Opinion ID: 2582098
Heading Depth: 2
Heading Rank: 1

Heading: collateral estoppel and arbitration

Text: ¶ 11 As indicated above, the trial court held that the Diamant arbitration provided a basis for the application of collateral estoppel in this case, and that the county was therefore precluded from litigating the issue of entitlement to back pay. Challenging this holding, the county contends that because the Diamant proceedings did not result in a final judgment on the merits, the elements of res judicata were not satisfied. The deputies counter that the trial court's preclusive rulings were correct and that because the county lost in the Diamant arbitration proceedings, it should not get another bite at the apple. The question of whether an arbitration decision may be given preclusive effect is a matter of first impression for this court. For the reasons that follow, we hold that a private arbitration award does not have nonmutual collateral estoppel effect unless the parties expressly provide for such preclusive effect beforehand.
¶ 12 The doctrine of res judicata embraces two distinct theories: claim preclusion and issue preclusion. Snyder v. Murray City Corp., 2003 UT 13, ¶ 33, 73 P.3d 325 (citing Salt Lake City v. Silver Fork Pipeline Corp., 913 P.2d 731, 733 (Utah 1995)). Claim preclusion involves the same parties or their privies and the same cause of action. It `precludes the relitigation of all issues that could have been litigated as well as those that were, in fact, litigated in the prior action.' Macris & Assocs. v. Neways, Inc., 2000 UT 93, ¶ 19, 16 P.3d 1214 (quoting Schaer v. State, 657 P.2d 1337, 1340 (Utah 1983) (citation omitted)). In contrast, issue preclusion, also known as collateral estoppel, arises from a different cause of action and prevents parties or their privies from relitigating facts and issues in the second suit that were fully litigated in the first suit. Id. In effect, once a party has had his or her day in court and lost, he or she does not get a second chance to prevail on the same issues. Berry v. Berry, 738 P.2d 246, 249 (Utah App.1987). In the instant case, the deputies argue that the dispute over pay inequities was resolved in the Diamant arbitration proceedings, and that collateral estoppel therefore precludes the county from relitigating the issue. ¶ 13 A party seeking to invoke collateral estoppel must establish that: (1) the issue decided in the prior adjudication is identical to the one presented in the instant action; (2) the party against whom issue preclusion is asserted was a party, or in privity with a party, to the prior adjudication; (3) the issue in the first action was completely, fully, and fairly litigated; and (4) the first suit resulted in a final judgment on the merits. Snyder, 2003 UT 13 at ¶ 35, 73 P.3d 325; Timm v. Dewsnup, 851 P.2d 1178, 1184 (Utah 1993). ¶ 14 Application of the doctrine of collateral estoppel may be unwarranted in circumstances where its purposes would not be served. See Estate of Covington v. Josephson, 888 P.2d 675, 678 (Utah Ct.App. 1994). These purposes include: (1) preserving the integrity of the judicial system by preventing inconsistent judicial outcomes; (2) promoting judicial economy by preventing previously litigated issues from being relitigated; and (3) protecting litigants from harassment by vexatious litigation. Parklane Hosiery Co. v. Shore, 439 U.S. 322, 326, 99 S.Ct. 645, 58 L.Ed.2d 552 (1979); State ex rel. J.J.T., 877 P.2d 161, 162-63 (Utah Ct. App.1994); Mel Trimble Real Estate v. Monte Vista Ranch, 758 P.2d 451, 453 (Utah Ct.App.1988). ¶ 15 Moreover, collateral estoppel can yield an unjust outcome if applied without reasonable consideration and due care. Parklane Hosiery, 439 U.S. at 330-31, 99 S.Ct. 645. In particular, allowing a party who took no part in the first suit to take advantage of the findings therein and use them offensively in subsequent litigation can result in adverse, unjust, and unforeseen consequences for the party against whom collateral estoppel has been asserted. Id. at 326-33, 99 S.Ct. 645. Courts, then, must carefully consider whether granting preclusive effect to a prior decision is appropriate. Id. at 330-31, 99 S.Ct. 645. Collateral estoppel is not an inflexible, universally applicable principle[.] ... [P]olicy considerations may limit its use where the... underpinnings of the doctrine are outweighed by other factors. Jackson v. City of Sacramento, 117 Cal.App.3d 596, 172 Cal. Rptr. 826, 829 (1981); see also Estate of Covington, 888 P.2d at 678; Parklane Hosiery, 439 U.S. at 330-31, 99 S.Ct. 645 (indicating that applying collateral estoppel may be unfair where, for example, a party had little incentive to defend vigorously, the judgment relied upon is inconsistent with prior judgments, or different procedural opportunities are offered in each proceeding).
