menu

Employers Ins. Co. of Wausau v. OneBeacon Am. Ins. Co

Issue Discussed: Power of Arbitrators

Submitted by Mark T. Megaw

Date Promulgated: February 26, 2014

Issues Decided: When an arbitration award is confirmed by a federal court order, whether that decision has a preclusive effect on a subsequent arbitration is a matter for an arbitrator to decide, not the federal court.

On February 26, 2014, the United States Court of Appeals for the First Circuit in Employers Insurance Company of Wausau v. OneBeacon American Insurance Company held that the preclusive effect of a prior arbitration award was a matter for arbitrators and not the federal courts, even where the award had been confirmed by a federal court.

Between 1966 and 1986, OneBeacon American Insurance Company (“OneBeacon”) “had a program known as ‘Multiple Line Excess Cover’ under which it annually entered into reinsurance contracts with various reinsurers,” including, at various times, National Casualty Company (“National Casualty”), Employers Insurance Company of Wausau (“Wausau”), and Swiss Reinsurance American Corporation (“Swiss Re”). Id. at *2. In 2007, OneBeacon “demanded arbitration” against Swiss Re under the MLEC Agreements. The arbitration panel “decided in favor of Swiss Re, and the District Court of Massachusetts confirmed the award.” Id.

In April 2012, OneBeacon demanded arbitration against National Casualty and Wausau under the MLEC Agreements. Wausau and National Casualty then “petitioned the District Court of Massachusetts for a declaratory judgment that the prior arbitration award between OneBeacon and Swiss Re had preclusive effect on the arbitration pending between OneBeacon and Wausau.” Id. at *3. The district court “denied the petition, holding that ‘the preclusive effect of a prior arbitration is a matter for the arbitrator to decide.” Id.

On appeal, the Reinsurers argued: (1) “that federal courts have the exclusive authority to determine the preclusive effects of their judgments, so an arbitrator lacks the authority to determine the preclusive effect of a prior arbitration once it has been confirmed by a federal court:” and (2) “when the parties negotiated their arbitration agreement in the early seventies, the applicable case law did not hold that preclusion was an arbitrable issue,” and “[t]hus, the parties could not have intended for the scope of their arbitration agreement to cover the preclusive effect of prior arbitrations.” Id. at *4. The Circuit Court found “the first argument is unpersuasive and the second argument is waived.” Id.

With respect to the preclusive effect of a prior arbitral award, the Circuit Court started with the language of the applicable arbitration clauses. According to the Court, the clauses were “broadly worded” and “cover ‘any irreconcilable dispute between the parties in connection with’ the MLEC Agreements.”Id. at *5. Thus, “by their plain terms [the MLEC Agreements] would appear to include disputes over the preclusive effect of prior arbitrations.” Id. Next, the Circuit Court pointed to “broad agreement among the circuit courts that the ‘effect of an arbitration award on future awards…is properly resolved through arbitration.” Id. at *6 (internal citations omitted). Finally, the Circuit Court addressed what it characterized as a Wausau’s “straightforward syllogism”:

(1) Section 13 of the FAA provides that an order confirming an arbitration award “shall have the same force and effect, in all respects, as, and be subject to all the provisions of law relating to, a judgment in an action,” 9 U.S.C. § 13; and

(2) enforcement of a federal judgment, including the determination of its preclusive effect, is the “exclusive province of federal courts”; therefore (3) only federal courts have the authority to determine the preclusive effect of an arbitration award after it has been confirmed by a court order. Any other conclusion, according to Wausau, would violate the unambiguous text of Section 13 placing orders confirming arbitration awards on equal footing with all other court orders. Id. at *7.

Noting that the “First Circuit has not addressed this issue,” the Circuit Court “agree[d]” with the district court’s reliance “on the Ninth Circuit’s opinion in Chiron to conclude that judicial confirmation of an arbitration award ‘does not warrant deviation from the general rule that the preclusive effect of a prior arbitration is a matter for the arbitrator to decide.’” Id. at *7-8. The Circuit Court stated that “[t]he flaw in Wausau’s logic is that a federal judgment confirming an arbitration award is distinct from the arbitration award itself.” Id. at *8. “A federal judgment confirming the arbitration award generally does not address the steps leading to the decision on the merits at all.” Id. at 10. “Since these matters are outside of the purview of the court order confirming the arbitration decision, there is no reason why that order should give the federal court the exclusive power to determine the preclusive effect of the arbitration.” Thus, “[t]he prerogative of the federal court to protect its own judgments does not need to extend beyond the scope of the judgment itself.”Id. The Circuit Court explained that “[t]his conclusion does no violence to the text of Section 13 or the Congressional intent underlying it,” and it does not “harm the federal court’s power to enforce its own judgments,” but, instead “simply means that the federal court will protect its judgments within their proper bounds.” Id. at *10-11. Accordingly, the Circuit Court would “not deviate here from the general rule that the preclusive effect of a prior arbitration is an arbitrable issue.” Id. at 11.

Finally, the Circuit Court held that, “[b]y failing to raise the argument” before the district court, Wausau waived the argument that, “at the time the parties negotiated the MLEC Agreements, ‘the law in existence…required that the question of the collateral estoppel effect of a federal judgment entered on an arbitral award would be decided by a court, not arbitrators.”’ Id. at *11-12.

*Mark Megaw is an ARIAS Board Member and co-chair of the ARIAS Law Committee.