The middle of the 2019-2020 Term of the Court featured only a handful of dispositions on civil matters, but no landmark decisions. Two opinions by Judge Stein, relating to the General Business Law and the arbitration process, do provide templates for future GBL claims and arbitration proceedings.

Plavin v. Group Health Inc.
March 24, 2020

Question: The United States Court of Appeals for the Third Circuit asked the Court of Appeals to decide whether Steven Plavin sufficiently alleged consumer-oriented conduct to assert claims under General Business Law §§ 349 and 350 for damages. An insurance company’s allegedly made materially misleading representations directly to the City of New York’s employees and retirees about the terms of its insurance plan to induce them to select its plan from among the varioous health insurance options made available to current and former City employees.

Answer: The complaint sufficiently alleged consumer-oriented conduct.

The City offers its employees and retirees their choice of health insurance plans as part of their compensation and retirement packages. Plavin, a retired New York City police officer, received health insurance coverage through the health care plan of Group Health Incorporated. GHI is a not-for-profit corporation, operating as an indemnity insurer, that offers City employees its “Comprehensive Benefits Plan,” which provides in-network coverage and partial reimbursement for out-of-network services.

Plavin alleged that the GHI Plan was among 11 plans the City offered to approximately 600,000 employees and retirees on an annual or biannual basis. The terms of the plans were negotiated between the City, the insurance vendors, and the New York City Municipal Labor Committee, which was comprised of various employee unions.

Prior to an open enrollment period, the New York City Office of Labor Relations, on behalf of the City, assembled and distributed to employees and retirees a summary program description, which contained health plan descriptions prepared by each insurer. Plavin alleged that the document—the content of which was not reviewed by the City or Municipal Labor Committee—was the only one distributed to City employees and retirees regarding the GHI Plan before they were required to make a selection. Plavin also claimed that GHI created its own online summary of benefits and coverage, which was available on its website. If an employee or retiree selected the GHI Plan, the City sponsored and paid the entire cost of the premiums.

The complaint alleged that the summary program description and online summary represented the GHI Plan as furnishing its members with extensive out-of-network coverage, subject to deductibles and coinsurance, and “the freedom to choose any provider worldwide.” Further, the summary materials stated that the GHI Plan contained “additional Catastrophic Coverage” for “100% of the Catastrophic Allowed Charge as determined by GHI” if a member’s out-of-network expenses for predominantly in-hospital care exceeded $1,500. And also represented that the Plan offered its members an optional rider, at an additional cost, that would provide enhanced coverage for certain services, increasing out-of-network reimbursements “on average, by 75%.” GHI also stated in the materials that the out-of-network reimbursement fee schedule was “originally based on 1983 procedure allowances,” and that some of the rates would be updated “periodically.”

According to the complaint, beginning in 1984, Plavin annually selected the GHI Plan and optional rider as his family’s health insurance plan, yet he was not provided with a certificate of insurance or a reimbursement schedule. From 2014 through 2015, Plavin’s wife received numerous medical services, which GHI determined were out-of-network. As a result, contrary to his expectations based on the summary materials provided or available to him, GHI covered only a portion of the medical claims, leaving Plavin responsible for payment of the balance. For example, one medical provider billed $512.66 for services, for which GHI ultimately allowed reimbursement of $21.

Plavin sued GHI in the United States District Court for the Middle District of Pennsylvania claiming violations of General Business Law §§ 349 and 350 based on GHI’s allegedly misleading representations to City employees and retirees about the terms of its Plan. Plavin alleged that GHI made misleading statements and omissions in its summary materials regarding the Plan’s out-of-network reimbursement rates; how often the reimbursement rate schedule was updated; the catastrophic coverage reimbursement rate; and the breadth of coverage of the optional rider—in order to induce him and others to select the GHI Plan. And Plavin asserted that GHI was the sole creator of its summary materials, and that the role of the New York City Office of Labor Relations was limited to assembling and distributing the program description.

