Ancillary Judicial Proceedings

After granting a motion to compel arbitration, should a court operating under the FAA stay or dismiss the pending judicial proceeding?  While the federal circuit courts are split on the question, the better rule seems to be that after granting a defendant’s motion to compel arbitration, FAA §4 (9 U.S.C. §4), the court should stay the judicial proceeding pending the arbitration.

The pertinent provision is FAA §3 (9 U.S.C. §3), which provides that:

“[u]pon being satisfied that the [claim] involved in [the pending] suit or proceeding is referable to arbitration under . . . an agreement [in writing for such arbitration], [the court] shall on application of one of the parties stay the trial of the action until such arbitration has been had in accordance with the terms of the agreement, providing the applicant for the stay is not in default in proceeding with such arbitration.”

On that basis, the Second Circuit decided in Katz v. Cellco Partnership, dba Verizon Wireless, 2015 WL 4528658 (2d Cir. July 28, 2015), that such a stay was mandatory.  The Court relied on the legislative use of the word “shall”.  “It is axiomatic that the mandatory term ‘shall’ typically ‘creates an obligation impervious to judicial discretion’.  Lexecon, Inc. v. Milberg Weiss Bershad Hynes & Lerach, 523 U.S. 26, 35 (1998).”  Cf. Lopez v. Davis, 531 U.S. 230, 241 (2001).

The Court further pointed out that its interpretation was consistent with the FAA’s statutory scheme and pro-arbitration policy.  For example, the FAA prohibits an appeal from an order compelling arbitration (but permits an appeal from an order denying a motion to compel).  If a court were to dismiss a case after compelling arbitration, that would be a final order that was inherently appealable, and thus conflict with the FAA scheme.

Prior to the Second Circuit’s decision in Katz, the Courts of Appeals were divided, with (a) the First, Fifth, and Ninth Circuits indicating that a District Court has the discretion to dismiss an action after compelling arbitration; and (b) the Third, Seventh, Tenth, and Eleventh Circuits indicating (expressly or impliedly) that, upon an application, a stay must follow an order compelling arbitration.  The Second Circuit joined the latter group, holding definitively in Katz that the FAA “requires a stay of proceedings when all claims are referred to arbitration and a stay requested.”

And after a court issues a stay order, then what?  The court has a potential ancillary role concerning the arbitration.  It would, for example, be available to enforce arbitral subpoenas, to provide (if not otherwise available from the arbitral tribunal) and/or enforce interlocutory relief, and eventually to confirm or vacate an award that is issued by the arbitral tribunal.  As the Katz court noted, the FAA identifies circumstances in which “judicial participation in the arbitral process is permitted” — i.e., (i) to resolve disputes regarding the appointment of an arbitrator or to fill an arbitrator vacancy, 9 U.S.C. §5; (ii) to compel the attendance of witnesses (i.e., to enforce an arbitrator’s subpoena) or to punish a witness for contempt, id. §7; and (iii) to confirm or vacate or modify an arbitral award, id. §§9-11.

And there is also the sometimes-overlooked proviso in FAA §3 that in effect gives the court a backstopping role.  Recall that a stay of a judicial proceeding should be granted as noted above provided “the applicant for the stay is not in default in proceeding with [the] arbitration.”  Notably, “proceeding with [the] arbitration” arguably refers to conduct by the applicant that is most likely to occur after the court stays the judicial proceeding.  Therefore, the court presumably would offer recourse to a litigation plaintiff that had opposed arbitration if the arbitration commenced and the stay applicant then “defaulted” in proceeding with it.

What would constitute such a default?  A refusal to participate in the arbitration, certainly.  Obstruction of the arbitration, possibly.  Thus, not long before the Katz v. Cellco Partnership decision was rendered in the Second Circuit, the Tenth Circuit Court of Appeals identified post-stay conduct by the stay applicant that constituted a “default” regarding the arbitration and thereby justified vacating the stay.  See Pre-Paid Legal Services, Inc. v. Cahill, 2015 WL 3372136 (10th Cir. May 26, 2015).

