Fourth Circuit Weighs in on Circuit Split Concerning Whether State Insurance Statutes “Reverse Preempt” Arbitration Provisions in International Agreements

ESAB Group, Inc. v. Zurich Ins. PLC, et al., No. 11-1243 (4th Cir. 2012), recently weighed in on a matter that has split the Circuits and has given pause to international contract draftsmen and international dispute resolution practitioners:  to what extent to international contracts containing mandatory arbitration provisions supercede contrary state (or even federal) law.  The superceding in this case would have taken the form of “reverse preemption” pursuant to the McCarran-Ferguson Act.  The Court of Appeals that there was no reverse provision.

ESAB Group is a South Carolina-based manufacturer of welding materials.  It sued its towers of insurance carriers for coverage in products liability cases against ESAB relating to injuries caused by exposure to welding consumables.  ESAB sued in state court, the insurers removed.  The District Court ordered arbitration of certain policies.  South Carolina law purported to preclude arbitration under the state’s power to regulate the business of insurance. 

Those opposing preemption argued that both the New York Convention and the federal legistlation enacting the New York Convention into law did not succumb to South Carolina’s state insurance statute.  The Court of Appeals then summarized decisions from the Second and Fifth Circuits addressing whether the New York Convention applied to the states as a treaty or as implementing federal lesiglation, and the Fourth Circuit saw a conflict in the holdings of the Second and Fifth Circuits.  For the Fourth Circuit, it acknowledged that “the question of what constitutes a self-executing treaty has long confused courts and commentators”.  Ultimately the Court of Appeals did not utilize that taxonomy.  Instead, the Court found:

Where a statute touches upon foreign relations and the  United States’ treaty obligations, we must proceed with particular care in undertaking this interpretive task. As the Supreme Court observed in considering a prior potential conflict between the Convention Act and a federal statute, “[i]f the United States is to be able to gain the benefits of international accords and have a role as a trusted partner in multilateral endeavors, its courts should be most cautious before interpreting its domestic legislation in such manner as to violate international agreements.”

Given the importance of “speak[ing] with one voice when regulating commercial relations with foreign governments”, the Circuit was unwilling to let the state statute preclude arbitration. 

The Court of Appeals also affirmed the District Court’s determination to remand to state court all claims that were not arbitrable.

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