PRE-PAID LEGAL SERVICES, INC., Plaintiff-Appellee, v. Todd CAHILL, Defendant-Appellant.
No. 14-7032.
United States Court of Appeals, Tenth Circuit.
May 26, 2015.
786 F.3d 1287
MATHESON, Circuit Judge.
Timila S. Rother (Harvey D. Ellis, Jr. and Melanie Wilson Rughani, with her on the brief), Crowe & Dunlevy, Oklahoma City, OK, appearing for Appellee.
Before MATHESON, SEYMOUR, and McHUGH, Circuit Judges.
MATHESON, Circuit Judge.
Pre-Paid Legal Services, Inc., d.b.a. LegalShield (“Pre-Paid“), sued Todd Cahill, its former employee, alleging tort and contract violations. Mr. Cahill removed the case from state to federal court based on
Mr. Cahill, however, failed to pay his share of the arbitration fees, and the arbitrators directed termination of the arbitration proceedings. Pre-Paid moved the district court to lift the stay and resume with litigation. The court granted the motion, adopting a magistrate judge‘s report and recommendation. The magistrate judge had recommended lifting the stay because the arbitrators “elected to terminate” the proceedings and “[i]t is clear under these circumstances that the arbitrators considered Cahill‘s failure to pay to be a default in arbitration.” App. at 603.
Mr. Cahill appeals the district court‘s order, arguing the court violated
We have jurisdiction to hear this appeal under
I. BACKGROUND
A. Factual History
Pre-Paid sells legal services contracts through which members have access to the assistance of provider attorneys. Independent sales associates sell these contracts through a network marketing system. Mr. Cahill became an independent sales associate with Pre-Paid in 2004.
In his employment contract with Pre-Paid, Mr. Cahill agreed not to solicit or recruit Pre-Paid‘s other sales associates during the term of his contract or for two years after its termination. The contract also required
[a]ll disputes and claims relating to [Pre-Paid], [this] Agreement, ... or any other claims or causes of action between [Cahill and Pre-Paid] ..., whether in tort or contract, shall be settled totally and finally by arbitration ... in accordance with the Commercial Arbitration Rules of the American Arbitration Association....
App. at 120.
In 2012, Mr. Cahill left Pre-Paid to join another network marketing company. Pre-Paid alleges Mr. Cahill began to misuse trade secret information, contact other Pre-Paid associates, and solicit them to join his new place of employment.
B. Procedural History
On August 14, 2012, Pre-Paid filed an action in Oklahoma state court claiming Mr. Cahill had breached his contract, unlawfully misappropriated Pre-Paid‘s trade secrets, and tortiously interfered with contract and business relations. Mr. Cahill removed the action to the District Court for the Eastern District of Oklahoma.
On August 24, 2012, Mr. Cahill moved to stay the district court proceedings pending arbitration. Pre-Paid did not object. A magistrate judge recommended granting Mr. Cahill‘s motion for a stay. On February 12, 2013, the district court adopted the magistrate judge‘s recommendation and entered the stay pending arbitration.
On February 13, 2013, Pre-Paid initiated arbitration proceedings before the American Arbitration Association (“AAA“). Pre-Paid paid its share of arbitration fees, but Mr. Cahill did not. Pre-Paid declined
On June 27, 2013, the arbitration panel suspended the аrbitration, warning the parties that if the deposits were not paid by a certain date, the arbitration would be terminated. Mr. Cahill still refused to pay and did not request any form of accommodation from the arbitrators. On July 10, 2013, the AAA terminated the arbitration: “As advised in our correspondence dated June 27, 2013, the outstanding balance remains unpaid.... By direction of the Panel, we have closed our file pursuant to R-54.” Id. at 441.
On July 16, 2013, Pre-Paid moved to lift the stay of district court proceedings. Mr. Cahill filed a response opposing Pre-Paid‘s motion to lift the stay. On March 31, 2014, a magistrate judge recommended the motion be granted. On April 16, 2014, the district court adopted that recommendation and lifted the stay.
