Nationwide Mutual Fire Insurance Company v. George V. Hamilton, Inc.

PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
_____________
No. 08-4733
_____________
NATIONWIDE MUTUAL FIRE INSURANCE COMPANY,
Appellant
v.
GEORGE V. HAMILTON, INC.,
Appellee
_______________
On Appeal from the United States District Court
for the Western District of Pennsylvania
(D.C. No. 08-cv-00646)
District Judge: Honorable Gary L. Lancaster
_______________
ARGUED May 21, 2009
Before: FUENTES, JORDAN and NYGAARD, Circuit
Judges.
(Filed: July 06, 2009 )

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2
_______________
Peter B. Skeel, Esq.
Summers, McDonnell, Hudock,
Guthrie & Skeel, LLP
707 Grant Street
2400 Gulf Tower
Pittsburgh, PA 15219
Rolf E. Gilbertson, Esq. [ARGUED]
Eric E. Caugh, Esq.
Christopher R. Paar, Esq.
Kathryn M. Hoffman, Esq.
Zelle Hofmann Voelbel & Mason LLP
500 Washington Avenue South
Suite 4000
Minneapolis, MN 55415
Counsel for Appellant
Frederick J. Francis, Esq. [ARGUED]
Joseph E. Linehan, Esq.
Richard T. Victoria, Esq.
Meyer, Unkovic & Scott LLP
535 Smithfield Street
1300 Oliver Building
Pittsburgh, PA 15222
Counsel for Appellee
_______________
OPINION OF THE COURT
_______________

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This appeal was initially captioned “Roe Co. v. Doe, Inc.”1
and documents filed in conjunction with this appeal were
initially filed under seal. The parties have since agreed that
sealing of this matter is no longer necessary.
3
JORDAN, Circuit Judge.
Nationwide Mutual Fire Insurance Company
(“Nationwide”) appeals the order of the United States District1
Court for the Western District of Pennsylvania granting appellee
George V. Hamilton, Inc. (“Hamilton”) summary judgment and
dismissing Nationwide’s motion to compel arbitration.
Nationwide challenges the District Court’s determination that it
was collaterally estopped from seeking enforcement of a
contractual arbitration clause because of a previous state court
lawsuit to which Nationwide was not a party, and it further
challenges the District Court’s conclusion that, irrespective of
estoppel, the federal action was duplicative of a pending action
in state court and warranted abstention pursuant to doctrine laid
down by the Supreme Court in Colorado River Water
Conservation District v. United States, 424 U.S. 800 (1976).
We conclude that the previous state court ruling does not
preclude Nationwide, who was a nonparty and did not otherwise
have its interests represented before the state court, from seeking
to enforce the arbitration provision of its agreement with
Hamilton. We further conclude that the kind of extraordinary
circumstances warranting abstention under Colorado River are
not present here. We will therefore reverse and remand to the
District Court to consider the merits of Nationwide’s petition to
compel arbitration.

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4
I. Background
Nationwide issued a single policy of liability insurance
to Hamilton which provided Hamilton with coverage from
January 30, 1985 to January 30, 1986. During the policy period,
Hamilton, an installer of commercial and industrial insulation,
received claims for asbestos-related injuries allegedly caused by
products it had installed. In 1992, Hamilton and Nationwide,
along with other carriers, including Pennsylvania
Manufacturers’ Association Insurance Company (“PMA”),
entered into an Interim Claim Handling and Settlement
Agreement (the “Settlement Agreement” or “Agreement”). The
Settlement Agreement concerned the administration and
allocation of defense and indemnity resources for claims under
the various insurers’ policies. Under the Agreement, an
insurer’s obligation to pay defense and indemnity costs
continued until it could establish that it had exhausted its policy
limits. Upon proof of exhaustion, that insurer was released by
Hamilton and discharged from further obligation, and any
remaining costs were allocated proportionally among the
remaining insurers. It is undisputed that the Settlement
Agreement included a three-year minimum term and that,
following the expiration of the three-year term, the Agreement
could be terminated as to all parties by the withdrawal of any
one party, so long as written notice, delivered by certified mail,
was provided to all parties 90 days in advance of the termination
date.
Nationwide participated in the Settlement Agreement
until early 1996, when it claimed to have exhausted its policy
limits and provided proof of exhaustion to both Hamilton and its

