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September 05, 2014 Articles

Arbitrability of Preclusive Effect of Prior Confirmed Award

By Monique Sasson

In a commercial arbitration dispute, the United States Court of Appeals for the First Circuit affirmed the district court's decision concerning the authority of an arbitral tribunal to determine the preclusive effect of a prior award, even though the award was confirmed by the federal court. Emp'rs Ins. Co. of Wausau v. OneBeacon Am. Ins. Co., 744 F.3d 25 (1st Cir. 2014).

Background and Procedural History
Two insurance companies, Employers Insurance Company of Wausau and National Casualty Company, filed a petition for declaratory relief regarding the preclusive effect of a prior arbitration confirmed by a federal court order. The plaintiffs contended that the question of preclusion is a matter for the federal court. The defendants, OneBeacon American Insurance Company and other insurance companies, filed a motion to dismiss and a cross-petition to compel arbitration. The district court granted the defendants' motion to dismiss, and the First Circuit affirmed.

During a 20-year period, between 1966 and 1986, one of the defendants, OneBeacon, had a program to enter into reinsurance contracts (MLEC Program). Employers Insurance Company of Wausau entered into agreements with the defendants in 1973 and 1974 that were identical to the MLEC Program agreements between the defendants and another company, Swiss Re, not a party to this court proceeding.

In December 2007, the defendants commenced an arbitration proceeding under their MLEC agreements with Swiss Re. Swiss Re was successful, and the District Court of Massachusetts confirmed the award.

In 2012, the defendants commenced arbitration against the plaintiffs for, according to one of the plaintiffs, the very same claims the defendants arbitrated against Swiss Re. The plaintiffs filed a motion in federal court for a declaratory judgment that the prior arbitration award between the defendants and Swiss Re had preclusive effect on the arbitration between the plaintiffs and the defendants.

In July 2013, the district court denied the petition on the basis that the preclusive effect of a prior arbitration is a matter for the arbitrators to decide. Nat'l Cas. Co. v. OneBeacon Am. Ins. Co., No. 12-11874-DJC, 2013 WL 3335022 (D. Mass. July 1, 2013). The plaintiffs argued: (1) when an award is confirmed, federal courts have exclusive authority to determine the preclusive effect of their judgments; and (2) when the parties negotiated the arbitration agreement, the applicable case law did not hold that issue preclusion was arbitrable, and therefore the parties could not have intended that the arbitration agreement cover the preclusive effect of prior arbitrations.

Issue Preclusion
The First Circuit first referred to § 2 of the Federal Arbitration Act (FAA), 9 U.S.C. § 2, in order to determine whether the scope of the relevant arbitration clause in the agreements covered disputes regarding the preclusive effect of prior awards. Citing Soto-Fonalledas v. Ritz-Carlton San Juan Hotel Spa & Casino, 640 F.3d 471, 474 (1st Cir. 2011), and Dialysis Access Center, LLC v. RMS Lifeline, Inc., 638 F.3d 367, 375 (1st Cir. 2011), the court noted that a party seeking to compel arbitration must prove: (1) the existence of a valid arbitration clause, (2) the movant is entitled to invoke and the other party is bound by such clause, and (3) the dispute is within the scope of the clause. OneBeacon, 744 F.3d at 27.

Because the parties did not argue the invalidity of the clause or their not being bound by it, the point that had to be addressed was the scope of the arbitration clause, which in this case was broad enough to cover any type of disputes between the parties in connection with the MLEC Program agreements. The First Circuit referred to National Union Fire Insurance Co. of Pittsburgh, Pa. v. Belco Petroleum Corp., 88 F.3d 129, 136 (2d Cir. 1996), where an arbitration clause similar to the one in dispute was considered broad enough to include a dispute about issue preclusion.

The First Circuit further relied on the broad agreement among circuit courts that the preclusive effect of an award should be determined by the arbitral tribunal. OneBeacon, 744 F.3d at 27–28 (citing Chiron Corp. v. Ortho Diagnostic Sys., Inc., 207 F.3d 1126, 1132 (9th Cir. 2000); Indep. Lift Truck Builders Union v. NACCO Materials Handling Grp., Inc., 202 F.3d 965, 968 (7th Cir. 2000); U.S. Fire Ins. Co. v. Nat'l Gypsum Co., 101 F.3d 813, 817 (2d Cir. 1996); Courier-Citizen Co. v. Bos. Electrotypers Union No. 11, 702 F.2d 273, 280 (1st Cir. 1983); Oil, Chem. & Atomic Workers Int'l Union, Local 4-367 v. Rohm & Haas, Tex. Inc., 677 F.2d 492, 494 (5th Cir. 1982)).

As for the argument that if a federal court confirmed an award, the award had the force and the effect of a judgment (with the implication that the determination of its preclusive effect had to be remitted to the federal court), the First Circuit agreed with the district court's reliance on Chiron in concluding that the confirmation of an award did not "warrant deviation from the general rule that the preclusive effect of a prior arbitration is a matter for the arbitrator to decide." OneBeacon, 744 F.3d at 28.

The First Circuit observed that the federal judgment confirming the award does not focus on the merits of the award. OneBeacon, 744 F.3d at 28 (citing UMass Mem'l Med. Ctr., Inc. v. United Food & Commercial Workers Union, 527 F.3d 1, 5 (1st Cir. 2008)). Such a review by the federal court is carried out on narrow grounds and is deferential to the arbitrators' decision, because it is limited to vacating or amending an award on the specific grounds listed in FAA § 10(a), 9 U.S.C. § 10(a). OneBeacon, 744 F.3d at 28 (citing Major League Baseball Players Ass'n v. Garvey, 532 U.S. 504, 509–10 (2001); Dennis v. Wachovia Sec., LLC, 429 F. Supp. 2d 281, 287 (D. Mass. 2006)).

The First Circuit concluded that collateral estoppel implies a determination on the merits, but the federal judgment confirming an arbitral award does not address the merits. Accordingly, the federal court does not have the exclusive power to determine issue preclusion, and an arbitral tribunal does not violate the prerogatives of the federal court by determining the preclusive effect of a confirmed award.

Finally, on the second argument raised by the plaintiffs concerning the law in force at the time of the execution of the relevant agreement, the court held that the plaintiffs failed to raise this before the district court and therefore waived it: Because the argument was not "squarely" presented before the district court, it could not be advanced in appeal. OneBeacon, 744 F.3d at 29–30 (citing Medina-Rivera v. MVM, Inc., 713 F.3d 132, 141 (1st Cir. 2013); Curet-Velázquez v. ACEMLA de Puerto Rico, Inc., 656 F.3d 47, 53 (1st Cir. 2011); Cochran v. Quest Software, Inc., 328 F.3d 1, 11 (1st Cir. 2003)).

If the arbitration clause at issue is broad enough to encompass issue preclusion, the arbitral tribunal may determine whether a previous award, confirmed by a federal court, has a preclusive effect in a subsequent arbitration proceeding.

Keywords: litigation, ADR, alternative dispute resolution, arbitrability, issue preclusion, collateral estoppel, prior confirmed arbitral award, subsequent arbitration