When a State Court Says “No” to Arbitration, Federal Courts Don’t Re‑Ask: Seventh Circuit Enforces Issue Preclusion After a Denial of Arbitration and Subsequent Settlement

Introduction

In Mazen Agha v. Uber Technologies, Inc., the Seventh Circuit affirmed a district court order denying Uber’s motion to compel arbitration as to one plaintiff, Ken Zurek, even though the district court compelled arbitration for three co-plaintiffs. The dispositive question was not the validity of Uber’s arbitration clause on the merits, but whether Uber was precluded from re-litigating the same arbitration issue it had already lost in a prior Illinois state court case with Zurek. Applying 28 U.S.C. § 1738 and Illinois issue preclusion doctrine, the Seventh Circuit held that the state court’s denial of Uber’s motion to compel arbitration—grounded in the interpretation of Uber’s Platform Access Agreement (PAA) and the effect of Zurek’s opt-out—barred Uber from raising the same argument again in federal court.

The case sits at the intersection of arbitration law and preclusion doctrine. It clarifies that a prior state court decision denying arbitration can have preclusive effect in later federal proceedings involving the same parties and the same contractual question, even if the state case later settles. It also underscores the practical stakes of early arbitration fights: one adverse state ruling can foreclose re-litigation in federal court.

Summary of the Judgment

The Seventh Circuit (Judge Lee, joined by Judges Kirsch and Kolar) affirmed the district court’s denial of Uber’s motion to compel arbitration with plaintiff Ken Zurek. The court held:

Under 28 U.S.C. § 1738, federal courts must give the same preclusive effect to state-court judgments that the rendering state would give.
Illinois issue preclusion (collateral estoppel) applies: the identity of issues requirement was met because the state court previously decided that Zurek’s 2020 arbitration agreement did not compel arbitration of a claim arising during the period governed by the 2022 PAA after Zurek opted out of the 2022 arbitration provision.
The state court’s decision was sufficiently final and on the merits for issue preclusion despite the subsequent settlement; under Illinois law, such interlocutory determinations can have preclusive effect.
Uber’s attempts to differentiate the issues (e.g., by pointing to FAA versus state law or the unresolved question whether Zurek assented to the 2020 PAA) failed because those points did not change the identity of the decisive issue actually decided and necessary to the earlier ruling.

Result: The denial of Uber’s motion to compel arbitration as to Zurek is affirmed. The court did not reach the parties’ alternative arguments because issue preclusion resolved the appeal.

Factual and Procedural Background

The parties and claims

Four drivers sued Uber, alleging misclassification as independent contractors, leading to violations of the Fair Labor Standards Act (minimum wage and overtime) and Illinois wage laws (unreimbursed expenses). Uber moved to compel arbitration under the FAA and Illinois Uniform Arbitration Act based on arbitration clauses in Uber’s PAAs with the drivers.

Uber’s platform agreements and the opt-out clause

Uber’s drivers must accept a Platform Access Agreement before using the app. Each PAA includes:

An arbitration provision requiring bilateral arbitration of disputes (with inapplicable exceptions).
An opt-out mechanism allowing drivers to opt out of arbitration within 30 days by mail or email.
Section 13.8(c), which states that opting out of “this Arbitration Provision” does not affect the validity of any other arbitration agreement; if a driver opts out and was already bound by an existing arbitration agreement when receiving the new agreement, that existing agreement remains in effect.

Zurek accepted PAAs in 2020, 2021, and 2022. He did not opt out after the 2020 PAA but did opt out after the 2021 and 2022 PAAs.

The earlier Illinois state court case

Before joining the federal wage case, Zurek sued Uber in Illinois state court in 2023 under the Chicago Municipal Code, challenging his deactivation following background check arrests. Uber moved to dismiss or compel arbitration, arguing that under § 13.8(c) the 2020 arbitration agreement continued to govern despite Zurek’s 2022 opt-out.

The state court rejected Uber’s reading. It held that reading § 13.8(c) to override a later opt-out would render the opt-out right meaningless and produce an absurd result. The only reasonable interpretation, it concluded, is that the 2020 arbitration agreement can govern disputes arising during the 2020 PAA period, but not disputes arising during the 2022 PAA period after a valid 2022 opt-out. The court deemed it unnecessary to decide whether Zurek had assented to the 2020 PAA because his claim arose during the 2022 PAA period. Two months later, the parties settled and the state case was dismissed.

