July 11, 2012

Fourth Circuit rules that state insurance law does not reverse preempt Chapter 2 of the Federal Arbitration Act or the New York Convention.

Willkie has won a significant Fourth Circuit victory on behalf of Zurich Insurance plc ("ZIP"). The principal issue before the Fourth Circuit was whether the McCarran-Ferguson Act would allow a South Carolina statute to reverse preempt Chapter Two of the Federal Arbitration Act and the Convention on the Recognition and Enforcement of Foreign Arbitral Awards ("New York Convention"). South Carolina, and many other states, have statutes that prohibit the enforcement of arbitration agreements in insurance policies. The plaintiff-appellant argued that because McCarran-Ferguson allows state laws regulating insurance to trump (or "reverse preempt") federal laws that don’t specifically relate to insurance, the South Carolina statute should reverse preempt Chapter Two of the FAA, which at least in part implements the New York Convention. Two other circuits had addressed the issue previously, the Second and Fifth, deciding the issue differently and creating a circuit split.

The Fourth Circuit agreed with ZIP that McCarran-Ferguson should not be read to allow reverse-preemption of an international obligation. Echoing the opening remarks of Willkie partner Richard Mancino at oral argument, the Court noted that the U.S. must "‘speak with one voice’ in regulating foreign commerce." The Court held that "Congress did not intend for the McCarran Ferguson Act to permit state law to vitiate international agreements entered by the United States," and that the "aim of McCarran-Ferguson is not arbitration or treaties, but ‘domestic commercial legislation.’" The opinion was unanimous, and in a concurrence, Judge Wilkinson listed ten reasons for affirmance, echoing Willkie’s arguments.

ESAB Group, Inc. v. Zurich Insurance plc, No. 11-1243 (Fourth Circuit), is being handled by partners Richard Mancino and Joseph G. Davis.