GHI filed a pre-answer motion to dismiss the complaint for failure to state a claim. The District Court concluded that Plavin had not adequately pleaded that GHI’s conduct was consumer-oriented. The court noted that, by reason of the large number of City employees, the City was “a powerful party in negotiations with insurance companies such as [GHI]”. The Court then opined that “the alleged deception [arose] out of a private contract negotiated between” GHI and the City—”two sophisticated institutions”– and concluded that Plavin was “not a mere consumer” because the City had contracted with GHI on behalf of its employees and “[t]he contract was aimed to benefit only a circumscribed class of individuals”. Thus, the Court held that because there was no indication in the complaint that the Plan would have been available to anyone who was not an employee of the City of New York, and because it was undisputed that Plavin’s receipt of benefits from GHI arose from a contractual policy, the GBL claims failed to plead consumer-oriented conduct.

Plavin appealed. The Third Circuit determined that the dispositive issue was whether GHI had engaged in consumer-oriented conduct. Because, in its view, existing New York law did not clearly dictate the outcome, the Circuit Court certified the question to the Court of Appeals.

GBL § 349 declares unlawful any “[d]eceptive acts or practices in the conduct of any business, trade or commerce or in the furnishing of any service in this state”. And GBL § 350 states that “[f]alse advertising in the conduct of any business, trade or commerce or in the furnishing of any service in this state” shall be unlawful.

To state a claim under sections 349 or 350, a plaintiff must allege that a defendant has engaged in consumer-oriented conduct, that is materially misleading, and that the plaintiff suffered injury as a result of the allegedly deceptive act or practice. A plaintiff claiming the benefit of either section must charge conduct of the defendant that is consumer-oriented or, in other words, demonstrate that the acts or practices have a broader impact on consumers at large.

The Court of Appeals found that, in this case, although there was an underlying insurance contract negotiated by sophisticated entities—only one of which was a party to the action—neither Plavin, nor any of the other hundreds of thousands of employees and retirees who participated in the GHI Plan, were participants in its negotiation. And that negotiation was followed by an open enrollment period, which exposed City employees and retirees to marketing resembling a traditional consumer sales environment. During the open enrollment period, the employees and retirees could select only one of 11 previously-negotiated health insurance plans offered as part of their compensation and retirement packages from the City. And the insurers were able to market their health care plans directly to the employees and retirees.

Significantly, it was the allegedly misleading summary materials that were the subject of Plavin’s case—not the contract between the City and GHI, which purportedly was never provided to City employees and retirees. Plavin alleged that GHI created misleading benefit and coverage summaries, which it published on its website and caused to be distributed by the City to all similarly situated employees and retirees—and that this marketing was critical to GHI’s effort to induce City employees and retirees to select its Plan.

Plavin asserted that GHI collected premiums only for its Plan, and it was in GHI’s financial interest for individual City employees and retirees to choose its Plan over the other available options. Plavin alleged that GHI was incentivized by the competition created during the open enrollment period to leverage its information advantage in order to gain the business of the employees and retirees over other insurers. In that manner, the open enrollment period resembled the sort of sales marketplace—characterized by groups of similarly-situated consumers subjected to the competitive tactics of a relatively more powerful business—that GBL claims were intended to address.

Plavin further claimed that he relied on the summary materials in selecting GHI’s Plan and rider which, according to him, did not cover out-of-network procedures to the extent that the summary materials led him to expect, thereby causing the alleged damages. Thus, Plavin’s complaint alleged claims that arose from the allegedly deceptive marketing materials distributed to him and the other City employees in order to induce them to select the GHI Plan over the other options available to them, as well as to pay additional premiums for the allegedly worthless out-of-network rider. Under these circumstances, Plavin satisfied the threshold test by alleging that the marketing actions were consumer-oriented in the sense that they potentially affected similarly situated consumers. The Court found that GHI’s alleged dissemination of information to hundreds of thousands of City employees in order to solicit their selection of its plan was precisely the sort of consumer-oriented conduct that was targeted by GBL §§ 349 and 350.