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At oral argument, Hamilton conceded that Nationwide had2
exhausted its policy limits with regard to product coverage but
not with regard to its premises coverage.
The record is unclear as to whether Nationwide made any3
payments from May 5, 1997 thru the end of 1997.
“PARTIES” is defined to include all signatories to the4
Settlement Agreement.
5
fellow carriers. On May 5, 1997, Hamilton stated that it was2
“willing to accept the evidence of exhaustion” supplied by
Nationwide. While the parties dispute whether Nationwide was
then released from any obligation to defend or indemnify
Hamilton, it is undisputed that Nationwide did not participate in
Hamilton’s defense or pay further indemnification after 1997.3
In addition to setting the insurers’ obligations with regard
to indemnity and defense, the Settlement Agreement included an
arbitration clause providing that “the PARTIES agree that any
and all disputes arising out of, or relating to this Agreement, or
breach thereof, shall be decided by nonjudicial arbitration which
shall be binding on the parties [sic] in accordance with 42 Pa.
U.P.S.A., Section 7341. Notice of the demand for arbitration
shall be served in writing upon all other PARTIES to this
Agreement.” 4
On January 5, 2005, PMA filed a complaint (the “PMA
Action”) in the Court of Common Pleas of Allegheny County,
Pennsylvania, seeking a declaratory judgment against Hamilton

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PMA’s preliminary objections were filed pursuant to Rule5
1028(a)(6) of the Pennsylvania Rules of Civil Procedure, which
provides that “Preliminary objections may be filed by any party
to any pleading and are limited to the following grounds: ... (6)
pendency of a prior action or agreement for alternative dispute
resolution.”
6
and several insurers other than Nationwide. PMA contended
that it had exhausted its policy limits under various umbrella
policies it had written for Hamilton and that it therefore had no
further obligation to Hamilton. Five days later, PMA served
Hamilton with an arbitration demand under the Settlement
Agreement. PMA did not serve Nationwide with a copy of the
arbitration demand, as required under the terms of the
Settlement Agreement. Hamilton rejected the demand on
March 29, 2005. In addition to declining the arbitration
demand, Hamilton responded to PMA’s complaint in the Court
of Common Pleas. It filed a New Matter and Counterclaim
against PMA, asserting various claims for breach of contract and
bad faith and arguing that PMA had a duty to defend and
indemnify it for asbestos related claims under PMA’s primary
policy, which was subject to the Settlement Agreement, and
other umbrella policies which were not subject to the Settlement
Agreement. PMA filed preliminary objections to the5
counterclaims before the Court of Common Pleas, contending
that the counterclaims were controlled by the Settlement
Agreement and should be dismissed in light of the arbitration
clause.

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7
Three years later, on May 20, 2007, the Court of
Common Pleas issued an order sustaining PMA’s objections, but
the Court stated that it would “vacate [its]... order and overrule
the preliminary objections if within ten (10) days... Hamilton
sends a notice of withdrawal from the [Settlement A]greement.”
(App. 350A-C.) The Court further stated that:
I agree with Hamilton if Hamilton is saying that it
is not required to arbitrate pursuant to paragraph
21 [of the Settlement Agreement] if it elects to
terminate the Agreement at this time.
However, I disagree with Hamilton if Hamilton is
taking the position that it is not bound by the
arbitration clause even though it chooses not to
terminate the Agreement. It cannot use some
portions of the Agreement and disassociate itself
from other portions of the Agreement.
(App. 350.) On May 30, 2007, Hamilton responded by sending
to Nationwide and the other Settlement Agreement signatories
notice of its intent to withdraw from the Agreement. The Court
of Common Pleas then, on June 22, 2007, granted Hamilton’s
motion to vacate and overruled PMA’s objections to the
counterclaims. The Court’s June 22 Order, vacating its May 20
Order, did not state a basis for the vacatur nor did it recognize
that, at a minimum, the Settlement Agreement required 90 days
written notice for a withdrawal to be effective.
In addition to the suit initiated by PMA, a second
Hamilton insurer, ACE Property & Casualty Co. (“ACE”),