In Cahill, the defendant had successfully moved to stay the action in question pending arbitration.  (The Tenth Circuit later agreed that a District Court must, upon the request of a party after arbitration is compelled, stay judicial proceedings pending arbitration pursuant to FAA §3.)  The plaintiff — Pre-Paid Legal Services – then commenced an arbitration under the rules of the American Arbitration Association (“AAA”), but Cahill refused to pay his share of the requisite initial fees.  (And Pre-Paid declined to advance those fees on behalf of Cahill on an interim basis as is permitted by the AAA.)  Consequently, after warning the parties, the arbitral tribunal terminated the arbitration, as permitted by the relevant rules.

The District Court then lifted the stay of Pre-Paid’s suit, and Cahill appealed.  (The Tenth Circuit equated the lifting of the stay with the denial of a stay, thereby making the matter appealable under FAA §16(a)(1)(A).)

The Court of Appeals held that Cahill’s conduct put him “in default” in the arbitration.  The arbitration had been conducted in accordance with the relevant arbitration agreement, the arbitral tribunal did not issue an award on the merits, but instead it terminated the proceeding in accordance with AAA rules.  The Court thus determined that when a party successfully obtains a stay of judicial proceedings after arbitration has been compelled, but that stay applicant subsequently does not fulfill its obligation under the relevant rules to maintain the arbitral proceeding, and the arbitration is thereupon terminated, that party was “in default,” and the stay of the judicial proceeding could be lifted by the court accordingly.

Published in Law 360 (July 30, 2018)

Who may determine whether “class arbitration” has been authorized by the parties to an arbitration agreement — a court, an arbitrator, either? Considering the nature of “class arbitration,” is this a special case of the arbitrability delegation issue, or is this issue sui generis? And what does exploring the issue reveal about the larger question of whether “class arbitration” is an oxymoron?

Continue Reading Who May Determine Whether Class Arbitration Is Authorized?

When an agreement to arbitrate contains a clear and unmistakable “delegation” provision, gateway questions of arbitrability are for the arbitrator to decide. See, e.g., Kubala v. Supreme Prod. Servs., 830 F.3d 199, 201-02 (5th Cir. 2016), citing First Options of Chi., Inc. v. Kaplan, 514 U.S. 938, 942 (1995); Rent-A-Ctr., W., Inc. v. Jackson, 561 U.S. 63 (2010). But a determination of the delegation issue is not always obvious, and it is sometimes presented to an arbitrator, rather than to a court, in the first instance. In that case, a party challenging arbitrability may feel some trepidation about submitting its challenge to the very arbitrator who could ultimately be deciding the merits of the case. And another, possibly surprising, concern should be the risk that making such a challenge too vigorously in the arbitration proceeding will foreclose a fulsome judicial review of the arbitrator’s ruling on the scope of his or her own authority.

Continue Reading The Potential Pitfalls of Contesting Arbitrability in the Arbitration

The U.S. Supreme Court has ruled that “class arbitration” may be permitted if an arbitration agreement authorizes it, Stolt-Nielsen v. AnimalFeeds Int’l Corp., 559 U.S. 662, 684 (2010), and that state contract law governs the interpretation of the parties’ arbitration agreement. A proposal: that an agreement to permit class arbitration must be “clear and unmistakable” to be enforceable.

Continue Reading A Proposal: Adopt a “Clear and Unmistakable” Standard to Determine If Parties Have Agreed to “Class Arbitration”

Published in Law360 (June 22, 2018)

“Gateway” arbitration issues, including the validity, enforceability, and scope of an arbitration agreement, are presumptively to be decided by a court, rather than by an arbitrator. However, such gateway issues may be “delegated” to an arbitrator, e.g., AT&T Technologies, Inc. v. Communications Workers, 475 U.S. 643, 106 S.Ct. 1415 (1986), if the pertinent arbitration agreement clearly and unmistakably manifests the parties’ intention to do so, First Options of Chicago v. Kaplan, 514 U.S. 938, 115 S.Ct. 1920 (1985); Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 123 S.Ct. 588 (2002); Greentree Financial Corp. v. Bazzle, 539 U.S. 444, 123 S.Ct. 2402 (2003). But what if the arbitration agreement is in doubt — could such a purported delegation be enforced if one of the concerned parties did not execute the arbitration agreement in question? Spoiler alert: arguably not.