Finally, the Court of Appeals noted the General Business Law provisions did not impose a requirement that consumer-oriented conduct be directed to all members of the public and the Court had never implied that such a requirement existed. Here, by providing a choice of 11 options, the City created a health insurance marketplace for its approximately 600,000 employees and retirees, who were not direct parties to the contracts negotiated between the City and insurance vendors. GHI’s summary materials, prepared and edited solely by GHI, contained the only information provided to City employees and retirees when determining whether to select GHI’s Plan.

Under these circumstances, the Court of Appeals held that the complaint adequately alleged consumer-oriented conduct and answered the certified question in the affirmative.


American International Specialty Lines Insurance Co. v. Allied Capital Corporation
April 30, 2020

Question: Did an arbitration panel exceed its authority by reconsidering an initial determination—denominated as a “Partial Final Award”—that addressed some, but not all, of the issues submitted for arbitration.

Answer: The record was devoid of any evidence that the parties to the arbitration mutually agreed to the issuance of a partial decision that would have the effect of a final award. The arbitration panel acted within the bounds of its broad authority by reconsidering the Partial Final Award.

Ciena Capital LLC and Allied Capital Corporation reached a settlement with the federal government resolving a federal qui tam action involving allegations of their participation in loan origination fraud. As part of the settlement, Ciena agreed to pay the federal government $10.1 million and Allied Capital—which owned 94.9% of the voting stock of Ciena—agreed to release a portion of its secured interest in Ciena, which was then facing bankruptcy, in order to facilitate Ciena’s payment of the settlement.

Ciena and Allied Capital, as insureds, sought payment of their defense costs for the federal action and indemnification for the settlement under two insurance policies issued by American International Specialty Lines Insurance Company.

After AISLIC denied coverage, the insureds demanded arbitration under the broadly worded arbitration clauses contained in the policies. The insureds sought damages for AISLIC’s alleged breach of the insurance policies by refusing to defend them in the federal action and indemnify them for the $10.1 million settlement. In response, AISLIC asserted that the settlement was not a “loss” within the meaning of the insurance policies. And that the insureds could not prove their entitlement to the defense costs claimed because the relevant invoices showed that the alleged costs arose, in part, from unrelated legal work that was not covered by the policies.

The insureds and AISLIC moved for summary disposition in the arbitration proceeding. In their submissions to the arbitration panel, the insureds noted that the precise amount of defense costs to which they were entitled could be the subject of a separate evidentiary hearing if it determined that AISLIC was liable for such costs. At oral argument on the parties’ applications for summary disposition, one of the arbitrators inquired whether “a partial summary disposition is in the cards,” and the insureds’ counsel replied that such a procedure would “make the most sense.” However, AISLIC’s counsel never directly commented on whether AISLIC would agree to a partial summary disposition The arbitration panel never stated on the record that it would issue such a partial determination. And there was no discussion regarding whether any such “partial summary disposition” would be a “final” award deciding some, but not all, of the issues submitted to the panel.

The arbitration panel, with one arbitrator dissenting, subsequently issued what it denominated a “Partial Final Award,” determining that only one insurance policy was applicable, under which only Allied Capital was an insured, and that the federal settlement did not constitute a covered loss under that insurance policy. The panel then concluded that Allied Capital was not entitled to indemnification. However, the arbitration panel determined that Allied Capital was entitled to defense costs and, because there was a factual dispute regarding the amount of legal expenses incurred during the federal action, the question of damages would be resolved after a separate evidentiary hearing before the panel.

Before an evidentiary hearing was held, the insureds sought reconsideration of the Partial Final Award, arguing that the panel had erred by concluding that the settlement did not constitute a covered loss. AISLIC opposed the reconsideration application both on procedural grounds—that the arbitrators were without authority to reconsider the Partial Final Award under the doctrine of functus officio—and on the merits, arguing that the arbitrators correctly decided the indemnification issue.

The arbitration panel, again with one member dissenting, changed course and concluded in a “Corrected Partial Final Award” that, upon reconsideration, the settlement did constitute a covered loss under the applicable insurance policy. A majority of the panel rejected AISLIC’s argument that the functus officio doctrine precluded reconsideration. Thereafter, the arbitration panel conducted an evidentiary hearing to determine the amount of Allied Capital’s covered defense costs And ultimately issued a “Final Award,” granting Allied Capital recovery against AISLIC for damages consisting of both the settlement and defense costs, less offsets for insurance proceeds paid to Ciena under insurance policies not otherwise at issue in this arbitration.

