Puerto Rico Federal Court Compels Arbitration Under the New York Convention

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I recently posted about the Ninth Circuit’s decision compelling arbitration under the New York Convention after holding that the McCarran-Ferguson Act did not reverse preempt the Convention. Two months earlier, the federal district court in Puerto Rico reached the same conclusion.

In Green Enterprises, LLC. v. Dual Corporate Risks Limited, Civ. No. 20-1243(JAG) (D. PR. Jun. 15, 2021), a claim dispute arose under a property policy after a fire loss. The case was removed from state court to federal court and the insurers moved to compel arbitration under the policy based on the New York Convention. The policyholder opposed the motion and sought to preclude arbitration based on the principle of reverse preemption under the McCarran-Ferguson Act and local insurance law precluding arbitration of insurance disputes.

In another well-reasoned opinion, the court granted the insurers’ motion to compel arbitration, holding that the McCarran-Ferguson Act cannot enable Puerto Rico’s Insurance Code to reverse-preempt a treaty like the Convention, or the Federal Arbitration Act itself and that the arbitration provision invoked by the insurers is valid and applicable.

Now this decision goes further than the Ninth Circuit because it addresses preemption of the FAA, which the Ninth Circuit did not address. Other cases have held that McCarran-Ferguson reverse preemption applies to the FAA because it is a federal statute that does not govern the business of insurance.

The analysis of the main issue–whether reverse preemption applies against the Convention is similar to the analysis in the Ninth Circuit opinion. Where this court goes further is what it calls the third-prong of the analysis: Whether the McCarran-Ferguson Act is not to be construed so broadly as to limit international commercial arbitration rather than domestic affairs? The court provides an interesting and useful analysis of statutory construction and how the Supreme Court and the Fourth Circuit have discussed preemption in the context of international obligations.

The court concluded that

Hence, refusal to enforce the arbitration provision at issue here would impair the Convention’s very own purposes: resolving disputes “essential to any international business transaction” and ensuring parties are not haled into inappropriate forums. [citation omitted]. A contrary conclusion, like that espoused by Plaintiff, would produce an absurd result, allowing state authority to displace international mandates.

This is the circuit split; whether the FAA itself overrides state anti-arbitration law. Because the Convention itself is an international mandate and because Chapter 2 of the FAA is required to implement many provisions of the Convention (not the self-executing parts), the role of McCarran-Ferguson in allowing state insurance laws to reverse preempt acts of Congress is inapplicable. Will that reasoning hold up when (and if) this issue gets to the Supreme Court?

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