The Tenth Circuit Court of Appeals recently affirmed a district court’s decision to lift the stay in federal proceedings due to the arbitrator’s decision to terminate proceedings based on a party’s failure to pay the arbitration fees. It reached this decision by concluding it had proper jurisdiction to hear the appeal and that the district court had reached the correct decision on the merits – that the employee was in default of his obligation to pay the arbitrator’s fees and that the proceedings were properly terminated.
The case, Pre-Paid Legal Servs., Inc. v. Cahill, 786 F.3d 1287, 1288 (10th Cir. 2015), involved a company suing its former employee for tort and contract violations. The case was removed to federal court due to diversity jurisdiction. However, the federal case was stayed under the Federal Arbitration Act (the “FAA”) so the parties could pursue arbitration. The former employee did not pay its share of arbitration fees and the arbitrators terminated the proceedings. The employer moved to lift the stay and resume the litigation. The district court granted the motion, and the former employee appealed, arguing that the decision to lift the stay violated section 3 of the FAA. The Tenth Circuit Court of Appeals disagreed with the appellant, and affirmed the district court’s decision to lift the stay.
The appeals court first examined issues of jurisdiction. Section 3 of the FAA mandates a stay of federal court proceedings pending arbitration. However, the appeals court determined that it had jurisdiction to hear appeals of interlocutory orders – in this case, the order lifting the stay, as it “revived” the court proceedings. The court held that a decision lifting the stay was, in effect, a decision “refusing a stay” under the statute. The court also found that the case properly involved section 3 of the FAA.
The appeals court then examined the merits of the case, and concluded that the district court had made the correct decision. Section 3 of the FAA mandates a stay of court proceedings “until arbitration has been had in accordance with the terms of the agreement.” The court found that, with the employee having failed to pay his share of the arbitration courts, the arbitrator had properly, under the arbitral institution’s rules, dismissed the action. With the employee being in breach of the arbitration agreement by failing to pay his fees, he could not properly maintain a stay under section 3 of the FAA. The appeals court further held that the arbitrators did not need to make a formal finding of default in the arbitration, and that even absent that the district court could make a determination of default under section 3 of the FAA.
This case illustrates the need, first, for parties to an arbitration to pay their fees or risk default. Second, it reinforces the appeals court’s ability to hear interlocutory appeals – specifically, on the ability to examine on the merits a decision to lift a stay on arbitration after the termination of arbitral proceedings. Arbitration is a creature of contract, but if that contract is not upheld, the parties will have no choice but to proceed in court.