Arbitration is meant to be an alternate to litigation. Yet arbitration is itself the subject of much litigation over who must arbitrate, what must be arbitrated, whether and how the arbitration should proceed, and the deference courts must show to arbitration awards. This blog is intended to be a resource for litigators, in-house counsel, arbitrators and anyone else who wants to stay on top of the many thorny issues that arise under the Federal Arbitration Act. Our Bloggers →

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Defendant’s Failure To Pay Arbitration Fees Cannot Stymie Claims Against It

Usually, when faced with a respondent who refuses to pay its share of the arbitration fees, a claimant simply pays both sides’ fees, so that the arbitration can proceed.  A new case out of the Tenth Circuit answers the question: what happens if it does not pay both sides’ fees?  Pre-Paid Legal Services, Inc. v. Cahill, __ F.3d__, 2015 WL 3372136 (10th Cir. May 26, 2015).  Somewhat surprisingly, the answer is that the claimant can choose to litigate its case in court, where there are no fees.

Pre-Paid Legal Services sued its former employee for allegedly taking its trade secrets to a new employer.  Pre-Paid brought that suit in state court.  The employee removed to federal court and moved to stay the case pending arbitration.  The district court agreed.  The day after the district court’s order, Pre-Paid started a AAA arbitration against the ex-employee.  Pre-Paid paid its share of the arbitration fees, but the ex-employee never paid its share.  “Pre-Paid declined to pay [the employee’s] share of the fees.”  (Maybe it wanted to be a test case??)  After many warnings, the AAA terminated the arbitration for non-payment of fees.  Because the employee refused to pay its share of the fees, and Pre-Paid would not pay its share either, Pre-Paid’s claims were never heard on the merits in arbitration.

So, Pre-Paid went back to federal court, asking the district court to lift the stay and allow litigation to proceed.  The ex-employee opposed the motion based on Section 3 of the FAA.  He argued that the language of Section 3 only allows a stay to be lifted after an arbitration is heard on the merits.  The statute says that if suit is brought on an arbitrable issue, the court:

shall on application of one of the parties stay the trial of the action 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 arbitration.

Both the district court and the Tenth Circuit disagreed with the ex-employee.  They refused to allow him to create a loophole whereby a defendant/respondent could avoid ever getting to the merits of a claim against him by simply refusing to pay his share of arbitration fees.

The Tenth Circuit analyzed two key phrases in the statutory language quoted above.  First, it found that “arbitration has been had in accordance with the terms of the agreement” does not necessarily mean a full hearing on the merits.  Instead, where the parties incorporate the rules of the AAA in their arbitration agreement, and those rules allow the AAA to terminate an arbitration for non-payment, even a terminated arbitration did happen “in accordance with the terms of the agreement.”

Second, the Tenth Circuit identified an alternative basis for lifting the stay: the ex-employee was “in default in proceeding” with the arbitration.  The ex-employee’s failure to pay constituted a default under Section 3, especially since he made no attempt to show he was unable to pay or ask the arbitrators for any relief from the payment obligation.

What is the result of this decision?  Pre-Paid will “resume with litigation” in the federal district court, almost three years after it initially filed its court case against the ex-employee.  What else?  Defendants everywhere are on notice that non-payment is not a “get out of litigation free” card.

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Another interesting tidbit: Judge Posner, writing for a panel of the Seventh Circuit, recently expressed his displeasure with the “strong federal policy” in favor of arbitration.  “It’s not clear that arbitration, which can be expensive because of the high fees charged by some arbitrators and which fails to create precedents to guide the resolution of future disputes, should be preferred to litigation.”  Andermann v. Sprint Spectrum L.P., No. 14-3478 (7th Cir. May 11, 2015).

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