In National Casualty Company v. Continental Insurance Company [1], the U.S. Court of Appeals for the Seventh Circuit altered its previous precedent and confirmed that a court should stay proceedings due to arbitration only if a party explicitly requests a stay. At the same time, it upheld its prior precedents, confirming that claim preclusion (res judicata) is a matter to be decided by the arbitral tribunal if parties are bound by an arbitration agreement.

Background

Between 1969 and 1975, National Casualty Company and Nationwide Mutual Insurance Company entered into three reinsurance agreements with Continental Insurance Company. All agreements provided that “any dispute [that] shall arise between [the parties] with reference to the interpretation of [the agreement] or their rights with respect to any transaction involved” shall be referred to arbitration. The clause further specified that an arbitral award would be “final and binding on both parties.”

In 2017, a dispute arose concerning Continental’s billing methodology and its compliance with the provisions of the reinsurance agreements. The dispute ultimately was resolved in arbitration in favor of National Casualty and Nationwide, and the arbitral awards were confirmed by federal district courts.

In 2023, the parties again disagreed whether Continental’s billing methodology was in line with the provisions of the reinsurance agreements. National Casualty and Nationwide took the view that the prior arbitral awards resolved the issue. Continental disagreed and demanded that the new dispute be referred to two new arbitrations.

District Court Proceedings

In these circumstances, National Casualty and Nationwide initiated proceedings in the U.S. District Court for the Northern District of Illinois, Eastern Division, seeking:

• Declaratory and injunctive relief, to (1) preclude Continental from attempting to re-arbitrate the issues, and (2) enjoin Continental from initiating any arbitrations arising from the same issues in the future, and
• Stay the new arbitration proceedings initiated by Continental, arguing that the preclusion argument is a matter for the court not arbitrators.

In reply, Continental filed a cross-motion to compel arbitration and requested that the matter be dismissed.

On November 15, 2023, the district court granted the motion to compel arbitration and dismissed the case without prejudice. The district court observed that:

• There was no dispute over the validity of the arbitration agreement and its scope. Instead, the parties disagreed on whether a dispute over the preclusive effect of a prior arbitration is arbitrable.
• This issue had been settled by the Seventh Circuit in Trustmark Ins. Co. v. John Hancock Life Ins. Co., which held that the preclusive effect of a prior arbitral award is a defense subject to arbitration [2].
• National Casualty and Nationwide failed to present any case law that could confirm that the claim preclusion should not be subject to arbitration. Precedents from the First and Ninth Circuit also supported this approach, even for arbitral awards confirmed by courts.
• All issues presented in the case were subject to arbitration. Therefore, there was no reason to stay the proceedings, and the matter was dismissed without prejudice.

Seventh Circuit Proceedings

National Casualty and Nationwide appealed. During the appellate proceedings, Continental filed a motion to vacate the district court’s dismissal order and instruct the stay of the proceedings. This motion was filed even though it was Continental who requested the dismissal in the first place. Continental’s motion was based on Supreme Court decision in the Smith v. Spizzirri, which held that “[w]hen a district court finds that a lawsuit involves an arbitrable dispute, and a party requests a stay pending arbitration, §3 of the FAA compels the court to stay the proceeding [3].” 

The Seventh Circuit declined to rule on Continental’s motion regarding the stay of the proceedings and affirmed the district court’s order.

In reaching this decision, the Seventh Circuit noted that:

• A motion to dismiss the appeal was not the appropriate vehicle to amend the district court’s order. A cross-appeal or appeal is necessary if a party seeks to alter a judgment. Continental had not filed such an appeal, merely a motion to dismiss the appeal. As such, Continental could not have requested that the order be vacated.
• Irrespective of that, the motion would have failed as the Supreme Court’s ruling in Spizzirri requires a stay of the proceedings in case of pending arbitration only if a party requests it. In this case, neither Continental, National Casualty nor Nationwide requested such a stay. As such, the Spizzirri precedent does not require vacating the dismissal order issued by the district court.
• On the appeal itself, the Seventh Circuit reaffirmed that the claim preclusion stemming from an arbitral award is an issue for the arbitrators, not for a federal court. As stated in Trustmark, “[a]rbitrators are entitled to decide for themselves those procedural questions that arise on the way to a final disposition, including the preclusive effect (if any) of an earlier award.”
• This approach aligns with the Supreme Court precedents, including Howsam, where the Supreme Court emphasized a presumption that arbitrators decide procedural questions that “grow out” of an arbitrable dispute and “bear on its final disposition [4].”
• Section 3 of the FAA [5] does not contradict this approach. As other Circuits explained, § 3 of the FAA does not regulate who determines the effects of an arbitral award.

Relevance of the case

This case represents a shift in the Seventh Circuit’s approach to motions to dismiss filed in connection with motions to compel arbitration.

Previously, in Halim v. Great [6], the Seventh Circuit interpreted motions to dismiss based on an arbitration clause as motions to stay the proceedings. As Halim explained, “the proper course of action when a party seeks to invoke an arbitration clause is to stay the proceedings rather than to dismiss [7].” This approach had remained the standard in the Seventh Circuit even after the issuance of Spizzirri [8]. National Casualty demonstrates a stricter application of Spizzirri, concluding that stay of the proceedings is warranted only when explicitly requested.

Going forward, parties in this Circuit should ensure their motions are carefully worded to avoid unintended results. Under the National Casualty standard, motions to dismiss based on arbitration clauses should no longer result in a stay of proceedings.

As for claim preclusion, the Seventh Circuit’s position remains consistent: claim preclusion defenses in cases involving broad arbitration clauses must be raised in arbitration, not in court. This approach mirrors the practices of other Circuits, including the Second Circuit [9].

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[1] Nat’l Cas. Co. v. Cont’l Ins. Co., No. 23-3373 (7th Cir. Nov. 22, 2024).

[2] Trustmark Ins. Co. v. John Hancock Life Ins. Co., 631 F.3d 869 (7th Cir. 2011).

[3] Smith v. Spizzirri, 599 U.S. ___ (2024).

[4] Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 84 (2002) (quoting John Wiley & Sons, Inc. v. Livingston, 376 U.S. 543, 557 (1964)).

[5] 9 U.S.C. § 13.

[6] 516 F.3d 557 (7th Cir. 2008).

[7] Id. at 561.

[8] See for example Wilhelm v. Bam Trading Servs., 23 CV 14906 (N.D. Ill. May. 20, 2024).

[9] Citigroup, Inc. v. Abu Dhabi Inv. Auth., 776 F.3d 126 (2d Cir. 2015).