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March 07, 2016 Articles

Failure to Pay Arbitration Fees Can Result in a Lift of Arbitration Stay

By Robyn Weinstein

In Pre-Paid Legal Services, Inc. v. Cahill, 786 F.3d 1287 (10th Cir. 2015), Pre-Paid Legal Services sued its former employee, Todd Cahill, alleging tort and contract violations. Cahill removed the case to federal court, and then moved to stay the district court proceeding under the Federal Arbitration Act (FAA) so the parties could pursue arbitration. Section 16(a)(1)(A) of the FAA requires a court to stay its proceedings pending arbitration, provided "the applicant for the stay is not in default in proceeding with the arbitration." See FAA § 3.

Once arbitration was initiated, Cahill failed to pay his share of the arbitration fees, and the arbitrators directed termination of the arbitration proceedings. As a result, Pre-Paid moved the district court to lift the stay of arbitration and resume litigation. The court granted the motion, but Cahill appealed the district court's order, arguing the court violated section 3 of the FAA by lifting the stay. Pre-Paid opposed Cahill's appeal, arguing that the court lacked jurisdiction.

The Issue of Jurisdiction
Pre-Paid argued that the court of appeals lacked jurisdiction in this matter because under section 16(a)(1)(A) of the FAA, an appeal may be taken from an order "refusing a stay of any action under section 3 of this title." Pre-Paid argued that "lifting a stay" of arbitration must be distinguished from "refusing a stay" under section 16(a)(1)(A), and Pre-Paid's motion to lift the stay did not fall under the court's jurisdiction. The court disagreed, finding that an order to "lift a stay" is effectively one "refusing a stay" under section 3 of the FAA.

Pre-Paid also argued that because its motion to proceed with litigation did not seek relief under section 3 of the FAA, the court did not maintain jurisdiction over Cahill's appeal. The court disagreed, stating that Cahill's motion in opposition to Pre-Paid was effectively a request for a stay under section 3 of the FAA and therefore the court maintained jurisdiction to decide the matter.

The Merits of the Stay of Arbitration
The court of appeals affirmed the district court's lifting of the stay of arbitration. The court conducted a two-part analysis as to whether the stay should be lifted. First, the court assessed whether the arbitration was conducted in accordance with the terms of the agreement between the parties, as required by section 3 of the FAA. The court found that the parties had contracted to conduct the arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association (AAA). The AAA rules require the parties to share arbitration expenses equally. When Cahill failed to pay his share of the fees, the arbitration panel terminated the proceedings in accordance with AAA rules. Therefore the court held that even though the arbitration proceeding did not take place, all arbitral action was done in accordance with the terms of the arbitration agreement entered into by the parties.

Second, the court assessed whether the arbitration proceeding was in default. Cahill argued that the question of default under section 3 is reserved for a formal finding by arbitrators. The court disagreed, stating that no formal default by the arbitrator is necessary in order for a court to find a default under section 3. Instead, the court may consider the record, which in this case showed no genuine effort on the part of Cahill to make payment or alternative arrangements.

In assessing the default, the court considered the AAA's repeated attempts to ask Cahill to pay his share of the arbitration fees. Importantly, Cahill did not respond to these requests, nor did he request that the arbitrators modify his payment schedule or move for an order requiring Pre-Paid to pay his share for him so the arbitration could continue. Therefore, even without a formal finding of a default by the arbitrators, the court held that the arbitral proceedings were in default.

Furthermore, the court held that in this case there was a formal finding of default by the arbitrators. According to the record, the arbitrators first suspended and then terminated the proceedings and closed the case as a result of Cahill's failure to pay the fees. The court makes a clear distinction between suspension of arbitral proceedings and termination of arbitral proceedings, stating that in order to find a default there must be no indication that proceedings might continue. In this case, the court concluded that the arbitrators' termination and closing of the case constituted a formal finding of default, and therefore upheld the district court's ruling to lift the stay of arbitration.

Keywords: litigation, ADR, arbitration, Federal Arbitration Act, FAA, American Arbitration Association, AAA, arbitration default, default, Commercial Arbitration Rule

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