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Arbitrators should be given the same broad discretion as courts to determine whether the doctrine of offensive non-mutual collateral estoppel should be applied to a particular claim, and an arbitrator does not engage in manifest disregard of the law in exercising that discretion without the benefit of clear precedent on the issue, according to the Ninth Circuit Court of Appeals.
In Collins v. D.R. Horton, Inc., No. 05-15737, 2007 WL 2756956 (9th Cir. Sept. 24, 2007), Collins and other employees entered into employment contracts with Continental, as it began merger negotiations with Horton. Once the merger was complete, several employees, including Collins and Hickcox, alleged that Horton violated those agreements by failing to honor the severance packages within the contracts once the employees’ employment terminated. Hickcox, another former Continental employee under the contract, alleged Horton had terminated him without good cause; Collins had resigned, alleging that the resignation fell under the “for good reason” provision of the contract, and therefore entitled him to severance.
Hickcox first brought an action against Horton for breaching his employment contract. Horton sought to consolidate the Hickcox and Collins claims, but the district court refused, alleging that the different circumstances surrounding their claims outweighed any benefit of consolidation. Horton then sought to arbitrate the Hickcox claim, but the district court refused to compel arbitration, holding that such employment contracts were exempt from enforcement under the Federal Arbitration Act (FAA). The district court ultimately found for Hickcox, and awarded damages, including damages for fraud regarding certain shares of stock promised to Hickcox.
Between the time the district court considered the Hickcox motion to compel and the Collins motion to compel, the United States Supreme Court held that such employment contracts were within the scope of the FAA, and the court compelled arbitration of Collins’ claims. At arbitration, Collins argued that collateral estoppel should apply to his claims, since the Hickcox court found, under the same contract, that Horton had engaged in fraud as to the stock promises. The arbitrator refused, finding that even though the Hickcox decision was final, it was subject to appeal, and it would be inappropriate to apply collateral estoppel to the arbitrated claims because arbitration did not provide a similar opportunity for appeal should the Hickcox decision be in error.
The arbitrator proceeded to render an award for breach of contract in favor of Collins, but refused to find fraud as to the stock promises. Collins then petitioned the district court for vacatur on the stock promises finding, alleging that the arbitrator engaged in manifest disregard of the law in refusing to apply the doctrine of collateral estoppel on that point. The district court denied the petition for partial vacatur, holding that the refusal to apply collateral estoppel was in error, but that the failure did not constitute manifest disregard of the law.
On appeal, the Court affirmed the judgment of the district court, and held that the arbitrator had not engaged in manifest disregard of the law that would warrant vacating the stock promise portion of the award. According to the Court, manifest disregard of the law is a “narrow standard,” requiring that the arbitrator “recognized the applicable law and then ignored it.”
While the Ninth Circuit had not yet considered the proper application of collateral estoppel in arbitration proceedings to prior federal judgments, the Court observed that most circuits have held that application of collateral estoppel is proper. But, the Court distinguished the instant case as one of “offensive non-mutual collateral estoppel,” where a party “seeks to estop a defendant from relitigating an issue which the defendant previously litigated and lost against another plaintiff.”
The Court, applying United States Supreme Court precedent, found that in this case, the proper application of offensive non-mutual collateral estoppel was to grant the district court “broad discretion to determine when it should be applied,” focusing on whether its application “would be unfair to a defendant.” Furthermore, according to the Court, there was “no basis for denying arbitrators the same broad discretion possessed by district courts.”
However, regardless of whether the arbitrator exercised this broad discretion, the Court did not find the arbitrator here had engaged in manifest disregard of the law. The Court emphasized that manifest disregard of the law could only be found when the applicable law was known and ignored by the arbitrators. Here, according to the Court, there could be no finding of manifest disregard, since there was no binding precedent for the arbitrator to consult as to whether an arbitrator was required to apply offensive non-mutual collateral estoppel in this situation.
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