INSURANCE LAW - NINTH CIRCUIT INTERPRETATION OF FOREIGN ARBITRATION TREATY AND FEDERAL LAW, PREVENTS STATE INSURANCE LAW FROM REVERSE-PREEMPTING TREATY - CLMS MGMT. SERVS. LTD. P'SHIP V. AMWINS BROKERAGE OF GA., 8 F.4TH 1007 (9TH CIR. 2021).

• Author: Roberts, Marguerite

The Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the Convention) is a multilateral treaty that ensures the recognition and enforcement of foreign arbitration agreements and awards. (1) The McCarran-Ferguson

Act gives states the authority to regulate the insurance industry without interference from federal regulation unless federal law specifically provides otherwise. (2) As a treaty of the United States, the Convention is "the supreme Law of the Land," but it is not always obvious whether treaty provisions are self-executing and thus automatically have the effect of being binding federal law in U.S. courts. (3) In CLMS Mgmt. Servs. Ltd. P'ship v. Amwins Brokerage of Ga., (4) the Ninth Circuit Court of Appeals examined the nexus of the Convention and the McCarran-Ferguson Act to determine whether the McCarran-Ferguson Act permitted a state anti-insurance arbitration statute to supersede the Convention, rendering the parties' private arbitration agreement unenforceable. (5) The Court held enforcement of the arbitration agreement was necessitated because Article II, Section 3 of the Convention is a self-executing treaty provision and not an "Act of Congress" within the meaning of the McCarran-Ferguson Act that is subject to reverse-preemption by state insurance law. (6)

In 2016, CLMS Management Services Limited Partnership (CLMS) and Roundhill I, LP (Roundhill) entered into an insurance contract (the policy) with Amrisc, LLC (Amrisc) that provided coverage for a residential townhome complex in Texas. (7)

The policy was underwritten by underwriters, Certain Underwriters at Lloyd's London (Lloyd's), and contained an arbitration provision agreement that required all disputes be resolved by an arbitration tribunal in New York. (8) In August 2017, Hurricane Harvey devastated Texas and caused an estimated $5,660,000 in damages to the insured townhome complex. (9)

CLMS and Roundhill submitted a claim under the policy, and a third-party claims administrator for Lloyd's, CJW & Associates (CJW), disputed the policy's deductible amount. (10)

CLMS and Roundhill (Plaintiffs) filed suit in the Western District of Washington, asserting the deductible should be $600,000 and not $3,600,000. (11) Lloyd's and CJW (Defendants) moved to compel arbitration in the district court. (12) The district court granted the Defendants' motion to compel arbitration, and the Plaintiffs appealed the decision. (13) The Ninth Circuit Court of Appeals held that the district court properly granted the Defendants' motion to compel arbitration because Article II, Section 3 of the Convention is self-executing and thus required enforcement of the arbitration agreement. (14) Further, the court held that the Convention is not considered an "Act of Congress" subject to reverse-preemption by the McCarran-Ferguson Act. (15)

In enacting the Federal Arbitration Act (FAA), Congress created a federal policy in favor of enforcing private arbitration agreements. (16) The FAA, however, did not ensure that U.S. courts would enforce foreign arbitration agreements or awards. (17) The shortfalls of the FAA became problematic as business transcended borders and the desire for reciprocal enforcement of foreign arbitration agreements and awards was sought among parties contracting with foreign entities. (18) As a result, the United States acceded to the Convention, a multilateral treaty that requires signatories to recognize and enforce foreign arbitration agreements and awards. (19) Congress enacted Chapter 2 of the FAA (the Convention Act) to codify the Convention's provisions. (20) The U.S. Supreme Court has since acknowledged a policy in favor of enforcing international arbitration agreements because of the predictability and comity that results from giving deference to them. (21)

When the United States accedes to a treaty, it signifies commitment to an international agreement, but it is not determinative as to how U.S. courts will treat its obligations. (22) It is often perplexing for courts to determine whether a treaty provision is self-executing, and has an automatic binding effect in U.S. courts, or non-self-executing, and depends on Congress to enact implementing legislation to ensure its enforcement in U.S. courts. (23) The U.S. Supreme Court's decision in Medellin v. Texas guides courts to interpret treaties by examining its text, negotiation and drafting history, and the practice among signatory nations regarding its enforcement. (24)

