Adam K. Magid
The U.S. Court of Appeals for the Second Circuit grapples daily with a dizzying array of doctrines derived from age-old case law. Inevitably, the court must revisit and reshape seemingly set doctrines to fit present-day facts.
Recently, the court took a fresh look at claim preclusion, mootness, and waiver, addressing:
(1) Fairness limitations on claim preclusion’s offensive use;
(2) When a defendant’s voluntary cessation of conduct may (or may not) moot a claim; and
(3) A new test – not rooted in prejudice – governing when participation in litigation may waive a party’s contractual right to arbitrate.
CLAIM PRECLUSION
In Thermal Surgical, LLC v. Brown, 2025 WL 2263862 (Aug. 8, 2025), a medical device distributor sued a former employee, Brown, in the U.S. District Court for the District of Vermont for violating his employment agreement by working for a competitor. Brown then filed for Chapter 7 bankruptcy, resulting in a stay of the lawsuit. In bankruptcy court, the distributor filed a proof of claim for $315,000 in lost commissions, which Brown did not challenge and the bankruptcy court allowed. Only $12,600, however, was ultimately distributed to satisfy the claim.
Post-bankruptcy, the Vermont lawsuit resumed, and the distributor moved for summary judgment seeking the balance of the $315,000. The district court (Judge William K. Sessions III) granted the distributor’s motion, holding that the allowed bankruptcy claim served as a final judgment on the merits entitled to preclusive effect. Brown appealed.
The Second Circuit (Judges Robinson, Walker, and Merriam) vacated the ruling. Claim preclusion prevents parties from raising issues that could have been raised and decided in a prior action, even if not litigated. Typically, claim preclusion is viewed as a “defensive tool” utilized by a defendant to prevent a plaintiff from asserting claims that could have been raised in a prior lawsuit. By contrast, the distributor sought to use claim preclusion offensively to compel a money judgment based on its allowed bankruptcy claim.
In prior cases, the court had assumed claim preclusion could be used offensively to bar a defense. Yet it could identify no decision actually applying claim preclusion in such manner. Without deciding whether the doctrine ever can be used offensively, the court held that, if it can be, it must be applied fairly. In this instance, it would be unfair to preclude Brown from defending the action based on a bankruptcy claim he had little incentive to challenge. Notably, an allowed claim in bankruptcy, unlike a money judgment, does not attach to a debtor’s future assets. The outcome of Brown’s bankruptcy punctuated the different stakes, allotting only $12,600 of $315,000 to the claimant, despite the allowed claim.
MOOTNESS
In 2020, Congress passed the “No Surprises Act” (Act) to prevent unexpectedly large medical bills after patients receive treatment from out-of-network providers. The Act requires out-of-network providers to bill healthcare plans, rather than patients directly, for certain items. If the provider and plan cannot agree on the reimbursement amount, the Act provides for an independent dispute resolution process (IDR) through a private third-party arbitrator.
In Neurological Surgery Practice of Long Island, PLLC v. DHHS, 145 F.4th 212 (July 22, 2025), a private neurosurgery practice brought suit against the U.S. Departments of Health and Human Services, Treasury, and Labor, alleging an excessive backlog of unresolved IDR disputes caused by the departments’ failure to enforce the Act. The departments temporarily paused an online portal used to initiate the IDR process so they could implement procedural changes. The plaintiff then sought a court order mandating the immediate resumption of IDR processes. Within months, the departments reopened the portal and resumed all IDR operations, after which the district court (Eastern District of New York Judge Brian M. Cogan) dismissed the claim as moot.
On appeal, the Second Circuit (Judges Nardini, Calabresi, and Bianco) affirmed. Article III of the Constitution requires a live case or controversy at all stages of a federal court proceeding. The mootness doctrine – which derives from Article III – ensures that a litigant’s interest in the outcome of the case continues throughout the life of a lawsuit. A “hallmark” of a moot case is that the requested relief is no longer needed.
A defendant’s “voluntary cessation” of a challenged practice, after litigation commences, does not necessarily deprive a court of its power to adjudicate the legality of the practice. But all circumstances here suggested that the conduct, the pause in IDR processes, would not recur, and plaintiff’s suggestion to the contrary was “entirely speculative.” Nor, in the court’s view, was there any basis for concluding that the departments resumed the IDR process simply to evade judicial review. The mootness doctrine applied with full force.
WAIVER
The question in Doyle v. UBS Financial Services, Inc., 144 F.4th 122 (July 14, 2025), was whether defendants waived their contractual right to arbitrate by filing a “response” joining a co-defendant’s motion to dismiss and seeking to arbitrate over seven months later, after the motion to dismiss was denied. The answer of the Second Circuit (Judges Merriam, Walker, and Robinson) was yes.
For years, the Second Circuit had held that, in light of the pro-arbitration policy embodied in the Federal Arbitration Act, a party’s active participation in litigation only results in arbitration waiver if it prejudices the opposing party (for example, through impairment of its defenses). In Morgan v. Sundance, Inc., 596 U.S. 411 (2022), however, the Supreme Court observed that a prejudice-based assessment conflicts with a common understanding of the waiver doctrine, which focuses on a party’s own conduct, not the impact on another. The Morgan Court thus held that a party waives its right to arbitrate when it “knowingly relinquish[es] the right to arbitrate by acting inconsistently with that right.” Prejudice is not, in itself, a consideration.
Acknowledging the change in law from Morgan, the court concluded that defendants acted inconsistently with their right to arbitrate, actively participating in the litigation, filing stipulations, and raising substantive arguments for over a year after the action commenced. A party must choose to arbitrate at the outset of a litigation or else lose that right. “Arbitration,” the court cautioned, “is not a fallback position. It is not a second bite at the apple.”
CONCLUSION
Each of these decisions presents a new twist on well-trodden doctrinal ground. Under Thermal Surgical, offensive claim preclusion – if ever valid – must be deployed fairly, and preclusion of a defense based on failure to challenge a low-risk bankruptcy claim is not fair. Neurological Surgery shows that the voluntary cessation of challenged conduct may indeed moot a case, unless gamesmanship or a risk of recurrence is evident from the record. And, as Doyle teaches, arbitration waiver hinges on a party’s conduct – not prejudice – incentivizing parties to seek to arbitrate early or else lose that right. As long as there is law, and courts to apply it, doctrinal development will never end.