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The actions were coordinated under Rule 213.1 of the6
Pennsylvania Rules of Civil Procedure which provides that,
upon a motion from a party, actions involving “common
question of law or fact or which arise from the same transaction
or occurrence” may be coordinated and the coordinating court
may “(1) stay any or all of the proceedings in any action subject
to the order, or (2) transfer any or all further proceedings in the
actions to the court or courts in which any of the actions is
pending, or (3) make any other appropriate order.”
The complaint against Nationwide asserted claims by7
American Guarantee & Liability Insurance Co. for declaratory
judgment and contribution with regard to amounts paid to
8
though it was not a party to the Settlement Agreement, also filed
an action (the “ACE Action”) against Hamilton and other
insurers seeking declaratory relief regarding its duty to defend
and indemnify Hamilton. Again, Nationwide was not made a
party. The ACE Action was filed in the Court of Common Pleas
of Philadelphia County on December 7, 2005, a year after the
PMA Action began. In response to a defense motion, the court
in Philadelphia transferred the case to the Court of Common
Pleas in Allegheny County on July 25, 2006. The ACE action
has since been coordinated with the PMA Action and both cases
remain pending.6
On June 7, 2007, a co-insurer defendant in the ACE
Action filed a third-party complaint against Nationwide,
marking the first time that Nationwide became a party in either
the ACE or PMA Actions. Nationwide filed its answer to the7

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defend and indemnify Hamilton.
9
third-party complaint on August 10, 2007. On September 28,
2007, Hamilton filed an answer, new matter counterclaim and
crossclaims. There were still no causes of action asserted by
Hamilton against Nationwide.
On October 19, 2007, Hamilton tendered new asbestos-
related claims to Nationwide and other insurers seeking
indemnity and defense. The claims were Hamilton’s first
against Nationwide in the more than ten years since Nationwide
had asserted exhaustion of its policy limits under the release and
discharge provision of the Settlement Agreement. On February
4, 2008, Hamilton filed amended crossclaims in the ACE
Action, including, for the first time, allegations against
Nationwide. In its reply to Hamilton’s amended crossclaims,
Nationwide raised the arbitration provision of the Settlement
Agreement as an affirmative defense but has not otherwise
presented the arbitration issue to the state court. However,
pursuant to the Settlement Agreement, Nationwide served
Hamilton with an arbitration demand on April 1, 2008.
Hamilton denied the demand, and Nationwide then filed this
action in the United States District Court for the Western
District of Pennsylvania to compel arbitration. Soon thereafter,
Hamilton moved to dismiss or for summary judgment, and, on
November 8, 2008, the District Court granted the summary
judgment motion.
In granting Hamilton’s motion, the District Court
determined that, as a result of a ruling by the Court of Common

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Coordinated discovery remains ongoing before the Court of8
Common Pleas in the PMA and ACE Actions, and Nationwide
is actively defending against Hamilton’s cross-claims.
10
Pleas in the PMA Action, Nationwide was collaterally estopped
from invoking the arbitration clause in the Settlement
Agreement. The Court reasoned that Nationwide was in privity
with PMA and shared an “identity of interest in enforcing the
arbitration agreement.” (App. 13.) As an alternative basis for
its ruling, the District Court cited the Colorado River abstention
doctrine, finding that the state and federal proceedings were
parallel and that “exceptional circumstances” warranting
abstention were present, despite the “strong federal policy in
favor of upholding arbitration agreements” and the general rule
that the “FAA does not favor abstention.” (App. 17, 18.)
Nationwide timely appealed the District Court’s order,
contesting the Court’s rulings on both collateral estoppel and
abstention.8
II. Jurisdiction and Standard of Review
The District Court had jurisdiction under 28 U.S.C.
§ 1332. We have jurisdiction under 28 U.S.C. § 1291. We
exercise plenary review over a district court’s decision regarding
collateral estoppel. See Prusky v. ReliaStar Life Ins. Co., 532
F.3d 252 (3d Cir. 2008) (citation omitted). In reviewing a
decision to abstain under the Colorado River doctrine, we
exercise plenary review over legal questions, including the
determination of whether the proceedings in state and federal
court are properly considered “parallel”. See Ryan v. Johnson,

