., Inc., 234 Cal. App. 4th 947 (Cal. Ct. App. 2015); and Montano
v. Wet Seal Retail, Inc., 182 Cal. Rptr. 3d 220 (Cal. Ct. App. 2015).15
Here, as already expressed supra, it is against the public policy of
California for a workers’ compensation policy or endorsement to be issued to any
employer unless filed for approval, attached to the policy, and not disallowed. The
statutes and regulations violated by National Union exist for the protection of the
working public – the state’s employees – just like PAGA. Thus, National Union’s
decision not to file its endorsements violates a law established for a public reason.
Under Iskanian, National Union cannot, by issuing its private agreement in
violation of Cal. Ins. Code § 11658 (and its accompanying regulations),
unilaterally waive the statutory pre-approval mandate or its public benefits.
National Union’s present attempt to enforce its unfiled and unapproved arbitration
endorsement must, therefore, be denied. The endorsement is unenforceable on a
“public protection” basis that is not preempted by the FAA because, as Iskanian
15 While a number of federal district courts had predicted a different result upon federal appellate
review (e.g., Ortiz v. Hobby Lobby Stores, Inc., No. 2:13-CV-01619, 2014 U.S. Dist. LEXIS
140552, at *25 (E.D. Cal. Oct. 1, 2014)), not only did the California Supreme Court affirm its
position in Iskanian after most of those federal opinions were published, but as noted above, the
California Courts of Appeal have uniformly endorsed Iskanian despite those federal district court
predictions. This Court should follow the California appellate judiciary and not speculate
whether federal appellate jurists will rule that deference to the States – a hallmark of recent
United States Supreme Court actions in many areas – survives an FAA challenge, particularly
where (as here) McCarran–Ferguson explicitly requires it. And while it is settled law that denial
of certiorari by the United States Supreme Court has no precedential effect, surely the fact that
the Supreme Court declined to review Iskanian indicates that it is not reaching out to massage
the contours of Concepcion, as was otherwise prognosticated by the federal district courts.
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found, the FAA is directed to disputes that affect strictly private parties, and not
the public.
CONCLUSION
It is undisputed that National Union failed to file its Payment
Agreements containing arbitration provisions in direct violation of the California
Filing Statute. The CDI, tasked with enforcing the California Insurance Code and
the accompanying regulations, has made clear that unfiled arbitration provisions
are unenforceable where the insured did not expressly agree to arbitrate at the time
the policy was issued. It is undisputed that such consent was not given by the
Respondents here. The Appellate Division was correct to afford weight and
deference to the CDI and the California courts that have interpreted the California
Filing Statute. Furthermore, the Appellate Division correctly held that the
McCarran-Ferguson Act reverse pre-empts the Federal Arbitration Act, and to hold
otherwise would contravene the clear intent of Congress to preserve for the States
the right to regulate the business of insurance. Finally, the issue of arbitrability is
one that is correctly determined by the courts, and not the arbitrator, because the
arbitration provisions here explicitly provide for such judicial determination. The
decision of the Appellate Decision denying National Union’s petitions to compel
arbitration should be affirmed.
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Dated: New York, New York
April 2, 2015
Respectfully submitted,
ANDERSON KILL P.C.
/s/Jeffrey E. Glen
Jeffrey E. Glen
Edward J. Stein
Rene F. Hertzog
1251 Avenue of the Americas
New York, New York 10020
Telephone: (212) 278-1000
Facsimile: (212) 278-1733
ROXBOROUGH, POMERANCE, NYE
& ADREANI, LLP
Nicholas Roxborough
(admitted pro hac vice)
5820 Canoga Avenue, Suite 250
Woodland Hills, California 91367
Telephone: (818) 992-9999
Facsimile: (818) 992-9991
Attorneys for Respondent
Priority Business Services, Inc., f/k/a
Inland Valley Staffing Services, f/k/a
Maintenance Match, Inc., d/b/a Priority
Staffing
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BOND, SCHOENECK & KING PLLC
/s/Clifford G. Tsan
Clifford G. Tsan
Suzanne M. Messer
One Lincoln Center
110 West Fayette Street
Syracuse, New York 13202
Telephone: (315) 218-8000
Facsimile: (315) 218-8100
Attorneys for Respondents
Monarch Consulting, Inc., Elite
Management, Inc., Brentwood Television
Funnies, Inc., Professional Employer
Options, Inc., Recurrent Software
Solutions, Ahill, Inc., The Accounting
Group, LLC and PES Payroll, IA, Inc.
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PILLSBURY WINTHROP SHAW
PITTMAN LLP
/s/Alexander D. Hardiman
Alexander D. Hardiman
1540 Broadway
New York, New York 10036
Telephone: (212) 858-1000
Facsimile: (212) 858-1500
Attorneys for Respondent
Source One Staffing, LLC