Allstate Insurance Company v OneBeacon American Insurance Company et al

Filing 25

Judge Nathaniel M. Gorton: ORDER entered. MEMORANDUM AND ORDER: "In accordance with the foregoing, 1) petitioner Allstate's Motion for Temporary Restraining Order and Preliminary Injunction (Docket No. 12 ) is DENIED; 2) petitioner Allsta te's Motion and Application to Enjoin Arbitration, Remove Umpire and Compel Arbitration (Docket No. 1 ) is DENIED; and 3) respondent OneBeacon's Cross-motion to Compel Arbitration (Docket No. 17 ) is DENIED as moot. So ordered."(Moore, Kellyann)

United States District Court
District of Massachusetts

ALLSTATE INSURANCE COMPANY,
Petitioner,
v.
ONEBEACON AMERICAN INSURANCE
COMPANY,
Respondent.

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Civil Action No.
13-12368-NMG

MEMORANDUM & ORDER
GORTON, J.
Petitioner Allstate Insurance Company (“Allstate”) is
engaged in ongoing arbitration with respondent OneBeacon
American Insurance Company (“OneBeacon”) concerning a series of
reinsurance contract disputes.

Allstate seeks to enjoin the

arbitration proceedings based on OneBeacon’s alleged violation
of the arbitration agreement’s Umpire Selection Protocol.
Pending before the Court are 1) Allstate’s initial motion
to enjoin arbitration permanently, 2) Allstate’s subsequent
motion for temporary restraining order and preliminary
injunction and 3) OneBeacon’s cross-motion to compel
arbitration.

Because Allstate cannot demonstrate that it is

likely to succeed on the merits of its claim or that it will
suffer irreparable harm in the absence of an injunction, the
Court will deny Allstate’s motions for injunctive relief.
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I.

Background
This case arises from a series of reinsurance contracts

between Allstate and OneBeacon, all of which contain a provision
requiring the parties to submit any dispute to arbitration.

The

substance of the reinsurance contracts is not at issue in this
case.

In April, 2012, OneBeacon demanded arbitration of its

dispute with Allstate under two separate reinsurance contracts.
After the parties were unable to reach a settlement OneBeacon
issued a supplemental arbitration demand in June, 2013.

In the

supplemental demand, OneBeacon proposed proceeding with
arbitration and umpire selection in accordance with the
previously agreed upon protocol (“the Protocol”).
The arbitration agreements under both contracts are
substantially the same and require arbitration to be conducted
before a Board of Arbitration composed of two party-appointed
arbitrators and one umpire.

To select the umpire according to

the Protocol, both party-appointed arbitrators name three
qualified individuals after which each arbitrator strikes two
names chosen by his or her counterpart.

The umpire is then

chosen by lot from the two remaining names.

The Protocol also

provides that
There shall be no ex parte communications with any
umpire candidate.
To maintain impartiality, each
umpire
candidate
shall
complete
an
umpire
Questionnaire based on the ARIAS US form (subject to
reasonable modifications by the parties). The parties
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shall jointly provide the Umpire Questionnaire to each
umpire candidate.
The Protocol also requires that the Umpire
shall be [a] disinterested current or former officer[]
of insurance or reinsurance companies authorized to
transact business in the United States.
In July, 2013, the parties selected arbitrators and Charles
Ehrlich (“Ehrlich”) was designated as umpire.

Ehrlich was

notified on July 15, 2013, of his appointment.
Erhlich subsequently solicited papers from the parties
which they provided on August 7, 2013. OneBeacon’s Statement of
Position included an addendum comprised of OneBeacon’s prior
supplemental arbitration demand which contained information
sufficient for the arbitrators to determine the method by which
the umpire was to be selected and that OneBeacon had proposed
Ehrlich as umpire.
On August 22, 2013, Allstate wrote to Ehrlich advising him
of the erroneous submission and demanding his withdrawal because
knowledge of his selection would “fundamentally corrupt[] the
integrity of the process.”

On August 26, 2013, Ehrlich

responded to and denied Allstate’s request, although he
“acknowledge[d] that it is general practice that the Umpire is
not made aware of who proposed him/her for the position.”
On September 5, 2013, Allstate filed an Application and
Motion to Enjoin Arbitration, Remove Umpire and Compel

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Arbitration in this Court.

The next day, Allstate argued to the

designated arbitration panel that the arbitration should be
stayed until the Court’s ruling.

The panel instead declared

that it had been “duly constituted” and could proceed. That same
day, Allstate submitted a Statement of Position with the panel,
after which an organizational meeting was held one week later.
On September 17, 2013, Allstate filed in this Court an
Emergency Motion for Temporary Restraining Order and Preliminary
Injunction based on its previously filed motion to enjoin
arbitration.

