Article by Hiroshi Motomura
This Article examines the collateral estoppel effect of findings made in arbitration. The issue can be phrased in several ways. When an arbitrator renders an award, just what, if anything, has been laid to rest? If an issue that an arbitrator has decided in rendering an award later arises in court litigation over a related claim, does the arbitrator's finding on that issue have the same binding effect as a finding made in litigation?
Let me illustrate the problem. A dissatisfied investor seeks damages from a securities brokerage firm, claiming that the firm improperly handled his account. An arbitrator exonerates the firm, finding that the firm's handling of the account was proper because the investor specifically authorized the challenged transactions. The investor then files a lawsuit against the individual broker responsible for the account, and one issue in this action is whether the investor specifically authorized the transactions. Assuming that a prior judicial finding on this issue would bind the investor, is the determination by an arbitrator likewise binding?
This topic is important and timely. Arbitration is used increasingly as an alternative to litigation, and the United States Supreme Court has decided a number of major arbitration cases in the past several years. When viewed in broad perspective, these cases have attempted to define the universe of claims that may be arbitrated rather than reserved exclusively for litigation. In this sense, these cases have raised and decided jurisdictional issues.
Several decisions upheld the authority of arbitrators to decide certain claims, such as securities law claims, which many observers had believed to be beyond arbitral jurisdiction. Another decision established that when a case involves both arbitrable and nonarbitrable claims, a court has no authority to stay arbitration until after the nonarbitrable claims are litigated. Two other decisions declared the preemption of provisions of state law that would have limited access to arbitration under federal law. In each of these cases, the Court addressed a jurisdictional issue that had divided lower courts, and it declared a significant expansion of access to arbitration.
Although these and other cases make it plain that federal policy relies heavily on arbitration as an alternative method of dispute resolution, they leave many aspects of the relationship between arbitration and litigation unclear. In particular, this recent flurry of cases may prompt observers to view arbitration policy from a jurisdictional perspective that confines itself to deciding which claims may go to arbitration and which claims may not. However, we also need to know what arbitral awards mean after they are made. Even the most sensible and coherent approach to jurisdiction can be subtly but effectively undermined by ill-conceived preclusion rules. We can successfully coordinate arbitral and judicial decisionmaking only if we fully appreciate the relationship between prospective rules to control arbitral jurisdiction and retrospective control by way of the preclusion doctrines.
This Article attempts to determine what the preclusion rules should be for arbitral decisionmaking. In broader terms, it is a case study in the use of preclusion to shape procedural choices. Preclusion usually refers to res judicata and collateral estoppel. Under res judicata, also known as claim preclusion, a final judgment on the merits bars further suit by parties or their privies on the same claim. This presents the easier question. If an arbitral award does not preclude any later litigation that asserts the same claim, no dispute resolution has occurred, and the award is nugatory. In this sense, arbitral awards and court judgments must have the same binding effect. In the prior example, it is clear that the investor, having unsuccessfully arbitrated his claim against the brokerage firm, may not later initiate litigation raising that same claim against the firm.
My focus here is a more complex question—the collateral estoppel effect of an arbitral award when the same issue arises in later litigation. Under collateral estoppel, or issue preclusion, parties to a lawsuit and their privies are bound by any decision of fact or law fully and fairly litigated in a previous suit and necessary to that judgment. In the brokerage firm example above, does the arbitrator's finding—that the investor authorized the challenged transactions—later bind the investor when he sues the individual broker in court? No arbitration statutes or rules specifically address this question, and parties rarely, if ever, address it in arbitration agreements. Yet it has been widely assumed that arbitration awards may have the same collateral estoppel effect as court judgments. This Article accepts the Supreme Court's recent invitation to reexamine that assumption.
Part II examines the cases that have directly considered the arbitral collateral estoppel issue. Under the dominant approach, courts accord collateral estoppel to arbitral findings on a case-by-case basis, depending on the magnitude of the differences between the litigation and a given arbitration. Part III analyzes this case-by-case approach and concludes that it is likely to frustrate the long-term use of arbitration either by discouraging arbitration in close cases, or by pressuring arbitration to resemble litigation so much that it cannot provide a meaningful alternative. In Part IV, I suggest that arbitral findings should be admitted into evidence in later litigation involving the same issue, but that courts should deny collateral estoppel effect to the findings unless the arbitration agreement clearly provides otherwise.
About the Author
Hiroshi Motomura. Associate Professor of Law, University of Colorado School of Law, Boulder.
Citation
63 Tul. L. Rev. 29 (1988)