Under the Federal Arbitration Act (“FAA”), 9 U.S.C. §§ 1 et seq., if a District Court compels arbitration of all of the claims that are before it, and thereupon dismisses the suit, its order compelling arbitration is final and appealable; but if the District Court stays the suit, its order compelling arbitration is “non-final” and not immediately appealable.  So what’s a right and proper court to do? The Federal Courts of Appeal are divided on the question of whether the FAA requires a stay or dismissal of judicial proceedings after a District Court sends all of the claims in suit before it to arbitration.  Currently, some parts of the U.S. are in effect more “arbitration friendly” in this regard than others.

(Note that we are not considering here the case of an “independent” motion to compel or to stay arbitration.  In that case, a petition under FAA § 4 commences a special proceeding, and no ordinary claim in suit is before the court.)

Section 4 of the FAA enables a party to move to compel a counter-party to arbitrate in accordance with an applicable arbitration agreement. Although federal courts ordinarily disallow appeals from interlocutory orders in order to prevent “piecemeal” litigation, see United States v. MacDonald, 435 U.S. 850, 853 (1978), the FAA permits immediate appeal of a non-final order that is “hostile to arbitration” (e.g., an order denying a motion to compel arbitration), while barring appeals of non-final orders compelling arbitration. Green Tree Fin. Corporation-Alabama v. Randolph, 531 U.S. 79, 85-86 (2000) (comparing FAA § 16(a) with § 16(b)).

Therefore, when a District Court refers all of the claims before it to arbitration, the court’s accompanying decision (a) to stay the judicial proceeding pending completion of the arbitration (making its order non-final) or (b) to dismiss the action from its docket (making its order and resulting judgment final) has a significant impact on whether a party may appeal immediately the court’s order compelling arbitration. Is the court required to do one or the other?

The Circuit Split

The First, Fifth, Ninth and Eleventh Circuits all have held that district courts have inherent authority to manage their dockets and thus to dismiss or to stay cases when they compel arbitration of all of the claims that are before them. See Bercovitch v. Baldwin School, Inc., 133 F.3d 141 (1st Cir. 1998); Alford v. Dean Witter Reynolds, Inc., 975 F.2d 1161 (5th Cir. 1992); Sparling v. Hoffman Constr. Co., 864 F.2d 635 (9th Cir. 1988); Lambert v. Austin Indus., 544 F.3d 1192 (11th Cir. 2008).

On the other hand, the Second, Third, Seventh and Tenth Circuits have held in the same circumstances that Section 3 of the FAA mandates a stay of proceedings. See Katz v. Cellco P’ship, 794 F.3d 341 (2d Cir. 2015); Lloyd v. Hovensa, LLC, 369 F.3d 263 (3d Cir. 2004); Cont’l Cas. Co. v. Am. Nat’l Ins., 417 F.3d 727 (7th Cir. 2005); Adair Bus Sales, Inc. v. Blue Bird Corp., 25 F.3d 953 (10th Cir. 1994).

Furthermore, although the Court of Appeals for the D.C. Circuit has not yet ruled on the issue, the D.C. District Court has followed the Second Circuit’s lead by adopting the Katz rationale in several recent decisions. See, e.g., Goodrich v. ADTRAV Travel Mgmt., No. 15-cv-00899 (CRC), 2016 U.S. Dist. LEXIS 11229, at *12 n.3 (D.D.C. Feb. 1, 2016) (referring all claims to arbitration and granting motion to stay proceedings); Selden v. Airbnb, Inc., No. 16-cv-933 (CRC), 2016 U.S. Dist. LEXIS 175162, at *5-6 (D.D.C. Dec. 19, 2016) (same).  Moreover, while the Fourth Circuit has expressly avoided reaching the issue, see Aggarao v. MOL Ship Mgmt. Co., Ltd., 675 F.3d 355, 376 n.18 (4th Cir. 2012), one district court in that Circuit adopted the Second Circuit’s interpretation of the FAA and held that a stay is mandatory in the relevant circumstances, see Terra Holding GmbH v. Unitrans Int’l, Inc., 124 F. Supp. 3d 745, 750-51 (E.D. Va. 2015) (“In sum, the FAA’s text, structure, and underlying policy mandate a stay when all claims have been referred to arbitration.”).

Katz v. Cellco P’ship

The Second Circuit’s relatively recent decision in Katz v. Cellco P’ship sets out the reasoning for the position that a district court’s inherent authority to manage its own docket does not trump a statutory requirement; in this case, Section 3 of the FAA.  The District Court had compelled arbitration of a class action against Verizon and denied Verizon’s motion to stay the judicial proceeding pending completion of the class arbitration. See Katz v.Cellco P’ship, No. 12 CV 9193(VB), 2013 U.S. Dist. LEXIS 176784, at *41-42 (S.D.N.Y. Dec. 12, 2013).  Upon review, the Court of Appeals held that the plain text of FAA § 3 divested the District Court of discretion to dismiss from its docket an action in which the court had referred all claims to arbitration. Katz, 794 F.3d at 345 (quoting FAA § 3:  (“…the court in which such suit is pending, upon being satisfied that the issue involved in such suit or proceeding is referable to arbitration under such an agreement, 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….” (emphasis added)).

The Second Circuit opined that any other interpretation of Section 3 would undermine the FAA – a statutory scheme embodying Congress’s pro-arbitration policy. Id. at 346.  The court reasoned that because FAA § 16(a) expressly permits interlocutory appeals of court orders “hostile to arbitration,” while Section 16(b) prohibits interlocutory appeals of orders directing arbitration and/or staying litigation, “[t]he dismissal of an arbitrable matter that properly should have been stayed” would “effectively convert[] an otherwise-unappealable interlocutory stay order into an appealable final dismissal order.” Id. The Second Circuit opined that Congress could not have intended such a result when it enacted the FAA. See id. Moreover, allowing arbitration to be delayed pending resolution of an interlocutory appeal would be inconsistent with the statute’s underlying policy “to move the parties to an arbitrable dispute out of court and into arbitration as quickly and easily as possible.” Id. (quoting Moses H. Cone Mem’l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 22 (1983)).  Instead, “a stay enables parties to proceed to arbitration directly, unencumbered by the uncertainty and expense of additional litigation, and generally precludes judicial interference until there is a final award.” Id.

Finally, the Second Circuit took aim at the rationale of sister circuits that had declined to hold that a stay is mandatory: “We recognize that efficient docket management is often the basis for dismissing a wholly arbitrable matter. But this is not reason enough.  While district courts no doubt enjoy inherent authority to manage their dockets, that authority cannot trump a statutory mandate, like Section 3 of the FAA, that clearly removes such discretion.” Id. (internal citations omitted).

Beyond Katz

One of the primary reasons parties contract to arbitrate is to enable a swift resolution of future disputes. Allowing the interlocutory appeal of an order compelling arbitration would deprive such parties of the benefit of their bargain by delaying arbitration of the merits of their dispute(s) in favor of protracted litigation regarding procedures.  That would impede the systemic efficiency of the arbitral process.

In any case, the issue is ripe for review by the Supreme Court, as the divide between the federal circuits is not closing. But the Supreme Court has not yet had occasion to address it.  Time will tell.

In the meantime, know your Circuit’s position on the issue – planning accordingly can save a good deal of time and money for those interested in doing so.