On September 19, 2013 OneBeacon responded to

Allstate’s initial motion for an injunction and filed its own
Cross-Petition to Compel Arbitration. A preliminary injunction
hearing was held on September 26, 2013, after which the Court
took the matter under advisement.
II.

Allstate’s Motion for a Preliminary Injunction
A.

Legal Standard

Under the familiar standard, a movant seeking a preliminary
injunction must demonstrate that he
is likely to succeed on the merits, that he is likely
to
suffer
irreparable
harm
in
the
absence
of
preliminary relief, that the balance of equities tips
in his favor, and that an injunction is in the public
interest.
Voice of the Arab World, Inc. v. MDTV Med. News Now, Inc., 645
F.3d 26, 32 (1st Cir. 2011) (citing Winter v. Natural Res. Def.
Council, Inc., 555 U.S. 7, 20 (2008)).
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Even under this

standard, “[a] preliminary injunction is an extraordinary and
drastic remedy” that “is never awarded as of right.” Voice of
the Arab World, 645 F.3d at 32 (quoting Munaf v. Green, 553 U.S.
674, 689-90 (2008)).

Although injunctions must be rooted in an

irremediable harm, a plaintiff’s likelihood of success on the
merits is the test’s “main bearing wall.” Ross-Simons of
Warwick, Inc. v. Baccarat, Inc., 102 F.3d 12, 16 (1st Cir.
1996).
B.

Legal Analysis
(1)

Likelihood of Success on the Merits
a.

Preliminary Injunction Standard

The first factor to consider in granting a preliminary
injunction is whether the movant is likely to succeed on the
merits. Voice of the Arab World, 645 F.3d at 32.

Although it is

only the first of four factors, the likelihood of success on the
merits inquiry is the test’s “sine qua non.” Weaver v.
Henderson, 984 F.2d 11, 12 (1st Cir. 1993).
b.

Challenging Arbitration Proceedings

The Federal Arbitration Act (“FAA”) clearly states that any
agreement on the “method of naming or appointing an arbitrator
... shall be followed.” 9 U.S.C. § 5.

The FAA also authorizes

courts to issue orders mandating that “arbitration proceed in
the manner provided for in [an] agreement.” 9 U.S.C. § 4.

These

provisions speak to the manner in which the arbitration proceeds
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in relation to the underlying agreement to arbitrate.

If that

agreement is violated, a court can order arbitration under § 4
of the FAA according to the agreement’s terms.

See Volt Info.

Sci., Inc. v. Bd. of Trs. of Leland Stanford Junior Univ., 489
U.S. 468, 479 (1989).
The FAA also allows for an arbitration decision to be
challenged under § 10 “where there was evident partiality or
corruption in the arbitrators.” 9 U.S.C. § 10(a)(2).

Before a

final arbitration award is issued, however, courts may not
examine “an arbitrator’s capacity to serve based on a challenge
that a given arbitrator is biased.” Nat’l Cas. Co. v. OneBeacon
Am. Ins. Co., No. 12-11874, 2013 WL 3335022, at *11 (D. Mass.
July 1, 2013)(citing Gulf Guar. Life Ins. Co. v. Conn. Gen. Life
Ins. Co., 304 F.3d 476, 489-490 (5th Cir. 2002)).

Indeed, it is

well-settled in the law of arbitration that
[t]he time to challenge an arbitration, on whatever
grounds, including bias, is when the arbitration is
completed and an award rendered.
Smith v. Am. Arbitration Ass’n, Inc., 233 F.3d 502, 506 (7th
Cir. 2000).
Courts have found several narrow exceptions to this general
rule, allowing pre-award challenges concerning the contractually
required qualifications of arbitrators and imposing injunctions
where an arbitration was “futile” because the underlying dispute
was “non-arbitrable.” See Jefferson-Pilot Life Ins. Co. v.
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LeafRe Reinsurance Co., No. 00-c-5257, 2000 WL 1724661, at *2
(N.D. Ill. Nov. 20, 2000); McLaughlin Gormley King Co. v.
Terminix Int’l Co., L.P., 105 F.3d 1192, 1194 (8th Cir. 1997);
see also Societe Generale de Surveillance, S.A. v. Ratheon Euro.
Mgmt. & Sys. Co., 643 F.2d 863, 868 (1st Cir. 1981).
c.

The Parties’ Arguments

Allstate contends that OneBeacon’s inadvertent disclosure
to Ehrlich that OneBeacon had nominated him to serve on the
arbitral panel was “contrary to both the Protocol and to the
reinsurance industry’s custom and practice.”

