In a recent decision, Citigroup, Inc. v. Abu Dhabi Inv. Auth., No. 13-4825-cv, 2015 U.S. App. LEXIS 549 (2d Cir. Jan. 14, 2015), the Second Circuit Court of Appeals ruled that it is for arbitrators, not courts, to decide the claim-preclusive effect of a federal judgment confirming an arbitral award.
Plaintiff-Appellant Citigroup and Defendant-Appellee Abu Dhabi Investment Authority (“ADIA”) entered into an investment agreement whereby ADIA invested billions into Citigroup. The agreement contained an arbitration clause providing that “any dispute that arises out of or relates to the [Agreement] or the breach thereof, . . . will be decided through arbitration administered by the American Arbitration Association.” In 2009, ADIA commenced arbitration proceedings claiming Citigroup violated the agreement when it sold preferred shares to other investors, thus diluting ADIA’s original investment.
After contentious and protracted proceedings, Citigroup prevailed in the arbitration and obtained confirmation of the award in the U.S. District Court for the Southern District of New York (“SDNY”), over ADIA’s objections. ADIA appealed the confirmation and the Second Circuit affirmed.
While ADIA’s appeal was pending before the Second Circuit, ADIA served Citigroup a new notice of arbitration pursuant to the investment agreement. Shortly thereafter, Citigroup brought suit in the SDNY pursuant to the Declaratory Judgment Act, the All Writs Act, 28 U.S.C. § 1651(a), the Federal Arbitration Act (“FAA”), 9 U.S.C. § 1, et seq., and the district court’s “inherent authority to protect its proceedings and judgments.” Citigroup sought to enjoin the second arbitration on the ground that ADIA’s new claims were barred by the doctrine of claim preclusion, or res judicata, because they were or could have been raised in the first arbitration. Citigroup also argued that the second arbitration was an “assault” on the judgment confirming the first arbitration award, and that the All Writs Act should be invoked to enjoin the second arbitration in order to protect the integrity of the confirmation judgment.
The district court dismissed Citigroup’s action and compelled arbitration of ADIA’s new claims; Citigroup appealed. The “sole issue” on appeal was “whether the district court erred when it refused to enjoin the second arbitration pursuant to the All Writs Act based on what Citigroup asserts is the claim-preclusive effect of the [district court’s judgment confirming the first arbitral award] and instead compelled the parties to arbitrate ADIA’s second set of claims.”
In affirming the dismissal of Citigroup’s action, the Second Circuit noted that the case represents a balancing between the FAA’s expressed national policy favoring arbitration and respect for the integrity of federal judgments. Some circuits have ruled that the All Writs Act, which empowers federal courts to “issue all writs necessary or appropriate in aid of their respective jurisdictions,” permits district courts to enjoin arbitrations that threaten to undermine federal judgments. The Second Circuit acknowledged it had previously commented in In re American Express Financial Advisors Securities Litigation, 672 F.3d 113 (2d Cir. 2011) that “in certain circumstances, the All Writs Act could permit a court to enjoin an arbitration.”
However, the Second Circuit held that those circumstances were not presented here. Prior Second Circuit cases have ruled that arbitrators should resolve the claim-preclusive effect of an arbitration award confirmed by a state court and the issue-preclusive effect of a federal judgment. See Nat’l Union Fire Ins. Co. of Pittsburgh, PA v. Belco Petroleum Corp., 88 F.3d 129 (2d Cir. 1996); U.S. Fire Ins. Co. v. Nat’l Gypsum Co., 101 F.3d 813 (2d Cir. 1996). The Second Circuit reasoned that it was a “simple intuitive step” to find that it is for arbitrators to decide the claim-preclusive effect of a federal judgment confirming an arbitral award.
At bottom, the Second Circuit held that where a prior federal judgment merely confirms an arbitration award without considering the merits of the underlying claims, the All Writs Act does not permit a district court to enjoin a subsequent arbitration of claims that one party asserts are barred by the prior arbitration.
A version of this post originally appeared in the March 2015 edition of Baker & McKenzie’s International Litigation & Arbitration Newsletter, which is edited by David Zaslowsky and Grant Hanessian.