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Ruling upholds Federal Arbitration Agreement’s primacy over state law
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Workers’ compensation payment agreements should be submitted to arbitration, despite disagreement between state and federal law, according to the New York Court of Appeals.
The court reversed an earlier decision by the state’s appellate division and ruled in favor of New York City-based insurance firm American International Group, the parent company of National Union Fire Insurance Co., in a case that pitted the California Insurance Code against the Federal Arbitration Act (FAA). The unanimous decision was issued Feb. 18.
Monarch Consulting Inc. v. National Union Fire Insurance Co. of Pittsburgh, Pa., et. al., No. 2016 NY Slip Op 01209, involved a group of California-based employers and the insurer’s arbitration clauses contained in payment agreements associated with its workers’ compensation policies. At issue was whether the FAA, which protects the right to arbitration, supersedes the California Insurance Code.
In some circumstances, Judge Leslie E. Stein wrote, the federal McCarran-Ferguson Act exempts state laws from FAA pre-emption. But in this case, “we hold that the FAA applies to the payment agreements because it does not ‘invalidate, impair, or supersede’ the California Insurance Code or any insurance regulations and, consequently, the McCarran-Ferguson Act is not triggered.” In addition, “because the parties clearly and unmistakably delegated the question of arbitrability and enforceability of the arbitration clauses to the arbitrators—in provisions that were not specifically challenged by the insureds—the FAA mandates that the arbitration provisions be enforced as written.”
The decision will affect the business community, given its support for the primacy of the FAA on the enforceability of arbitration agreements, said Peter Keisler, a partner with Sidley Austin in Washington, D.C., and co-leader of Sidley’s Supreme Court and Appellate practice. The ruling underscores the strong national policy in favor of arbitration, he noted.
Wider Implications for Arbitration
“We believe that the decision will have a very significant precedential effect beyond California, as many states have filing requirements that are similar to California's,” said Sidley partner Nicholas Crowell, in an e-mail interview with SHRM Online. “This holding should apply equally to those states. Unless a state has prohibited arbitration of insurance disputes, then courts will enforce arbitration agreements, including for threshold issues like arbitrability itself.”
The ruling also has implications beyond insurance and workers’ comp agreements. “The impact of the ruling is that parties can expect to get exactly what they bargained for when they agree to arbitrate their disputes,” Crowell added. “In particular, the court held that, where parties have expressly agreed that arbitrators have the authority to decide threshold issues of arbitrability (including whether the arbitration agreement itself is enforceable and whether the particular dispute is subject to arbitration), courts should not decide these issues and, rather, should defer to the arbitrators.”
Last December, the U.S. Supreme Court ruled that dissatisfied customers of DirecTV in California could not band together in a class action and must instead pursue individual arbitrations, as agreed to in their contracts with DirecTV—despite a California law that bans class-action waivers. That decision, DirecTV Inc. v. Imburgia, is expected to encourage more employers to use arbitration agreements with class-action waivers in employment contracts.
Linking the appellate decision in this case, Monarch Consulting, with the Supreme Court’s ruling in DirecTV, Crowell said, “The [Monarch Consulting] case confirms the primacy of federal law and the policy in favor of arbitration, and is in accord with a long line of U.S. Supreme Court precedent where the court has upheld arbitration agreements when faced with parties who are hostile to arbitration.”
Stephen Miller, CEBS, is an online editor/manager for SHRM. Follow me on Twitter.
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