Overview
First Tuesday Update is our monthly take on current issues in commercial disputes, international arbitration, and judgment enforcement.
More than a dozen states, including important commercial jurisdictions such as Georgia, Virginia, and Louisiana, have adopted legislation that voids arbitration clauses in insurance contracts. The McCarran-Ferguson Act creates a “reverse preemption” that gives state insurance statutes precedence over federal statutes not dealing specifically with insurance. But state anti-arbitration statutes conflict with the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the Convention) when it comes to international insurance. The Convention is a treaty between the United States and 171 other countries implemented in Chapter 2 of the Federal Arbitration Act that requires signatories to enforce international arbitration agreements and awards. Over the past twenty years, parties to international insurance contracts have litigated whether McCarran-Ferguson’s reverse preemption means that state anti-arbitration laws trump the Convention’s mandate to enforce international arbitration agreements. A circuit split has emerged, with the First, Fourth, Fifth, and Ninth Circuits giving the Convention precedence, while the Second Circuit, despite subsequent misgivings, giving state statutes precedence. The Supreme Court has not addressed the issue, but did deny certiorari in the Ninth and Fifth Circuit cases. The Solicitor General of the United States has expressed the view in an amicus brief that the Convention takes precedence.
We discuss below the history of this circuit court conflict and the difficulty in predicting how it might be resolved.
Under 9 U.S.C. § 202, an arbitration agreement falls within the Convention if it arises out of a commercial relationship and either one of the parties to the agreement is not a US citizen or if the subject of the agreement “involves property located abroad, envisages performance or enforcement abroad, or has some other reasonable relation with one or more foreign states.” The arbitration clauses in international insurance agreements meet this test.
As a general rule, the Constitution’s Supremacy Clause (Article 6) gives precedence to federal law over inconsistent state law. State insurance regulation is an exception. The McCarran-Ferguson Act creates a “reverse preemption in order to preserve the states’ rights to regulate insurance within their borders. The Act gives state insurance laws precedence over conflicting federal statutes that do not deal specifically with insurance. See 15 U.S.C. § 1012(b).
The Second Circuit was the first appeals court to address the conflict between a state anti-arbitration insurance law and the Convention. In Stephens v. American International Ins. Co., 66 F.3d 41 (2d Cir. 1995), a Kentucky statute voided arbitration clauses in certain insurance contracts with foreign insurers. The insurers argued that the Convention itself, as a treaty made by the United States, remained supreme under the Supremacy Clause, and independently required arbitration. The Second Circuit rejected the argument. Offering little explanation of its reasoning, the court held the Convention was not “self-executing” because it relied on an act of Congress for its implementation. Id. at 45. Later that year, the court questioned whether it had decided the case correctly. In Stephens v. National Distillers & Chemical Corp. 69 F.3d 1226, 1233 n.6 (2d Cir. 1995) (National Distillers), the court held that the Foreign Sovereign Immunities Act preempted New York state insurance law despite the fact that the FSIA does not specifically relate to insurance. In a footnote, the court noted its reasoning might apply to the Convention. Nonetheless, subsequent district court decisions in the Circuit have adhered to Stephens.[1]
Whether a treaty is “self-executing” has “long confused courts and commentators” and is “perhaps one of the most confounding [questions] in treaty law.” ESAB Group, Inc. v. Zurich Ins. PLC, 685 F.3d 376, 387-88 (4th Cir. 2012). In Medellín v. Texas, 552 U.S. 491 (2008), the Supreme Court provided new guidance on that question. The Supreme Court held the treaty at issue in Medellín was not self-executing, in significant part because that treaty lacked “a directive to domestic courts.” 552 U.S. at 508; see also ESAB Group, 685 F.3d at 387. By contrast, Article II, Section 3 of the Convention does contain such a directive: “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.”
Subsequent to the Supreme Court’s decision in Medellín, four other circuits have addressed the conflict. Though their reasoning varied, each rejected the Second Circuit’s holding in Stephens and held that the Convention preempted state anti-arbitration laws.