Continue Reading Can Arbitrability Questions Concerning a Non-Signatory to the Arbitration Agreement Be “Delegated” to an Arbitrator?

Lest we forget, many are the arbitrations that are subject to state arbitration law rather than the Federal Arbitration Act (“FAA”). And one should never underestimate the differences between those regimes. For example, under the FAA, the grounds for vacatur of an award are few and narrowly construed. See FAA §10(a), (9 U.S.C. §10(a)). Accordingly, federal court doctrine permitting vacatur of an award on public policy grounds affords only a very narrow opening, including in cases of sexual harassment in the workplace. State law may be less limiting, however, concerning the significance of public policy in such cases.

Continue Reading #MeAgain: New York Appellate Court Applies State Law to Vacate Arbitration Award As a Violation of Public Policy (Prohibiting Workplace Harassment)

Arbitration is a creature of contract, and an arbitrator’s powers are in effect defined by the parties’ arbitration agreement. Paradoxically, although an arbitration agreement can be written (double-spaced) on one side of a cocktail napkin, in some cases it may grant greater authority to an arbitrator than a judge has.

Continue Reading An Arbitrator’s Power May Be Greater Than That of a Judge

In a proceeding under the Federal Arbitration Act (“FAA”) to determine if a dispute must be arbitrated, a federal district court performs a more limited function than in a plenary civil action. On an application to stay an action allegedly referable to arbitration, the court decides only if “the issue involved in such suit or proceeding is referable to arbitration under [a written arbitration] agreement.” 9 U.S.C. § 3. On a petition to compel arbitration, the court decides only whether “[1] the making of the agreement for arbitration or [2] the failure to comply therewith” are in issue. 9 U.S.C. § 4. If the court is satisfied that the two matters are not in issue, it must direct the parties to arbitrate in accordance with the agreement. But if either matter is in issue, the court must proceed summarily to trial. Id.

Continue Reading Must Your Dispute Be Arbitrated? You May Be Entitled to Discovery to Find Out.

On April 30, 2018, the U.S. Supreme Court granted certiorari to review an unpublished Ninth Circuit decision in Varela v. Lamps Plus, Inc., No. 16-56085 (9th Cir. Aug. 3, 2017). See Lamps Plus, Inc. v. Varela (No. 17-988, U.S. Sup.). Lamps Plus framed the question presented to the Supreme Court as follows: “Whether the Federal Arbitration Act [“FAA”] forecloses a state-law interpretation of an arbitration agreement that would authorize class arbitration based solely on general language commonly used in arbitration agreements.”

Continue Reading Supreme Court Will Determine If Silence in an Arbitration Clause May Be Judicially Interpreted to Permit Class Arbitration

An ex parte proceeding in a U.S. court to “recognize,” “enforce,” or “confirm” an arbitration award against a foreign sovereign is improper. The U.S. Court of Appeals for the Second Circuit issued a lengthy and instructive decision to that effect in Mobil Cerro Negro, Ltd. v. Bolivarian Republic of Venez., 863 F.3d 96 (2d. Cir. 2017). Its lesson is that in the United States, the only way to enforce (or recognize or confirm) an arbitral award issued against a sovereign entity by the International Centre for Settlement of Investment Disputes (“ICSID”) (and probably otherwise as well) is in compliance with the Foreign Sovereign Immunities Act (“FSIA”).

Continue Reading When Seeking to Enforce an ICSID Arbitration Award Against a Foreign Sovereign, Think FSIA First