Issue Preclusion in the Holiday Season

In celebration of the recent publication (November 30, 2018) of important sections of the American Law Institute’s Restatement (Second) of the U.S. Law of International Commercial and Investment Arbitration (in an as yet not formally ALI-approved Council Draft), concerning the topic of the issue preclusive (collateral estoppel) effect of international arbitration awards in later US litigation, today’s post will report upon findings of a brief excursion into recent US federal case law to see what the courts have actually been doing in this area.

As a foundation for the reader’s appreciation of this report, it seems to suitable to set forth here at the outset: first, the Restatement’s “black letter” in regard to this dimension of   issue preclusion, and second, the Restatement’s summary of the criteria applied by US courts to determine the issue-preclusive effect of prior adjudications (whether judgments or awards). Thus, the Restatement in Section 4-37 (as proposed for ALI Council approval) states:

Issue Preclusive Effect of Arbitral Award

            A court declines to permit reexamination of the merits of a specific issue of fact or law previously adjudicated in an international arbitral award to the extent that the party seeking preclusive effect establishes that:

     (a) the prior award is entitled to recognition under this Chapter;

     (b) the award satisfies the requirements for issue preclusion prescribed for an arbitral award by the law of the forum in which such recognition is sought; and

    (c) barring reexamination of the issue is consistent with the arbitration agreement and the reasonable expectations of the parties.

And in Section d (ii) of the Reporters’ Notes to this section the US forum requirements for issue preclusion are summarized as follows: “Although jurisdictions that embrace issue preclusion vary in their articulation of the governing standards, those jurisdictions that allow it commonly require that four central requirements be satisfied: (1) the parties must have been given a full and fair opportunity to litigate the relevant issues; (2) the issue on which preclusion is sought must actually have been decided in the previous adjudication; (3) resolution of the issue must be necessary to the previous adjudication; and (4) the party against whom preclusion is sought must be a party or in privity with a party to the previous adjudication.”

Having furnished this foundation, I now report on my recent excursion:

1. Whereas there is judicial discretion to give or withhold issue-preclusive effect to a prior arbitral award, the arbitration community has an understandable unease, a valid concern about awards being relegated to second-class status in relation to the judgments of courts. But major elements in the discretion equation are within the arbitrators’ substantial control: Can the Court can determine with confidence, from the Award and/or other submitted portions of the arbitral record, that the precise issue on which preclusive effect is sought was actually and necessarily decided in the arbitration? When a well-reasoned and precisely-crafted international arbitration award is involved, that concern should be satisfied most of the time — both as to the issues actually decided, and the procedures followed in the arbitration. As an illustration, in a recent case a federal district court in Texas gave preclusive effect to a factual finding made in a foreign arbitration that plaintiff suffered no economic harm by virtue of the merger of Respondent’s predecessor into the Respondent. And the Court was fully satisfied that the issue-precluded litigation plaintiff had received due process in the arbitration. The result was a summary judgment for defendant on the basis that damages could not be established on any of its litigation claims. (OJSC Ukrnafta v. Carpatsky Petroleum Corp., 2018 WL 5921228 (S.D. Tex. Nov. 13, 2018)). It is notable that in the same case, however, the court declined to find plaintiff’s claims to be time-barred, where the arbitral tribunal’s determination that plaintiff was a put on notice of its claims many years earlier was an alternative finding to the tribunal’s decision that no notice was even required under the contract. Thus the question of the timing of notification had not been necessarily decided in the arbitration.

