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.

As discussed in an earlier post, obtaining discovery from a non-party to an arbitration often is easier said than done. Depending on the law of the place of arbitration, arbitrators may not be able to compel document production or testimony from a non-party before a hearing on the merits. This can impair a claimant’s ability to prove its claims considerably, or in some cases altogether inhibit a potential claimant from learning the facts necessary to identify the correct respondent(s) or to articulate a competent claim. Moreover, while Fed. R. Civ. P. 27 permits pre-action discovery to “perpetuate testimony regarding [a] matter that may be cognizable,” many federal courts have interpreted the phrase “perpetuate testimony” to mean that Rule 27 may only be used to “preserve testimony which could otherwise be lost,” rather than as a “substitute for discovery.” Ash v. Cort, 512 F.2d 909, 912 (3d Cir. 1975); accord Bryant v. Am. Fedn. of Musicians of the United States, 666 Fed. Appx. 14, 16 (2d Cir. 2016); In re Allegretti, 229 F.R.D. 93, 96 (S.D.N.Y. 2005) (“[Rule 27] is not a method of discovery to determine whether a cause of action exists; and, if so, against whom the action should be instituted.”)).

Continue Reading Pre-Arbitration Discovery: Turn to State Law Where the Federal Rules are Inadequate

The courts undoubtedly have the power to grant provisional remedies in aid of a pending arbitration – including temporary restraining orders, preliminary injunctions, and attachments. As a recent Fifth Circuit decision reminds us, the courts also can grant such remedies in aid of an arbitration that has yet to be commenced. Indeed, those remedies may be available under state law, even if the future arbitration is governed by the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “Convention”), and even if the arbitration will be sited in a state other than the one in which the interim remedy is sought.

Continue Reading Your Arbitration Is Not Yet Filed, But Attachment in Aid of That Arbitration May Be Available

Last month, we described the split among Federal Circuit Courts regarding the question of whether the Federal Arbitration Act (“FAA”), 9 U.S.C. § 3, mandates a stay rather than dismissal of a judicial proceeding after a district court compels arbitration of all of the claims in an action before it. (LINK) But what is the practical significance of the district court’s retaining jurisdiction?  Among other things, it may thus be able to grant interim relief in order to preserve the status quo pending arbitration.

Continue Reading Powers of a District Court to Grant Interim Relief After Compelling Arbitration of All Claims Before It