USA: Tenth Circuit confirms lifting stay for refusal to pay arbitration fees

In Pre-Paid Legal Services, Inc. v Cahill, No. 14-7032 (10th Cir. May 26, 2015), the U.S. Court of Appeals for the Tenth Circuit held that a district court properly lifted a stay of proceedings pending arbitration based on a party’s refusal to pay arbitration fees.

Pre-Paid Legal Services (“Pre-Paid”) sued Todd Cahill (“Cahill”), its former employee, for allegedly violating the parties’ non-compete agreement. Pre-Paid brought its action in Oklahoma state court. Cahill removed the action to federal district court and then immediately moved to stay the action pending arbitration. Pre-Paid did not object, and the district court entered the stay. After Pre-Paid initiated arbitration proceedings, however, Cahill refused to pay his share of the costs and did not request an accommodation. Eventually, after several requests for payment, the arbitration panel terminated the arbitration because of Cahill’s refusal to pay the fees.

Pre-Paid then moved in the district court to lift the stay of proceedings. The court granted Pre-Paid’s motion. Cahill appealed the court’s decision. Pre-Paid argued that the appellate court did not have jurisdiction to hear Cahill’s appeal, and, even if the appellate court did have jurisdiction, the district court correctly granted Pre-Paid’s motion on its merits.

The court first analyzed whether it had jurisdiction to hear Cahill’s appeal. Section 16(a)(1)(A) of the Federal Arbitration Act, 9 U.S.C. § 1 et seq. (“FAA”) provides: “(a) An appeal may be taken from—(1) an order—(A) refusing a stay of any action under section 3 of this title.”  In turn, under section 3 of the FAA, district courts must, upon request of a party, stay proceedings pending arbitration.  The court found that it had jurisdiction to decide Cahill’s interlocutory appeal under Section 16(a)(1)(A) because “[t]he order lifting the stay . . . was effectively one ‘refusing a stay.’” In other words, it refused to draw a distinction between an order denying a party’s motion for a stay pending arbitration and an order lifting a previously ordered stay. Further, the court determined that the district court’s order refused a stay “under section 3” of the FAA because Cahill sought to maintain a stay pursuant to section 3. Thus, it had jurisdiction to hear Cahill’s appeal.

The court then determined that the district court properly lifted the stay. Under section 3 of the FAA, district courts should stay proceedings pending arbitration “until such arbitration has been had in accordance with the terms of the agreement, providing the applicant for the stay is not in default in proceeding with such an arbitration.” The court held that the district court’s decision was proper for two independent reasons: (i) the parties’ arbitration was “had in accordance with the terms of the agreement”; and (ii) Cahill was “in default” in the arbitration.

In regard to the first basis, the court acknowledged that the arbitration clause in the contract between the parties provided that all disputes must be “totally and finally” resolved by arbitration in accordance with AAA rules, and that, arguably, the clause was not satisfied because the arbitration panel did not make a decision on the merits. It ruled, though, that the clause was satisfied because the arbitration panel terminated the arbitration “in accordance with AAA rules,” i.e. because Cahill refused to pay his share of the fees.

The court also ruled that, alternatively, the district court properly lifted the stay because Cahill was “in default” in the arbitration proceedings. According to the court, failure to pay arbitration fees constitutes a default under Section 3. Thus, Cahill was “in default” in arbitration proceedings, allowing the district court to lift the stay.

A version of this post originally appeared in the September 2015 edition of Baker & McKenzie’s International Litigation & Arbitration Newsletter, which is edited by David Zaslowsky and Grant Hanessian.