Issue Preclusion in Arbitration: Two Recent Cases

Karl Hansen v. Elon Musk; Tesla Motors, Inc.; U.S. Securities Associates, Inc., Docket No. 23-15296 (Ninth Circuit, December 10, 2024), raises the question of whether a confirmed arbitration award resolving an arbitrable claim may preclude a separate claim that is statutorily nonarbitrable.

Hansen filed a federal lawsuit alleging multiple causes of action in retaliation for reporting alleged misconduct at Tesla. The district court ordered most of Hansen’s claims to arbitration while staying proceedings on his Sarbanes-Oxley Act (SOX) claim, which arose from the same conduct as his other claims but was statutorily exempt from arbitration.

Following an unfavorable arbitration outcome, Hansen pursued his SOX claim in court. The district court determined that Hansen could not relitigate the issue whether he engaged in protected activity under SOX, as the arbitrator had already found that he had not engaged in any protected activity. The court emphasized that Hansen had a full and fair opportunity to litigate the issue and highlighted the arbitrator’s finding that Hansen could not have reasonably believed his complaint related to a securities law violation. Consequently, the district court dismissed Hansen’s SOX claim with prejudice. The Ninth Circuit panel affirmed the district court's dismissal.

In National Casualty Company v. Continental Insurance Company, 121 F.4th 1151 (7th Circuit, November 22, 2024), a panel upheld the district court’s ruling that the preclusive effect of a prior arbitration award is itself an arbitrable issue.