Originally from the AAA Yearbook on Arbitration and the Law - 29th Edition

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6.01 Preclusion: Res Judicata and Collateral Estoppel

Manganella v. Evanston Ins. Co., 700 F.3d 585 (1st Cir. 2012)

Issue preclusion barred the plaintiff from re-litigating in court a substantially identical issue previously determined in arbitration.

The clothing retailer, Jasmine, purchased an insurance policy from Evanston. The policy covered any claim that sought relief for wrongful employment practices. The policy contained a coverage exclusion for claims based on “conduct. . . committed with wanton, willful, reckless or intentional disregard of any law. . . .” Manganella sold Jasmine to Lerner New York, Inc. Lerner kept Manganella as President of Jasmine and $7 million of the purchase price was placed in escrow as security for any major employment breach by Manganella.

Multiple sexual harassment allegations prompted Lerner to fire Manganella and invoked the arbitration clause to demand the escrow fund. The arbitration panel found that Manganella did not comply with the Lerner’s corporate Code of Conduct on sexual harassment and did so willfully. The panel, however, did not award the escrow funds because Lerner failed to give notice and an opportunity to remedy as required by the purchase agreement.

A month before the arbitration ended, a former human resources manager for Jasmine filed a discrimination charge against Manganella, Lerner, and Jasmine with the Massachusetts Commission Against Discrimination. After receiving the discrimination charge, Manganella requested coverage from Evanston Insurance under Jasmine’s Employment Practices Liability Policy. Because Evanston denied coverage based on the policy’s coverage exclusion, Manganella brought action against Evanston in federal district court. The district court, a few months after the arbitration decision on the escrow funds, held that the doctrine of issue preclusion barred Manganella from re-litigating the willful violation issue.

Arbitration awards receive the same preclusive effects if the issues are sufficiently similar and the determination on the issue in arbitration was necessary.