In Citigroup, Inc. v. Abu Dhabi Investment Authority, No. 13-4825 (2d Cir. Jan 14, 2015) (click here for a copy of the decision), the Second Circuit refused to enjoin a second arbitration proceeding based on the alleged claim-preclusive effect of a court’s judgment confirming an earlier arbitration award between the parties. As explained below, I believe the decision is flawed and contrary to the Federal Arbitration Act.
Citigroup allegedly breached an investment agreement with Abu Dhabi Investment Authority (ADIA), and the first arbitration award, which was confirmed by a district court, found in favor of Citigroup. ADIA then commenced a second arbitration proceeding against Citigroup. In response, Citigroup filed an action in federal district court pursuant to the All Writs Act to enjoin the second arbitration on the grounds of claim preclusion because the claims raised in the second arbitration could have been raised during the first arbitration proceeding. However, the district court refused to enjoin the second arbitration reasoning that the second arbitration panel, not a court, should resolve the preclusive effect of the first arbitration proceeding. The Second Circuit confirmed the district court’s refusal to enjoin the second arbitration proceeding.
Consider the following two hypotheticals:
Hypothetical #1: A court issues a judgment after a full trial on the merits, followed by the loser commencing an arbitration proceeding on the same issues.
Hypothetical #2: A court issues a judgment confirming an arbitration award, followed by the loser commencing an arbitration proceeding on the same issues.
Courts faced with the first hypothetical have enjoined the loser’s second arbitration proceeding based on the claim preclusive effect of the first judgment. However, the Second Circuit in this Citigroup case faced the second hypothetical and distinguished it from the first hypothetical. The Second Circuit in Citigroup, in effect, had to reconcile the All Writs Act, which permits a federal court to issue orders protecting its prior judgments, with the Federal Arbitration Act. The Second Circuit reasoned that in light of the broad arbitration clause between the two sophisticated parties at issue, the FAA’s strong policy in favor of arbitration would control and indicated that arbitrators, not courts, should decide the claim-preclusive effect of a prior court judgment confirming an arbitration award. In reaching its decision, the Second Circuit believed that the Citigroup case was different from the first hypothetical mentioned above because the prior court judgment did not really address the merits of the underlying investment dispute. Instead, the prior court judgment in this Citigroup case merely confirmed an arbitration award in a summary proceeding with extremely limited review. The Second Circuit believed hypothetical #2 should be treated differently.
In my mind, hypotheticals #1 and #2 set forth above should be indistinguishable, and just like courts enjoin a subsequent arbitration filed by a losing party in the first hypothetical, courts should do the exact same in the second. Under the FAA, a confirmed arbitration award is supposed to be equal in all respects to a court’s judgment on the merits. (If a confirmed arbitration award is not equal to a court’s judgment on the merits, such discriminatory treatment would undermine the value of arbitration.) The Second Circuit’s decision seems to treat a confirmed arbitration award as less meritorious of protection than a court’s judgment addressing the underlying merits of a dispute. The parties made a contract to receive a final, binding arbitration award, and the Federal Arbitration Act guarantees this finality. The Second Circuit’s decision, however, undermines the finality of arbitration awards by permitting subsequent arbitration panels to revisit a prior arbitration award. By entering into an arbitration agreement, parties expect an arbitration proceeding to end a dispute once and for all. Unfortunately, the Second Circuit’s decision in effect construes a broad, pre-dispute arbitration clause as permitting a loser to continuously challenge a prior arbitration proceeding through a series of subsequent arbitration proceedings. It seems that under the Second Circuit’s application of the FAA, a broad, pre-dispute arbitration clause forever gives continuous power to arbitrators to revisit a prior arbitration award, but this interpretation gives too much weight to an arbitration clause and conflicts with the finality of an award recognized by the FAA. If parties desired a second arbitration panel to revisit a prior arbitration award, a new, post-dispute arbitration agreement should permit this, but an original pre-dispute arbitration agreement should generally not be interpreted in this expansive manner in light of the finality of awards.