Yesterday, the Sixth Circuit tried to bring some clarity to the role of res  judicata in arbitration proceedings.  W. J. O’Neil Company v. Shepley, Bullfinch, Richardson & Abbott, Inc.  In a construction project gone awry, the W.J. O’Neil Company sued its construction manager in state court but the parties ended up in arbitration.  The two defendants in this case did not have a direct contract with O’Neil but also ended up in the arbitration on indemnity claims.   In the arbitration, however, O’Neil did not assert claims against the defendants in this action, and it ultimately prevailed in the case against the construction manager.  After the arbitration, O’Neil set its sights on the defendants.   Although the district court dismissed the case based on res judicata, the Sixth Circuit, in a divided decision, reversed.

The Court began by wrestling with whether Michigan or federal law governed the res judicata analysis, acknowledging, “the issue is underdeveloped and murky when it involves an unreviewed arbitration award.”  In the end, the Sixth Circuit elected not to resolve the thorny choice of law question based on general agreement between the parties that federal and Michigan law were largely uniform.

The Court then explained that it was aware of no circuit that had held that an unreviewed arbitration award bars later litigation of a claim not subject to the arbitration.  Because the arbitrator’s authority derives from the contract, “it makes little sense to allow an arbitration proceeding or award to preclude a claim the arbitrator had no authority to decide.”  As a result, the Court concluded that “res judicata yields where the claims sought to be precluded were not subject to the arbitration.”  The majority then turned to an analysis of the contractual relationship between the parties and found the lack of the contract between O’Neil and the defendants significant to its determination that any claims between those parties were non-arbitrable.  It reached its finding notwithstanding the fact that all of the parties were involved in the previous arbitration; according to the majority, simply because the parties were all there that did not compel O’Neil to raise claims against the defendants.

Judge McKeague dissented, emphasizing some of the practical realities of the problem created by O’Neil’s failure to bring claims in the arbitration.  He emphasized the length and complexity of the hearings and that O’Neil and the defendants were actively hostile to each other in the arbitration.  He also would have found a contractual basis for the arbitration because the contract between O’Neil and the arbitration defendant had a “flow-through” provision that operated to bind the present defendants.

As this case illustrates, arbitration preclusion rules are not always a portrait of clarity.  This opinion has significance because of its efforts to clarify some of these issues within the Circuit.  It also provides a good road map for parties arbitrating claims and evaluating potential res judicata implications.