NTCH-WA, Inc. v. ZTE Corp., No. 17-35833 (9th Cir. Apr. 25, 2019)

NTCH-WA, Inc. is one of a number of affiliates that operate together under the name “ClearTalk” and offer prepaid and flat-rate cell phone service to customers with poor credit or who otherwise cannot open accounts with major cell phone providers. The ClearTalk entities filed suit in California against ZTE Corp.’s wholly-owned subsidiary, ZTE USA, for breach of contract and other related causes of action.

ZTE USA moved to compel arbitration, and the parties stipulated to a consolidated arbitration. Shortly thereafter, the ClearTalk entities filed an amended statement of claim, asserting claims against ZTE Corp. as well as ZTE USA. The arbitrator declined to hear the ClearTalk entities’ claims against ZTE Corp, because those claims were not pending at the time the parties stipulated to a consolidated arbitration. NTCH-WA therefore initiated litigation against ZTE Corp. in the Eastern District of Washington. The district court stayed those proceedings pending the conclusion of the arbitration.

In February 2014, the arbitrator issued a Final Award denying NTCH-WA’s claims. The Middle District of Florida confirmed the award and the Eleventh Circuit affirmed that decision. After the Eleventh Circuit’s decision the district court in the Eastern District of Washington lifted the stay and granted ZTE Corp.’s motion for summary judgment, holding that the arbitration award precluded NTCH-WA from pursuing its claims.

On appeal, the Ninth Circuit determined that Florida law governed the preclusive effect of the award, because (1) a federal court order confirming an arbitration award has the same force and effect as a final judgment on the merits, including the same preclusive effect; and (2) courts must determine the preclusive effect of a prior federal diversity judgment by reference to the law of the state where the rendering court sat. Here, because the Florida court was sitting in diversity when it confirmed the award, Florida law governs the preclusive effect of the award.

The Ninth Circuit noted that Florida gives preclusive effect to arbitration awards confirmed by federal district courts where there exists: (1) an identity of the thing sued for; (2) an identity of the cause of action; (3) and identity of the persons and parties to the action; and (4) an identity of quality in persons for or against whom the claim is made. The court found these conditions met. Monetary damages were sought in both the arbitration and the lawsuit. The facts or evidence necessary to maintain the suit was the same in both actions. Privity existed between ZTE Corp. and ZTE USA, because Florida treats parents and subsidiaries as privies for purposes of preclusion. Finally, both ZTE USA and ZTE Corp. were suing and being sued in the same capacities, namely their corporate capacities, as in the arbitration.

NTCH-WA argued that claim preclusion should not apply because of ZTE Corp.’s “gamesmanship” in actively trying to remain out of the arbitration. The Ninth Circuit found this unpersuasive because ZTE Corp. and ZTE USA were in privity at the time of the arbitration so, functionally, it was as if ZTE Corp. had been a party to the arbitration. The court also noted that ZTE Corp. was not a party in the arbitration because NTCH-WA had not yet sued it, not due to its own gamesmanship. As such, the Ninth Circuit upheld the district court’s decision that claim preclusion barred NTCH-WA’s claims.

A version of this post originally appeared in the July  2019 edition of Baker McKenzie’s International Litigation & Arbitration Newsletter, which is edited by David Zaslowsky and Grant Hanessian.