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Posts Tagged ‘Sixth Circuit’

Res Judicata and Consolidated Arbitration: the Sixth Circuit puts the Kibosh on the “Contagion Theory of Arbitration”

September 17th, 2014 Appellate Practice, Arbitrability, Arbitration Agreements, Arbitration as a Matter of Consent, Arbitration Practice and Procedure, Authority of Arbitrators, Awards, Confirmation of Awards, Consolidation of Arbitration Proceedings, Construction Industry Arbitration, Contract Interpretation, Drafting Arbitration Agreements, Existence of Arbitration Agreement, Final Awards, Judicial Review of Arbitration Awards, Michigan State Courts, Practice and Procedure, Preclusive Effect of Awards, Res Judicata or Claim Preclusion, State Courts, United States Court of Appeals for the Sixth Circuit, United States Supreme Court Comments Off on Res Judicata and Consolidated Arbitration: the Sixth Circuit puts the Kibosh on the “Contagion Theory of Arbitration”

Res judicata—Latin for a “matter” or “thing” “decided”—is the legal principle under which a final judgment in one action bars the same parties from relitigating in another, successive action matters that were or could have been asserted in that  first action. Also known as “claim preclusion”, it is designed to promote finality and judicial economy, and to protect persons from vexatious litigation. See, generally, Taylor v. Sturgell, 553 U.S. 880, 891 (2008).

But can an unconfirmed arbitration  award preclude a party from maintaining a court action to resolve a matter that it did not submit or agree to submit to arbitration? Suppose:

  1. A has an arbitration agreement with B (the “AB Agreement”);
  2. B has an arbitration agreement with C (the “BC Agreement”);
  3. A and C did not agree to arbitrate any disputes between them;
  4. The AB Agreement contemplates the parties arbitrating their claims against each other in a consolidated arbitration that may involve factually-related disputes that B has agreed to arbitrate with C or other third parties, provided those third parties consent to consolidated arbitration;
  5. The AB Agreement does not purport to require A or B to arbitrate any disputes between (a) A or B or both; and (b) C or any other non-party;
  6. The BC Agreement does not purport to require B or C to arbitrate any disputes between (a) B or C or both; and (b) A or any other third party;
  7. A dispute arises between A and B, and A demands arbitration against B;
  8. B, in turn, demands arbitration against C, seeking indemnity from C for any liability B may have to A;
  9. The AB and BC arbitrations are consolidated over A’s objection;
  10. A knows it has a legal and factual basis for asserting a tort claim against C arising out of the same transactions and occurrences at issue in the consolidated arbitration, but does not submit (or attempt to submit) that claim to arbitration;
  11. The arbitration proceeds, and the arbitrator issues a final award finding that B is liable to A for $X in damages and that C is not obligated to indemnify B;
  12. Nobody seeks to confirm, vacate, modify or correct the award; and
  13. A subsequently brings an action in court against C, which seeks damages from C allegedly caused by C’s negligent conduct with respect to the same transactions and occurrences that were the subject of the consolidated arbitration.

Is A’s lawsuit barred by res judicata?

On August 28, 2014, in O’Neil v. Shepley, No. 13-2320, slip op. (6th Cir. Aug. 28, 2014),  the U.S. Court of Appeals for the Sixth Circuit, in a 2-1 decision, said the answer was “no,” and that the answer would have been the same had the AB/BC award been confirmed. See slip op. at 10-11.

The two-judge majority opinion—authored by Chief Circuit Court Judge R. Guy Cole, and joined by Circuit (and former Chief) Judge Danny Julian Boggs—minced no words when it said that to bar A’s lawsuit based on res judicata would be to endorse a “contagion theory of arbitration” that “has no basis in law or the relevant contracts[:]”

Simply put: the premise of arbitration is consent and [A] did not consent to arbitrate the present claims [against C]. Our judicial doctrines do not force it to do so now.

Slip op. at 10-11.

Circuit Court Judge David William McKeague dissented, arguing that the “court does not need to infect [A] with a ‘contagion theory of arbitration’ to bar his claims with res judicata. It merely needs to hold him to the basic terms of his contract. Any infection that [A] O’Neil has acquired is its own doing.” That was so, claimed the dissent, because:

[The AB arbitration was] eventually expanded to include [C]. Moreover, in [subcontractor A’s] contract with [construction manager B], [A] agreed to arbitrate his grievances with [B] and further agreed in a standard ‘flowthrough’ provision to be ‘bound by the procedures, decision and determinations resulting from any dispute resolution process’ in the contract between [B] and [the owner].  The contract between [B] and the [owner] required all disputes, among all contractors, to be submitted to binding arbitration.