Mr. Cahill appeals the district court‘s lifting of thе stay. He argues this court has jurisdiction under
C. Legal Background
Two FAA provisions and two AAA rules are relevant to this case. Section 16(a)(1)(A) of the FAA provides: “(a) An appeal may be taken from---(1) an order---(A) refusing a stay of any action under section 3 of this title.”
If any suit or proceeding be brought in any of the courts of the United States upon any issue referable to arbitration under an agreement in writing for such arbitration, the court in which such suit is pending, upon being satisfied that the issue involved in such suit or proceeding is referable to arbitratiоn 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, providing the applicant for the stay is not in default in proceeding with such arbitration.
AAA Rule 50 requires parties to share arbitration expenses equally “unless they agree otherwise or unless the arbitrator in the award assesses such expenses or any part thereof against any specified party or parties.” App. at 486. AAA Rule 54 provides that if the payments are not made, “the AAA may so inform the parties in order that one of them may advance the required payment.” Id. at 487. But if the payments remain unpaid, “the arbitrator may order the suspension or termination of the proceedings.” Id.
II. DISCUSSION
We have jurisdiction under
A. Jurisdiction
1. Interlocutory Review under the FAA
Section 16(a)(1)(A) of the FAA, however, recognizes an exception to the final decision rule for an order that refuses a stay under
Here, the district court initially stayed its proceedings on February 12, 2013. Its April 16, 2014 order lifted that stay. Our threshold question is whether the order lifting the stay is an order “refusing a stay of any action under section 3,” which would confer jurisdiction on this court to review the order.
2. Statutory Interpretation and Application
When interpreting a statute, “we turn first to the text.” Conrad v. Phone Directories Co., 585 F.3d 1376, 1381 (10th Cir. 2009) (quotations omitted). “If the words of the statute have a plain and ordinary meaning, we apply the text as written.” Id. We also consider the statute‘s broader context. Id.
Federal courts interpret jurisdictional statutes narrowly. Id. at 1382 (“Because of the limited and defined naturе of the jurisdiction of the federal courts, we are bound to construe statutes conferring jurisdiction narrowly.“). “[I]f there is ambiguity as to whether the instant statute confers federal jurisdiction over this case, we are compelled to adopt a reasonable, narrow construction.” Pritchett v. Office Depot, Inc., 420 F.3d 1090, 1095 (10th Cir. 2005).
Our jurisdictional analysis focuses on two phrases in
a. “[R]efusing a Stay”
Section 16(a)(1)(A) permits an appeal only from an order “refusing a stay.”
The order lifting the stay here was effectively one “refusing a stay.” Mr. Cahill sought and initially received a stay. When the district court later lifted the stay, it declined to keep the stay in effect. The court‘s decision granted Pre-Paid‘s request to lift the stay but also denied Mr. Cahill‘s request to maintain the stay, a request Mr. Cahill made in his response to Pre-Paid‘s motion to lift the stay. We cannot draw a meaningful distinction in applying
[The appellant] asked for a stay under section 3 of all proceedings in the district court. The district judge in the order that [the appellant] is appealing has granted in effect a more limited stay. His refusal to grant the complete stay that [the appellant] seeks is appealable even though the stay order is interlocutory and the appellant might not be entitled to the stay that he is seeking.
Id.; see also Dobbins v. Hawk‘s Enters., 198 F.3d 715, 716 (8th Cir. 1999) (equating, without explanation, an order to lift a stay with an order refusing a stay); Corpman v. Prudential-Bache Sec., Inc., 907 F.2d 29, 30 (3d Cir. 1990) (noting it had jurisdiсtion to consider an order vacating a stay and reinstating a case “since the district court‘s order is in essence an order refusing to stay an action under section 3 of the Federal Arbitration Act“).
Guided by the statute‘s text and persuasive authority from other circuits, we conclude the district court‘s order lifting the stay in this case was effectively one “refusing a stay” under
b. “[U]nder section 3”
Section 16(a)(1)(A) permits an appeal only from an order “refusing a stay of any action under section 3 of this title.”