Although Allstate

points to no specific provision that OneBeacon violated,
Allstate notes that “[t]he arbitration clause calls for a
‘disinterested’ umpire” and that the Protocol “prohibited ex
parte communications with the umpire candidates.”

Furthermore,

Allstate asserts that “it is customary for the parties to
refrain from improper communications with panel members” as
indicated by standards of conduct from the Reinsurance and
Insurance Arbitration Society of the Association Internationale
de Droit des Assurances (“ARIA-US”).

Those standards recommend

that “the individuals named [as umpire] not be advised of which
Party initiated their selection.”
OneBeacon responds initially that Allstate has failed to
cite any provision of the agreement that OneBeacon has in fact
violated.

Although Allstate repeatedly invokes the Protocol’s
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prohibition against ex parte contacts, OneBeacon emphasizes that
Allstate “does not argue that OneBeacon violated [that]
agreement.”

Moreover, OneBeacon rejects Allstate’s claims that

the custom and practice of the ARIAS-US guidelines have any
legal effect because they were not incorporated in the parties’
agreement.

Finally, OneBeacon maintains that, even assuming

arguendo that OneBeacon did violate the arbitration agreement or
Umpire Selection Protocol, pre-award challenges to arbitrations
are not permitted for claims that an arbitrator is biased.
d.

Application

Allstate’s assertion that OneBeacon breached the agreement
is unconvincing.

As OneBeacon has emphasized repeatedly,

Allstate can point to no specific contractual provision that
OneBeacon violated.

Allstate’s arguments that the express

prohibition against ex parte contacts, in effect, precluded
advising Ehrlich of the manner of his selection contradicts the
plain wording of the agreement.

Allstate’s attempt to add

provisions to the agreement by implication based on custom and
practice is also unpersuasive.

The ARIAS-US guidelines were not

incorporated into the agreement and cannot serve as the basis
for a breach of contract claim. See Smith, 233 F.3d at 505-06
(excluding arbitration guidelines from agreement because
guidelines had not been incorporated).

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In addition, Allstate’s attempt to distinguish its
contentions here from a straightforward, but impermissible,
request to remove an arbitrator for bias prior to a final award
is unavailing.

Allstate seeks an injunction and order removing

the Umpire to “maintain the impartiality and neutrality of the
umpire selection process,” which, despite Allstate’s protests,
is in all respects a challenge to the impartiality and
neutrality of the arbitrator.

Pre-award challenges on the basis

of bias, as Allstate itself admits, are not permitted. See Nat’l
Cas. Co., 2013 WL 3335022, at *11.
At oral argument, Allstate cited in support of its
contention an additional case for the Court’s consideration.
That case, Astoria Medical Group v. Health Insurance Plan of
Greater New York, 182 N.E.2d 85 (N.Y. 1962), does not, however,
make Allstate’s case but rather stands for the simple
proposition that “party-designated arbitrators are not and
cannot be neutral.” Id. at 87.

Indeed, the New York Court of

Appeals expressly held that while it possesses the authority “in
an appropriate case” to disqualify an arbitrator prior to a
final award, “the present is not such a case.” Id. at 86-87.
The opinion confirms rather than refutes the contention that
Allstate’s subject challenge is, in fact, addressed to the
arbitrator’s bias. Accordingly, this latest citation does not
resuscitate Allstate’s case.
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Allstate cannot credibly make the case that OneBeacon
violated any part of the arbitration agreement, nor can Allstate
reasonably contend that its claim is anything but a dressed-up
bias claim against an allegedly impartial arbitrator.
Therefore, Allstate cannot demonstrate that it is likely to
succeed on the merits of its underlying claim.
(2)

Irreparable Harm
a.

Preliminary Injunction Standard

The second factor to evaluate in considering a preliminary
injunction is whether the plaintiff will “suffer irreparable
harm in the absence of preliminary relief.” Voice of the Arab
World, 645 F.3d at 32 (citation omitted).

No “mechanical test”

exists to calculate “the quantum of hard-to-measure harm that
will suffice to justify interim injunctive relief.” Ross-Simons
of Warwick, 102 F.2d at 19.

It normally suffices, however, if

the movant demonstrates that legal remedies are inadequate and
it faces “a substantial injury that is not accurately
measureable or adequately compensable by money damages.” Id. at
18-19 (citation omitted).

Examples of irreparable injuries

include loss of incalculable revenue and harm to goodwill or
reputation. Id. at 19-20.

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b.

The Parties’ Arguments

Allstate contends that it will suffer “irreparable harm to
the arbitral process” if the arbitration continues with the
current Umpire.