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In addition to contesting the District Court’s determination9
regarding privity, Nationwide also contests the finality of the
Court of Common Pleas’s ruling on arbitration. Our conclusion
that there is no privity between the parties obviates any need to
consider the finality of the state court ruling, and we do not
address that issue.
11
115 F.3d 193, 196 (3d Cir. 1997). If the proceedings are
parallel, we review for abuse of discretion a district court’s
decision to abstain; although, “to the extent the district court
evaluated a factor based on an erroneous view of the law, it
necessarily abused it discretion and [appellate] review becomes
plenary.” Id.
III. Discussion
The District Court decided that there is a sufficient
identity of interests between Nationwide and PMA that PMA
can be said to have adequately represented Nationwide in the
PMA Action and that, accordingly, the two insurers are in
privity for estoppel purposes. Nationwide understandably takes
exception to that ruling, and we agree that estoppel was
inappropriate. Nationwide and PMA were not in privity because
PMA was not Nationwide’s legal representative, nor do the two
companies have any other relationship warranting the
conclusion that they were in privity. Indeed, at the time of the
state court’s ruling in the PMA Action, Nationwide’s interests
were not even adverse to Hamilton’s and so cannot rightly be
said to have been aligned with PMA’s.9

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12
Nationwide also objects to the District Court’s conclusion
that abstention pursuant to the Colorado River doctrine provides
an independent basis for dismissal. Again, we agree and
conclude that the District Court erred in determining that the
instant case presents extraordinary circumstances that warrant
abstention. Because the question of abstention is jurisdictional
and would dispose of the matter in its entirety, we address it
first.
A. Abstention
The Colorado River doctrine allows a federal court to
abstain, either by staying or dismissing a pending federal action,
when there is a parallel ongoing state court proceeding. See
Colorado River Water Conservation District v. United States,
424 U.S. 800 (1976). The doctrine is to be narrowly applied in
light of the general principle that “federal courts have a strict
duty to exercise the jurisdiction that is conferred upon them by
Congress.” Quackenbush v. Allstate Ins. Co., 517 U.S. 706, 716
(1996); see also Colorado River, 424 U.S. at 813 (“The doctrine
of abstention, under which a District Court may decline to
exercise or postpone the exercise of its jurisdiction, is an
extraordinary and narrow exception to the duty of a District
Court to adjudicate a controversy properly before it.”) (internal
quotation omitted). Whether abstention is appropriate is a two-
part inquiry. The initial question is whether there is a parallel
state proceeding that raises “substantially identical claims [and]
nearly identical allegations and issues.” Yang v. Tsui, 416 F.3d
199, 204 n.5 (3d Cir. 2005) (internal quotation and citation
omitted). If the proceedings are parallel, courts then look to a
multi-factor test to determine whether “extraordinary

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Only the first four of these factors were delineated in10
Colorado River, the other two are drawn from Moses H. Cone
Memorial Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 23, 26
(1983) (“Besides the four factors expressly discussed in
Colorado River, there is another that emerges ... the fact that
federal law provides the rule of decision on the merits”; “an
important reason against allowing a stay is the probable
inadequacy of the state-court proceeding to protect Mercury’s
rights.”).
13
circumstances” meriting abstention are present. Spring City
Corp. v. American Bldgs. Co., 193 F.3d 165, 171 (3d Cir. 1999).
We need not take up the parallel action analysis here because,
even presuming parallelism, this action does not present the type
of circumstances warranting abstention.
In determining whether an action presents “extraordinary
circumstances” we consider six factors: “(1) [in an in rem case,]
which court first assumed jurisdiction over [the] property; (2)
the inconvenience of the federal forum; (3) the desirability of
avoiding piecemeal litigation; (4) the order in which jurisdiction
was obtained; (5) whether federal or state law controls; and (6)
whether the state court will adequately protect the interests of
the parties.” Spring City, 193 F.3d at 171. “No one factor is10
determinative; a carefully considered judgment taking into
account both the obligation to exercise jurisdiction and the
combination of factors counseling against that exercise is
required.” Colorado River, 424 U.S. at 818-19. The balancing
of factors is “heavily weighted in favor of the exercise of

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14
jurisdiction.” Moses H. Cone Memorial Hosp. v. Mercury
Constr. Corp., 460 U.S. 1, 16 (1983).
Of primary importance with regard to this case are the
third and fourth factors. As the parties concede, the first two
factors are irrelevant, as this is not an in rem action and the
federal forum is convenient for both parties. The fifth and sixth
factors also carry little weight here. The fifth factor is relatively
neutral, given that the Federal Arbitration Act (the “FAA”)
governs the enforceability of the arbitration clause but a choice
of law clause provides that Pennsylvania law governs the
Settlement Agreement. The sixth factor does not significantly
inform the analysis because the FAA grants concurrent
jurisdiction to federal and state courts and thus expressly
contemplates the state court as an adequate forum for
adjudication. See Spring, 193 F.3d at 172 (“[T]he question
whether parties’ interests are protected is only relevant when
they are not; that is, ‘when the state court is adequate, ... [this]
factor carries little weight.’”) (quoting Ryan, 115 F.3d at 199,
200).
The third and fourth factors, however, weigh heavily
against abstention. The third factor, the desirability of avoiding
piecemeal litigation, was “[b]y far the most important factor” in
the Colorado River decision itself. Moses H. Cone, 460 U.S. at
16. By definition, it is an inquiry into whether avoiding
piecemeal litigation is a priority contemplated by the statute,
regulation, or other authority at issue. Spring, 193 F.3d at 172
(third factor satisfied only where the law in question evinces a
“strong federal policy against [such] litigation.”). In this
instance, rather than containing a strong policy against