In Arthur Andersen LLP v. Carlisle, 556 U.S. 624, 627-29 (2009), the Supreme Court instructed that circuit courts should not consider the underlying merits of an appeal from the denial of a stay in determining whether they have jurisdiction. Instead, “any litigant who asks for a stay under § 3 is entitled to an immediate appeal from denial of that motion---regardless of whether the litigant is in fact eligible for a stay.” Id. at 627. “Jurisdiction over the appeal ... must be determined by focusing upon the category of order appealed from, rather than upon the strength of the grounds for reversing the order.” Id. at 628 (quotations omitted). Thus, in determining whether we have jurisdiction in this case, Arthur Andersen prohibits us from considering the merits of the appeal---whether Mr. Cahill was in default or the arbitration had terminated at the time the district court refused to maintain the stay.
Shortly after Arthur Andersen, this court in Conrad recognized two ways for a circuit court to determine whether an appellant hаd asked the district court for a stay “under section 3” for purposes of appellate jurisdiction under
Conrad then applied this test to the appellants’ appeal of a district court order granting in part and denying in part their motion to dismiss. Id. at 1379-80, 1386. We held this court lacked jurisdiction to hear the appeal because the appellants failed to meet either means to satisfy
Mr. Cahill‘s response to Pre-Paid‘s motion to lift the stay satisfies
Pre-Paid argues we have no jurisdiction under
Pre-Paid also attempts to rely on Grosvenor. In that case, Mr. Grosvenor had sued Qwest. Grosvenor, 733 F.3d at 992. The parties filed сross-motions for partial summary judgment contesting the enforceability of an arbitration agreement. Id. at 991-92. The district court‘s summary judgment order held that the arbitration agreement between the parties was illusory and unenforceable. Id. at 992. Qwest appealed, and this court dismissed for lack of jurisdiction. Id.
Grosvenor interpreted and applied
A party aggrieved by the alleged failure, neglect, or refusal of another to arbitrate under a written agreement for arbitration may petition any United States district court ... for an order directing that such arbitration proceed in the manner provided for in such agreement.... The court shall hear the parties, and upon being satisfied that the making of the agreement for arbitration or the failure to comply therewith is not in issue, the court shall make an order directing the parties to proceed to arbitration in accordance with the terms of the agreement.
Id.
Among other differences,
Grosvenor said Qwest‘s motion for partial summary judgment did not ask the district court to order arbitration under § 4, thereby failing Conrad. Grosvenor, 733 F.3d at 998.1 For the rеasons explained above, Mr. Cahill‘s response requested to maintain a stay under § 3, thereby satisfying Conrad. The Grosvenor court also said it could not consider Qwest‘s response to Mr. Grosvenor‘s motion for partial summary judgment because it was not a “‘petition under section 4 ... to order arbitration.‘” Id. at 997 (quoting
For the foregoing reasons, we have jurisdiction to hear this appeal.
B. Merits
We affirm the district court‘s lifting of the stay because § 3 did not require the court to maintain a stay. We analyze two relevant phrases in § 3---“until such arbitration has been had in accordance with the terms of the agreement” and “in default in proceeding with such arbitration.”
As for the standard of review, “[w]e review de novo the district court‘s decision to deny a stay pending arbitration.” Chelsea Family Pharmacy, PLLC v. Medco Health Solutions, Inc., 567 F.3d 1191, 1196 (10th Cir. 2009). “We review a district court‘s decision as to default of arbitration de novo but defer to the district court‘s underlying factual findings.” Forrester v. Penn Lyon Homes, Inc., 553 F.3d 340, 342 (4th Cir. 2009). “[W]e review the factual findings of a district court for clear error.” Sink v. Aden Enters., 352 F.3d 1197, 1199 (9th Cir. 2003).
1. “[U]ntil such arbitration has been had in accordance with the terms of the agreement”
In recommending the stay be lifted, the magistrate judge noted “the arbitration in this case is not still pending, because the arbitrator has decided that the appropriatе remedy for Cahill‘s failure to pay his share of costs was dismissal.” App. at 602. Although § 3 does not use the term “pending” in reference to arbitration, it does state a federal court must stay court proceedings until arbitration “has been had in accordance with the terms of the agreement.”