In the absence of an injunction, Allstate

will be forced to participate in an arbitration that
was fatally flawed virtually from the outset and will
need to be recommenced from scratch upon the removal
of the umpire.
Allstate therefore asks this Court to decide “whether the umpire
should be removed before the arbitration proceedings begin in
earnest.”

OneBeacon counters that Allstate will not be

irreparably harmed by continuing with the arbitration because it
would merely subject Allstate to the same requirements “as all
other parties to arbitration.”

OneBeacon emphasizes that the

basic premise of arbitration is that a party can challenge an
arbitrator only after the arbitration proceeding is concluded.
c.

Application

Allstate does not proffer an argument of sufficient
irreparable harm to warrant an injunction.

Although it claims

that no adequate legal remedy could compensate for being forced
to participate in a “fundamentally unfair arbitration before a
panel that sits in breach of the parties’ agreements,” such a
legal remedy clearly exists in the form of a post-award
challenge to the arbitration proceeding itself. See Smith, 233
F.3d at 506 (“To allow a party to bring an independent suit to

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enjoin the arbitration is inconsistent with fundamental
procedural principles that apply with even greater force to
arbitration than to conventional litigation.”).
Allstate’s attempt to muster support from case law is
unavailing.

It cites a recent case from the District of Kansas

wherein a court supposedly found “the cost of defending the
arbitration and having the court set aside any favorable award”
amounted to an “irreparable injury.” See FedEx Ground Package
Sys. Inc. v. Vic Jackson Trans., Inc., No. 12-2228, 2012 WL
2953218 (D. Kan. July 19, 2012).

Allstate’s citation, however,

misplaces the authority and mischaracterizes its holding.

The

quoted language actually emanated from McLaughlin Gormley King
Co. v. Terminix Int’l Co., L.P., 105 F.3d 1192 (8th Cir. 1997).
In McLaughlin, the Eighth Circuit affirmed the district court’s
finding of irreparable injury after continuing with a “futile
arbitration” of an underlying dispute that itself was “nonarbitrable.” Id. at 1194.

Allstate’s other citations are

equally inapt and unpersuasive because the courts in those cases
found invalid or nonexistent arbitration agreements. See, e.g.,
Vic Jackson Trans., 2012 WL 2953218 at *2 (citing cases where
“no valid arbitration agreement exists”).

Therefore, Allstate

has not demonstrated that it will suffer irreparable harm if it
is forced to arbitrate according to its agreement with
OneBeacon.
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(3)

Balance of Equities and Public Interest

The third and fourth factors to be considered with respect
to a motion for a preliminary injunction are the balance of the
relevant equities and the public interest. See Voice of the Arab
World, Inc., 645 F.3d at 32.

The Court need not dwell on these

prongs, however, because both inquiries are straightforward.
Allstate’s purported hardship is a lack of neutrality throughout
the arbitral process, a harm that would not tilt the balance of
equities in Allstate’s favor. Furthermore, the issuance of an
injunction in this case, a technical skirmish over arbitration
procedure between two reinsurance companies, does not rank high
in terms of the public interest.

Therefore, Allstate cannot

meet its required burden with respect to either factor.
(4)

Conclusion

Allstate has proven none of the required elements for a
preliminary injunction, let alone all of them.

It is unlikely

to succeed on the merits of its claim that OneBeacon violated
the agreement or Protocol nor show that it will suffer any harm
that cannot be remedied through a post-award challenge.

The

balance of the subject equities and the public interest are not
at issue.

Therefore, this Court will deny Allstate’s motion for

preliminary injunction.
Although the foregoing analysis addresses the four-factor
test applicable to a preliminary injunction, it applies equally
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to Allstate’s preceeding motion for a permanent injunction. See
Voice of the Arab World, 645 F.3d at 34 (“The standard for a
preliminary injunction is essentially the same as for a
permanent injunction....”) (citing Amoco Prod. Co. v. Gambell,
480 U.S. 531, 546 n. 12 (1987)). Accordingly, this Court will
also deny Allstate’s motion for a permanent injunction.

ORDER
In accordance with the foregoing,
1) petitioner Allstate’s Motion for Temporary Restraining
Order and Preliminary Injunction (Docket No. 12) is DENIED;
2) petitioner Allstate’s Motion and Application to Enjoin
Arbitration, Remove Umpire and Compel Arbitration (Docket
No. 1) is DENIED; and
3) respondent OneBeacon’s Cross-motion to Compel Arbitration
(Docket No. 17) is DENIED as moot.

So ordered.
/s/ Nathaniel M. Gorton_________
Nathaniel M. Gorton
United States District Judge
Dated October 8, 2013

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