Businesses that lose a motion to compel arbitration may be surprised to find that, in some federal courts, they will be required to proceed with litigation in court even while appealing their right to arbitrate the matter. A principal reason to agree to arbitration is to save the time and money spent in litigation. But in these courts, a business could be forced to incur those litigation costs and then find at the end of the concurrent appeal that the matter should never have been in court in the first place. Thousands of dollars and weeks of litigation may be wasted. Not every federal court of appeals has taken this approach, but the ones that have done so cover major business centers, including New York City, San Francisco, and Dallas.
A Circuit Split Over Automatic Stays
Critical to reaping the benefits of an arbitration agreement is getting a case out of court and into arbitration. That is where the Federal Arbitration Act (FAA) comes in. Recognizing that courts can be hostile to efforts to remove a case from their jurisdiction, Congress enacted the FAA to ensure that arbitration agreements be enforced, AT&T v. Concepcion, 131 S. Ct. 1740, 1748 (2011). The FAA “embodies [a] national policy favoring arbitration,” Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 443 (2006), and its “principal purpose” is to “ensur[e] that private arbitration agreements are enforced according to their terms,” Volt Info. Sciences, Inc. v. Bd of Trustees of Leland Stanford Junior Univ., 489 U.S. 468, 478 (1989).
Under the FAA, a party in court may move, pursuant to a written arbitration agreement, to compel arbitration and stay the court proceedings. See 9 U.S.C. § 3. If the court grants the motion, the court proceedings are stayed until the arbitration concludes. Id. On the other hand, if the court denies the motion, the FAA permits the moving party to immediately appeal that decision. Id. § 16(a)(1)(A). The FAA does not address, however, the effect of such an appeal on proceedings in the district court.
The federal courts of appeals have divided over the question of whether an appeal of a district court’s decision denying arbitration automatically stays proceedings in the district court. The split turns on the application of Griggs v. Provident Consumer Discount Co., 459 U.S. 56 (1982). In Griggs, the Supreme Court held that “[t]he filing of a notice of an appeal is an event of jurisdictional significance—it confers jurisdiction on the court of appeals and divests the district court of its control over those aspects of the case involved in the appeal.” Id. at 58 (emphasis added). The courts of appeals have disagreed over what is “involved in” an appeal of an order denying arbitration.
The Majority View
The majority of the circuits that have considered the issue have concluded that an appeal of an order denying arbitration acts as an automatic stay of the district court proceedings. See Levin v. Alms & Assocs., Inc., 634 F.3d 260, 264-66 (4th Cir. 2011); Ehleiter v. Grapetree Shores, Inc., 482 F.3d 207, 215 n.6 (3d Cir. 2007); McCauley v. Halliburton Energy Servs., Inc., 413 F.3d 1158, 1160-62 (10th Cir. 2005); Blinco v. Green Tree Servicing, LLC, 366 F.3d 1249, 1251-52 (11th Cir. 2004); Bombadier Corp. v. Nat’l R.R. Passenger Corp., No. 02-7125, 2002 WL 31818924 (D.C. Cir. Dec. 12, 2002); Bradford-Scott Data Corp., Inc. v. Physician Computer Network, Inc., 128 F.3d 504, 505-06 (7th Cir. 1997); cf. Lummus Co. v. Commonwealth Oil Refining Co., 273 F.2d 613 (1st Cir. 1959). The appeal divests the district court of jurisdiction because “[t]he . . . aspect of the case involved in an appeal from an order denying a motion to compel arbitration is whether the case should be litigated at all in the district court.” Blinco, 366 F.3d at 1251 (emphasis added).
All six courts have adopted the common-sense reasoning first articulated by the U.S. Court of Appeals for the Seventh Circuit. In Bradford-Scott, the Seventh Circuit explained that “[c]ontinuation of proceedings in the district court largely defeats the point of the appeal”:
Arbitration clauses reflect the parties' preference for non-judicial dispute resolution, which may befasterand cheaper. These benefits are eroded, and may be lost or even turned into net losses, if it is necessary to proceed in both judicial and arbitral forums, or to do this sequentially. . . . Cases of this kind are therefore poor candidates for exceptions to the principle that a notice of appeal divests the district court of power to proceed with the aspects of the case that have been transferred to the court of appeals.
