Ninth Circuit Blasts Use of Collateral Estoppel to Block Arbitration

Is the application of non-mutual offensive collateral estoppel to preclude the enforcement of arbitration agreements compatible with the Federal Arbitration Act (FAA)?

No, the Ninth U.S. Circuit Court of Appeals recently ruled.

Aya Healthcare Services offers work to traveling nurses by pairing them with hospitals. As a condition of employment, the nurses each signed an agreement with Aya to resolve any employment-related disputes by arbitration.

In the event a dispute arises over the validity of the arbitration agreement itself, a delegation clause in the agreement provided that an arbitrator (rather than a court) will decide whether the arbitration agreement is valid.

Four former employees brought a putative class action against Aya for allegedly reducing their pay mid-contract, asserting breach of contract, fraudulent inducement, state wage and hour violations and violations of the Fair Labor Standards Act (FLSA).

Aya moved to compel arbitration, and the district court granted the motion. Aya proceeded to arbitration with each of the four plaintiffs in four separate arbitrations.

Each plaintiff challenged the validity of the arbitration agreements, resulting in split outcomes: two arbitrators ruled that the agreements were unconscionable, while the other two found them to be valid.

Pursuant to the collective action procedure under the FLSA, an additional 255 plaintiffs opted in to the case. Aya moved to compel each of those plaintiffs to arbitrate.

The district court denied the motion, applying the doctrine of non-mutual offensive collateral estoppel to preclude the enforcement of the arbitration agreements between Aya and the other 255 plaintiffs.

In so holding, the district court gave collateral estoppel effect only to the two arbitral awards finding the arbitration agreements to be invalid, declining to give collateral estoppel effect to the other arbitral awards.

Aya appealed.

The Ninth Circuit reversed, finding the district court’s decision to be “the sort of ‘judicial hostility to arbitration’ that the [FAA] was enacted to prevent.’”

“A hallmark of the FAA is the enforcement of arbitration agreements and the resolution of disputes in individualized, one-on-one proceedings,” the court wrote. “Doing away with such bilateral proceedings between mutually consenting parties, because other arbitrators in other proceedings involving other parties have already decided the issue, is anathema to the FAA. The district court’s ruling effectively transformed the parties’ individualized proceedings into a bellwether-type class action proceeding to which the parties never agreed. The FAA prohibits that transformation.”

The FAA requires courts to enforce arbitration agreements as written, and the agreements at issue required individualized arbitration, the court said. By rendering those agreements unenforceable, the district court interfered with a fundamental attribute of arbitration.

Looking to the text of the FAA, the court explained that Section 2 recognizes generally applicable contract defenses, such as fraud, duress or unconscionability as grounds for revocation. Not included is non-mutual offensive issue preclusion, which does not pertain to a deficiency with respect to the formation of contracts.

“The application of non-mutual offensive issue preclusion would also violate the principle of consent that the FAA incorporates,” the court said. “Precluding an arbitration that the parties had agreed to – because a different arbitrator in a different proceeding had concluded that an agreement between different parties was unconscionable – would render the parties’ consent meaningless.”

Under the district court’s logic, just one arbitration proceeding would be enough to preclude hundreds or thousands of other arbitration proceedings.

“We are not aware of any other instance in which non-mutual offensive issue preclusion has been used to invalidate arbitration agreements,” the court wrote. “The parties have identified none. We reject this new application of preclusion doctrine as it would be ‘fundamentally at war’ with the FAA and undermine Congress’s efforts to protect arbitration from judicial opposition.”

To read the opinion in O’Dell v. Aya Healthcare Services, click .

Why it matters: The Ninth Circuit was clear: the FAA does not permit the application of non-mutual offensive collateral estoppel that would result in the effective invalidation of arbitration agreements, and to incorporate the doctrine would “eviscerate” the FAA, which requires mutual consent.