We previously reported on this case in our blog dated December 21, 2015. The background of the dispute is as follows. A dispute arose between an insurer and its insured under four written program agreements, each containing an arbitration clause. The insurer filed a single demand for arbitration with the American Arbitration Association (the “AAA”), alleging that the insureds failed to pay amounts due under the four program agreements. The insureds raised various objections to the arbitration demand, including that they were entitled to four separate arbitrations. The AAA ruled that the arbitration would continue as one arbitration, and the insureds appointed the sole arbitrator. Shortly thereafter, the insureds filed an action in Texas state court, seeking a Temporary Restraining Order (“TRO”) to stay the arbitration because it had been improperly consolidated. The Texas court granted the TRO, stating that the AAA had failed to follow the arbitration agreements by administering one proceeding, not four, and enjoined the AAA from administering the arbitration. The AAA removed the Texas action to federal court, and filed a motion to dismiss, to which the insureds did not file a response. After the TRO expired, the AAA attempted to resume administration of the arbitration, but the insureds would not participate in the arbitration and informed the AAA that their counsel could not communicate with the AAA given the pending Texas action. Thus, the insurer filed an action in Illinois federal court, where the arbitration was pending, seeking to compel arbitration, which was granted in November 2015. The parties then returned to arbitration.
In the arbitration, predicting future legal resistance from the insured, the insurer petitioned the arbitrators for the insured to post pre-hearing security. The arbitrators granted the petition, and ordered the insured to post about $4.6 million in security. The insured did not post such security, and the insurer thus sought to confirm the panel’s pre-hearing award for security in the Illinois federal court. In response, the insured argued that the award should be vacated because the arbitrators exceeded their authority under Section 10(a)(4) of the Federal Arbitration Act (the “FAA”).
The Illinois federal court first found that an interim pre-hearing security award is an “award” under the FAA. Thus, the court noted that, under the FAA, it must confirm the award unless a statutory exception applies, one of which is Section 10(a)(4)of the FAA. The court also noted that a party seeking relief under Section 10(a)(4) bears a heavy burden and that strong deference is given to arbitrators’ decisions. Then, focusing on the parties’ program agreements, the court held that there is support for the pre-hearing security award in the agreements and arbitration clause. Although the agreements did not mention prehearing security as a remedy available to the parties, the court noted that it does not mean such remedy is not available. In this regard, citing other precedents, the court noted that “[i]f an enumeration of remedies were necessary, in many cases the arbitrator[s] would be powerless to impose any remedy, and that would not be correct. Since the arbitrator[s] derive all [their] powers from the agreement, the agreement must implicitly grant [the arbitrators] remedial powers when there is no explicit grant.” The court then stated that the arbitration clause at issue provided that the arbitration was to be conducted under the AAA Rules, which allow for interim awards of security. Thus, the court held that, by adopting the AAA Rules into their agreements, the parties implicitly included the arbitrators’ authority to grant an award like the interim security award at issue. Finding the insured’s arguments to vacate unpersuasive, the court then granted the insurer’s motion to confirm the pre-hearing security award.
Zurich American Insurance Company, et al. v. Trendsetter HR, LLC, et al., No. 1:15-cv-08696 (USDC N.D. Ill. Aug. 24, 2016).