Pre-Paid Legal Services, Inc. v. Cahill
786 F.3d 1287
| 10th Cir. | 2015Background
- Pre-Paid Legal Services sued former sales associate Todd Cahill in Oklahoma state court for breach of contract, trade-secret misappropriation, and tortious interference; Cahill removed to federal court and successfully moved for a §3 FAA stay to pursue arbitration.
- The arbitration before the AAA was initiated by Pre-Paid; Pre-Paid paid its fees but Cahill repeatedly refused to pay his share despite warnings, leading the AAA panel first to suspend and then to terminate/close the arbitration.
- After AAA termination, Pre-Paid moved to lift the federal-court stay; the district court adopted a magistrate judge’s recommendation and lifted the stay, concluding the arbitrators treated Cahill’s nonpayment as a default.
- Cahill appealed, arguing the district court violated §3 of the FAA by lifting the stay; Pre-Paid argued lack of appellate jurisdiction and, on the merits, that lifting the stay was proper.
- The Tenth Circuit held it had jurisdiction under 9 U.S.C. §16(a)(1)(A) (an order effectively refusing a §3 stay is immediately appealable) and affirmed the district court: arbitration was ended in accordance with the parties’ agreement and Cahill was in default, so §3 did not require continuation of the stay.
Issues
| Issue | Plaintiff's Argument (Pre-Paid) | Defendant's Argument (Cahill) | Held |
|---|---|---|---|
| Appellate jurisdiction under 9 U.S.C. §16(a)(1)(A) to review lifting of an existing stay | Dismiss appeal for lack of jurisdiction because appellee moved to lift a stay (not a district-court refusal of a stay) | Cahill contends the lifting is effectively a refusal to keep a §3 stay and thus immediately appealable | Court: §16(a)(1)(A) covers orders that lift a stay because lifting is effectively refusing to maintain a §3 stay; jurisdiction exists |
| Whether §3 required the district court to continue the stay after AAA terminated the arbitration for nonpayment | Stay not required because AAA terminated arbitration pursuant to incorporated AAA rules — arbitration had been had in accordance with the agreement | Arbitral process hadn’t resolved merits; district court must maintain stay absent a formal arbiter finding that prevents arbitration | Court: Arbitration was terminated under AAA rules incorporated into the contract, so arbitration "had been had in accordance with the terms" and a §3 stay was no longer mandated |
| Whether Cahill was “in default in proceeding with such arbitration” under §3 | Cahill’s nonpayment constituted default; he made no attempt to seek accommodation, so §3’s stay mandate inapplicable | Cahill argued arbitrators must expressly find default and courts should not substitute judgment for arbitrators on such procedural matters | Court: Cahill was in default by failing to pay; §3 does not require a stay where applicant is in default; court may decide default where record shows it or rely on arbitrators’ termination as a finding |
| Who decides default (arbitrator or court) when arbitration ends for nonpayment | Whether or not a formal default order was entered, the AAA’s termination and record suffice to show arbitrators treated nonpayment as default; court may also decide on the record | Cahill relied on Howsam to argue procedural gateway questions belong to arbitrators and there was no formal arbitral default finding | Court: Distinguishes Howsam; default under the FAA is a statutory gateway for courts to consider. Here arbitrators effectively found default by terminating the proceeding, and the district court’s factual finding (or independent review of the record) was permissible and not clearly erroneous |
Key Cases Cited
- Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20 (U.S.) (federal policy favoring arbitration)
- Arthur Andersen LLP v. Carlisle, 556 U.S. 624 (U.S.) (appealability under FAA §16 focuses on category of order, not merits)
- Howsam v. Dean Witter Reynolds, 537 U.S. 79 (U.S.) (procedural questions presumptively for arbitrator)
- Conrad v. Phone Directories Co., 585 F.3d 1376 (10th Cir.) (tests for whether district-court filing invokes §3 for §16(a) jurisdiction)
- Sink v. Aden Enters., 352 F.3d 1197 (9th Cir.) (failure to pay arbitration fees can justify lifting stay)
- Brown v. Dillard’s, Inc., 430 F.3d 1004 (9th Cir.) (refusal to participate in properly initiated arbitration can constitute repudiation/default)