This case presents a very interesting question regarding the use of non-mutual offensive collateral estoppel in arbitrations. Three former employees sued D. R. Horton, Inc. (“Horton”), alleging in two separate lawsuits that Horton had improperly reneged on a promise to include stock in severance packages when their employment ended as a result of a merger agreement. After Horton's motion to consolidate the cases was denied, one of the employees prevailed at a trial, while the other two took their claims to arbitration. The arbitration panel ruled for Horton on the stock issue. The Claimants contended that the panel should have accorded the prior final judgment in favor of the other former employee on this issue preclusive effect based upon the doctrine of offensive collateral estoppel. The panel had declined to so rule since there was not complete mutuality of parties in the prior lawsuit and the arbitration, and since the prior judgment was on appeal.
The district court denied Claimants' motion to vacate the arbitration award on the basis that it was in manifest disregard of law, and the Ninth Circuit Court of Appeals affirmed. The Court concluded that the arbitration panel could not have manifestly disregarded the law because there was no binding precedent on the issue presented; indeed, it was an issue of first impression in the federal courts of appeal. The Court noted that district courts had discretion in deciding whether to apply collateral estoppel offensively where there was a lack of complete mutuality of parties between the two actions, and held that arbitrators should have the same discretion. The panel had stated that it would not apply the collateral estoppel doctrine due to an interesting procedural difference between lawsuits and arbitration. The panel noted that if the second action was a lawsuit, and the prior judgment was reversed on appeal, the losing party in the second lawsuit could then seek to have the application of collateral estoppel reversed on appeal, but that due to the restrictive judicial review of arbitration awards under the Federal Arbitration Act, if the prior judgment was reversed on appeal, the preclusive effect given the prior judgment in a later arbitration proceeding would remain. The possibility of this inequitable result persuaded the panel to hear evidence and decide the issue itself rather than to short-cut the determination of the issue through the application of collateral estoppel. Collins v. D. R. Horton, Inc., No. 05-15737 (USCA 9th Cir. Sept. 24, 2007).