Steve Sparks and Vincent Miner of Sanders & Parks, together with a number of other law firms, jointly secured a victory in a class action lawsuit originally filed in the U.S. District Court for the District of Arizona-Phoenix Division.
Plaintiffs Dimitri Shivkov, et al. alleged that various actuarial and captive insurance promoters, including Artex Risk Solutions, Arthur J. Gallagher & Co, TSA Holdings, Tribeca Strategic Advisors, Epsilon Actuarial Solutions, and AmeRisk had devised a widespread conspiracy to promote and sell tax-advantaged captive insurance strategies that were later disallowed and deemed illegal by the Internal Revenue Service (IRS). The plaintiffs were ordered to pay substantial back-taxes, penalties and interest to the IRS when their Section 831(b) captives were flagged as abusive tax shelters. They sued in a class action lawsuit seeking to recover tens of millions of dollars in damages.
Shivkov and others who entered into captive agreements with the named defendants brought a variety of claims, including breach of fiduciary duty, negligent misrepresentation, disgorgement, and civil conspiracy. But the agreements, which were signed by the plaintiffs, contained an Arbitration Clause stipulating that any dispute between the parties would be arbitrated by the American Arbitration Association. The agreements also contained a “Limitation of Liability” provision, which specified that the defendants “shall have no liability to [the plaintiffs] for any losses, claims, demands, damages, liabilities, costs or expenses arising from this agreement.” On behalf of their clients, Mr. Sparks and Mr. Miner argued that the claims were subject to individual arbitration – claimant by claimant – and that it would be improper to allow the claims to proceed via class action lawsuit. Because all claims in the lawsuit were barred by the Arbitration Clause, individualized arbitration would inevitably lead to a dismissal of the action. Shivkov argued against individual arbitration on the basis that the clause was unenforceable, asserting, in part, that the Arbitration Clause was both “substantively and procedurally unconscionable,” the terms of the clause were beyond reasonable expectations, and the clause was terminated along with the agreements.
Senior U.S. District Judge Stephen McNamee delivered the order granting defendants’ joint motion to compel individual arbitration, thus dismissing the action in its entirety as all claims in the suit are barred by the Arbitration Clause. Judge McNamee found that the availability of class arbitration vs. individualized arbitration is a “gateway issue” that a court must presumptively decide.
Plaintiffs appealed the decision to the U.S. Court of Appeals for the Ninth Circuit. After briefing and oral argument, the 9th Circuit upheld the District Court’s order compelling individual arbitration and dismissing the putative class action. The 9th Circuit also rejected the plaintiffs’ argument that, at a minimum, any arbitration ought to be class arbitration, as opposed to individualized. Finally, the 9th Circuit upheld the District Court’s ruling that even non-signatory defendants (such as the actuaries) could compel arbitration pursuant to the agreements.
On March 17, 2021, the plaintiffs filed a Petition for Writ of Certiorari with the United States Supreme Court. After briefing by all parties, the U.S. Supreme Court denied plaintiffs’ Petition in a written order dated June 28, 2021.