M.D. Imad John Bakoss v. Certain Underwriters at Lloyd's of London, __F3d __, 2013 WL 238708 (2d Cir. Jan. 23, 2013).
In an insurance coverage dispute over disability insurance, the Second Circuit has joined the majority of federal circuit courts in holding that the question of whether a clause in a contract provides for arbitration is governed by federal common law in a case that falls under the Federal Arbitration Act ("FAA") through its application of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the "New York Convention"). The case was removed from state court to federal court by the insurer and the insurer obtained summary judgment. On appeal, the insured challenged the basis for federal jurisdiction and summary judgment.
In affirming the district court, the Second Circuit examined the contractual provision that the insurer claimed was an arbitration clause and agreed with the motion court. The clause provided that the insured and insurer may each examine the insured by a physician of its choice to determine if the insured was permanently disabled and, in the event of a disagreement between each party's physician, the two party-appointed physicians "shall [jointly] name a third Physician to make a decision on the matter which shall be final and binding." The district court applied federal common law to hold that the third-physician clause was an agreement to arbitrate and that the court had subject matter jurisdiction under the FAA via the New York Convention.
In holding that federal common law provides the definition of arbitration under the FAA (not state law), the circuit court recognized that unless there is a plain indication to the contrary, a federal act is not dependent on state law and will be interpreted under federal common law. This allows for the creation of a uniform national arbitration policy, as intended by Congress. To apply state law would result in a patchwork of varying interpretations of the FAA, said the court.
This case is important because now the Second Circuit has clearly held that questions about whether a clause is an arbitration clause and how it should be interpreted require the application of federal common law, not state law, when the case is governed by the FAA.