¶ 16 Arbitration is governed by the Utah Uniform Arbitration Act. Utah Code Ann. §§ 78-31a-101 to -131 (2003). The Utah legislature promotes alternative dispute resolution, including arbitration, because it reduce[s] the need for judicial resources and the time and expense of the parties. Id. § 78-31b-3(2)(c). Arbitration is meant to offer an alternative or supplement to the formal processes associated with a court trial and to promote the efficient and effective operation of the courts of this state by authorizing and encouraging the use of alternative methods of dispute resolution to secure the just, speedy, and inexpensive determination of civil actions filed in the courts of this state. Id. § 78-31b-3(1). ¶ 17 This court has also recognized the strong public policy favoring arbitration as an approved, practical, and inexpensive means of settling disputes and easing court congestion. Chandler v. Blue Cross Blue Shield of Utah, 833 P.2d 356, 358 (Utah 1992). Arbitration proceedings benefit the parties by providing a method more expeditious and less expensive [than the court system] for the resolution of disputes. Docutel Olivetti Corp. v. Dick Brady Sys., Inc., 731 P.2d 475, 479 (Utah 1986) (internal quotations and citations omitted); see also Giannopulos v. Pappas, 80 Utah 442, 15 P.2d 353, 356 (1932) ([A]rbitration is favored in the law as a speedy and inexpensive method of adjudicating differences.). The use of arbitration as an alternative to traditional judicial proceedings should therefore be encouraged. Pac. Dev., L.C. v. Orton, 2001 UT 36, ¶ 12, 23 P.3d 1035. ¶ 18 Arbitration is a matter of contract. Cent. Fla. Invs., Inc. v. Parkwest Assocs., 2002 UT 3, ¶ 10, 40 P.3d 599. The parties to the arbitration determine the scope and questions to be resolved during the proceedings and the arbitrator must not exceed the scope defined in the parties' written agreement. Intermountain Power Agency v. Union Pac. R.R., 961 P.2d 320, 323 (Utah 1998). Moreover, arbitration contracts are to be enforced according to their terms, and arbitration proceedings shall be conducted in the manner to which the parties have agreed. Docutel Olivetti, 731 P.2d at 480.
¶ 19 As stated above, whether an arbitration decision should be given collateral estoppel effect is a matter of first impression for this court. Other jurisdictions, however, have decided this question and in making our own determination we will consider their analyses. These decisions can be summarized generally as involving two distinct approaches: the case-by-case approach and the California approach. See Brian Levine, Preclusion Confusion: A Call for Per Se Rules Preventing the Application of Collateral Estoppel to Findings Made in Nontraditional Litigation, 1999 Ann. Surv. Am. L. 435, 439-45. ¶ 20 As its name implies, the case-by-case approach, followed by a majority of jurisdictions considering the issue thus far, [3] determines on a case-by-case basis whether collateral estoppel effect should be given to a particular arbitration proceeding. See Hiroshi Motomura, Arbitration and Collateral Estoppel: Using Preclusion to Shape Procedural Choices, 63 Tul. L.Rev. 29, 32-36, 52-53 (1988). After evaluating whether the party seeking to invoke collateral estoppel has established its traditional elements, these courts determine whether the arbitration proceedings provided a full and fair opportunity to litigate the issues. This determination is based on various factors, including: (1) whether the non-moving party had incentive to vigorously litigate the prior action; (2) whether procedural differences, such as representation by counsel, presentation of evidence, questioning of witnesses, and availability of appellate review, would make preclusion unfair; and (3) whether policy considerations exist to deny preclusive effect. Witkowski v. Welch, 173 F.3d 192, 199 (3d Cir.1999); Anderson v. City of Pocatello, 112 Idaho 176, 731 P.2d 171, 179 (1987); Aufderhar v. Data Dispatch, Inc., 437 N.W.2d 679, 680 (Minn.Ct.App.1989); Rex, Inc. v. Manufactured Hous. Comm., 119 N.M. 500, 892 P.2d 947, 952 (1995). ¶ 21 While the case-by-case approach recognizes that parties benefit from the informal and speedy nature of arbitration and, therefore, voluntarily choose to arbitrate, these courts also examine the extent to which the arbitration proceedings in a particular case gave the parties the opportunity to present evidence and argument in a manner substantially similar to that provided in a judicial proceeding. Rex, 892 P.2d at 952; Restatement (Second) of Judgments § 84 cmt. c (1982). Essentially, the more closely the arbitration proceedings resemble those of a typical judicial proceeding, the more likely it becomes that a court will find that the issues were fully and fairly litigated. Id. ¶ 22 In contrast to the case-by-case approach, California has adopted a bright-line rule on this question. In Vandenberg v. Superior Court, 21 Cal.4th 815, 88 Cal. Rptr.2d 366, 982 P.2d 229, 242-43 (1999), the California Supreme Court held that a private arbitration award could not have nonmutual collateral estoppel effect unless the parties expressly provided for such preclusive effect beforehand. ¶ 23 The Vandenberg court recognized the benefits that derive from the inexpensive and speedy nature of arbitration for both the parties and the judicial system. Id. at 240. Moreover, the court considered these benefits in light of the purposes of collateral estoppel as stated above: preservation of judicial integrity, conservation of judicial resources, and protection of the parties from vexatious litigation. Id. In contrast to other jurisdictions, however, the court concluded that the justifications for promoting arbitration and for applying collateral estoppel did not require giving nonmutual preclusive effect to arbitration decisions. Id. ¶ 24 First, the court reasoned that refusing to give preclusive effect to an arbitration decision does not undermine judicial integrity because arbitration decisions are outside the judicial system. Id. at 