AISLIC sued to vacate the Corrected Partial Final Award and the Final Award, and reinstatement and confirmation of the original Partial Final Award, reiterating its argument that the doctrine of functus officio precluded the arbitration panel from reconsidering the Partial Final Award. Supreme Court denied the petition and confirmed the Final Award.

Upon AISLIC’s appeal, the Appellate Division, with one Justice dissenting, reversed Supreme Court’s order and judgment; granted AISLIC’s petition; vacated the Corrected Partial Final Award and Final Award; and confirmed the Partial Final Award. The majority concluded that, “during the arbitration proceedings, the parties agreed to an immediate determination solely as to liability, which they expected would be final,” and “nothing in the record . . . suggest[ed] that the parties or the panel believed that the [Partial Final Award] would be anything less than a final determination”. Therefore, the Court held that, “under the functus officio doctrine, it [was] improper and in excess of the panel’s authority” to reconsider the Partial Final Award. AISLIC appealed. And the Court of Appeals reversed the Order of the Appellate Division.

Arbitrators routinely use their expertise to orchestrate expeditious resolutions to complex legal problems in commercial disputes, as well as in other areas of the law. And the Court of Appeals had steadfastly discouraged courts from becoming unnecessarily entangled in arbitrations or from serving as a vehicle to protract litigation.

CPLR article 75 codifies a limited role for the judiciary in arbitration. An application to vacate an arbitration award may be granted in narrow circumstances, including where “an arbitrator . . . exceeded his [or her] power”. And arbitrators exceed their power, within the meaning of the CPLR, only when they issue an award that violates a strong public policy, is irrational or clearly exceeds a specifically enumerated limitation on the arbitrator’s power.

AISLIC argued, and the Appellate Division held, that the arbitration panel exceeded its authority because it violated the common law doctrine of functus officio. Functus officio, Latin for “having performed [one’s] office”, has operated historically as a restriction on the authority of arbitrators, precluding them from taking additional actions after issuing a final award.

Under the common law rule, arbitrators relinquished all powers over the parties to the arbitration upon issuance of a final award and, therefore, were precluded from modifying or reconsidering that award. CPLR 7509 permitted the arbitrators to correct formal errors or clarify their intent but not to re-examine the grounds of the award or alter the decision.

The insureds argued that the functus officio rule was no longer valid under New York law because the doctrine was grounded upon anti-arbitrational sentiments rejected long ago by our state courts and by Congress in the Federal Arbitration Act. The Court did not address this argument because functus officio would apply only to final awards and, despite its name, the Partial Final Award was not, in fact, final.

Final awards are those that are coextensive with the issues submitted to the arbitrators by the parties. And for the courts to entertain review of intermediary arbitration decisions, involving procedure or any other interlocutory matter, would disjoint and unduly delay the proceedings. Thus, a final arbitration award is generally one that resolves the entire arbitration.

The Court of Appeals had not had occasion to determine whether, or under what circumstances, parties may agree to the issuance of a final award that disposes of some, but not all, of the issues submitted to the arbitrators. And it did not resolve that question in this case.

Even assuming that parties to an arbitration may agree to the issuance of a partial determination that constituted a final award, the Court of Appeals concluded that the parties here did not reach any such agreement. The insureds’ counsel suggested a separate proceeding to determine the amount of Allied Capital’s defense costs in the event the panel determined such costs were recoverable. But AISLIC never consented to bifurcate the proceeding or agreed that any resulting partial decision would be treated as a final award. Neither the parties nor the arbitrators ever discussed or otherwise demonstrated any mutual understanding regarding whether the proposed severance of the calculation of defense costs would result in a final partial award. And, absent an express, mutual agreement between the parties to the issuance of a partial and final award, the functus officio doctrine had no application in this case. The Court of Appeals rejected AISLIC’s argument that the arbitration panel exceeded its authority by reconsidering the Partial Final Award.