The phrase “totally and finally” may suggest the arbitration “ha[d][not] been had in accordance with the terms of the agreement” because it had not reached a merits determination. Id.;
The AAA determined the arbitration had gone as far as it could due to Mr. Cahill‘s repeated refusal to pay the fees. Under the AAA rules, the panel terminated the proceedings. As such, the arbitration “ha[d] been had in accordance with the terms of the agreement,”
Our holding is consistent with decisions of other courts that have determined a party‘s failure to pay its share of arbitration fеes breaches the arbitration agreement and precludes any subsequent attempt by that party to enforce that agreement. See, e.g., Brown v. Dillard‘s, Inc., 430 F.3d 1004, 1011 (9th Cir. 2005) (explaining the defendant “breached the arbitration agreement by refusing to participate in properly initiated arbitration proceedings” and that the “breach was tantamount to a repudiation of the arbitration agreement“); Sink, 352 F.3d at 1201 (“[F]ailure to pay required costs of arbitration was a material breach of its obligations in connection with the arbitration.“); Garcia v. Mason Contract Prods., LLC, No. 08-23103-CIV, 2010 WL 3259922, at *3 (S.D. Fla. Aug. 18, 2010) (unpublished) (holding “[b]y failing to timely pay its share of the arbitration fee, Defendant materially breached its obligations, thereby ‘scuttling’ [its] opportunity” to insist on arbitration).2 Mr. Cahill breached the arbitrаtion agreement by failing to pay his fees in accordance with AAA rules and was not entitled to maintain the stay under § 3.
2. “[I]n default in proceeding with such arbitration”
Alternatively, lifting the stay was permissible under § 3 because Mr. Cahill was “in default in proceeding with [the] arbitration.”
a. Mr. Cahill was “[i]n default in proceeding with [the] arbitration.”
The parties agree and the record shows Mr. Cahill failed to pay his share of the arbitration fees. The AAA repeatedly asked him to pay. In the arbitration proceeding, Mr. Cahill did not show he was unable to afford payment, ask the arbitrators to modify his pаyment schedule, or move for an order requiring Pre-Paid to pay his share for him so that arbitration could continue. Instead, by refusing multiple requests to pay, he allowed arbitration to terminate.
Failure to pay arbitration fees constitutes a “default” under § 3. Because Mr. Cahill failed to pay his arbitration fees, he was in “default.” See Garcia, 2010 WL 3259922, at *4 (“[T]his default was ... an intentional and/or reckless act because the AAA provided repeated notices to the Defendant that timely payment of the fee had not been received.... There is no other description the Court can find for this self-created situation other than ‘default.’ “);
b. The question of default under § 3 is not reserved for a formal finding by arbitrators.
Mr. Cahill contends the arbitrators must find default under § 3. Because the arbitrators did not make a formal finding of default when they terminated the proceedings, Mr. Cahill argues “it is not the trial court‘s place to substitute its judgment or to guess what the arbitrator meant” on the nonpayment of fees and its consequences. Aplt. Br. at 7.
Mr. Cahill relies primarily on Howsam v. Dean Witter Reynolds, 537 U.S. 79 (2002). In Howsam, the Supreme Court considered a rule of the National Association of Securities Dealers (“NASD“) that no dispute is subject to arbitration when six years have elapsed since the event giving rise to the dispute. Id. at 81. After the petitioner sought arbitration, the respondent sued in federal district court, invoking the NASD rule. Id. at 82. The Supreme Court held an arbitrator, not the court, should apply the rule. Id. at 82-85. “[P]rocedural questions which grow out of the dispute and bear on its final disposition are presumptively not for the judge, but for an arbitrator, to decide. So, too, the presumption is that the arbitrator should decide allegations of waiver, delay, or a like defense to arbitrability.” Id. at 84 (quotations, citation, and alterations omitted).