240. Second, because arbitration does not require the use of a judge or courtroom, subsequent adjudication does not undermine judicial economy by requiring duplication of judicial resources to decide the same issue. Id. Third, denying nonmutual collateral estoppel effect does not protect parties from harassment by vexatious litigation. Id. Instead, it only prevents a third party from gain[ing] vicarious advantage from a litigation victory won by another. Id. Fourth, in light of the contractual nature of arbitration, the parties to the arbitration should be the ones who determine any subsequent preclusive effect of the arbitration proceedings. Id. at 240-41. ¶ 25 Finally, the Vandenberg court found that the case-by-case approach gives insufficient consideration to the expectations of the parties and to the contractual and informal nature of arbitration. Id. at 241. The court reasoned, [u]nder the prevailing rule, parties who agree to arbitrate, but neglect or fail to negotiate a specific disclaimer of collateral estoppel effect, cannot know in advance whether a court may later find the arbitration binding in favor of third parties on different claims. Id. at 242. A determination of this issue would depend on whether a reviewing court finds that the arbitration proceedings offered the losing party a full and fair opportunity to litigate. Consequently, arbitration procedures would have to conform to those of traditional judicial proceedings, which would eliminate the advantages of choosing to arbitrate, including the right to shape, control, know, and predict at the outset the scope and effect of the arbitrator's decision. Id. ¶ 26 Both the case-by-case and the California approaches seek to promote the use of arbitration as an alternative to traditional adjudication. However, the two approaches diverge on the critical question of whether the objectives of arbitration are best served by granting or refusing to grant collateral estoppel effect to arbitration proceedings. We concur with the California approach, and conclude that giving collateral estoppel effect to arbitration decisions will not make it a more attractive alternative forum, and consequently, will not best serve the goals of arbitration. Allowing the parties themselves to decide whether or not the arbitration proceedings will have preclusive effect in subsequent litigation against third parties better serves the goals of arbitration. Therefore, we hold that nonmutual preclusive effect will not be given to arbitration decisions unless the parties have expressly so agreed. ¶ 27 In opting for arbitration over traditional judicial proceedings, parties are selecting an inexpensive and speedier alternative. At the same time, the parties are also necessarily choosing a more informal and imprecise method for resolving their dispute. A party choosing which forum to use for dispute resolution must weigh these differences carefully. While arbitration should be encouraged, the benefits derived from its more relaxed procedures can be undermined if third parties are permitted to invoke the theory of collateral estoppel for its results, without prior agreement by the parties. ¶ 28 In selecting arbitration, a party has demonstrated only that the current dispute is better resolved by avoiding traditional adjudication, not that it is willing to apply the arbitrator's decision to future disputes with other parties. The case-by-case approach creates uncertainty by requiring the arbitrating parties to guess whether or not arbitration will have preclusive effect in future litigation. This exposure and uncertainty make choosing to arbitrate unnecessarily risky. For example, if what is at stake in a particular dispute is small, a party might be very willing to agree to have the dispute resolved quickly through arbitration. If the party ultimately loses in arbitration, the loss would be minimal. However, if the arbitration were given preclusive effect and used offensively by a third person or group, the initial party risks losing much more than what is at stake in the original dispute. Therefore, if arbitration proceedings are routinely given nonmutual preclusive effect, the parties will be unable to predict or control what is at risk. This inability to accurately assess and control risk would chill, rather than promote, arbitration. ¶ 29 We also agree with the California court that the case-by-case approach, in its examination of how closely a particular arbitration proceeding mirrors court process, is likely to exert pressure on arbitration in general to match its process to court adjudication, thus destroying its speedy, inexpensive, and informal nature. Finally, we conclude that the case-by-case approach undermines the right of the parties to determine the scope and terms of the arbitration proceedings and their subsequent effect. Because arbitration is a matter of contract, the parties to the proceedings are entitled to determine not only the scope and questions to be resolved in the arbitration proceedings, but also whether the proceedings will have any preclusive effect with respect to third parties in future litigation. Arbitration agreements are to be enforced according to their terms, and these terms extend to a determination of whether the findings made by the arbitrator will have any preclusive effect in subsequent litigation with other parties. Therefore, we hold that in Utah, third parties will only be permitted to invoke collateral estoppel in subsequent litigation if provided for by the parties to the original arbitration proceeding. ¶ 30 In the instant case, the deputies contend that the county should be precluded from defending itself on the issue of inequitable pay based on the outcome of the Diamant arbitration proceedings. However, because the parties involved in the Diamant proceeding made no agreement that the outcome there would have any preclusive effect in subsequent litigation, we decline to permit it. The county is therefore not precluded from defending itself against the deputies' claims of inequitable pay.