In Safety National Casualty Corporation v. Certain Underwriters at Lloyd’s, London, 587 F.3d 714 (5th Cir. 2009) the en banc Fifth Circuit observed that whether the Convention was self-executing was “unclear,” id. at 721, but held it did not matter because although Congress had implemented the Convention’s requirements in a federal statute, the Convention itself remained a treaty, not an “Act of Congress” as that phrase was used in the McCarran-Ferguson Act. Id. at 723-24. Thus, the Court held that McCarran-Ferguson’s reverse preemption did not apply to the Convention and that the Convention preempted a Louisiana anti-arbitration statute.
The Fourth Circuit also declined to “wade into [the] murky waters” of whether the Convention was self-executing in ESAB Grp.,685 F.3d at 388. The court took a different tack from the Fifth Circuit, limiting McCarran-Ferguson “to legislation within the domestic realm.” Id. Exercising caution “before interpreting [U.S.] domestic legislation in such manner as to violate international agreements,” id., the court construed McCarran-Ferguson narrowly to avoid “permit[ting] state law to vitiate international agreements entered into by the United States.” Id. at 389.
The Ninth Circuit took up the question in CLMS Management Services Limited Partnership v. Amwins, 8 F.4th 1007 (9th Cir. 2021). The court adopted the position the Solicitor General had taken in response to an ultimately unsuccessful certiorari petition in Safety National: that the Convention’s Article II, Section 3 fit precisely into the Supreme Court’s definition of a self-executing treaty provision in Medellín, because it contained “‘mandatory language directed to courts rather than aspirational language directed to the political branches.’” Id. at 1015 (quoting the United States’ Safety National amicus brief). The “United States’ interpretation of a treaty” of course “‘is entitled to great weight,’” Medellín, 552 U.S. at 513, and the Ninth Circuit followed it, easily concluding that Article II, Section 3 independently required enforcement of international agreements to arbitrate. Id. at 1013-15. Thus, the Ninth Circuit held that “state laws prohibiting arbitration provisions insurance contracts do not reverse-preempt the Convention’s command that domestic courts are obligated to enforce international arbitration agreements.” Id. at 1016.
The First Circuit followed suit in Green Enterprises, LLC v. Hiscox Syndicates Limited at Lloyd’s of London, 68 F.4th 662 (1st Cir. 2023). The parties in that case agreed that McCarran-Ferguson’s reverse preemption did not apply to self-executing treaties, but disagreed on whether the Convention was self-executing. Green Enterprises argued that because the Convention contains both non-self-executing and self-executing provisions, the Convention as a whole had to be considered non-self-executing. The court “reject[ed] Green’s ‘all or nothing’ argument,” and held that Article II, Section 3 is self-executing and thus not reverse-preempted by McCarran-Ferguson. Id. at 669-70, 677.
The Supreme Court denied certiorari review in Safety National and CLMS Mgmt. Servs. Those denials do not express the court’s view on the merits, or indicate whether it would favor a particular view—for example, that any treaty falls outside “Act of Congress” as used in McCarran-Ferguson (Safety National), or that only self-executing treaty provisions do and the Convention’s directive to enforce international arbitration agreements is self-executing (CLMS Mgmt.; the Solicitor General in Safety National), or that McCarran-Ferguson reaches only domestic federal statutes, not laws affecting treaty obligations (ESAB Group). But the consistent tide of undisturbed post-Medellín decisions also gives no indication that the Second Circuit’s pre-Medellín decision in Stephens—a decision the Second Circuit itself has expressed doubt in—carries significant weight.
One thing is clear: resolving international insurance disputes in the United States will be subject to some uncertainty until the conflict is resolved.
[1] See e.g., Certain Underwriters at Lloyds, London, et al. v. 3131 Veterans Blvd LLC, No. 22-CV-9849 (LAP), 2023 WL 5237514 (S.D.N.Y. 2023).
