Most parties that enter into arbitration agreements do not expect their choice to be diminished by being forced to litigate in open court. This paramount deference to contractual freedom is a hallmark of US law as well as the practice in the United States Court of Appeals for the Second Circuit.
Earlier this month, the Appeals Court for the Second Circuit once again confirmed that this stance gives arbitrators, not courts, the power to determine whether a claim is barred by a prior adjudication or arbitration under the principle of res judicata. Critically, the ruling stands in line with the ever-growing list of cases demonstrating the New York courts’ pro-arbitration stance.
In Citigroup, Inc. v. Abu Dhabi Investment Authority, No. 13-4825-cv (2d Cir. Jan. 14, 2015), the Second Circuit affirmed a District Court’s judgment to dismiss a complaint and compel arbitration, rather than have the District Court determine the preclusive effect of a District Court judgment that confirmed an award from a prior arbitration between the parties.
In this matter, the Abu Dhabi Investment Authority (ADIA) invested billions of dollars in Citigroup under the parties’ Investment Agreement. The Agreement’s broad arbitration clause stated that “any dispute that arises out of or relates to the [Agreement], or the breach thereof ... will be decided through arbitration administered by the American Arbitration Association.”
In 2009, ADIA commenced arbitration proceedings, alleging that Citigroup committed fraud, securities fraud, negligent misrepresentation, breach of fiduciary duty, breach of contract, and breach of the implied covenant of good faith and fair dealing by issuing preferred shares to other investors and diluting the value of ADIA’s investment. The arbitration panel denied ADIA’s claims and ruled for Citigroup. Citigroup then had the award confirmed by the District Court, as is routine following an award. ADIA appealed the confirmation order but (again, as is routine) the Second Circuit affirmed the award confirmation.
In August 2013, ADIA served Citigroup with a new notice of arbitration. In response, rather than argue its position to the new arbitrators, Citigroup sought to have the District Court determine there should be no arbitration. Citigroup invoked several federal statutes and asked the District Court to enjoin the second arbitration, citing the Declaratory Judgment Act, the All Writs Act, the Federal Arbitration Act (FAA), 9 U.S.C. § 1, et seq., and the District Court’s “inherent authority to protect its proceedings and judgments.” Citigroup argued that ADIA’s claims were, or could have been, raised during the initial arbitration and therefore the new claims should be precluded by the doctrine of res judicata. ADIA moved to dismiss Citigroup’s complaint and compel arbitration.
In granting ADIA’s motions, the District Court invoked its strong pro-arbitration policy, referring to the Second Circuit decision in National Union Fire Insurance Co. of Pittsburgh, PA v. Belco Petroleum Corp. (Belco), 88 F.3d 129 (2d Cir. 1996), which held that the arbitrators should decide preclusive effect of a prior arbitration that a state court has confirmed. The District Court determined that Citigroup’s case did not invoke any of the bases for application of the federal statues, specifically, any “separate, ongoing proceeding at risk of being undermined by the second arbitration” and “no basis for an extraordinary remedy to issue under the All Writs Act.”
The Second Circuit affirmed the District Court’s judgment. The Court highlighted the “national policy favoring arbitration when the parties contract for that mode of dispute resolution” and the statutory mandate that the federal courts can “conduct only a limited review of discrete issues before compelling arbitration, leaving the resolution of all other disputes to the arbitrators,” citing both Preston v. Ferrer, 552 U.S. 346, 349 (2008) and Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 83–84 (2002).
Of course, courts must also ensure “the integrity of federal judgments” and, where appropriate, invoke the All Writs Act to “issue all writs necessary or appropriate in aid of their respective jurisdictions,” 28 U.S.C. § 1651(a), for example, enjoining arbitrations if they threaten court decisions. See In re Y & A Grp. Sec. Litig., 38 F.3d 380, 382–83 (8th Cir. 1994) (“The All Writs Act makes plain that each federal court is the sole arbiter of how to protect its own judgments: federal courts may issue all writs necessary ... in aid of their respective jurisdictions ... It is this concept that underlies the related rule that the court which issues an injunction is the only one with authority to enforce it”) (internal quotations and citations omitted).
Under the FAA, the disputes between parties to an arbitration agreement should be decided by the arbitrators unless the parties expressly agree that a court should decide arbitrability or some statutory provision dictates otherwise, and they are rare. See Howsam, 537 U.S. at 83–84. In In re Am. Express Fin. Advisors Sec. Litig., 672 F.3d 113, 140 (2d Cir. 2011), for example, an arbitration was enjoined solely because the District Court had been granted “exclusive jurisdiction” over the case when the parties entered into a settlement agreement. But here, the parties chose arbitration, not exclusive court jurisdiction, and the courts enforced that choice. Acting in accordance with its rulings in Belco and United States Fire Ins. Co. v. National Gypsum Co., 101 F.3d 813, 816–17 (2d Cir. 1996), that respectively held that the arbitrators should determine the claim-preclusive effect of an arbitration award confirmed by a state court and the issue-preclusive effect of a federal judgment, the Second Circuit ruled that “it is a simple intuitive step to conclude that arbitrators should also decide the claim-preclusive effect of a federal judgment confirming an arbitral award.” The Court concluded that this case did not present any circumstances under which an All Writs Act injunction should be imposed.
Unless parties draft around their arbitration agreements to confer jurisdiction on courts, it is in arbitration that their disputes will be decided, including whether an arbitration demand is barred by relief in a prior award under the doctrine of res judicata.