The federal case and the district court ruling

In the federal misclassification action, Uber again moved to compel arbitration. The district court:

Compelled arbitration for three drivers (not appealed).
Denied Uber’s motion as to Zurek, holding that issue preclusion barred Uber from re-litigating the effect of § 13.8(c) on Zurek’s later-arising claim in light of his 2022 opt-out.

Uber appealed solely as to Zurek.

Analysis

Precedents Cited and Their Influence

28 U.S.C. § 1738; Migra v. Warren City School District; Marrese v. American Academy of Orthopaedic Surgeons; Sapp v. Foxx. These authorities establish that federal courts must accord the same preclusive effect to state court judgments that the rendering state would provide, reflecting comity and federalism.
E.E.O.C. v. AutoZone, Inc. (7th Cir.): Standard of review for issue preclusion is de novo.
Illinois law on issue preclusion: Dunlap v. Nestlé USA, Inc.; Herzog v. Lexington Township; American Family Mutual Insurance Co. v. Savickas. Collectively, they set out the Illinois elements: (1) identical issue; (2) final judgment on the merits; (3) same party or privity; plus the issue must have been actually litigated and necessary to the prior judgment.
Du Page Forklift Service, Inc. v. Material Handling Services, Inc.; Restatement (Second) of Judgments § 13; Haber v. Biomet, Inc. These establish that a decision may be “sufficiently firm” to have preclusive effect even if it precedes settlement, focusing on whether the parties were fully heard, the court issued a reasoned opinion, and whether the decision was subject to appeal.
Parklane Hosiery Co. v. Shore (U.S. Supreme Court): Policy objectives of issue preclusion—protecting litigants from duplicative litigation and promoting judicial economy.
Best Coin-Op, Inc. v. Paul F. Ilg Supply Co. (Ill. App. Ct.): Used by Uber to argue that undecided issues cannot support preclusion. The Seventh Circuit distinguishes it: there, key elements had not been decided. Here, the decisive contractual interpretation for later-arising claims during the 2022 PAA period was decided and necessary to the judgment.

Legal Reasoning

Governing law on preclusion. Under § 1738, the Seventh Circuit applied Illinois preclusion law. Review is de novo.
Identity of issues. The central question in both forums was the same: does Zurek’s 2020 arbitration agreement compel arbitration of a dispute arising during the 2022 PAA period after Zurek opted out of the 2022 arbitration provision? The state court answered “no,” interpreting § 13.8(c) to preserve earlier agreements for disputes arising in their effective period, but not to nullify a later opt-out for later-arising claims.
Uber’s two attempts to avoid identity of issues fail.
- Unresolved 2020 assent argument: Uber argued the state court left undecided whether Zurek agreed to the 2020 PAA, invoking Best Coin-Op. But that fact was unnecessary to the state court’s ruling because the claim arose during the 2022 period; the court expressly said it was “not necessary to address” 2020 assent. Issue preclusion requires that the earlier decision resolve the issue that matters here, and it did: the temporal reach of § 13.8(c) vis-à-vis a later opt-out.
- FAA vs state law: Uber contended the state court used state law rather than the FAA. The Seventh Circuit found Uber did not show any material difference in standards that would defeat identity of issues. Uber effectively conceded formation and interpretation questions are governed by Illinois law—the law the state court applied. Thus, the same legal issue was decided.
Remaining preclusion elements.
- Final judgment on the merits: Under Illinois law, a reasoned order denying arbitration can be “sufficiently firm” to have preclusive effect even if the case later settles (Du Page Forklift; Restatement § 13; Haber). The state court issued a reasoned opinion; nothing suggested it would revisit the ruling; and it was subject to appeal. The Seventh Circuit agreed with the district court that finality was satisfied.
- Same party and actual litigation: Uber was the party in both cases and had a full opportunity to litigate the arbitration issue. The decision on the issue was necessary to the earlier judgment because it disposed of Uber’s motion to compel arbitration.
Policy considerations. Even if the outcome appears superficially inconsistent—three plaintiffs compelled to arbitration, one not—preclusion doctrine serves systemic goals: it prevents do-overs of identical issues between the same parties and conserves judicial resources (Parklane Hosiery).
Scope of the holding. Because issue preclusion resolved the appeal, the court did not reach the FAA’s application to Uber drivers, the enforceability of the arbitration provisions under Illinois law, or other alternative arguments.

Impact

This decision will reverberate in arbitration practice, especially in gig-economy disputes where standard-form agreements are revised and re-accepted over time.

