ESAB Group, Inc. v. Zurich Insurance PLC, No. 11-1655

Decided: July 9, 2012

The court of appeals affirmed the lower court’s exercise of personal and subject matter jurisdiction, and it’s authority to remand the remaining nonarbitrable claims to state court.

In 1925, Congress enacted the Federal Arbitration Act, which protects the enforceability of domestic arbitration agreements. The Convention of the Recognition and Enforcement of Foreign Arbitral Awards, adopted in 1958, ensures that courts enforce agreements to arbitrate in foreign tribunals, and awards granted by such tribunals. In 1945, Congress enacted the McCarran-Ferguson Act, which essentially authorizes reverse preemption of generally applicable federal laws by state laws enacted for the purpose of insurance regulation.

In the present case, ESAB Group contends that, pursuant to the McCarran-Ferguson Act, South Carolina law reverse preempts federal law in the area of commercial arbitration of insurance disputes.  Thus, the issue before the court is whether the McCarran-Ferguson Act applies, such that state law can reverse preempt federal law and invalidate a foreign arbitration agreement.

In the underlying suit, ESAB Group faced numerous products liability suits stemming from personal injuries allegedly caused by its welding products. Several of ESAB Group’s insurers, including Zurich Insurance, refused coverage, and ESAB brought suit in South Carolina state court. The insurers removed the case to federal court pursuant to the Convention Act’s grant of removal jurisdiction. ESAB Group disputed the district court’s exercise of subject matter jurisdiction, and Zurich Insurance disputed the district court’s exercise of personal jurisdiction.

The district court found that it had jurisdiction over the subject matter and the parties to the action, and subsequently enforced the underlying arbitration agreements. Since the court referred to arbitration all claims providing a basis for subject matter jurisdiction, the court remanded the remaining claims to state court. On appeal, ESAB Group disputes the district court’s exercise of subject matter jurisdiction, and Zurich Insurance disputes the district court’s exercise of personal jurisdiction and its authority to remand the nonarbitrable claims to state court.

The Court of Appeals first considered whether the federal courts have jurisdiction over the present action or whether, as ESAB Group contends, South Carolina law reverse preempts federal law and eliminates the basis for jurisdiction. The court held that, because the Supreme Court made has made it clear that the McCarran-Ferguson Act is limited to domestic affairs, the Convention Act falls outside of its scope. Thus, the district court’s exercise of subject matter jurisdiction was proper. Furthermore, the court held that, because the relevant Zurich policies contain valid arbitration clauses that are subject to the Convention Act, the district court properly compelled arbitration of ESAB Group’s claims under those policies. The Court, applying a three-part test to determine if the exercise of specific jurisdiction over Zurich comported with due process, affirmed the district court’s exercise of personal jurisdiction. Finally, the court of appeals, noting that while a district court may be compelled to stay nonarbitrable issues within an otherwise arbitrable claim, there is no like requirement that the court exercise supplemental jurisdiction over nonarbitrable claims where all claims within the court’s original jurisdiction have been sent to arbitration, held that the district court had the authority to decline to exercise jurisdiction over the nonarbitrable claims and to remand those claims to state court.

Judge Wilkinson concurred, listing several additional reasons supporting the majority opinion.

Full Opinion

– Kassandra Moore

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