On June 23, 2023, the Supreme Court of the United States held district court proceedings must be put on hold during an appeal on the question of whether claims are subject to arbitration. The ruling is a big win for businesses that had argued staying underlying cases is necessary to avoid costly litigation for claims that should be subject to valid arbitration agreements.

Quick Hits

• ­­The Supreme Court holds district court proceedings must be stayed pending an appeal over arbitrability.

• The ruling resolves a circuit split on the question of whether a stay pending appeal over arbitrability should be at the discretion of the district court judge.

In the 5–4 decision in Coinbase v. Bielski, the high court held a district court “must stay its proceedings while [an] interlocutory appeal on arbitrability is ongoing,” finding such an approach “reflects common sense.” Without an automatic stay, the Supreme Court stated that the right to an interlocutory appeal under the Federal Arbitration Act (FAA) on the threshold issue of arbitrability would be “largely nullified,” as parties may be forced to settle cases that belong in arbitration to avoid the burdens of litigation.

Background

The case arose from a purported class action lawsuit over consumer practices. The company argued the claims were subject to an arbitration provision in its user agreement. However, the district court in California denied the motion to compel arbitration. The company filed an interlocutory appeal over the arbitration issue, but the district court and the Ninth Circuit denied motions to stay the underlying litigation pending the appeal.

Under Section 16(a) of the FAA, parties have a statutory right to an interlocutory appeal on the issue of arbitrability. However, Section 16(a) does not state whether district court proceedings must be stayed during the pendency of that appeal. In practice, courts commonly stay proceedings during the pendency of an interlocutory appeal, but a circuit split existed over whether such a stay is discretionary or mandatory:

• The Third, Fourth, Seventh, Tenth, Eleventh, and D.C. Circuits have held a district court lacks jurisdiction once an appeal is filed.

• The Second, Fifth, and Ninth Circuits have held parties must request a discretionary stay from the district court.

The Majority Decision

In the majority opinion by Justice Brett Kavanaugh, the high court ruled district courts must grant a stay when an interlocutory appeal under Section 16(a) of the FAA is filed. The Court reasoned that if district courts are allowed to “move forward with pre-trial and trial proceedings while the appeal on arbitrability” is ongoing, then “many of the asserted benefits of arbitration (efficiency, less expense, less intrusive discovery, and the like) would be irretrievably lost.” Parties “could be forced to settle” to avoid burdensome and intrusive court proceedings that could be meaningless if the claims are ultimately sent to arbitration and lead to the possibility of what has been described as “blackmail settlements.”

The Dissent

In a lengthy dissent joined by Justices Sonia Sotomayor and Elena Kagan and in large part by Justice Clarence Thomas, Justice Ketanji Brown Jackson argued that requiring automatic stays for arbitrability appeals creates a new rule that is not in the FAA or any other statute. She argued the traditional approach to discretionary stays pending appeal “promotes procedural fairness because it allows for a balancing of all relevant interests.”

The Impact

The Court’s decision is highly significant, as emphasized by the dissent:

This mandatory-general-stay rule for interlocutory arbitrability appeals comes out of nowhere. No statute imposes it. Nor does any decision of this Court. Yet today’s majority invents a new stay rule perpetually favoring one class of litigants—defendants seeking arbitration….  Now, any defendant that devises a non-frivolous argument for arbitration can not only appeal, but also press pause on the case—leaving plaintiffs to suffer harm, lose evidence, and bleed dry their patience and funding in the meantime.

In employers’ ongoing evaluation or reevaluation of the pros and cons of having arbitration agreements, the Supreme Court’s decision is an important new factor.