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15
piecemeal litigation, the FAA has a policy in favor of it, at least
to the extent necessary to preserve arbitration rights, as the
Supreme Court made clear in Moses H. Cone. The Court
considered whether abstention was appropriate when there was
a federal action to compel arbitration under a contract at the
same time that there was a state court action seeking a
declaration that there was no contractual right to arbitration.
460 U.S. at 1. The state court case also contained disputes
between the federal defendant and a third party, a fact which the
defendants claimed militated in favor of abstention due to the
potential for piecemeal adjudications. Id. The Supreme Court
rejected that argument, concluding that:
It is true...that if [plaintiff] obtains an arbitration
order for its dispute, the [defendant] will be
forced to resolve these related disputes in
different forums. That misfortune, however, is not
the result of any choice between the federal and
state courts; it occurs because the relevant federal
law requires piecemeal resolution when necessary
to give effect to an arbitration agreement. Under
the Arbitration Act, an arbitration agreement must
be enforced notwithstanding the presence of other
persons who are parties to the underlying dispute
but not to the arbitration agreement.
Id. at 20-21 (emphasis added). The circumstances presented in
Moses H. Cone are analogous to those before us. While not all
parties in the ACE Action are covered by the arbitration
agreement between Nationwide and Hamilton, and enforcement
of the arbitration agreement may result in separate adjudications,

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16
that is an insufficient basis for the District Court to decline
jurisdiction. Because the FAA requires piecemeal litigation
where necessary, irrespective of any concomitant decline in
judicial efficiency, this critical factor weighs against abstention.
The fourth factor, the order in which jurisdiction was
obtained, also counsels against abstention. Although the PMA
and ACE Actions were both filed prior to Nationwide’s
initiation of this suit, we must consider more than which action
was filed first. See Moses H. Cone, 460 U.S. at 21 (defendants
first filed argument “gives too mechanical a reading to the
‘priority’ element of the Colorado River balance”). The
comparative progress made in the state cases and this one also
needs to be considered. Id. at 22. Although there has been
significant progress in the state cases with regard to Hamilton’s
crossclaims against Nationwide and the other insurers,
consideration of the arbitration issue is not so far advanced. It
has been raised only in Nationwide’s response to the crossclaims
and has not otherwise been litigated before the Court of
Common Pleas. On this record, it does not appear that there will
be much, if any, duplicative judicial effort in allowing the
arbitration issue to proceed in the federal forum where the
parties have already been litigating it. See Moses H. Cone, 460
U.S. at 22 n. 26 (observing that because the parties had
submitted extensive briefing on the arbitrability issue, “[i]t is
readily apparent that if the District Court had denied the stay, it
doubtless could and should have gone on to decide the
arbitrability point in very short order.”).
On balance, the relevant factors weigh against abstention.

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While it has been suggested that “issue preclusion” has11
replaced the term “collateral estoppel,” Taylor v. Strugell, 128
S.Ct. 2162, 2171 n.5 (2008), the latter term is still very much in
use, including by the parties and District Court in this case. We
think it would be more confusing to work around so well-worn
a phrase, so we use it too.
Pennsylvania courts will occasionally frame the test as a12
five-factor test, adding the requirement that “the determination
in the prior proceeding was essential to the judgment.” Yamulla
17
B. Collateral Estoppel11
Because the District Court had jurisdiction and should
have exercised it, the question becomes whether collateral
estoppel applies against Nationwide’s demand for arbitration.
There is no dispute that Pennsylvania law on collateral estoppel
governs in this diversity action. See Semtek Int’l Inc. v.
Lockheed Martin Corp., 531 U.S. 497, 508 (2001) (holding that
the preclusion law to be applied is that of “the State in which the
federal diversity court sits.”). Under Pennsylvania law, the
following conditions must be satisfied for collateral estoppel to
bar a subsequent claim: (1) the issue decided in the prior case
must be identical to the one presented in the later case; (2) there
was a final judgment on the merits in the prior action; (3) “[t]he
party against whom collateral estoppel is asserted was a party to
the prior action, or is in privity with a party to the prior action”;
and (4) “[t]he party against whom collateral estoppel is asserted
had a full and fair opportunity to litigate the issue in the prior
action.” Rue v. K-Mart Corp., 713 A.2d 82, 84 (Pa. 1998).12

