Lead Article: Res Judicata and Class Action Arbitration Awards

by Kristen M. Blankley

Parties to a lawsuit know that when the case is over, they can live with the outcome or appeal. Starting over and trying again is not an option. The doctrines of res judicata and collateral estoppel prohibit such repetitive litigation. Whether these well-established judicial doctrines apply in arbitration, however, is far from clear. Although arbitration is becoming increasingly similar to litigation, the two procedures have key distinctions that may affect whether the courts or other arbitrators would apply preclusion principles to subsequent dispute resolution proceedings. The legal landscape becomes even murkier when determining what preclusion principles, if any, would prevent unnamed class members in a class-action arbitration from instituting either a legal action or arbitration procedure against a party who has already defended one class-wide arbitration.

Preclusion in the Courts

When parties litigate their claim in court, they can rest assured that they will not be forced to pursue or defend the exact same action in court another time after a binding resolution in the first action has been rendered. This is because the courts employ a system that precludes re-litigation of entire actions or issues that have been previously determined by a court. The term res judicata , which literally means "the thing decided," refers to the inability of parties to re-litigate an entire claim. Typically, res judicata , sometimes referred to as "claim preclusion," will be applied by a subsequent court when a prior court 1) makes a determination on the merits 2) of factual and legal issues actually litigated 3) between the same parties.

Collateral estoppel, a related doctrine, prohibits parties from re-litigating certain issues–rather than entire claims–that have already been decided by another court. Collateral estoppel applies when 1) the same parties have 2) actually litigated the same issue or issues 3) which were essential to a 4) final judgment on the merits by a previous court. Under collateral estoppel, issues which are not essential to a first action can be re-litigated in a subsequent action. However, if res judicata applies, the parties cannot re-litigate at all.

Public policy supports both of these doctrines. The preclusion doctrines promote judicial economy. Parties who have already litigated either an entire claim or an issue or two will be forced to accept the court's decision. In other words, the parties are not permitted to have two bites of the proverbial apple. Parties who are unsatisfied with the outcome of the first proceeding will have to appeal the first decision rather than start anew in the trial courts. Forcing parties to accept a final decision of the trial court will reduce the number of filings and relieve the courts of deciding the same issues multiple times, and the courts can more quickly turn their attention to other parties and their claims.

The doctrines of res judicata and collateral estoppel also benefit the individual parties. Parties bring suit, in part, so a neutral third party can render a binding decision, disposing of their claims. If the losing party could simply re-litigate the same action or issues a second, third, or fourth time, a judgment is no longer binding, and the prevailing party will constantly worry that the losing party will try again with a different judge or a different jury. Preclusion principles force the litigants to appeal their decisions rather than starting anew.

The third principle underlying preclusion is to give due respect to court decisions and to preserve faith in the court systems. Finality not only benefits the parties but also the public as a whole. The public can rest assured that decisions are final and binding, creating a greater confidence in the legal system. Furthermore, the integrity of the judges and their decisions will be preserved. If parties could re-litigate their claims over and over again, different judges or juries could render conflicting opinions and undermine the principles of stare decisis. Thus, preclusion is rooted in sound public policy preserving the integrity of the courts and the parties' expectations.

Preclusion and Arbitration

Whether preclusion applies in arbitration may depend on two factors: 1) whether the parties entered their arbitral award as a court order under the Federal Arbitration Act (“FAA”) and 2) whether the parties instituted the second action in arbitration or litigation. Under Section Nine of the FAA, the parties to an arbitration can agree to enter their award into the public record of the courts. A confirmed award is treated as if it were a judgment of the court. As such, a non-complying party could use the legal system to enforce the award through mechanisms such as attachment and garnishment. However, unlike state court decisions, arbitration awards are not entitled to Full Faith and Credit protections. [1] This Supreme Court decision, though, might only apply to arbitration awards involving Section 1983 claims. The McDonald court left open the question of the general preclusive effect of arbitration awards, and it allowed courts to establish their own preclusion rules. [2] Indeed, federal courts have applied the principles of res judicata to arbitration awards in cases not involving Section 1983. [3]

Most states have fashioned rules allowing confirmed awards to have preclusive effect. In Corey v. Avco-Lycoming Division , 307 A.2d. 155, 161 ( Conn. 1972), the Supreme Court of Connecticut stated, “An arbitration award is accorded the benefits of the doctrine of res judicata in much the same manner as the judgment of the court.” The Corey decision has been extended to awards in voluntary arbitration including claims under federal law. [4] California courts also give preclusive effect to arbitration awards, and in some instances the courts will apply an arbitration award in a subsequent proceeding involving a party not involved in the arbitration. [5] While most states give confirmed awards preclusive effect, some states, such as Michigan and Ohio, favor looking to the underlying contract to determine if an award should be given preclusive effect.

