Case of the Day: CLMS Management Services v. Amwins Brokerage

The case of the day is CLMS Management Services LP v. Amwins Brokerage of Georgia, LLC (9th Cir. 2021). CLMS obtained property insurance from Lloyds’ underwriters for a townhouse complex in Texas that CLMS operated. After Hurricane Harvey hit the area in 2017, causing more than $5 million in damage to the property, CLMS made a claim and was informed that the deductible was $3.6 million. It sued its insurance broker, Amwins, as well as the underwriters for breach of contract, failure to communicate policy changes, and unfair claims handling practices, asserting that the deductible should have been $600,000, not $3.6 million. The claims arose under Washington law and were brought in a federal court in Washington.

The underwriters moved to compel arbitration and stay the lawsuit. There was no question that the case fell within the scope of the New York Convention. But Washington law prohibits the use of arbitration clauses in insurance contracts, and CLMS argued that under the McCarran-Ferguson Act and the doctrine of reverse preemption, state law preempted the Convention. The Act provides that with exceptions:

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, or which imposes a fee or tax upon such business, unless such Act specifically relates to the business of insurance:

15 USC § 1012

The statute refers to “Acts of Congress” and not to federal law generally, so you may think that of course it could not preempt the Convention, which is a treaty, not an Act of Congress. But Congress implemented the Convention in Chapter 2 of the Federal Arbitration Act, which of course is an act of Congress. So the question is not as simple as it might first appear. The Ninth Circuit decided to address it by asking whether the Convention is self-executing. If it is self-executing, then when we say that federal law preempts state law and requires arbitration in certain cases, we’re really saying that the Convention preempts state law, because treaties, under the Supremacy Clause, are the law of the land. If, on the other hand, the Convention is not self-executing, then it’s really Chapter 2 of the FAA, an act of Congress, that preempts state law and requires arbitration, in which case there would be a much clearer basis for arguing for reverse preemption.

The Second Circuit had previously held the Convention was not self-executing. But the Ninth Circuit thought that the Supreme Court’s discussion in the Medellin case supported the view that the Convention is self-executing. Medellin held that Article 94 of the UN Charter, which requires member states to comply with decisions of the International Court of Justice, was not self-executing. A dictum in Medellin suggested that the key is whether the language of the treaty is directed to domestic courts and whether it uses words such as “must” or “shall.” Article II(3) of the Convention provides:

The court of a Contracting State, when seized of an action in a matter in respect of which the parties have made an agreement within the meaning of this article, shall, at the request of one of the parties, refer the parties to arbitration, unless it finds that the said agreement is null and void, inoperative or incapable of being performed.

I don’t have a strong view on whether the Convention is or is not self-executing. I do want to note one surprising consequence of the Ninth Circuit’s decision, though: it suggests that the outcome of the case would have been different if the insurer had been a US insurer and the case had not fallen within the scope of the Convention (which does not apply to purely domestic arbitrations). Should the preemption issue differ depending on the citizenship of the insurer or the place of the arbitration?

Because of the circuit split, which the Ninth Circuit acknowledged, I think this case has a reasonable likelihood of ending up before the Supreme Court. Stay tuned.

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