The U.S. Court of Appeals for the First Circuit earlier this year held that the preclusive effect of a prior arbitration is itself a matter for arbitration as between a reinsurer and its cedent.  The decision in Employers Insurance Company of Wausau v. OneBeacon American Insurance Company, No. 13-1913 (1st Cir. Feb. 26, 2014), available here, is of interest to all who arbitrate claims because the Court’s decision also discussed when a subsequent arbitration panel would have to consider a court judgment upholding a prior arbitration panel’s award.

The case arose out of a series of agreements between OneBeacon and its various reinsurers, including Wausau (1973-74) and Swiss Re (1975-80).  In all material respects, the reinsurance agreements were identical.  In December 2007, OneBeacon demanded arbitration with Swiss Re, claiming that OneBeacon was entitled to reinsurance recovery for a series of losses arising out of underlying direct claims.  The arbitration panel decided in favor of Swiss Re, and the federal district court in Massachusetts confirmed the award.

In April 2012, OneBeacon demanded arbitration with Wausau.  Wausau claimed that the demand included approximately $100,000 for the very same claims that OneBeacon had arbitrated against Swiss Re – and lost.  Wausau subsequently petitioned the federal district court in Massachusetts for a declaration that the prior arbitration award between OneBeacon and Swiss Re had preclusive effect in the arbitration between OneBeacon and Wausau.  The district court denied the petition, holding that “the preclusive effect of a prior arbitration is a matter for the arbitrator to decide.”

On appeal, Wausau argued in part that it was for the federal court alone to determine the preclusive effect of its judgment confirming the prior arbitration award.  Affirming the district court, the First Circuit drew a distinction between a federal judgment confirming an arbitration award, and the arbitration award itself.  The court observed that a federal judgment very rarely considers the merits of an arbitrator’s decision.  Rather, judicial review of an arbitration award prior to confirmation under the Federal Arbitration Act is limited to two narrow purposes: whether the decision should be vacated on one of the specific grounds set forth in the FAA itself, and enforcement of the arbitration award.  What Wausau was asking the court to do, the First Circuit held, was perform a collateral estoppel analysis, which inherently involves an examination of the details of the prior arbitration, and is beyond the scope of what the FAA permits.

The First Circuit was careful to point out that the federal courts retain jurisdiction to protect their judgments, within their proper bounds.  So, for example, if a federal court expressly found that an arbitration award was not fraudulent and ordered that it be enforced, a subsequent arbitrator would not be able to decide to the contrary.  But if the court says nothing about the merits of the arbitration award that it confirms – which is almost always the case – then a subsequent arbitrator does not infringe on the prerogatives of the federal court in determining the preclusive effect of that arbitration decision.

The First Circuit’s holding is in keeping with the purposes of the FAA, which broadly encourages parties to resolve disputes according to the means they have chosen.  By signaling that federal courts will only narrowly review arbitration awards, and that courts will often not address the merits of the disputes resolved by those awards, the First Circuit reaffirmed that arbitration remains a flexible means of dispute resolution, but that the courts will hold the parties to the terms of their arbitration agreements.