2. Arbitral unease about US judicial discretion in regard to issue preclusion is most acute when it comes to the procedural differences between litigation and arbitration. There may be a visceral fear that US judges will systematically reject issue preclusion on the basis that a proceeding with more searching pre-hearing discovery, broader scope for oral witness examination, more fulsome opportunity to obtain the evidence of non-parties, might lead to a different outcome on an issue in the courtroom. My brief tour of case law for this post did not reveal a pattern in which such considerations resulted in denying preclusive effect to international awards. But many other considerations might come into play. For example, a federal judge in Los Angeles ruled in 2016 in a patent licensing case that an arbitral determination of the reasonable royalty rate against the same licensor would not be given preclusive effect for what were characterized as “equitable” reasons — notably, that in the case before the court the jury was charged with determining a broad range of fair contractual terms and not merely the royalty rate that the arbitral tribunal had addressed. (TCL Communications Technology Holdings Ltd. v. Ericsson, 2016 WL 6662725 (C.D. Cal. May 26, 2016)).

3. An arbitral tribunal might still be sitting, or a second arbitral tribunal in a related matter might be sitting, after confirmation of Award #1 by a US court. In that scenario, who decides issue preclusion? It it a matter for the Court, in “defense” of its judgment, or for the still-sitting tribunal? It seems that the issue-preclusive effect of Confirmed Award #1 in pending Arbitration #2 is likely to be seen by US courts as a matter for Tribunal #2. It was so held by the US Second Circuit Court of Appeals in Citigroup v Abu Dhabi Investment Authority, 776 F.3d 126 (2d Cir. 2015), where the Court held that an anti-arbitration injunction against Arbitration #2 would not be issued to “protect” the judgment confirming Award #1. In essence, the Court reasoned that federal courts’ interest in protecting their judgments from collateral attack did not justify taking an arbitrable dispute (over issue prelusion) away from the arbitrators, where the court’s judgment did not ensue from a plenary proceeding in the court but only from a motion to recognize and enforce the award under the New York Convention. But query whether the same outcome would follow if a party were seeking a stay of litigation on the merits, and not merely, as in Citigroup, an injunction against Arbitration #2. The case discussed below is indicative, in a positive way.

4. A recent case was resolved in favor of a discretionary stay of the merits litigation based on the potential issue-preclusive effect of a related pending international investor-State arbitration. In this case, plaintiffs who had invested in a mining concession in the African nation of Guinea brought (1) an ICSID arbitration against Guinea for breach of the mining concession and violations of international law, and (2) a US litigation against George Soros and Soros-affiliated non-profit entities who, the plaintiffs alleged, had under the pretext of helping Guinea to revoke the corruption-tainted mining contracts engaged by a prior regime, had tortiously interfered with plaintiffs’ rights. The District Court granted the Soros defendants’ motion for a stay, finding that the issues to be decided in the ICSID arbitration — mainly whether the mining concession was valid or instead was void based on corruption in its procurement — would “likely provide significant insight into, if not actually resolve, the claims asserted in this action.” (BSG Resources (Guinea) Ltd. v. Soros, 2017 WL 5897450 (S.D.N.Y. Nov. 29, 2017)).

5. The litigant to be precluded may not have been a party to, but only a participant in, the related earlier arbitration. In such a case, before finding a “full and fair opportunity to litigate” before the arbitral tribunal, there must be an especially careful assessment of the status and motives that the putative precluded party had when it participated in the arbitration. Suppose the later-litigating party was a voluntary non-party witness in the arbitration, and knew it was a potentially liable party that might have to resolve disputes with a party to the arbitration in court later on, and its exposure would depend largely on the arbitration outcome? That was the situation in SMS Demag Inc. v. ABB Transmissone & Distrobuzone, S.p.A., 2008 WL 906530 (W.D. Pa. Mar. 31, 2008), where the manufacturer of defective industrial machinery testified as a non-party in arbitration between the owner of the factory and the contractor-developer who had separately procured the machinery. Its witness role at the arbitration was held insufficient to satisfy the “full and fair opportunity to litigate” requirement, despite the clear incentive to limit its potential exposure. (Frequently but not uniformly, the application issue-preclusion law of the forum will require that the party sought to be precluded shall have been either a party or in privity with the party in the earlier proceeding. But that standard was not applicable in the SMS case, and so the examination of motives and incentives was necessarily more wide-ranging).

