Maintaining Confidentiality When Petitioning for Relief in Court

A long-running dispute between Pennsylvania National Mutual Casualty Insurance Company and one of its reinsurers, Everest Reinsurance Company, recently culminated in the unsealing of an award from an arbitration to which Everest had not been a party. Everest was able to obtain this result despite the fact that Penn National had withdrawn its petition to confirm the award (and accompanying motion to seal) mere days after filing and the district court had made no substantive decision based on the award or relied on it in any way.

After the dispute made its way to the Third Circuit for a second time, the court held that the arbitration award was a judicial record to which a common law right of access applied and that Penn National had not demonstrated a specific harm to overcome the presumption of public access.[1] Following remand to the district court, the award was finally unsealed earlier this year. Although not binding precedent for the Third Circuit (since the decision was not issued by the full court),[2] Penn National is nevertheless a development in the law on the unsealing of arbitration awards that both cedents and reinsurers will want to take into consideration when petitioning courts to confirm or vacate awards issued in confidential arbitration proceedings.

The award concerned Penn National’s cession of lead paint claims under certain excess of loss treaties subscribed to by various reinsurers. Two of the reinsurers on the treaties (New England Reinsurance Corporation and Hartford Fire Insurance Company) did not accept Penn National’s reinsurance presentation, leading to arbitration and ultimately an award in favor of the two Hartford companies in March 2018.[3] Despite the fact that Penn National lost its bid for any reinsurance recoveries and a panel majority concluded that Penn National’s cession methodology was “unreasonable” and violated a policy limits warranty, and that the Hartford companies were entitled to attorneys’ fees, Penn National filed a petition in the Middle District of Pennsylvania in April 2018 to confirm the award.

Together with its petition to confirm, Penn National filed an unopposed motion to seal the award, based on the terms of the standard ARIAS form confidentiality agreement, which the district court granted. A few days later, Penn National withdrew its petition. The dispute with Everest began after Penn National subsequently demanded arbitration against Everest on the same claims and treaties as had been at issue in the proceeding with the Hartford companies. Penn National and Everest disagreed about the interpretation of a consolidation provision in the treaties, whereby reinsurers were to “constitute and act as one party,” and also as to whether their dispute should be decided by the original panel in the Penn National-Hartford arbitration or by a new panel. Both parties sought relief in district court in November 2018 with competing motions to compel arbitration. A few months later, in January 2019, Everest also moved to intervene in the original confirmation proceeding and to unseal the award issued in the Penn National-Hartford arbitration.

The district court allowed Everest to intervene but denied the motion to unseal. Everest appealed the decision, together with a related order granting Penn National’s petition to compel arbitration.

In December 2019,[4] the Third Circuit vacated the district court’s order denying the motion to unseal, finding that the lower court erred by using the factors set out in Pansy v. Borough of Stroudsburg, 23 F. 3d 772 (3d Cir. 1994), which apply to orders preserving confidentiality of documents produced in discovery under the Federal Rules. These factors include: “1) whether disclosure will violate any privacy interests; 2) whether the information is being sought for a legitimate purpose or for an improper purpose; 3) whether disclosure of the information will cause a party embarrassment; 4) whether confidentiality is being sought over information important to public health and safety; 5) whether the sharing of information among litigants will promote fairness and efficiency; 6) whether a party benefitting from the order of confidentiality is a public entity or official; and 7) whether the case involves issues important to the public.”[5]

Instead, the Third Circuit directed that the relevant analysis should follow its 2019 Avandia[6] decision, which clarified the standard of review when discovery materials are filed as court documents. This standard is “the more rigorous common law right of access,” which not only recognizes “fewer reasons to justify the sealing of court records,” but also “begins with a presumption in favor of court access.”[7] On remand, the district court granted Everest’s motion to unseal and initially also denied Penn National’s motion to stay the unsealing pending appeal. Following a motion for reconsideration, a stay was granted while an appeal was taken.

Once again before the Third Circuit, Penn National argued that the award was not a judicial record and thus not subject to a presumptive common law right of access. Everest countered that under clear Third Circuit precedent, a non-discovery document, like the arbitration award at issue, becomes a judicial record upon its filing with a court. Everest further argued that Penn National had failed to make the requisite showing of a clearly defined and serious injury to rebut the presumption of access. The Third Circuit sided with Everest,[8] citing Avandia to explain that the common law right of access “attaches to ‘judicial proceedings and records.” The court further noted that it had rejected the test used in other circuits to determine whether a document is a judicial record, i.e., a test that turns on the use a court has made of a document. In the Third Circuit, the relevant issue is whether a document “found its way into the clerk’s file,” and once Penn National filed the award it had become a “judicial record,” regardless of what use (or not) the district court had made of it.

The Third Circuit also rejected Penn National’s arguments as to the specific harm it would sustain if the award was unsealed, finding that an affidavit by one of its officers “assert[ing] that other reinsurers might choose to forego paying Penn National and contest their contractual obligation to pay if they learned of the contents in the arbitration award” did not amount to a “clearly defined injury.” This was because the averments in the affidavit did not allow for a determination of “how many relationships could be impacted, the amount of money that could be at stake, the types of actions other parties may pursue, or the likelihood that any such actions would be successful.”

Given the long tradition of confidentiality in reinsurance arbitrations, the Penn National decision should be taken into account when a party to an arbitration files a petition in court seeking to confirm, vacate, or otherwise challenge an award. At least in the Third Circuit, defeating a motion to unseal will likely require a strong showing of “clearly defined injury,” which according to the Third Circuit’s description of relevant factors (such as the amount of money at stake, or the likelihood of success of other actions against a party) could result in the disclosure of further information traditionally seen as proprietary and confidential.

[1] Pennsylvania Nat’l Mut. Cas. Ins. Grp. v. New England Reinsurance Corp., 840 F. App’x 688 (3d Cir. 2020)
[2] The decision is not contained in an official reporter and expressly notes that it is not binding precedent under the Third Circuit’s Internal Operating Procedures because it was not heard by the full court.  See I.O.P. 5.7 (“Citations. The court by tradition does not cite to its not precedential opinions as authority. Such opinions are not regarded as precedents that bind the court because they do not circulate to the full court before filing.”)
[3] Mound Cotton’s Lloyd Gura, Amy Kallal, and Matthew Lasky represented the Hartford companies.
[4] The Third Circuit upheld the district court’s order compelling arbitration of the consolidation issue before a new panel. 794 F. App’x 213, 214 (3d Cir. 2019):

By asking us to send the consolidation question to the panel that decided the Hartford Arbitration, Everest invites us to prejudge that question and to disregard the express language of the agreement. But we are bound to enforce the agreement according to its terms and to compel the parties to follow the procedure they agreed to. Because of this, we can only compel arbitration of the consolidation issue before a new panel chosen according to the express terms of the agreement. Consistent with the agreement’s terms, the two disputes must be consolidated if and only if: (1) a new panel determines that Everest’s dispute is “the same” as the dispute at issue in the Hartford Arbitration, and (2) the panel that decided the Hartford Arbitration is still extant such that it can handle this new dispute.
[5] Glenmede Trust Co. v. Thompson, 56 F.3d 476, 483 (3d Cir. 1995) (citing Pansy, 23 F.3d at 787-91).
[6] In re Avandia Marketing, Sales Practices and Products Liability Litigation, 924 F.3d 662 (3d Cir. 2019). The Avandia decision was filed about two months after the district court’s initial order.
[7] Id. at 670.
[8] See 840 F. App’x 688.

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If you have any questions regarding this client alert, please contact Amy Justine Kallal, Andrea Fort or the Mound Cotton attorney with whom you regularly work.