January 19, 2012 Articles

When Is an Arbitration Award Final for Purposes of Collateral Estoppel?

By Alexander O. Canizares

Federal and state courts have repeatedly applied the doctrine of collateral estoppel, also known as issue preclusion, to prevent the re-litigation of issues that have been finally decided in a prior arbitration between the same parties. However, applying issue preclusion to arbitration has proven difficult and unpredictable, complicated in part by perceived differences between arbitration and litigation. This article focuses on recent cases in which courts have examined whether an arbitration award is a "final" judgment entitled to preclusive effect, with different and sometimes inconsistent results that have turned, for example, on whether the award was confirmed by a court. Practitioners are well advised to be aware of the various approaches taken by courts and to consider them when drafting and negotiating arbitration agreements.

The Doctrine of Issue Preclusion and Arbitration
Issue preclusion is a branch of the doctrine of res judicata, also known as claim preclusion, which bars re-litigation of the same claims by the same parties (or persons in privity with those parties) that were decided in a prior judgment. Both doctrines are grounded in notions of finality, judicial economy, and the protection of litigants against vexatious litigation. Generally, issues decided in a prior adjudication have preclusive effect if (1) the issue to be litigated is identical to the one already decided; (2) the issue was actually litigated in the prior case and was necessary to the judgment; (3) the issue was finally decided on the merits; (4) the party sought to be estopped was either a party or in privity with a party to the prior action; and (5) the party sought had a full and fair opportunity to be heard on the issue. See 8B Wright, Miller & Cooper, Federal Practice & Procedure § 4417; Allen v. McCurry, 449 U.S. 90, 93–95 (1980).

It has been widely accepted that issue preclusion operates to prevent a party from re-litigating findings of fact made in a final arbitration award. See, e.g., Hammad v. Lewis, 638 F. Supp. 2d 70, 74 (D.C. Cir. 2009) ("Decisions of an arbitral panel normally provide the type of finality sought by courts to be protected by collateral estoppel."); 8B Wright, Miller & Cooper, Federal Practice & Procedure § 4475.1 ("[I]ssue preclusion is rested on arbitral decisions, and properly so."). Giving collateral estoppel effect to issues decided in arbitration is supported by the conclusive nature of arbitration. It would defeat the purpose of finality of arbitration if the losing party were to have a second chance to win on the very issue that he or she lost in arbitration. See B-S Steel of Kan., Inc. v. Tex. Indus., Inc., 439 F.3d 653, 666 (10th Cir. 2006) ("Such a result would undermine the legitimacy of the arbitration award itself, and of the arbitration process.").

Problems in Applying Issue Preclusion to Arbitration
For some time, however, courts have been hesitant to extend issue preclusion to issues decided in arbitration in certain instances. Some courts have held, for example, that preclusive effect should not be accorded to arbitral findings of fact on questions of public policy. See Air Line Pilots Ass'n Int'l v. Trans States Airlines, LLC, 638 F.3d. 572, 579 (8th Cir. 2011) ("[W]here, as here, a challenge to an arbitration award raises a question of public policy, we do not give a prior award, specifically one which has not been subject to judicial review, any preclusive effect on a matter of public policy."). The U.S. Supreme Court has stated that "arbitration proceedings will not necessarily have a preclusive effect on subsequent federal-court proceedings" and that federal courts may refuse to give an arbitration award preclusive effect to protect federal statutory interests. Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 223 (1985); McDonald v. City of West Branch, 466 U.S. 284, 292–93 (1984).

The differences between arbitration and litigation, and the perception of the former as informal, have also led to the adoption of a case-by-case approach in some jurisdictions. It has been suggested that courts may have discretion to decide whether issue preclusion is appropriately applied to arbitration. See 8B Wright, Miller & Cooper, Federal Practice & Procedure § 4475.1 ("[A]rbitrators are not judges, and arbitral procedures often wander far from judicial procedures."). According to the Restatement (Second) of Judgments section 84, "a valid and final award by arbitration has the same effects under the rules of res judicata . . . as a judgment of a court" except that "a determination of an issue in arbitration does not preclude relitigation of that issue" if according preclusive effect would be "incompatible with a legal policy or contractual provision . . . " or the "procedure leading to the award lacked the elements of an adjudicatory procedure prescribed in § 83(2) [of the Restatement]." Section 83(2) contains a non-exhaustive list of factors relevant to whether a decision carries preclusive effect, including whether there was adequate notice to persons to be bound; the right to present legal argument and evidence; the formulation of issues of law or fact in terms of the application of rules, and a rule of finality "specifying a point in the proceeding when presentations are terminated and a final decision is rendered[.]"

