Res Judicata and Arbitration: who decides?
Does the arbitrator or the court decide whether a claim or defense in litigation is precluded by a prior arbitral award under the doctrine of res judicata? This question was recently addressed by the US District Court for the Northern District of California in the matter of Synopsys Inc. (“Synopsys”) v Siemens Industry Software Inc. (“Siemens”) N.D.Cal. Apr. 2, 2021, No. 20-cv-04151-WHO. In this case, the plaintiff sought partial summary judgement as to an affirmative defense which it argued was resolved in a prior arbitration. Before ruling on whether the defense was subject to res judicata preclusion, the Court was first tasked with determining whether it should determine if the arbitral award covered the prospective defense or send the matter to the arbitrators.
Background
Synopsys and Siemens had a long running dispute over a claim for patent infringement pertaining to a specialized software called “Aprisa.” Eventually, the Parties entered into a Patent License and Settlement Agreement (PLSA) in 2018 with the intention of resolving their differences. The PLSA contained a clause calling for arbitration with the International Court of Arbitration in the International Chamber of Commerce (“ICC”). After executing the PLSA, the parties fell into another dispute over the Aprisa software, and in particular, whether certain modifications made by Siemens came within the terms of the PLSA license.
The parties began arbitration in order to address the initial question of whether Siemens’s modifications were covered by the license grant. After commencing the arbitration, and following a round of substantial written briefing, the ICC Tribunal found it difficult to ascertain precisely what issues were put to them by the Parties. The Arbitrators thus wrote to the Parties and sought clarification as to the matters they should decide. Subsequent submissions and oral argument eventually clarified the issues so that the Tribunal was able to provide an award, finding in favor of Synopsys and ruling that the PLSA license did not cover Siemens’ software modifications.
The award favoring Synopsys’ meant the claim for infringement could proceed before the US District Court. When the time came for Siemens to answer the suit, it raised an affirmative defense asserting that it had a license to sell the modified software under the PLSA. Synopsys moved for partial summary judgment on the license defense, claiming that this was a matter resolved by the arbitration and was precluded by res judicata.
The doctrine of res judicata prohibits a party from asserting in a subsequent lawsuit any matter that might have been raised in a prior case between the parties. It is well settled that “[a] confirmed final arbitration award constitutes a final judgment on the merits”, thus excluding further adjudication. Basile v. L.A. Film Sch., LLC, No. 2:18-08604 CJC (ADS), 2019 U.S. Dist. LEXIS 181954, at *25 (C.D. Cal. Sep. 30, 2019). See also Clark v. Bear Stearns & Co., 966 F.2d 1318, 1321 (9th Cir. 1992). Based on this, Synopsys argued that Siemens failed to raise its affirmative defense during the first arbitration, and as an award had been issued by the Tribunal, Siemens was not entitled to raise another defense based on the PLSA license here. Siemens argued that its new defense was proper because the Tribunal’s interpretation of the contract raised new theories, and new developments introduced by Siemens in regard to the Aprisa software meant that it’s offering now fell within the PLSA license. Siemens argued it could not have raised this defense in arbitration without first understanding the Tribunal’s interpretation of the PLSA and without knowing about these innovations.
In addressing the partial-summary judgment motion, the Court took note of the reasoning of the Ninth Circuit in Chiron Corp. v. Ortho Diagnostic Sys., 207 F.3d 1126, 1132 (9th Cir. 2000), where it was held that “a res judicata objection based on a prior arbitration proceeding is a legal defense that, in turn, is a component of the dispute on the merits and must be considered by the arbitrator, not the court.” Here, the Court considered the question before it to be one of determining whether the Tribunal’s decision on the scope of the PLSA meant that Siemens’ new defense in the litigation was foreclosed. This would amount to an inquiry into the merits of the prior arbitration, requiring analysis of the evidence, the decision, and the PLSA – it was not just a question of enforcing the arbitral award. Consequently, the Court determined that it would not enter summary judgment, but instead would send the question back to 1the ICC Tribunal to decide.
Takeaway
Of interest here is the manner in which the Court considered and dealt with the res judicata argument in the context of a final arbitral award. The tension in the law lies between two competing principals – the enforcement of a final award versus the need to resolve lingering questions pertaining to the substance of an arbitral dispute. In the first instance, a Court need not refer a matter back to an arbitrator but in the second, this may be required. Here, the Court found that the Chiron Corp. decision was controlling, because the question at hand required a considered analysis of the PLSA, its scope, and the Tribunal’s reasoning as opposed to simply giving effect to the decision of the arbitrators as it relates to the current litigation. In contrast to this case, one could imagine a scenario where the issue raised before a court so clearly comes within the ambit of an arbitral award that it does not require revisiting the merits of the arbitrable dispute to apply the doctrine of res judicata. See Trina Solar US, Inc. v. Carson-Selman, No. 220CV1308JCMBNW, 2021 WL 9869720 (D. Nev. Oct. 29, 2021)