Howsam is distinguishable. It dealt with an NASD rule about time limits, not default under § 3 of the FAA. The time limit was part of the arbitrator‘s own rules and not contained in a federal statute like § 3. Indeed, the Court in Howsam noted that NASD arbitrators, as compared to judges, are “comparatively more expert about the meaning of their own rule, [and] are comparatively better able to interpret and to apply it.” Id. at 85. The same cannot be said, however, of the meaning of “default” in a federal statute; the parties “would likely have expected a court to have decided [this] gateway matter.” Id. at 83.4
At least one circuit has expressed concern about divesting courts of the power to decide whether a default has occurred under § 3. In Marie v. Allied Home Mortgage Corp., 402 F.3d 1, 3 (1st Cir. 2005), the First Circuit considered whether the ap-
In addition to Marie, we find Sink more instructive to decide our case than Howsam. In Sink, the Ninth Circuit permitted the lifting of a stay after the district court found the defendants had failed to pay their arbitration fees. 352 F.3d at 1199-1200. The arbitration entity had cancelled the arbitration due to the nonpayment of fees. Id. at 1199. The plaintiff then sought, and the arbitrator entered, default against the defendants. Id. The plaintiff moved to lift the stay of district court proceedings, which the court granted because the defendants had defaulted. Id. The defendants appealed, arguing it was error for the district court to find they had defaulted. Id. The Ninth Circuit affirmed, noting the district court‘s finding was “in confirmation” of the arbitrator‘s determination of default and was supported by the record. Id. at 1199-1200.
Mr. Cahill argues Sink is distinguishable because the AAA in this case did not enter a formal default order against him, whereas the arbitration entity did in Sink. We disagree. Contrary to Mr. Cahill‘s assertion that “[t]he arbitrator‘s finding of default in Sink was dispositive,” Aplt. Br. at 8, the Ninth Circuit did not rely exclusively on the formal default order. It also relied on the record, which showed the defendants had received multiple notices to pay, did not report inability to pay, and had not made genuine efforts to make alternative arrangements. Sink, 352 F.3d at 1199; see also Garcia, 2010 WL 3259922, at *1 (“The record here shows that Defendant is now in default.“). The Ninth Circuit never mentioned Howsam.
Other courts also have rejected the argument that Sink is distinguishable from cases where the arbitrators had not formally entered default. See, e.g., Rapaport, 2011 WL 1827147, at *2 (discounting the fact the arbitrator had not entered a default judgment against the defendant because the record showed the defendant had failed to pay his fees and the “[l]ack of a formal ruling of default from the arbitrator does not change [the] reality” that “the failure by a party to pay fees in arbitration will prevent that party from successfully moving to compel arbitration in the same сase in the future“).
Mr. Cahill also cites Lifescan, Inc. v. Premier Diabetic Services, Inc., 363 F.3d 1010 (9th Cir. 2004), and Dealer Computer Services, Inc. v. Old Colony Motors, Inc., 588 F.3d 884 (5th Cir. 2009), to argue the arbitrators, not the district court, should have made a formal finding of default.
In Lifescan, the parties submitted their dispute to AAA arbitration. 363 F.3d at 1011. A few days before the final hearings, the defendant announced it could not pay its share of fees. Id. The arbitrators gave the plaintiff the option of advancing the defendant‘s fees, but it refused. Id. The AAA suspended the proceedings. Id. The plaintiff filed a motion to compel arbitration and order the defendant to pay its share of fees under
In Dealer, the plaintiff sought arbitration and paid its share оf fees. 588 F.3d at 886. The defendant notified the AAA it did not have adequate funds to pay. Id. The arbitrators asked the plaintiff to pay the defendant‘s share, but it refused. Id. The arbitrators suspended the proceedings. Id. The plaintiff filed a motion to compel arbitration and order the defendant to pay its share of fees under § 4, which the district court granted. Id. The Fifth Circuit reversed, citing Lifescan and stating the “[p]ayment of fees is a procedural condition precedent that the trial court should not review.” Id. at 887, 889.