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Trucking & Excavating Co., Inc. v. Justofin, 771 A.2d 782, 786
(Pa. Super. 2001).
18
The parties agree, as do we, that Pennsylvania law is “not
inconsistent” with federal decisions on collateral estoppel and
privity, and we therefore consider our own precedent to be
persuasive in addressing collateral estoppel questions arising
under Pennsylvania law. Cf. First Options of Chicago, Inc. v.
Kaplan, 913 F.Supp. 377, 384 n. 8 (E.D.Pa. 1996) (“State law
requirements for res judicata and privity are not inconsistent
with the federal law applied by [the Court of Appeals for the
Third Circuit].”)).
Collateral estoppel operates to bar “successive litigation
of an issue of fact or law actually litigated and resolved in a
valid court determination.” New Hampshire v. Maine, 532 U.S.
742, 748-49 (2001). Prohibiting parties from going to court
again after they have had a full opportunity to litigate guards
against “the expense and vexation attending multiple lawsuits,
conserves judicial resources, and fosters reliance on judicial
action by minimizing the possibility of inconsistent decisions.”
Montana v. United States, 440 U.S. 147, 153-54 (1979).
Estoppel, however, is limited by the due process principle that
“[a] judgment or decree among parties to a lawsuit resolves
issues as among them, but it does not conclude the rights of
strangers to those proceedings.” Richards v. Jefferson County,
Ala., 517 U.S. 793, 798 (1996) (citation omitted). Thus there is
generally a bar against applying collateral estoppel to those who
were not parties in the prior litigation.

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We have observed that “privity states no reason for13
including or excluding one from the estoppel of a judgment. It
is merely a word used to say that the relationship between the
one who is a party on the record and another is close enough to
include that other within the res judicata.” Collins v. E.I.
DuPont de Nemours & Co., 34 F.3d 172, 176 (3d Cir. 1994)
(quoting Bruszewski v. United States, 181 F.2d 419, 423 (3d Cir.
1950) (Goodrich, J., concurring)).
19
A well-established exception to that bar exists when the
nonparty is in privity with someone who was a party to the prior
suit. Richards, 517 U.S. at 798-99. While simply stated, the
exception can prove difficult in application because, as
Pennsylvania courts have noted, “‘[p]rivity’ is a term which the
courts have never been able to define satisfactorily.” Ammon v.
McCloskey, 655 A.2d 549, 553 (Pa. Super. 1995). Indeed, the
efforts at definition have been notably circular. For example,13
privity has traditionally been understood as referring to the
existence of a substantive legal relationship, such as by contract,
from which it was deemed appropriate to bind one of the
contracting parties to the results of the other party’s participation
in litigation. Taylor, 128 S.Ct. at 2172 n.8. Sometimes privity
is referred to as a mutual or successive right or interest in the
same property. See Greenway Ctr. Inc. v. Essex Ins. Co., 475
F.3d 139 (3d Cir. 2007). Over time, the definition of privity has
loosened to the point that the word is now used as “a way to
express the conclusion that nonparty preclusion [i.e. collateral

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The Supreme Court has found “privity” so elastic a word14
that it has tried to avoid using it altogether, in an effort to “ward
off confusion”. Taylor, 128 S.Ct. at 2172 n.8.
The Pennsylvania Supreme Court has not addressed the15
issue of virtual representation outside of the traditional context,
where there is a prior legal representative relationship between
a party and nonparty.
20
estoppel] is appropriate on any ground.” Taylor, 128 S.Ct. at14
2172 n.8. During the course of that definitional loosening, the
term “virtual representation,” employed here by the District
Court, has come into usage.
Under the “virtual representation” version of privity, a
nonparty may be estopped in a second action where a party acted
as the “virtual representative of the non-party,” meaning that
“there is such an identification of interest between the two as to
represent the same legal right.” Collins, 34 F.3d at 176
(citations omitted). Caselaw from courts within our Circuit15
has provided conflicting statements regarding “virtual
representation” as an exception to the bar against nonparty
collateral estoppel. Compare First Options, 913 F.Supp. at 385
n.11 (stating that while some courts have required that a prior
legal relationship exist between the party and nonparty, “[r]ather
than requiring the legal obligation or accountability in all
circumstances, however, the cases are better read as indicating
that such a relationship is but one factor that will push mere
sharing of parallel interests, into privity for res judicata or
collateral estoppel purposes”) with Collins v. E.I. DuPont de

