November 25, 2014 Practice Points

Arbitrators Determine the Preclusive Effect of Prior Arbitrations

By Christopher S. Moore

Arbitrators—not courts—determine the preclusive effect of a prior arbitration. So ruled the First Circuit in Employers Ins. Co. of Wausau v. OneBeacon Am. Ins. Co., 744 F.3d 25 (1st Cir. 2014).

In Employers Ins. Co. of Wausau, the plaintiffs, National Casualty Company and Employers Insurance Co. of Wausau (collectively, Wausau), sought a declaration that an arbitration initiated by defendants, OneBeacon American Insurance Co. and others (OneBeacon), had previously been arbitrated and was, therefore, collaterally estopped.

Between 1966 and 1986, OneBeaon entered into annual reinsurance contracts with Wausau, Swiss Reinsurance America Corp. (Swiss Re) and others. Id. at 26. In 2007, OneBeacon demanded arbitration against Swiss Re for reinsurance recovery for certain claims made by its policyholders. Id. The arbitration panel ruled in Swiss Re’s favor and the District Court of Massachusetts confirmed that award. Id.

Years later, OneBeacon demanded arbitration against Wausau seeking reinsurance, allegedly for the same claims that were decided in the earlier arbitration. Id. Based on the earlier arbitration award, Wausau sought a declaratory judgment in district court that OneBeacon was collaterally stopped from bringing a new arbitration proceeding. Id. The district court denied Wasau’s declaratory judgment petition, holding that the preclusive effect of the prior arbitration was to be decided by an arbitrator, and not the court. Id. at 26–27. Wausau appealed and the First Circuit affirmed.

On appeal, Wausau argued that the district court should have decided the preclusive effect of the Swiss Re arbitration because the confirmation of the earlier award constituted a district court judgment, and arbitrators lack the authority to determine the preclusive effect of such judgments. Rejecting this argument, the First Circuit noted that the party’s arbitration clause was broad—it required “any irreconcilable dispute” between the parties to be resolved in arbitration, and so “appeare[ed] to include disputes over the preclusive effect of prior arbitrations.” Id. at 27. In addition, the court observed that it was widely accepted that “the effect of an arbitration award on future awards . . . is properly resolved through arbitration.” Id. (internal quotation marks omitted, collecting cases).

Wausau argued that allowing arbitrators to determine the preclusive effect of an earlier, confirmed, arbitration award would violate Section 13 of the Federal Arbitration Act (FAA), which provides that orders confirming arbitration awards are given the same effect as federal court judgments. Id. at 28. Wausau asserted that because the enforcement of a judgment is in the “exclusive province of the federal courts,” only federal courts can determine the preclusive effect of an arbitration award once it is confirmed. Id.

That issue was one of first impression in the First Circuit. Id. The court held that arbitrators can determine the preclusive effect of earlier arbitration awards, finding that an arbitration award is distinct from the order confirming it. Id. It noted that the federal courts “very rarely” consider the merits of an arbitration award. Instead, it said, the purpose of the reviewing district court is to ensure that the arbitration award was not the product of specific bases for vacating an award (e.g., fraud) and to give the award a mechanism for enforcement. Id. In contrast, a collateral estoppel analysis requires a detailed examination of the prior arbitration to determine, among other things, whether the issue raised in the two actions was the same and whether the issue was actually litigated in the earlier action. Because a collateral estoppel inquiry is beyond the scope of a court’s limited review of an arbitration award, there is no reason why a confirmation order should give the court exclusive power to determine the preclusive effect of the arbitration. Id. at 29. That is, because a federal court’s order regarding an arbitration rarely goes to the merits, a subsequent arbitrator does not “infringe on the prerogatives of the federal court” by deciding the preclusive effect of an earlier arbitration decision. Id.

Wausau also argued that at the time the parties’ contracts were negotiated, the courts—not arbitrators—decided the preclusive effect of an earlier arbitration. Hence, according to Wausau, the collateral estoppel issue should have been decided by the court under the principle that then-existing law is a part of the party’s contract. The court declined to address this argument, holding that it had been waived because it was not raised in the district court. Id.

The court’s holding that the preclusive effect of a prior arbitration should be decided by the arbitrator in the first instance does not appear to be particularly controversial. However, it will be interesting to see whether other courts will follow suit, and whether, in particular, Wausau’s second (albeit waived) argument will gain any traction.

Keywords: alternative dispute resolution, litigation, collateral estoppel, preclusive effect, arbitrability, waiver

Christopher S. Moore is with Novack and Macey LLP in Chicago, Illinois.

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