June 29, 2015 Practice Points

Litigation Stay Lifted after Arbitration Dismissed for Failure to Pay Arbitration Fees

By Adam Waskowski

In Pre-Paid Legal Services, Inc. v. Cahill, No. 14-7032, 2015 WL 3372136 (10th Cir. May 26, 2015), the United States Court of Appeals for the Tenth Circuit rejected an attempt to stay a federal lawsuit pending arbitration after the arbitrators terminated the proceeding because of a party’s failure to pay arbitration fees.

In Cahill, Pre-Paid Legal Services, Inc. (Pre-Paid) and Todd Cahill (Cahill) entered into an employment contract containing an arbitration clause. Id. at *1. Cahill was Pre-Paid’s sales associate. Id. After Cahill left the company, Pre-Paid sued Cahill for breach of his employment contract. Cahill moved to stay the case pending arbitration before the American Arbitration Association (AAA). Id. at **1–2. The district court entered the stay. Id. at *2.

In the arbitration proceeding, Pre-Paid paid its share of the arbitration fees. Id. Cahill did not pay his share, despite repeated warnings from the AAA that the arbitration proceeding would be suspended if he failed to make payment. Id. Eventually, the AAA suspended the arbitration proceeding, warning Cahill that the arbitration proceeding would be terminated if payment was not received by a specific deadline. Id. Cahill failed to pay by the deadline. The AAA then terminated the arbitration proceeding. Id.

Subsequently, Pre-Paid asked the federal district court to lift the stay. Id. Cahill opposed the request. Id. The district court lifted the stay, and Cahill filed an interlocutory appeal under section 16(a)(1)(A) of the Federal Arbitration Act (FAA). Id. Pre-Paid asked the court to dismiss the appeal or, alternatively, affirm the order lifting the stay. Id.

As to the request for dismissal, Pre-Paid argued that the appellate court lacked jurisdiction to hear the interlocutory appeal. Id. at *3. More specifically, it argued that although section 16(a)(1)(A) allows an appeal of an order “refusing a stay”, the district court’s ruling lifting the stay was not an order “refusing a stay” and hence not appealable under section 16(a)(1)(A). The appellate court disagreed, finding that the order was “effectively one refusing a stay.” Id. at *4. The court also held that, in essence, Cahill was seeking relief under FAA section 3, even if he did not expressly ask for relief under that section. Id. at *5. Thus, the court found that it had jurisdiction to hear the appeal. Id. at **5–6.

As for the merits, however, the court found that the district court correctly lifted the stay. Id. at *6. Section 3 of the FAA provides that courts should enforce arbitration agreements by staying lawsuits until such arbitration “has been had in accordance with the terms of the agreement.” Id. at *7 (quoting 9 U.S.C. §3). Pre-Paid and Cahill’s arbitration agreement provided that “[a]ll disputes and claims . . . shall be settled totally and finally by arbitration . . . in accordance with the Commercial Arbitration Rules of the American Arbitration Association.” Id. The court held that the arbitration proceeding had “gone as far as it could,” and Cahill could not continue to maintain the stay under FAA section 3 after breaching the arbitration agreement by failing to pay fees in required by the AAA’s rules. Id.

The court alternatively found that the district court properly lifted the stay because “Cahill was in default in proceeding with [the] arbitration,” as set forth in section 3 of the FAA. Id. Cahill did not dispute that he failed to pay the required arbitration fees, but argued that the arbitration panel never formally made a finding of default, and the federal courts could not make such a finding. Id. at *8. The court disagreed, finding that the federal courts have authority to interpret the phrase “default” in section 3. Id. The court also held that, in any event, the arbitrators’ termination of the arbitration proceeding did constitute a finding of default. Id. at **11–12.

Cahill stands as a reminder that parties seeking to take advantage of arbitration agreements need to comply with the arbitration administrative requirements, including prompt payment of all required fees.

Keywords: adr, litigation, stay, failure to pay, arbitration fees, interlocutory appeal

Adam Waskowski is with Novack and Macey LLP in Chicago, Illinois.

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