In Tillman v. Rheingold, Valet, Rheingold, Shkolnik & McCartney, No.13-56624 (Ninth Cir. June 15, 2016), the Ninth Circuit held a case may proceed in court when one party is unable to pay for contractual arbitration. The dispute was one for legal malpractice brought by Renee Tillman, who brought an action against the firm of Rheingold, Valet, Rheingold, Shkolnik & McCartney, who Tillman claimed committed malpractice by failing to advise her of the rights of other heirs in a wrongful death lawsuit she filed after the death of her husband. (Tillman was awarded $8 million in the wrongful death lawsuit and was later sued by the decedent's son from a prior marriage.)
Tillman Fails to Pay Her Deposit and the Arbitrator Terminates the Arbitration
Tillman originally brought her action in district court. The firm moved to compel arbitration under the retainer agreement it had with Tillman, which required arbitration with the American Arbitration Association (AAA). The firm's motion to compel was granted, the district court stayed the case pending arbitration, and the case proceeded in arbitration with the AAA for a period of time. During the arbitration, Tillman challenged the necessity of certain costs imposed during arbitration, including the "case-within-a-case" treatment of the arbitration, which required the arbitrator to re-hear witnesses and evidence presented in the underlying wrongful death case. In addition, Tillman was required to pay a deposit of $18,562.50 to the AAA, which she could not afford despite borrowing money and having several costs advanced by her attorney.
The AAA asked the firm whether it would pay the deposit, but the firm declined. Tillman requested interim relief under the AAA rules, but the arbitrator declined to hear the motion for interim relief until the deposit was paid. The AAA was then required to terminate the arbitration because of the missing deposit.
The District Court Dismisses the Case, Maintaining the Claims Are Subject to the Parties' Arbitration Agreement
The firm then sought to lift the district court stay and have the case dismissed under Federal Rule of Civil Procedure 41(b), which allows for dismissal where a party has failed to comply with a court order: "If the plaintiff fails to prosecute or to comply with these rules or a court order, a defendant may move to dismiss the action or any claim against it." The firm claimed Renee Tillman's failure to pay the arbitration deposit was a violation of the court's order to arbitrate.
Before ruling on the firm's Rule 41(b) motion, Tillman was allowed to submit a declaration with exhibits demonstrating she was unable to pay for the arbitration because the funds from the wrongful death suit had been exhausted through legal fees, paying back debts, educational payments and set-asides, vehicle purchases, home improvements, investment losses, and gambling losses. The district court agreed that Tillman was "unable to pay for her share of arbitration." Despite this finding, the district court dismissed the case because the AAA rules allowed termination by the arbitrator for nonpayment and the Federal Arbitration Act (FAA) deprived the court of the authority to hear "the claims that would have been subject to the arbitration agreement."
The Ninth Circuit Reverses and Remands, Holding that the FAA Does Not Require Dismissal of the Case
The Ninth Circuit disagreed, holding that the FAA only requires courts to stay proceedings on issues subject to arbitration "until such arbitration has been had in accordance with the terms of the agreement." 9 U.S.C. § 3. Thus, the court was required to determine whether the arbitration had "been had" even though the proceedings were suspended prior to an award being rendered. Here, all requisite steps had been followed because arbitration was compelled, the parties participated, and the arbitration was terminated. The court of appeals then looked to the district court's other duties under the FAA, which include compelling arbitration in the event of a party's "failure, neglect or refusal" to arbitrate under 9 U.S.C. § 4 and enforcing a valid award resulting from an arbitration under 9 U.S.C. §§ 9–11. The court found there was no "failure, neglect or refusal" to arbitrate on the part of Tillman, who presented evidence that she was unable to afford further arbitration. Finally, there was no award to be enforced by the court.
Furthermore, the firm could not point to any authority under the FAA requiring dismissal of Tillman's claims under these circumstances. Although the FAA requires the trial court to stay proceedings on claims subject to arbitration until the arbitration "has been had," to compel arbitration if a party neglects or refuses to participate, and to enforce a valid arbitration award, nothing in the act required dismissal of Ms. Tillman's claims.
The Ninth Circuit relied partly on the case of Lifescan, Inc. v. Premier Diabetic Services., Inc., 363 F.3d 1010 (9th Cir. 2004). In Lifescan, which also involved an AAA arbitration, Premier informed the AAA that it was unable to pay its share of the arbitrator's costs. This happened shortly before the arbitration hearing. Lifescan declined to pay Premier's fees, and the arbitration was terminated. Lifescan sought relief through the district court, requesting that Premier be compelled to arbitrate. Ultimately, the holding in that case was, where the agreed-upon arbitration rules allow the arbitrator to terminate the arbitration for failure to pay costs, the dismissal is "pursuant to the parties' agreement."
The Ninth Circuit reversed and remanded the Tillman case based on its reading of the FAA and the Lifescan case, and because "[a]s Tillman's arbitration terminated before the merits were reached or any award issued, allowing her case to proceed in district court is the only way her claims will be adjudicated." The Ninth Circuit did limit its holding, maintaining that the holding would not apply in situations where a party chooses not to pay costs as a means of circumventing contractual arbitration.
This holding could have significant impacts on both consumer arbitration cases and those cases involving business entities. As long as the parties can demonstrate an inability to pay, it seems retreating back to court is an option irrespective of an agreement to arbitrate. However, it is key that the holding is limited to those parties unable to pay, as opposed to unwilling. Furthermore, the result can potentially be avoided by a respondent if the respondent agrees to cover the claimant's fees and requests that the arbitrator take such an action into account when making the award.
Keywords: alternative dispute resolution, termination, suspension, costs
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