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Collins involved an analysis of New Jersey privity law,16
which is not significantly distinguishable from that of
Pennsylvania. See e.g., State v. Gonzalez, 380 A.2d 1128, 1132
(N.J. 1977) (setting forth requirements for issue preclusion).
While Taylor concerned federal preclusion law, it is17
nonetheless highly persuasive here, given the close similarity
between Pennsylvania law and federal common law on this
topic.
21
Nemours & Co., 34 F.3d 172, 176 (3d Cir. 1994) (“Virtual
representation does not mean merely that someone in the suit
serves the interests of the person outside the suit. It requires a
relationship by which the party in the suit is the legally
designated representative of the non-party .... A pre-existing
legal relationship is not only a sufficient condition for privity, it
is also a necessary one.”). But, as Collins indicates, our own16
precedent has been to require a preexisting legal relationship
between those contending over privity, before lifting the bar
against collateral estoppel. “The scope of privity, while largely
freed from the very constrictive common law mutuality anchor,
remains small.” Collins, 34 F.3d at 176.
That approach was recently vindicated when the Supreme
Court considered the soundness of the virtual representation
doctrine and the meaning of the term “privity.” In Taylor v.
Strugell, 128 S.Ct. 2162 (2008), the Court considered a17
decision by the United States Court of Appeals for the District
of Columbia Circuit that precluded Taylor from filing a suit
under the Freedom of Information Act. The basis of the Court

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In addition to being at odds with efforts to “delineate18
discrete grounds and clear rules” for nonparty preclusion, this
diffuse balancing test would place an undue burden on district
courts by requiring them to engage in a time-consuming
evaluation of a functionally limitless range of “factors,” robbing
both courts and parties of the litigation efficiencies that
preclusion law is intended to foster. Taylor, 128 S.Ct. at 2174,
2166-67.
22
of Appeals decision was that a third party, with whom Taylor
had no legal relationship, had previously filed an unsuccessful
suit on the same theory and facts advanced by Taylor. Id. at
2167. The D.C. Circuit concluded that the third party was
Taylor’s “virtual representative” in the prior action. In rejecting
that conclusion, the Supreme Court stated emphatically that
“[w]e disapprove the doctrine of preclusion by ‘virtual
representation.’” Id. The Court specifically rejected the
argument, advanced by Appellees and adopted by the District
Court in this case, that preclusion exists where “the relationship
between a party and a non-party is ‘close enough’ to bring the
second litigant within the judgment.” Id. at 2174-75.
Application of such a standard would require a “diffuse
balancing test” at odds with the preferred “constrained approach
to nonparty preclusion.” Id. at 2175. In addition, such a18
liberal “virtual privity” doctrine would defy the limitations on
nonparty preclusion established by the requirement that the party
adequately represent the interests of the nonparty. Id. (citing
Richards, 517 U.S. at 801-02).

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23
Accordingly, in line with Taylor, and for the reasons
articulated therein, we reject the notion of “virtual
representation” as an exception to nonparty collateral estoppel
to the extent it embraces anything more than the understanding
that privity requires a prior legal or representative relationship
between a party to the prior action and the nonparty against
whom estoppel is asserted. Without such a relationship, there
can be no estoppel. Collins, 34 F.3d at 176. Hence, the very use
of the term “virtual representation” is suspect. Cf. Taylor, 128
S.Ct. at 2178 (“[D]ropping the ‘virtual representation’ label
would lead to clearer analysis... .”). In so concluding, we
recognize that we are without the benefit of express guidance
from the Supreme Court of Pennsylvania, but the weaknesses of
a “virtual representation” doctrine, as described in Taylor, cause
us to anticipate that the Supreme Court of Pennsylvania would
concur in rejecting so dangerously broad a definition of privity.
Turning to the traditional categories where privity has
been found to exist, it is clear that Nationwide and PMA have
no relationship that fits. The Taylor Court identified six
categories where nonparty preclusion may be appropriate:
1) the nonparty agrees to be bound by the
determination of issues in an action between
others;
2) a substantive legal relationship – i.e. traditional
privity– exists that binds the nonparty;

