Yesterday the Fourth Circuit issued its decision in ESAB Group v. Zurich Insurance PLC, a case raising “a complex question regarding the intersection of a treaty and federal and state statutory law.” Not surprisingly, this question—whether state insurance law may “reverse preempt” a treaty guaranteeing the reciprocal enforcement of arbitration agreements and awards in signatory nations—has led to a split among the circuit courts.
In 1970, the U.S. became a party to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the Convention), under which the U.S. promised to enforce arbitration agreements and awards arising out of commercial relationships reasonably related to one or more of the signatory nations. As the Fourth Circuit in ESAB Group noted, Congress enacted chapter 2 of the Federal Arbitration Act to ensure that all arbitration agreements and awards reasonably related to foreign interests or citizens are respected and enforced on U.S. soil in a manner consistent with its Convention.
In doing so, Congress placed the Convention and its corresponding Act on a collision course with the McCarran-Ferguson Act of 1946, which “authorizes ‘reverse preemption’ of generally applicable federal statutes by state laws enacted for the purpose of regulating the business of insurance.” Congress enacted the McCarran-Ferguson Act, the Fourth Circuit's opinion explains, “to restore the states’ preeminent position in insurance regulation” by reversing the normal rule under which state law is impliedly preempted by conflicting federal law.
In ESAB Group, a Swedish insurance provider agreed to insure ESAB Group, a South Carolina company that makes welding and cutting equipment, tools, and materials. In return, the ESAB Group’s parent company agreed to arbitrate coverage disputes in Swedish arbitral tribunals. In 2009, ESAB Group’s insurance provider refused coverage, prompting ESAB Group to file suit in state court. The insurance provider removed the case to federal court, to which the ESAB Group responded by arguing that the McCarran-Ferguson Act deprived the federal court of subject-matter jurisdiction over the dispute, notwithstanding the Group’s arbitration clause to the contrary.
On appeal, the Fourth Circuit considered whether the South Carolina law, which would have invalidated ESAB Group’s arbitration agreement mentioned above, may reverse preempt the Convention under the McCarran-Ferguson Act. Writing for the three-member panel, Judge Henry Floyd identified “a split amongst our sister circuits concerning the interaction between the Convention, the Convention Act, and the McCarran-Ferguson Act.” Compare Stephens v. Am. Int’l Ins. Co., 66 F.3d 41 (2d Cir. 1995) (holding that state laws precluding arbitration in certain cases may preempt the Convention or Convention Act pursuant to the McCarran-Ferguson Act); with Safety Nat’l Cas. Corp. v. Certain Underwriters at Lloyd's, London, 587 F.3d 714, 722–23 (5th Cir. 2009) (en banc) (rejecting the applicability of reverse preemption in such cases).
After analyzing the competing positions, the Fourth Circuit in ESAB Group joined the Fifth Circuit in holding that “the Convention Act, as implementing legislation of a treaty, does not fall within the scope of the McCarran-Ferguson Act.” You can read the court’s full opinion here: ESAB Group v. Zurich Insurance PLC, No. 4:09-cv-01701-TER (4th Cir. July 9, 2012).
*Hat tip to Steven M. Klepper.