128 F.3d at 506. This reasoning has a logical appeal and is also consistent with the FAA’s principal purpose of ensuring that parties get their bargained-for benefits of arbitration.
The Fifth Circuit Adopts the Minority View
Recently, in Weingarten Realty Corp. v. Miller, 661 F.3d 904 (5th Cir. 2011), the Fifth Circuit joined the Second and Ninth Circuits in rejecting the majority view. Focusing on Griggs, the Fifth Circuit characterized the issue as whether “the merits” are involved in the appeal or not. 661 F.3d at 908. It concluded that they are not. The appeal will “ha[ve] an impact on what arbiter—judge or arbitrator—will decide the merits, but that determination does not itself decide the merits.” Id. Accordingly, a district court has the power to continue litigation on the merits during the appeal of the order denying arbitration.
But the Fifth Circuit missed the point. It is irrelevant that “the merits” are not before the appeals court. The question before the appeals court is antecedent to the merits—i.e., whether the district court should hear the merits at all. Contrary to the court’s assertion, the appeal will not merely “ha[ve] an impact” on who decides the merits, it will conclusively determine (barring a successful petition for a writ of certiorari) who has the authority to do so.
The minority approach has strains of the judicial resistance to arbitration that the FAA was intended to overcome. These circuits have concluded that, even though there may be a valid arbitration agreement, a district court has the discretion to continue hearing the matter. Between arbitration and litigation, they have erred in favor of litigation. This view is in tension with the FAA’s national policy favoring arbitration and “Congress’s clear intent . . . to move the parties to an arbitrable dispute out of court and into arbitration as quickly and easily as possible.” Moses H. Cone Memorial Hosp. v. Mercury Const. Corp., 460 U.S. 1, 22 (1983).
It is cold comfort that a district court may, in its discretion, stay proceedings during an appeal of an order denying arbitration. Weingarten, 661 F.3d at 910. A party seeking a discretionary stay must convince the district court, which has already ruled against it, that its appeal is likely to succeed. Moreover, the party must show that it will be irreparably injured absent a stay. The obvious argument is that, absent a stay, the party will be forced to incur litigation costs and irreparably lose the bargained-for benefits of arbitration. But in Weingarten, the Fifth Circuit made clear that “these considerations alone do not constitute irreparable injury.” Id. at 913.
Supreme Court Review on the Horizon?
Although the losing party in Weingarten did not seek Supreme Court review, there are reasons to believe the Court may be ready to take a case and side with the majority of circuits. The Court has chosen to stay out of this debate in the past, see Motorola Credit Corp. v. Uzan, 388 F.3d 39, 53 (2d Cir. 2004), cert. denied, 544 U.S. 1044 (2005), but four additional circuits have since deepened and entrenched the split.
Furthermore, the Court has recently stressed the importance of the cost- and time-saving benefits to those who have agreed to arbitration. Just last year, the Court explained that “the FAA requires courts to honor parties’ expectations,” including the expectation that arbitration can be faster, cheaper, and generally more efficient than litigation. Concepcion, 131 S. Ct. at 1749. And two years ago, the Court concluded that those who agree to arbitrate presumably do so to ensure “lower costs, [and] greater efficiency and speed” than in litigation. Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 130 S. Ct. 1758, 1775 (2010); see also Preston v. Ferrer, 552 U.S. 346, 357 (2008) (noting that “[a] prime objective of an agreement to arbitrate is to achieve ‘streamlined proceedings and expeditious results’”); Hall Street Associates, LLC v. Mattel, Inc., 552 U.S. 576, 588 (2008) (reading the FAA in a way that “maintain[s] arbitration’s essential virtue of resolving disputes straightaway”).
