The Ninth Circuit has issued an important opinion on the preclusive effect of arbitral awards on non-arbitral portions of the parties’ litigation; so, today’s “Highlights” largely addresses that case. However, there are, also, some practical lessons for arbitrators and an odd footnote from the Second Circuit.

Issue Preclusion in a Statutorily Non-arbitrable case; Sarbanes-Oxley Act

The Sarbanes-Oxley Act (SOX) prohibits the mandatory arbitration of SOX claims under a predispute agreement.  However, what happens when an action includes non-SOX claims which go to arbitration and the arbitrator resolves those claims based upon facts that would be determinative of the SOX claims?  Is the plaintiff precluded from relitigating those issues before the court in the remaining SOX claims?  The Ninth Circuit says “yes” in a divided opinion, Hansen v. Musk, 2024 U.S. App. LEXIS 31237 (9^th Cir. December 10, 2024).

Hansen claimed that he was the subject of retaliation for his reporting of alleged misconduct to the SEC and Tesla management.  He brought claims under federal and state RICO acts, the Dodd-Frank whistleblower protection act, and Sarbanes-Oxley.  Defendants moved to compel arbitration under Plaintiff’s employment agreement.  The District Court granted the motion except as to the SOX claims, holding those are statutorily non-arbitrable, see 18 U.S.C. § 1514A(e)(2). The arbitrator found in favor of defendants on all the claims before him.  The District Court confirmed the award.  After confirmation, Defendants Musk and U.S. Security Associates moved to dismiss the entire suit, arguing that the court must give preclusive effect to the arbitrator’s finding that Hansen was not engaged in SOX-protected activity.  Absent such protected activity, Defendants contended, there could be no recovery under SOX.  The District Court agreed and dismissed the action.  This appeal ensued.

The panel split, with Circuit Judge H.A. Thomas, writing for herself and Circuit Judge Johnstone, affirming the District Court, while Circuit Judge Collins concurs in part and dissents in part.

The majority views the case as centering on a question of first impression in the Circuit – “whether a confirmed arbitration award resolving an arbitrable claim could preclude a separate claim made nonarbitrable by statute.”  As a starting point, the majority looks to Section 13 of the Federal Arbitration Act, which provides that a confirmed arbitration award is to be given the same effect as a final judicial decision on the merits, including, the court opines, the same preclusive effect. The opinion, then, looks to see whether there is any indication that Congress intended to carve SOX claims out of this general provision of the FAA.  It finds none.  As there is no “’clear and manifest‘ expression of congressional intent, [the panel] will not presume that another statute has displaced the Federal Arbitration Act’s requirements.   We therefore see no reason to exempt SOX claims from the preclusive effect afforded to confirmed arbitral awards.” (Citations omitted).

The court next moves to Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213 (1985), for the proposition that, when some issues go to arbitration while the court retains jurisdiction over others, the court may determine “what preclusive effect should be given to the arbitration proceedings.”  That case, Judge Thomas opines, holds that “courts can continue to apply conventional ‘preclusion doctrine’ to ‘directly and effectively protect federal interests by determining the preclusive effect to be given to an arbitration proceeding.’”  Those interests include whether the “arbitration proceedings provide a ‘full and fair opportunity to litigate’ the preclusive issues, and that ‘the issue was actually litigated and decided’ in the arbitration proceedings.”  Finding that the arbitration met both of those touchstones, the majority affirms the District Court’s dismissal of the SOX claim based upon the preclusive effect of the arbitrator’s findings.

Circuit Judge Collins dissents from this portion of the opinion.[1]  He opines that the preclusion issue must be resolved under federal common law.  Referencing Section 84(3)(a) of the Restatement (Second) of Judgments, Judge Collins argues that “’the conclusive effect of an arbitration award is subordinate’ to any ‘statutory provision for alternate or supplementary procedures’ governing a dispute.”  Relying on Alexander v. Gardner-Denver Co., 415 U.S. 36 (1974), and its progeny, the dissenter opines that “preclusion ‘understandably’ would not be afforded to an arbitral award so as to bar litigation of a statutory claim when the ‘arbitrators were not authorized to resolve such claims,’” quoting 14 Penn Plaza LLC v. Pyett, 556 U.S. 247, 264 (2009).  Judge Collins further disagrees with the majority’s understanding of Byrd, reading the case as permitting arbitration “precisely because preclusive effect could later be denied to the arbitration award is warranted.” (Emphasis in opinion).  In summary, Judge Collins would remand the dismissal of the SOX claims to the District Court for “further proceedings concerning that claim” – presumably, ordinary motion practice and, if the claims are not dismissed, a trial thereon.

At first blush, the case might seem to have limited applicability, as there are not an abundance of SOX claims each year.  However, remember that there is another, much larger set of statutorily non-arbitrable claims – those cases which fall within the provisions of the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act.  How does a court address the results of the arbitration of non-EFASA claims when considering sexual assault or harassment matters which are pled in the same case?[2]

A final thought – to any law students looking for a subject for their senior note or write-on to law review, consider this case.  It is heavily citation-laden, well-written by both the majority and dissenter, and the issue preclusion question is one that runs throughout post-award jurisprudence.

Quick Hits –

Litigation Waiver

In WCW, Inc. v. Atlantis Industries, Inc. 2024 U.S. App. LEXIS 31447 (2^nd Cir. December 9, 2024)(Summary Order)(Kearse, Raggi, and Kahn, Circuit Judges), the Court affirms the District Court’s denial, based on litigation waiver, of a motion to compel arbitration.  The interesting aspect of this otherwise routine decision is a footnote in which the panel recognizes that “Since Morgan [v. Sundance, Inc. 596 U.S. 411 (2022)] this court has not clarified in a  precedential opinion the test for evaluating waiver of arbitration.”  It, then, cites District Court opinions which have adopted slightly conflicting standards.  Maybe it’s time for the Circuit to find a case in which to enunciate a uniform standard – and why not this one?

Arbitrator Awards and Rulings

Blake v. Rocklyn Homes, Inc., 2024 U.S. App. LEXIS 30570 (11^th Cir. December 4, 2024)(per curiam)(Circuit Judges Wilson, Jordan, and Lagoa), is a reminder of two basics of arbitral behavior.  First, be sure to end all final awards with the blanket language that “all claims not expressly granted. . . are hereby denied.” The court relies upon that portion of the arbitrator’s award to reject Blake’s claim that the tribunal failed to resolve all the issues which the parties presented.  Second, premise all rulings on some neutral, objective standard and voice that standard.  In asserting a claim of bias, Plaintiff maintained that the arbitrator erred in quashing third-party subpoenas.  The court rejects that claim, holding that it is doing so “even if the arbitrator based his procedural ruling on his personal preferences for handling subpoenas. . . . “  The short opinion does not give any details as to the procedural question, but it is a reminder to arbitrators to be precise in the language used in making rulings and to find some record-based standard to which to tie the order.  Why give a party ammunition for a vacatur motion?

It’s Friday, the Thirteenth.  May you avoid ladders, not spill salt, and meet no black cats – but, do have a good weekend. See you next week.

David Reif, FCIArb

Reif ADR

Dreif@reifadr.com

[1] He concurs with the majority to the extent that it affirms the District Court’s dismissal of the non-SOX claims based upon the arbitrator’s dismissal.

 

[2] Some courts have held that all claims in such litigation are non-arbitrable, regardless of whether they directly involve harassment or assault, but this is not a uniform rule.