Ordinarily, a treaty and its related federal law would preempt conflicting state law under the Supremacy Clause of the U.S. Constitution. (25) Within the realm of insurance, however, the McCarran-Ferguson Act reverses the normal rules of preemption by providing that "[n]o 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 ...." (26) Thus, the McCarran-Ferguson Act safeguards the states' broad power to regulate the insurance industry by calling for reverse- preemption, or the preemption of those "Act[s] of Congress" not specifically related to insurance by state insurance laws. (27) Some courts have held the Convention and its implementing legislation to fall within the meaning of an "Act of Congress" under the McCarran-Ferguson Act while other courts have recognized the Convention as a mandatory directive to U.S. courts to enforce valid international arbitration agreements, thus avoiding preemption by the McCarran-Ferguson Act. (28)

In CLMS Mgmt. Servs. Ltd. P'ship v. Amwins Brokerage of Ga., the Ninth Circuit Court of Appeals sought to resolve the intersection of three sources of law: the Convention, a Washington anti-insurance arbitration statute, and the McCarran-Ferguson Act. (29) The court began its analysis by acknowledging that, in the context of insurance law, the McCarran-Ferguson Act reverses the general principles of preemption established by the Supremacy Clause. (30) The court then applied the treaty interpretation guidelines established in Medellin v. Texas to contemplate the effect of the Convention in U.S. courts. (31) This process involved a close examination of the text which revealed that Article II, Section 3 is a directive to domestic courts that mandates they "shall" enforce arbitration agreements. (32) Next, the court examined the Convention's negotiation and drafting history to ensure its textual interpretation was not at odds with other sources of interpretation. (33) The court concluded that Article II, Section 3 of the Convention is self-executing and therefore compels enforcement of the parties' arbitration agreement. (34) The court acknowledged that its holding creates a circuit split with the Second Circuit, who previously held the Convention as non-self-executing, but relied on precedent from the Fourth and Fifth Circuits to support its decision. (35)

Next, the Court examined whether the parties' arbitration agreement is reverse preempted by the Washington anti-insurance arbitration statute by operation of the McCarran-Ferguson Act. (36) By explicitly agreeing with the Fifth Circuit that an "Act of Congress" does not constitute a "treaty," the Court concluded that Congress did not intend treaties, like the Convention, to fall within the scope of the McCarran-Ferguson Act. (37) Finally, the Court observed that this decision conforms with pragmatic foreign policy concerns encouraging the maintenance of stable commercial relations with other nations. (38) The Court affirmed the district court's order compelling arbitration. (39)

The Ninth Circuit's decision in CLMS Mgmt. Servs. Ltd. P'ship v. Amwins Brokerage of Ga. emphasizes the wavering results that courts continue to produce when faced with the intersection of the Convention, state anti-insurance arbitration statutes, and the McCarran-Ferguson Act. (40) The Court, notwithstanding, was up to the challenge, and prudently began its analysis by following the U.S. Supreme Court's treaty interpretation guidelines set forth in Medellin to determine whether the Convention itself or its implementing legislation compels enforcement of the parties' arbitration agreement. (41) The Court was correct to explicitly conclude that Article II, Section 3 of the Convention is self-executing, especially as other circuit courts have been reluctant to commit to such a determination. (42) In reaching this conclusion, the Court correctly used Medellin's text-centered approach, holding that the language in Article II, Section 3 is a directive to domestic courts. (43) Additionally, the Court diligently confirmed its textual interpretation by examining the treaty's negotiation and drafting history. (44) Following Medellin's guidelines, however, the Court should have engaged in a stronger analysis of how other signatory nations understand and apply the Convention to bolster its position. (45)

Furthermore, the Court was right to lean on foreign policy principles for guidance on whether a treaty and its implementing legislation fall within the scope of the McCarran-Ferguson Act. (46)

By agreeing with the Fifth Circuit's precedent that a multilateral treaty does not qualify as an "Act of Congress" as used in the McCarran-Ferguson Act, the Court sensibly saved the Convention from reverse-preemption. (47) In doing so, the Court expressed respect for international comity and preserved the United States as a trusted partner in commercial relations. (48)

Although correctly decided, the Court's decision leaves parties to international insurance contracts unsure whether their arbitration agreements in such contracts will be enforceable in U.S. courts. (49) The Supreme Court may now need to step in, grant the Plaintiffs' request for certiorari, and decide whether Article II, Section 3 of the Convention is self-executing. (50) Additionally, Congress should clarify the meaning of an "Act of Congress" under the McCarran-Ferguson Act. (51)

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