An unconfirmed award, in contrast, is not an official court judgment, so a subsequent court may be less likely to give it preclusive effect. At least one court has denied giving preclusive effect to an unconfirmed award and found the award not final because the parties still had time under the FAA to seek to vacate or confirm it. [6] One Connecticut court determined that unconfirmed arbitration awards are not entitled to preclusive effect because, without the backing of the court, the awards are not entitled to Full Faith and Credit under federal law. [7]

However, many courts are willing to give unconfirmed awards preclusive effect. California , for instance, has repeatedly applied res judicata to unconfirmed awards. Often, courts will ensure that the traditional elements of res judicata and collateral estoppel have been met before giving preclusive effect to unconfirmed awards. [8] In the federal courts, the Second Circuit has recognized the preclusive effects of unconfirmed awards since 1997. [9]

Whether an arbitrator must apply the principles of res judicata and collateral estoppel is much less documented. Arbitration has no settled rule of law, and the arbitrators are often only obligated to rule on the basis of equity. Because of this, arbitration does not have established preclusion rules and is unlikely to develop any set of binding legal rules. However, equitable principles and the previously mentioned policies may sway an arbitrator to give preclusive effect to a previously arbitrated case. Because arbitrators create awards, not legal judgments, the difference between a confirmed award and an unconfirmed award probably bears little, if any, on the analysis.

Although arbitration does not have overflowing dockets as do state and federal courts, there is still a need for decision-making economy. If one arbitrator does not give preclusive effect to previously-rendered awards, the parties who re-try the claims would essentially be wasting the time and talent of the second arbitrator as well as their own money. The arbitrator could be dedicating time to new cases, rather than re-hashing old issues with bitterly entrenched parties. Additionally, allowing the parties to try and try again until they win is fundamentally unfair for the defendant who is repeatedly forced into the proceedings.

Refusing to apply preclusion principles would also defeat the finality arbitration is supposed to impose. Finality is often championed as a hallmark of arbitration, and the extremely limited appellate review can be viewed as a way to ensure a quicker, binding resolution to a dispute. Against this backdrop, policy would support the use of res judicata and collateral estoppel to ensure that proceedings are over when the award is rendered. Repeated attempts to change the award would undermine the finality arbitration treasures. Furthermore, arbitrators may be inclined to apply preclusion principles out of respect and fairness for their fellow arbitrators. Although the number of arbitrators grows daily, the arbitral community is still relatively close-knit, and they may refuse to entertain repetitive claims out of deference to their colleagues. Thus, the principles supporting judicial res judicata and collateral estoppel are present in the arbitral forum.

Arbitrators, however, may have a marked advantage over their judicial counterparts: they are free to deviate from the norm when equity so dictates. There may be cases in which a court would be bound by the law to apply preclusion principles, but an arbitrator could balance the equities and determine that preclusion is inappropriate under the circumstances. While an arbitrator should consider the preclusion principles, the arbitrator should also recognize his or her ability to apply the principles of equity and fairness in making a determination on preclusion.

How this Affects Class Action Arbitration

Even if courts and arbitrators are willing to give preclusive effect to arbitration awards involving the parties—or at least one of the parties—present in the first arbitration, it is not clear if either the courts or an arbitrator would give preclusive effect to a class action arbitration award against an unnamed class member. The unnamed class members, by definition, have not participated in the first action and have had no control over the proceedings that may bind them later. For this reason, courts or arbitrators may be wary of giving preclusive effect to a prior class action arbitration award.

On the other hand, a class action arbitration award would be rendered largely worthless if no subsequent court or arbitrator is willing to apply it to unnamed class members. Class procedures are necessary, especially for consumers whose claims may be worth less than the cost of pursuing the matter in either litigation or arbitration. They also spread the costs of pursuing a claim among all class members. If a plaintiff class wins their case in arbitration, the defendant should also be assured of its obligations to the class. If additional claimants could bring other actions, perhaps even other class actions, a defendant could be subject to financial exposure on multiple fronts. Defendants who fear such liability may choose to vigorously defend each action rather than settling the cases.