Preclusive effect of state arbitration rulings. Litigants cannot treat a loss on arbitrability in state court as a dry run for federal court. If the same parties and same contractual arbitrability question arise later, § 1738 requires giving the state decision the preclusive weight Illinois would give it—even if the case settles thereafter.
Drafting implications for opt-out clauses. The state court’s reasoning (which now binds Uber and Zurek through preclusion) treats later opt-outs as controlling for disputes arising during the later agreement’s effective period. Contract drafters seeking to preserve prior arbitration commitments must speak clearly about temporal reach and avoid language that nullifies opt-out rights by indirection. Any clause akin to § 13.8(c) should be calibrated to avoid an “absurd result” of making opt-outs illusory.
Litigation strategy. Companies should approach the first arbitrability fight with full recognition that an adverse decision may stick. Consider appellate avenues in the initial forum and ensure complete records (e.g., proofs of assent to earlier agreements); here, the state court noted Uber failed to attach records establishing Zurek’s assent to the 2020 PAA.
FAA arguments will not bypass preclusion. Merely invoking the FAA does not negate § 1738 or the identity-of-issues requirement. Parties must articulate a material difference in legal standards—otherwise, state-law determinations on formation and interpretation will carry preclusive weight in federal court.
Fragmented proceedings. The outcome illustrates how one plaintiff may proceed in court while others arbitrate, depending on individual preclusion histories. This can influence collective-action dynamics under the FLSA and case management in multi-plaintiff litigation.
Finality after settlement. The opinion reinforces Illinois law that a reasoned, appealable interlocutory order may be “sufficiently firm” to have preclusive effect despite later settlement. Parties cannot count on settlement to erase the collateral consequences of interim rulings.

Complex Concepts Simplified

Issue preclusion (collateral estoppel): A rule that stops a party from re-litigating an issue that was already decided in a prior case, when (a) the issue is the same, (b) there was a final judgment on the merits of that issue, (c) the party had a full opportunity to litigate it, and (d) the decision on that issue was necessary to the prior judgment.
Identity of issues: The key question must be the same in both cases. Minor differences that do not change the decisive question do not defeat identity.
“Final judgment” for preclusion: In Illinois, an order can be “sufficiently firm” to be preclusive even if it is interlocutory and the case later settles, provided it was reasoned, the parties were fully heard, and it was appealable.
28 U.S.C. § 1738 (Full Faith and Credit statute): Requires federal courts to give state court judgments the same preclusive effect they would receive in that state’s courts.
FAA vs state law in contract disputes: While the FAA favors arbitration, contract formation and interpretation questions are generally governed by state law. Saying “the FAA applies” does not automatically change the applicable standards for these questions.
Opt-out clause: A contractual right allowing a party to decline arbitration within a specified period, thereby preserving access to court for disputes covered by the opt-out period.
Temporal reach of arbitration agreements: Which set of contractual terms governs depends on when the dispute arises and which agreement is then in effect. An opt-out in a later agreement can control disputes arising during that later agreement’s effective period.

Key Precedents and How They Shaped the Decision

Migra; Marrese; Sapp v. Foxx: Anchored the court’s duty to apply Illinois preclusion law to the prior state decision.
Dunlap; Herzog; Savickas: Supplied Illinois’s elements for issue preclusion and the “actually litigated/necessary to the judgment” requirements.
Du Page Forklift; Restatement § 13; Haber: Provided the “sufficiently firm” doctrine enabling preclusion despite post-ruling settlement.
Best Coin-Op: Distinguished to show why the “undecided” 2020-assent point did not matter; the decisive issue had been decided.
Parklane Hosiery: Underscored the policy values of finality and efficiency served by preclusion.

Conclusion

The Seventh Circuit’s decision establishes a clear practical rule: when a state court has already decided a dispute’s arbitrability between the same parties—especially by interpreting the same agreement language and the effect of an opt-out—the losing party cannot seek a second chance in federal court. Section 1738 requires honoring the state court’s ruling, and Illinois law recognizes that a reasoned denial of arbitration can be sufficiently final for preclusion notwithstanding later settlement.

For businesses and practitioners, the message is twofold. First, approach the first arbitrability forum as the main event; build the evidentiary record, articulate any FAA-specific arguments that truly differ from state law principles, and pursue any available appellate relief in that forum. Second, draft opt-out and temporal provisions in arbitration agreements with precision. Language that can be read to nullify a later opt-out will invite judicial resistance and, if rejected once, may bind the drafter in future litigation through issue preclusion.

Although the court did not reach the broader questions about Uber’s arbitration program or the FAA’s application to Uber drivers generally, its preclusion analysis meaningfully shapes the procedural terrain for arbitration enforcement in multi-forum, multi-plaintiff disputes: one adverse state ruling on the same contractual question can control the federal court outcome.