Distilling lessons about issue preclusion in the US courts for arbitrators and the parties appearing before them, we may take away the following points:

1. Issue preclusion as a potential basis to resolve an issue before the Court generally has the same jurisprudential status in relation to a prior arbitration as it does in relation to prior litigation. (This much can be said to be “black letter law”  enshrined for instance in the ALI’s Restatement (Second) of Judgments: “[A] valid and final award by arbitration has the same effects under the rules of res judicata, subject to the same exceptions and qualifications, as a judgment of a court”, sec. 84(1), with the clarification offered in ensuing text that “res judicata” here is used in a broad sense to include issue preclusion. The differences are mainly in the details, that is, how the arbitration process and arbitral award factor into the legal formula for deciding issue preclusion.
2. Whether or not the award has been enforced under the New York Convention appears not to factor into the courts’ assessments (although the pendency of an annulment proceeding would evidently raise doubt that the award is final). This is as it should be, because the transformation of the award into a court judgment contributes nothing on the question of what issues where actually and necessarily resolved, or whether the party to be precluded had a full and fair opportunity to litigate the issue. On the other hand, it seems at least implicit in the case law that a foreign or international arbitration award should be entitled to recognition, whether or not it has actually been recognized, as a predicate for giving issue-preclusive effect to findings of fact or law made by the Tribunal in an award. The new Restatement Council Draft provides in the “black letter” that “[a] court declines to permit reexamination on the merits of a specific issue of fact or law previously adjudicated in an international arbitral award to the extent that the party seeking preclusive effect demonstrates that: (a) the prior award is entitled to recognition under this Chapter….” In the Reporter’s Notes, no case law is cited illustrating an affirmative judicial finding of the award’s entitlement to recognition; it seems to be rather an analytical point, as stated by the Reporters, that “[a]n award that is not entitled to recognition cannot be granted issue preclusive effect. Thus, as an initial matter, issue preclusion is only possible in relation to an award that satisfies the requirements for recognition under this Chapter.” Closer examination of the record in cases discussed above might reveal that indeed the Claimant did provide sufficient factual basis to demonstrate that the award was entitled to recognition, and that no question in this regard was raised by the party against whom issue preclusion was sought.
3. Arbitrators generally know from the context of the case whether other proceedings are probable in which a party to the arbitration may seek issue preclusive effect against another and/or be confronted with an issue preclusion contention. The most obvious situation is where the parties have agreed to arbitrate certain types of claims and to litigate others, both types of claims arise from the same business dispute, and the arbitration occurs first. When this happens, arbitrators will wish to be especially mindful to state succinctly the issues actually presented and actually decided, and to recite the procedural history in a fashion that anticipates any possible claim that a party was not afforded fair opportunity to address an issue. (Here I do not mean to understate the technical-legal significance of a court judgment in the US law of issue preclusion, but only to emphasize that the possible frailties of arbitration from an issue preclusion perspective are not cured merely by a confirmation judgment).
4. Arbitration’s epic and incremental struggle for legitimacy in the US courts, over a period of several decades, should always be borne in mind. Richard Hulbert when he wrote nearly 30 years ago on this subject (Vol. 7 No. 1 Berkeley J. Int’l Law at p. 159) sought to enlighten US jurists about the due process procedural quality of prototypical international arbitrations – then far less well understood than they are today. But judicial misconceptions of arbitration persist, especially away from the major centers of judicial activity related to international arbitration. When writing with potential issue-preclusive impact, arbitrators do well to remember that the main exposure to arbitration of  many US judges relates to domestic awards written with little if any reference to evidence, case law, reasoning, or the arbitral process. Arbitration seems to be perennially on trial in the US courts despite its advances.

Thank you readers for your indulgence in reaching the end of this and prior posts. Wishing you all Happy Holidays.