The doctrines of res judicata and collateral estoppel, if available at all, should be available for use by both the plaintiffs and the defendant. If the plaintiff class wins in the first proceeding, an unnamed class member should be able to enforce his or her rights under the award without having to re-prove the merits of the case. However, an unnamed class member who is disappointed with the first award should not be able to get a proverbial “second bite at the apple.” Just as the plaintiff class is bound by a favorable award, the defendant should be likewise bound and able to prevent additional proceedings on settled matters.

In order to limit liability and create predictability in class action arbitrations, the parties may want to consider setting forth the preclusive effects of an arbitration in their agreement to arbitrate. Such was the case in Cremin v. Merrill Lynch, Pierce, Fenner & Smith, Inc. , 328 F. Supp. 2d 865 (N.D. Ill. 2004), involving a class action claim by female employees against Merrill Lynch for gender discrimination. The arbitration consisted of a two-step process in which general fact-finding and statistical evidence was evaluated in part one, and the individual claims would be evaluated under this backdrop in part two. The court determined that under this agreement, the facts determined in part one must be accepted by the decision maker in the individual claims. Id. at 868-69. Thus, by ignoring the findings of the first procedure, the decision maker exceeded his authority.

While it may be advantageous for class participants to fashion an arbitration similar to the procedure used in Merrill Lynch , this is often not feasible. The Merrill Lynch litigation involved a post-dispute arbitration agreement and the plaintiff class consisted of a discrete, known group of female employees. Supplanting this procedure into the consumer realm would be difficult. Consumer class actions often include an indefinite plaintiff class. Even if all of the class members have signed pre-dispute arbitration agreements (which have been stored and maintained), the defendant company still may not be able to contact these consumers to institute a Merrill Lynch-style post-dispute arbitration agreement. Perhaps this information could be included in any pre-dispute arbitration agreement, but a pre-dispute agreement could only give a general statement as to what preclusive effect, if any, an arbitration award should have.

Because unnamed class members in any class action procedure have the most to lose, courts and arbitrators should ensure the first class action arbitration properly safeguarded the rights of the absent class members. For example, a court or arbitrator could use the Federal Rules of Civil Procedure as a guide to determine if the class members were adequately represented by both the named class members and the lawyers for the named members. The second decision-maker should also determine if the absent members received adequate notice of the proceedings or had the ability to “opt out.” These types of inquiries ensure the first proceeding was fair and that extending the decision of the first proceeding to the subsequent proceedings results in a just outcome.

What is clear is that class action arbitration is here to stay, even if the rules concerning res judicata and collateral estoppel have lagged behind. Without valid preclusion doctrines, any benefit received by the defendant would be lost, and the defendant would have little incentive to either agree to allow class action arbitration in the first place or to settle class action claims filed against it. However, class action arbitration is a necessary procedure, and both courts and arbitrators should recognize the preclusive effect of a prior arbitration in a subsequent procedure by an unnamed class member. However, the courts and arbitrators could be greatly assisted by developing guidelines under which they review the first decision for fairness before applying it to parties who did not participate in the first action.

[1] McDonald v. City of West Branch, Mich., 466 U.S. 284, 287-88 (1984).

[2] See Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 223 (1985).

[3] See Benjamin v. Traffic Exe. Ass'n Eastern RR, 869 F.2d 107, 110 (2d Cir. 1989).

[4] Serafin v. Connecticut, 2005 WL 578321, at *9 (D. Conn. Mar. 9, 2005).

[5] Richard B. LeVine, Inc. v. Higashi, 32 Cal. Rptr. 3d 244 (Cal. App. Ct. 2005).

[6] Green Tree Fin. Corp. v. Honeywood Development Corp., 2001 WL 62603, at *4 (N.D. Ill. Jan. 24, 2001).

[7] Jacobs v. Yale University, 2000 WL 1530030, at *8 ( Conn. Super. Ct. Sept. 21, 2000).

[8] See In re Klein, Maus & Shire, Inc., 301 B.R. 408, 417 (Bnkr. S.D.N.Y. 2003).

[9] See Jacobson v. Fireman's Fund Ins. Co., 111 F.3d 261, 267-68 (2d Cir. 1997).