May 10, 2012 Articles

Trends in Court Interference with Pending Arbitration Proceedings

By Adam Waskowski

The Federal Arbitration Act (FAA) does not expressly allow courts to enjoin or otherwise interfere with pending arbitration proceedings. Accordingly, some courts have held that they lack the power to do so. See, e.g., Hicks v. Cadle, no. 04-cv-02616, 2008 WL 2324129 at *2 (D. Colo. June 2, 2008) ("the FAA does not authorize the courts to interfere with ongoing arbitration proceedings by making interlocutory rulings related to the arbitration").

Other courts recognize an implied power to intervene in pending arbitration proceedings, but even these courts historically have been reluctant to do so. As one court explained, the "purpose [of arbitration] is the speedy disposition of disputes without the expense and delay of extended court proceedings. It is this fear of needlessly prolonging disputes which has made courts reluctant to stay or enjoin ongoing arbitrations in favor of court proceedings." In re Y & A Group Sec. Litig., 38 F.3d 380, 382 (8th Cir. 1994) (internal citations omitted); see also Tejidos De Coamo, Inc. v. Int'l Ladies' Garment Workers' Union, Civ. No. 93-1026, 1993 WL 34609, at *2 (D.P.R. Jan. 20, 1993) ("there is a considerable reluctance on the part of any court to enjoin an arbitration"); Candor Central School Dist. v. Am. Arbitration Ass'n, 411 N.Y.S.2d. 162, 164 (N.Y. Sup. Ct. 1978) (noting "long-established judicial reluctance to intervene in [arbitration] process").

Recent Cases Allowing Intervention
Recently, however, some courts seem to be more willing to intervene in pending arbitration proceedings. For example, in In re Am. Express Fin. Advisors Sec. Litig., No. 10-3399___ F.3d ___, 2011 WL 5222784 (2nd Cir. Nov. 3, 2011) (affirming the district court's decision to enjoin arbitration proceedings that were released by class-action settlement), the U.S. Court of Appeals for the Second Circuit held that courts have the power to enjoin arbitration, resolving what previously had been an "open question" in that circuit. The Second Circuit noted that while the act does not expressly allow courts to stay arbitration, if the parties "have not consented to arbitrate a claim, the district court was not powerless to prevent one party from foisting upon the other an arbitration process to which the first party had no contractual right," because "to enjoin a party from arbitrating where an agreement to arbitrate is absent is the concomitant of the power to compel arbitration where it is present." Notably, the Second Circuit did not require the party seeking to enjoin the arbitration to show irreparable injury, as have some other courts.

In Northwestern Nat'l Ins. Co. v. INSCO Ltd., No. 11 Civ. 01124, 2011 WL 4552997 (S.D.N.Y. Oct. 3, 2011), the court held that it had power to intervene in an arbitration proceeding to disqualify an attorney to the proceedings. One of the lawyers in the arbitration proceeding improperly obtained information concerning deliberations. The court held that that it had implied power to disqualify that attorney, given the attorney's serious violations of arbitration guidelines.

Likewise, a recent Connecticut appellate court upheld a trial court's intervention in a pending arbitration proceeding to disqualify an arbitrator.  The court held:

[a]lthough an arbitrator in a tripartite arbitration proceeding may be non-neutral, a trial court may intervene in an arbitration proceeding pursuant to its equitable powers and disqualify an arbitrator when the arbitrator cannot observe his or her ethical duties or cannot participate in the arbitration proceeding in a fair, honest and good faith manner. By allowing court intervention in these circumstances, we seek to protect the integrity of the arbitration process itself, which our courts have recognized as a central concern when reviewing the validity of arbitration awards.

See Metro. Dist. Comm'n v. Conn. Res. Recovery Auth., 22 A.3d 651 (Conn. App. Ct. 2011); see also Arrowood Indem. Co. v. Clearwater Ins. Co., No. 11-6018055-S (Conn. Sup. Ct. 2011) (trial court intervened to facilitate selection of a neutral arbitrator and held that the FAA does not preclude state-court intervention in procedural pre-arbitration matters).

Recent Trends in the Seventh Circuit
On the other hand, the Seventh Circuit recently issued decisions that make it more difficult for courts in its circuit to enjoin, or otherwise interfere with, pending arbitrations. For example, in Trustmark Ins. Co. v. John Hancock Life Ins. Co., 631 F.3d 869 (7th Cir. 2011), cert. denied, 131 S.Ct. 2465 (2011), the court held that a party must establish irreparable harm to justify enjoining arbitration, and that the added expense of arbitration does not constitute irreparable harm. This holding arguably is inconsistent with earlier Seventh Circuit decisions and decisions from other federal circuits that enjoined arbitration proceedings because the dispute was not arbitrable, but the only alleged harm was (or appeared to be) the expense and inconvenience of arbitration. See American Express, 2011 WL 5222784, at *22; McLaughlin Gormley King Co. v. Terminix Int'l Co., 105 F.3d 1192, 1194 (8th Cir. 1997)(enjoining arbitration proceeding pending determination of whether dispute was subject to arbitration); Duthie v. Matria Healthcare, Inc., 540 F.3d 533, 537–40 (7th Cir. 2008) (affirming preliminary injunction of arbitration proceeding because the party did not agree to arbitrate, but not directly addressing issue of irreparable harm).

Subsequently, in December 2011, the Seventh Circuit held that a district court lacked authority under the act to block the consolidation of several arbitration proceedings. Applying Trustmark, the court held:

We observed earlier this year that judges must not intervene in pending arbitration to direct arbitrators to resolve an issue one way rather than another. Review comes at the beginning or the end, but not in the middle. If [the party seeking intervention] wanted a judge to decide whether the [arbitration] demands should be arbitrated jointly or separately, it should have refused to appoint an arbitrator.

Blue Cross Blue Shield of Mass. Inc. v. BCS Ins. Co., Nos. 11-2343, 11-2757, ___ F.3d ___ , 2011 WL 6382203 (7th Cir. Dec. 16, 2011) (internal citations omitted).

At least one court outside the Seventh Circuit has adopted Trustmark's reasoning. In Rodarte, a South Carolina district court refused to enjoin arbitration proceedings, holding that "this court agrees [with the Seventh Circuit] that a party to arbitration will rarely if ever be able to show irreparable harm in having to complete the arbitration process prior to seeking relief from the court from any 'award' which might ultimately be entered." Rodarte v. Fin. Indus. Regulatory Auth., Inc., Misc. Matter No. 3:11-MC-0084-CMC, 2011 WL 2144886 at *3 (D.S.C. June 1, 2011).

Whether most courts follow the trend of the Seventh Circuit or of the Second Circuit will have important consequences. If courts start routinely enjoining or interfering with arbitration proceedings, it will make arbitration much more expensive. Parties will have to actively litigate in both the court system and before the arbitration panel. These increased costs could defeat the incentive for parties to include arbitration clauses in their contracts.

Keywords: litigation, alternative dispute resolution, Federal Arbitration Act, interference, Seventh Circuit trend