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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Is Refusal To Pay Fees A Way Out Of Arbitration?

The 9th Circuit recently allowed a claimant to proceed in court after her arbitration had been terminated due to her  failure to pay half the arbitration fees. Tillman v. Tillman, __ F.3d __, 2016 WL 3343785 (9th Cir. June 15, 2016).

The case involved a client’s malpractice claim against her lawyers, which was stayed by the federal court after the lawyers compelled it into arbitration. At some point in arbitration, the client was unable to pay the $18,562.50 the AAA required to continue with the claim.  The law firm refused to pay the client’s share of the fees, and the arbitrator terminated the arbitration as a result of nonpayment.

The law firm then asked the federal court to lift its stay and dismiss the malpractice complaint for failure to prosecute. The court reviewed evidence and confirmed the client was unable to pay the AAA fee, but dismissed her case.

On appeal, the Ninth Circuit first focused its attention on the text of Section 3 of the FAA. Section 3 requires courts to stay court proceedings “until such arbitration has been had in accordance with the terms of the agreement.”  It found that the client’s arbitration “ha[d] been had in accordance with the terms of the agreement”, as the AAA rules allowed the arbitrator to terminate the proceeding for nonpayment.  So, lifting the stay was appropriate.

However, the Ninth Circuit found the district court erred when it dismissed the client’s claim. It found nothing in the FAA or binding precedent that required dismissal of the litigation.  Therefore, it enforced a district court’s usual obligation to decide cases properly before it.

The court was not blind to the potential policy ramifications of its decision, though.  It commented:

“Our decision that Tillman’s case may proceed does not mean that parties may refuse to arbitrate by choosing not to pay for arbitration.  If Tillman had refused to pay for arbitration despite having the capacity to do so, the district court probably could still have sought to compel arbitration under [Section 4 of the FAA].”

So, poor litigants may avoid arbitration by failing to pay the arbitration fees, but wealthy litigants cannot? That seems to be the outcome here (and last year in the 10th Cir. ).  Any respondent in arbitration who wants to avoid this odd result should agree to pay both parties’ fees, and then ask the arbitrator(s) to take that into account in the resulting award.

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