The Restatement reflects a sense of caution about applying res judicata principles to arbitration. Rules of evidence may be applied differently, and the grounds for a decision may not be clearly spelled out in an award, making it difficult to discern which claims or issues were decided and which were left open. This may give rise to disputes in subsequent litigation over whether the issues were the same and whether there was a "full and fair" opportunity to litigate. See FleetBoston Fin. Corp. v. Alt, 638 F.3d 70, 80 (1st Cir. 2011) (noting that there "may be particular difficulties" in applying collateral estoppel and res judicata to arbitration awards).

Focusing on the similarities, or lack thereof, between arbitration and litigation is problematic, however. Parties often choose arbitration precisely because it may allow for a faster, less costly, and more efficient resolution of disputes. The case-by-case approach to collateral estoppel of arbitration risks discouraging the use of arbitration and may serve to pressure arbitration to become more like litigation. See Horishi Motomura, "Arbitration and Collateral Estoppel: Using Preclusion to Shape Procedural Choices," 63 Tul. L. Rev. 29, 32–33 (1988). The notion that a court should scrutinize the arbitration is also in tension with the limited scope of judicial review under the Federal Arbitration Act (FAA), under which a court "must" confirm an arbitration award unless it is vacated, modified, or corrected on limited statutory grounds. See 9 U.S.C. §§ 9–11; Hall St. Assocs. L.L.C. v. Mattel Inc., 552 U.S. 576 (2008) (reading sections 9 through 11 as "substantiating a national policy favoring arbitration with just the limited review needed to maintain arbitration's essential virtue of resolving disputes straightaway").

When Is an Award "Final" for Purposes of Issue Preclusion?
Within this context, the question of finality as a requirement of issue preclusion has generated inconsistent approaches. For present purposes, the cases addressing finality can be grouped into three categories: (1) cases suggesting that an award must be confirmed by a court to be final; (2) cases finding that finality is determined by the nature of the arbitral proceedings rather than by confirmation of the award; and (3) cases finding that finality depends on the arbitration agreement and the parties' intentions that the award would be final and binding.

Judicial Confirmation
Within the first category of cases, although there is agreement that a confirmed award is a "final judgment" having collateral estoppel effect, there is conflicting authority regarding whether confirmation is a precondition to application of the doctrine. Under the FAA, a judgment confirming an award has "the same force and effect" as a court judgment. See 9 U.S.C. § 13. Some courts have held that the award must be confirmed to be "final" under the doctrine. See, e.g., Gruntal v. Steinberg, 854 F. Supp. 324, 337–38 (D.N.J. 1994) ("Absent judicial confirmation, an arbitration award will not result in a 'final judgment' and cannot, therefore, have preclusive effect on subsequent litigation."). Gruntal stated that it "must be kept in mind that arbitration panels are not courts of law and the arbitral procedures often vary significantly from judicial procedures."

There is also the question of when a confirmed award is final for preclusion purposes. In 2010, a Colorado Court of Appeals held, as a matter of first impression, that an arbitration award or other judgment is not final until certiorari has been resolved in both the Colorado Supreme Court and the U.S. Supreme Court. See Barnett v. Elite Props. of Am., Inc., 252 P.3d 14, 22–23 (Colo. App. 2010); see also Diederich v. Yarnovich, 196 P.3d 411, 422 (Kan. Ct. App. 2008) (finding award was not final for collateral estoppel purposes because of a pending appeal and noting that if the prevailing party wanted the arbitration to have preclusive effect it "should have requested a stay until the arbitration case is final").

The Court of Appeals for the Eighth Circuit and other jurisdictions have held, by contrast, that even unconfirmed arbitration awards are entitled to collateral estoppel effect so long as they finally dispose of the dispute on the merits. See Wellons v. T.E. Ibberson Co., 869 F.2d 1166, 1169 (8th Cir. 1989) ("The fact that the award in the present case was not confirmed by a court and was modified by a subsequent settlement agreement does not vitiate the finality of the award"); Jacobson v. Fireman's Fund Ins. Co., 111 F.3d 261, 267–68 (2d Cir. 1997); Williamson v. Stallone, 905 N.Y.S.2d. 740, 754–55 (N.Y. Sup. Ct. 2010) (under New York law, "[w]here there has been a final determination on the merits, an arbitration award, even one never confirmed, may serve as the basis for the defense of collateral estoppel in a subsequent action").