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24
3) the nonparty was “adequately represented by
someone with the same interests who [wa]s a
party”;
4) the nonparty assumes control over the litigation
in which the judgment is rendered;
5) the nonparty attempts to bring suit as the
designated representative of someone who was a
party in the prior litigation; and,
6) the nonparty falls under a special statutory
scheme that “expressly foreclos[es] successive
litigation by nonlitigants.”
Taylor, 128 S.Ct. at 2173-74 (internal citations omitted). The
first, fourth, fifth and sixth categories plainly do not apply
because there is no contention that Nationwide agreed to be
bound by the results of the PMA Action, or that it controlled the
PMA Action, or sought to bring suit as PMA’s designated
representative, or fell under a statutory scheme barring it from
seeking arbitration. The second category is similarly
inapplicable because, as the District Court correctly recognized,
no legal relationship existed between Nationwide and PMA.
The third category, which looks to whether a party
“adequately represented” the non-party’s interests, bears a
superficial resemblance to “virtual representation” but is notably
different. Under the “adequate representation” exception, the
interests of the party and nonparty must be squarely aligned and
there must be either an understanding that the party is acting in

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In Taylor, the Supreme Court noted that its precedent has19
left open the question of whether notice is always required in a
suit where preclusion is based on “adequate representation.”
128 S.Ct. at 2176 n. 11. The implication, however, is that prior
notice greatly strengthens any argument for preclusion.
One large problem with the broad virtual representation20
doctrine is that it can allow courts to circumvent procedural
safeguards and “create de facto class actions at will.” Taylor,
128 S.Ct. at 2176 (quoting Tice v. American Airlines, Inc., 162
F.3d 966, 973 (7th Cir. 1998)).
25
a representative capacity or special procedural protections must
have been in place in the original action to ensure the due
process rights of nonparties who might face issue or claim
preclusion. Taylor, 128 S. Ct. at 2176. In class action suits, for
example, the procedural safeguards of Federal Rule of Civil
Procedure 23 must be followed, including the provision in Rule
23(c)(2) requiring notice to nonparties. The carefully19
circumscribed “adequate representation” exception to the bar
against nonparty preclusion is thus in marked contrast to the
vague contours of the virtual representation doctrine applied by
the District Court here. There is no basis in the record from
which to conclude that PMA was Nationwide’s legal
representative. There is no indication that PMA understood
itself to be representing Nationwide or that Nationwide
understood itself to be represented by PMA. And there were no
procedural safeguards to protect Nationwide’s interests.20

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26
We cannot agree with the District Court’s conclusion that
“Nationwide and PMA share an ‘identity of interest’ in
enforcing the arbitration agreement... .” (App. 13.) It appears
that, to the contrary, no such interest existed at the time of the
PMA Action. At that juncture, Hamilton had not even
submitted a claim to Nationwide, and there was no arbitratable
dispute between the two. Further, it is unclear that, even at the
present stage of litigation in state court, Nationwide’s and
PMA’s interests are entirely aligned. The scope of claims that
PMA seeks to arbitrate is broader than that which Nationwide
seeks to arbitrate. While PMA sought arbitration on issues
outside of the Settlement Agreement, such as whether PMA had
acted in bad faith in denying Hamilton further coverage,
Nationwide seeks arbitration only on the scope of its obligations
under the Settlement Agreement, specifically the impact of the
discharge and release provision. The record does not show that
PMA intended to or did adequately represent Nationwide’s
interests such that the two can be said to be in privity.
Binding Nationwide to the order denying arbitration in
the PMA Action, either under the guise of virtual representation
or adequate representation, would expand the scope of
preclusion law in contravention of the “deep-rooted historic
tradition that everyone should have his own day in court.” Id. at
798 (citation omitted). We therefore conclude that the ruling of
the Court of Common Pleas denying arbitration in the PMA
Action does not serve as a viable basis for the District Court’s
preclusion order against Nationwide.

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III. Conclusion
For the foregoing reasons, we will reverse the District
Court’s order and remand for consideration of the merits of
Nationwide’s petition to compel arbitration.

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