Dealer and Lifescan are distinguishable from our case. First, in both Dealer and Lifescan, the arbitrators had asked the party that had already paid its share of arbitration fees to pay the fees of the other party, which had refused to pay. Dealer, 588 F.3d at 886; Lifescan, 363 F.3d at 1011. Rather than do so, the party that had paid its share sought help outside the arbitration proceedings and asked the district court to order the оther party to pay. Dealer, 588 F.3d at 886; Lifescan, 363 F.3d at 1011. Both district courts granted the request. Dealer, 588 F.3d at 886; Lifescan, 363 F.3d at 1011. But the circuit courts reversed, leaving the issue of how to allocate fee payment to the AAA, which had already decided to ask the paying party to advance the fees for both sides. Dealer, 588 F.3d at 888-89; Lifescan, 363 F.3d at 1012-13. Here, the AAA did not ask Pre-Paid to advance Mr. Cahill‘s fees. Instead, it terminated the arbitration. Pre-Paid did not ask the district court to order Mr. Cahill to pay. Instead, Pre-Paid asked the district court to lift the stay, arguing Mr. Cahill was in default in the arbitration proceedings under § 3. Neither Dealer nor Lifescan concerned whether a district court could address that issue---whether a party was in default---because it was not a question presented in those cases.5
We hold in the circumstances of this case that the absence of a formal finding of default by the arbitrators does not preclude the district court from making that determination under § 3.
c. Even if the question of default is left to the arbitrators, the arbitrators here found Mr. Cahill was in default.
Even assuming the issue of default must be left to the arbitrators, the arbitrators in this case found that Mr. Cahill was in default. Rather than alter the payment schedule, order Pre-Paid to pay Mr. Cahill‘s share, or relieve Mr. Cahill of his obligation to pay, the arbitrators first suspended and then terminated the proceedings and closed the case. As the district court found, this termination constituted a finding of default because it was the result of Mr. Cahill‘s failure to pay. See App. at 600 (“[A]lthough no order of default was entered, it is difficult to see termination of the proceedings under such circumstances as anything other than a declaration of default.“); id. at 603 (“It is clear under these circumstances that the arbitrators considered Cahill‘s failure to pay to be a default in arbitration....“); see also Garcia, 2010 WL 3259922, at *3-4 (noting thаt although the arbitrator did not take the “affirmative action” of entering a default, “[t]here is no other description the Court can find for this self-created situation other than ‘default’ “); Rapaport, 2011 WL 1827147, at *2 (noting that although the arbitrator had not “formally entered an order of default against him due to his inability to pay,” the arbitrator‘s termination of the arbitration for this reason nevertheless constituted a finding of default, and the “[l]ack of a formal ruling of default from the arbitrator does not change this reality“).
Mr. Cahill argues that even if the termination constituted a finding of default, the arbitrators did not know which party had failed to pay and their termination thus could not have been a finding of default against Mr. Cahill specifically. We disagree. The district court did not clearly err in finding the arbitration panel knew of Mr. Cahill‘s failure to pay. Although the relevant emails were between the Director of ADR Services at the AAA and Mr. Cahill‘s attorney, the emails permitted the inference that the Director informed the arbitrators of Mr. Cahill‘s failure to pay. See App. at 515 (stating in an email “[i]f payment is not received by the end of the week, Friday, June 21, 2013, I will be advising the arbitrator that the first deposits have not yet been received.” (emphasis omitted)); id. at 441 (stating in an email from the Director that “[b]y direction of the Panel, we have closed our file“).
Even if we assume the arbitrators did not know, the district court could determine for itself, as explained above, which party was in default, as evident from the record. See Rapaport, 2011 WL 1827147, at *2 (observing that, although the record was insufficient to determine the correctness of the defendant‘s contention that the AAA “simply closed the arbitration because neither party paid the arbitration fees,” it was “evident from the limited record available” that defendant was responsible for paying the deficient fees “and that the termination resulted from his lack
III. CONCLUSION
We have jurisdiction under
SCOTT M. MATHESON, JR.
UNITED STATES CIRCUIT JUDGE