Two recent, albeit unpublished, decisions have reaffirmed this approach. In Shaffer v. Merrill Lynch, Pierce, Fenner & Smith, Inc., the U.S. District Court for the Northern District of California held that "[u]nder Pennsylvania law, an unconfirmed arbitration award does constitute a final judgment." 2011 WL 3047478 (N.D. Cal. 2011). In September 2011, the U.S. District Court for the Southern District of Florida held that "an unconfirmed arbitration award has a preclusive effect on subsequent litigation proceedings[,]" noting the "deference accorded to arbitration awards" and reasoning that "[c]onfirmation of an arbitration award does not add significant weight to the validity of the award" in light of the "summary" proceeding of confirmation under sections 9 and 10 of the FAA. Freecharm v. Atlas Wealth Holdings Corp., 2011 WL 4591929 (S.D. Fla. 2011) (slip copy).

It is sensible to question the significance of confirmation of an arbitral award in relation to issue preclusion, especially given the limited scope of judicial review. Moreover, focusing on whether an award was confirmed fails to consider the arbitration agreement. The expectations of parties that have agreed to "final and binding" arbitration and resolved their dispute by arbitration could be frustrated if a court in a subsequent case involving the same parties allowed the issue to be re-litigated simply because the award had not been confirmed by a court. Conditioning finality on confirmation by a court may also be inconsistent with the arbitration rules governing a dispute. See UNCITRAL Arbitration Rules, art. 34(2) (2010) (the award "shall be binding on the parties" and "the parties shall carry out all awards without delay").

Elements of Adjudication
In the second category of cases, courts found that whether an award is final depends not on whether it is confirmed but on whether the arbitration had the essential elements of adjudication. See, e.g., Jacobs v. CBS Broadcasting Inc., 291 F.3d 1173, 1178–79 (9th Cir. 2002). In 2010, the Supreme Judicial Court of Maine held, as a matter of first impression, that an unconfirmed arbitration award is a final judgment for collateral estoppel purposes as long as the arbitrator's determination is "sufficiently analogous" to a final judgment, relying on the factors in Restatement sections 83 and 84 noted above. Beal v. Allstate Ins., 989 A.2d 733, 738–39 (Me. 2010).

The Parties' Arbitration Agreement
The third category of cases focuses on the arbitration agreement, invoking the contractual nature of arbitration and the parties' consent. In Murakami v. Wilmington Star News, Inc., 137 N.C. App. 357, 528 S.E.2d 68 (N.C. Ct. App. 2000), the court held that "if the agreement to arbitrate states that the decision is binding on the contracting parties, the award is final, and collateral estoppel will bar re-litigation of the issues actually decided during the arbitration proceedings." It noted that the right to submit disputes to arbitration is contractual and that "[w]hen both parties consent to an enforceable contract each party is bound by its terms."

The relevance of the arbitration agreement to questions of collateral estoppel has arisen in other contexts. In 2011, the Supreme Court of Utah decided, in a case of first impression, to follow California in holding that an arbitration award cannot be invoked by a nonparty offensively to prevent re-litigation of an issue resolved by arbitration "unless the parties expressly provide for such effect beforehand." Buckner v. Kennard, 99 P.3d 842, 846 (Utah 2011) (citing Vandenberg v. Superior Court, 982 P.2d 229, 242–43 (Cal. 1999)). This approach puts the onus on the contracting parties to decide whether issues may be re-litigated and who may prevent such re-litigation.

Practical Observations
Several observations can be made based on the disparate case law addressing the finality of arbitration awards for issue preclusion purposes. First, practitioners should be attentive to collateral estoppel issues not only when representing clients in pending arbitration but also when drafting arbitration agreements. An express provision in the arbitration agreement that the award is "final and binding" may be an important, if not dispositive, factor in a later court's assessment as to whether to apply collateral estoppel. An agreement lacking such express language may reduce the prospects of res judicata or issue preclusion being applied later. The scope of the arbitration agreement and whether, for example, it extends to "all disputes relating to the subject matter of, or arising from, this contract" might also be relevant. Second, the question of finality of an arbitration award should also be considered at an early stage of arbitration, when the parties are often able to shape the procedural aspects of the case. A fast-track or informal procedure may be attractive from many standpoints, but it may be less likely to result in issue preclusion in a subsequent litigation involving the same parties, all things being equal. Third, a party that has prevailed in arbitration may promptly want to seek to confirm and even enforce the award if securing issue preclusion is likely to be important. This may substantially avoid, if not eliminate, future questions about whether the award on its own was sufficiently final in a subsequent proceeding.

Keywords: arbitration, finality, collateral estoppel, issue preclusion, arbitration award