Opinion ID: 3010689
Heading Depth: 3
Heading Rank: 1

Heading: Res Judicata Based on a Prior Federal Judgment

Text: Notwithstanding the analysis discussed above, many federal courts have held as a matter of law that claims of 9 res judicata based on a prior federal judgment must be decided by the district court before compelling or enjoining arbitration. See, e.g., In re Y&A Group Sec. Litig., 38 F.3d 380, 382 (8th Cir. 1994); Kelly v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 985 F.2d 1067, 1069 (11th Cir. 1993); Miller Brewing Co. v. Forth Worth Distrib. Co., 781 F.2d 794, 499 (5th Cir. 1986); see also Miller v. Runyon , 77 F.3d 189, 194 (7th Cir. 1996) (collecting other cases). These courts typically reason that federal courts must protect the finality and integrity of prior judgments. See Kelly, 985 F.2d at 1069; In re Y&A, 38 F.3d at 382. As succinctly stated by the Eleventh Circuit Court of Appeals, federal [c]ourts should not have to stand by while parties re-assert claims that have already been resolved. Kelly, 985 F.2d at 1069. Because the FAA contemplates that an arbitration award may be enforced by judgment, see 9 U.S.C.S 9, these courts would allow a district court to enjoin arbitration if the claim would be precluded under ordinary rules of res judicata. Miller Brewing Co., 781 F.2d at 499. Not all courts, however, have been persuaded by such logic. Most notably, the Second Circuit Court of Appeals has held that a collateral estoppel defense to arbitration based on a prior federal judgment should be decided by an arbitrator because it is a merit-based defense to arbitration. See United States Fire Ins. Co. v. National Gypsum Co., 101 F.3d 813, 817 (2d Cir. 1996). Whether such a defense is itself arbitrable, like any other ambiguity in the scope of arbitration, must stem from the language of the arbitration agreement itself because arbitration is a matter of contract and a defense based on the issue preclusive effect of the prior judgment is part of the dispute on the merits. Id. Thus, the court reasoned, unless it may be saidwith positive assurance that the parties intended to place the collateral estoppel issue with a court, the viability of that affirmative defense must be decided by an arbitrator. Id. These competing considerations present the court with a high order challenge. On the one hand, a realistic concern for the finality and integrity of judgments would arise if parties were free to ignore federal court decisions that have conclusively settled claims or issues now sought to be arbitrated. Yet, arbitration is a matter of contract and the 10 FAA only authorizes a limited review of the parties' intent before compelling or enjoining arbitration. See Painewebber, 921 F.2d at 511. The issue is thoughtfully discussed in Miller v. Runyon, 77 F.3d 189, 193-94 (7th Cir. 1996), but that court fell short of providing a comprehensive answer. In the final analysis, we conclude that a decent respect for a precedent of this court dictates that we resolve the issue in favor of district court jurisdiction to decide the res judicata defense as it relates to a prior judgment. Thus, we stated in Telephone Workers Union of New Jersey v. New Jersey Bell Tel. Co., 584 F.2d 31 (3d Cir. 1978): The district court did not reach the merits of the Board of Arbitrators' interpretation of the Collective Bargaining Agreement. It turned, first, to the judgment preclusion effect of the Consent Decree. This was the proper course. When a federal court is presented with the contention that a prior federal judgment determined issues now sought to be relitigated in an arbitral forum it must first determine the effect of the judgment. This is so whether the question arises in an action to compel arbitration or, as here, in an action to enforce a disputed award. The federal policy favoring forum selection clauses, based in part on the institutional interest of federal courts in avoiding litigation, does not come into play until the courtfirst determines whether prior completed litigation has already finally determined all issues. Id. at 32-33 (citation omitted). In that case, an aggrieved employee sought arbitration of a matter that had been conclusively settled by a consent decree entered by a federal district court. Arbitration had in fact rendered a result that conflicted with the consent decree and the district court, in considering a motion to enforce the arbitrator's award, turned first to the issue preclusive effect of the consent decree. We affirmed on the principle that a district court must first determine the effect of a prior federal judgment when faced with the possibility of relitigating issues already settled by that judgment. Moreover, we explicitly stated that this was the correct course regardless of whether parties seek to compel arbitration or confirm a disputed award. 11 The district court did not apply our analysis in New Jersey Bell to this case because of the uniquehybrid res judicata objection raised by Hancock -- hybrid in the sense that Hancock's claim of preclusion stems from both a prior judgment and a prior arbitration. We find no principled reason underlying this distinction. When a party resisting arbitration bases its claim of res judicata not only on a prior judgment but also on the existence of a prior arbitration, the analysis must focus on each aspect of the claim; hybrid facts do not call for a hybrid analysis. To be sure, there may be a number of factual grounds to distinguish our holding in New Jersey Bell, but the legal principle announced in that case directly controls the issue presented before the district court -- in particular, whether an arbitrator or a court must decide the preclusive effect of a prior federal judgment. Given the broadly worded language in that case, many courts have read New Jersey Bell, as do we, for the proposition the federal courts must intervene in the arbitration process when faced with res judicata objections stemming from a prior federal judgment. See Aircraft Braking Systems Corp. v. Local 856, Int'l Union, United Auto., Aerospace and Agric. Implement Workers , 97 F.3d 155, 159 (6th Cir. 1996); John Morrell & Co. v. Local Union 304a of the United Food and Commercial Workers , 913 F.2d 544, 562 (8th Cir. 1990); American Trade Dispatchers Assoc. v. Burlington N. R.R., 784 F. Supp. 899, 903 (D.D.C. 1992). Thus, whether we honor our internal operating procedure governing the application of this court's precedent, see 3d Cir. IOP Chapter 9.1. ([T]he holding of a panel in a reported opinion is binding on subsequent panels.) (emphasis added), or apply the pertinent language in New Jersey Bell, we conclude that the district court in this case should have first decided the preclusive effect of the prior federal judgment as it relates to Olick's demand for arbitration before the NASD.