There are all sorts of questions when court proceedings run alongside an arbitration dispute. Who decides issues that cut across both? Judge? Arbitrator?
Assume that you represented the Claimant in an arbitration In which the opposing party (the Respondent) made a number of counterclaims on which it was awarded a substantial amount. You’re still smarting from the loss, and the Respondent starts a second arbitration. The claims in the second arbitration are essentially a rehashing of the original counterclaims.
You’ve got a pretty good res judicata defense. But who decides whether the Respondent now turned Claimant is barred from pursuing its new claims? Can the Arbitrator assigned to the second Arbitration deal with that issue?
A Plaintiff in the Business Court found itself in precisely this situation. Allscripts, a "healthcare-related software provider" had initiated an arbitration against Etransmedia Technology, Inc., which "delivers similar software programs to medical practices and health systems."
The arbitration panel socked Allscripts with an Award of nearly $10 million on Etransmedia’s counterclaims which was confirmed by an NC Court..
Almost two years after that Award, Etransmedia filed its own arbitration action against Alllscripts.
Allscripts, seeing these "new" claims as barred by the resolution of the first arbitration, filed a Complaint seeking an injunction that the claims were barred by res judicata. Etransmedia opposed the request for an injunction, arguing that the question of res judicata should be decided by the Arbitrator in the second case. The case (Allscripts Healthcare, LLC v. Etransmedia Technology, Inc.) was designated to the Business Court, and Judge McGuire issued an (unpublished) Order right before Christmas, denying the request for an injunction and ruling that the Arbitrator was the proper decisionmaker on this issue.
The NC COA Had Previously Ruled That A Judge (Not An Arbitrator) Decided Issues Of Res Judicata
Allscripts presented two Court of Appeals decisions seeming to dictate a ruling in its favor and giving the Business Court the right to rule on the injunction. In the first, C & O Dev. Co. v. American Arbitration Ass’n, 48 N.C. App. 548 (1980), the Court held that "it is our opinion that the extent of a judgment’s binding effect is a matter for judicial determination." In the second case, Rodgers Builders, Inc. v. McQueen, 76 N.C. App. 16 (1985), the Court held that:
[t]he scope of an arbitration award and its res judicata effect are matters for judicial determination; therefore, whether plaintiff’s claims are barred was for the superior court to determine.
Id. at 23.
The NC Legislature Changed Those Rulings With The Enactment Of The Revised Uniform Arbitration Act
Why would Judge McGuire rule otherwise, given the clarity of those COA decisions? Because those cases were decided before North Carolina adopted the Revised Uniform Arbitration Act (the "RUAA") in 2003, Order ¶21. Judge McGuire observed that:
[s]ection 6(c) of the RUAA provides that ‘[a]n arbitrator shall decide whether a condition precedent to arbitrability has been fulfilled and whether a contract containing a valid agreement to arbitrate is enforceable.
Order ¶21 (quoting N.C. Gen. Stat. §1-569.6(c)).
If you are not seeing how that statutory language covers a res judicata argument, it’s clearer in the Official Comment to Section 6(c) It says that the provision is meant to:
incorporate the holdings of the vast majority of state courts and the law that has developed under the [Federal Arbitration Act] that . . . issues of procedural arbitrability, i.e. whether prerequisites such as time limits, notice, laches, estoppel and other conditions precedent to an obligation to arbitrate have been met, are for the arbitrators to decide.
Given that the RUAA was meant to bring the state arbitration act in line with the Federal Arbitration Act, the NC COA’s opinion in WMS, Inc. v. Alltel Corp., 185 N.C. App. 86 (2007) was determinative. There, the appellate court held that "in the context of the FAA, the issues of res judicata and collateral estoppel must be decided initially by the arbitrator and not the trial court." Id. at 92.
Would you rather have a Judge or an Arbitrator decide a question of res judicata? Don’t forget that arbitrators aren’t obligated to follow the law. Judge McGuire observed a month ago that arbitrators:
‘are not bound to decide according to law when acting within the scope of their authority, being the chosen judges of the parties and a law unto themselves, but may award according to their notion of justice and without assigning any reason.’
Trilogy Capital Partners,, LLC v. Killian, 2015 NCBC 103, ¶33 (quoting Bryson v. Higdon, 222 N.C. 17, 19-20 (1942)).
If you are wondering whether an arbitration Award is even entitled to res judicata effect, that bridge was crossed years ago. See Lancaster v. Harold K. Jordan and Co., 2014 NCBC 22, ¶48 ("It is clear that a confirmed Arbitration Award constitutes a final judgment on the merits for purposes of collateral estoppel.").