Slip op. at 13 (emphasis in original) (McKeague, J., dissenting).

All three judges appeared to agree that res judicata does not turn on whether the first proceeding would have barred the second had the first been a plenary court proceeding. The difference of opinion between the majority and dissent was that the dissent was prepared to find A’s agreement to consolidated arbitration was the functional equivalent of an agreement arbitrate its claims against any person who might consent to join such a consolidated arbitration, even if A had no contractual relationship with that person, let alone a written agreement to arbitrate.

We think the majority’s read of the relevant contractual provisions gave effect to the parties expressed intent, whereas the dissent’s view of what the parties agreed did not. But to appreciate why, you’ll need to take a closer look at the Sheply facts, which in substance are much like (but not identical to) those in our hypothetical. Continue Reading »

Update on Federal Arbitration Act Cases Pending in the United States Supreme Court

September 29th, 2009 Awards, Class Action Arbitration, Class Action Waivers, Consolidation of Arbitration Proceedings, United States Court of Appeals for the Ninth Circuit 1 Comment »

Today the United States Supreme Court is considering whether to grant certiorari in three cases that concern whether manifest disregard of the law remains a viable ground for vacating or modifying an arbitration award after Hall Street Assoc., L.L.C. v. Mattel , Inc, 552 U.S. ___, slip op. (March 25, 2008).  The first is The Coffee Beanery, Ltd. v. WW, LLC, 300 Fed. Appx. 415 (6th Cir. 2008), petition for cert. filed May 11, 2009 (08-1396), in which the United States Court of Appeals for the Sixth Circuit held that manifest disregard survived Hall Street as an independent ground for vacatur, and that an award in favor of a franchisor must be vacated because the arbitrator manifestly disregarded Maryland franchise law requiring franchisors to disclose certain types of prior criminal convictions.  The Sixth Circuit also found that the franchisor’s failure to disclose the conviction vitiated the arbitration clause contained in the franchise contract, a holding that seems questionable in light of Buckeye Check Cashing v. Cardegna, 546 U.S. 440, 449 (2006). 

The second case is Grain v. Trinity Health, 551 F.3d 374 (6th Cir. 2008), petition for cert. filed May 19, 2009 (08-1446), in which the Sixth Circuit held that the arbitrators’ failure to enforce the parties’ choice of Michigan law as respects the issue of costs and attorney fees — characterized as manifest disregard of the law — was not a valid ground for modifying an arbitration award under Federal Arbitration Act Section 11.  

The third is Improv West Associates v. Comedy Club, Inc.,  553 F.3d 1277 (9th Cir. ), petition for cert. filed June 8, 2009 (08-1529), in which the United States Court of Appeals for the Ninth Circuit held that manifest disregard of the law remained viable after Hall Street because it fell within the ambit of Federal Arbitration Act Section 10(a)(4), and vacated an award on the ground that the arbitrator’s interpretation of applicable state law was “fundamentally incorrect,” albeit made in good faith. 

The briefs in support of and in opposition to both petitions, as well as the lower court decisions, can be obtained by visiting one of our favorite blogs, the SCOTUSblog, here and  here.  It will be interesting to see whether the United States Supreme Court decides to grant certiorari in any or all of these cases.   

On a related matter, Petitioners’ and amici merits briefs in  Stolt-Nielsen, S.A. v. AnimalFeeds Int’l Corp., 548 F.3d 85 (2d Cir. 2009), petition for cert. granted June 15, 2009 (No. 08-1198) can be accessed via the American Bar Association’s website, here.  Respondent’s briefs are due later in October and oral argument has been scheduled for December 9, 2009.  (See Russ Kunkel’s LawMemo Arbitration Blog here).  We have written extensively on Stolt-Nielsen, which concerns whether class arbitration may be imposed on parties whose contracts are silent on that point.  (Posts available here,  here, here, here, here, here, here, here and here.)  

 Finally, we are following the petition for certiorari filed in the American Express Merchants’ Litigation (blogged here), which has not yet come up for conference.   The Amex Merchants’ Litigation concerns whether class arbitration waivers comport with federal antitrust policy. 

We shall keep readers apprised of developments as and when they occur.  .  .  .