Can a federal court order deciding whether to compel arbitration be appealed? While federal appellate jurisdiction is generally limited to district court "final decisions" (28 U.S.C. Section 1291), the Federal Arbitration Act authorizes appeals from orders denying arbitration. But appealing an order that compels arbitration depends on whether the district court dismisses the civil action as well. Before appealing, consider the following principles and limitations.
FAA Appellate Jurisdiction
FAA appellate jurisdiction extends to orders "refusing a stay of any action under section 3" and orders "denying a petition under section 4 ... to order arbitration to proceed." 9 U.S.C. Section 16(a)(1)(A)-(B). Consistent with Congress' intent to have arbitrable disputes proceed quickly, Section 16 promotes appeals from orders denying arbitration and limits appeals requiring arbitration. Bushley v. Credit Suisse First Bos., 360 F.3d 1149, 1153 (9th Cir. 2004). Thus, under the FAA, a district court's denial of a motion or petition to compel arbitration is appealable.
Whether an order compelling arbitration can be appealed is a complicated issue. There is only one FAA provision expressly allowing for appeals of interlocutory orders when the district court certifies an appeal on a "controlling question of law as to which there is substantial ground for difference of opinion and that an immediate appeal from the order may materially advance the ultimate termination of the litigation." 9 U.S.C. Section 16(b) (allowing appeals taken under 28 U.S.C. Section 1292(b)). However, such certification is extremely rare. That leaves only one other possibility. Section 16(a)(3) allows for an appeal of any "final decision with respect to an arbitration that is subject to" the FAA. 9 U.S.C. Section 16(a)(3). But what does "final decision" mean, exactly? The Supreme Court has held that the district court's dismissal of an action is a "final decision" and thus, appealable, whereas a stay of the action pending arbitration is not. Green Tree Fin. Corp.-Alabama v. Randolph, 531 U.S. 79, 87 n.2 (2000).
Must courts avoid, or should courts avoid, dismissing the action when arbitration is ordered? The Supreme Court declined to consider that question in Green Tree. And the circuit courts are split on whether a district court is required to enter a stay, or has the discretion to dismiss the action, when arbitration of all claims is required under FAA Section 3. The circuit divide centers around the language in Section 3 providing that a district court referring claims to arbitration "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." 9 U.S.C. Section 3 (emphasis added).
The 2nd, 3rd, 7th, and 10th Circuits have interpreted Section 3 as mandating a stay of proceedings when compelling arbitration on all claims. See Katz v. Cellco P'ship, 794 F.3d 341, 345-46 (2d Cir. 2015) (joining line of cases holding a stay is required). According to these circuits, the plain language of Section 3, especially the operative word "shall" stay the action, affords "no discretion to dismiss a case where one of the parties applies for a stay pending arbitration." Lloyd v. HOVENSA, LLC, 369 F.3d 263, 269 (3d Cir. 2004). "It is axiomatic that the mandatory term 'shall' typically creates an obligation impervious to judicial discretion." Katz, 794 F.3d at 345 (quotations omitted). Requiring a stay makes intuitive sense given the FAA's design favoring immediate arbitration of disputes.
But other circuits -- the 1st, 4th, 5th, 6th, 8th and 9th -- have held that district courts have inherent authority to manage their dockets and the discretion to dismiss the action when all claims are compelled to arbitration under Section 3. In these circuits, if the district court dismisses the action, appellate jurisdiction is conferred by FAA Section 16(a)(3)'s "final decision" language. In the 9th Circuit, a district court's order that does not explicitly dismiss the action creates a rebuttable presumption that the underlying claims are stayed pending arbitration. MediVas, LLC v. Marubeni Corp., 741 F.3d 4, 5 (9th Cir. 2014). These circuits reason that the FAA's rule that an order staying claims is not immediately appealable "was not intended to limit dismissal of a case in the proper circumstances." Alford v. Dean Witter Reynolds, Inc., 975 F.2d 1161, 1164 (5th Cir. 1992); see also Sparling v. Hoffman Const. Co., 864 F.2d 635, 638 (9th Cir. 1988) (concluding FAA section 3 "did not limit the court's authority to grant a dismissal.").
Effect of Voluntary Dismissals
There is one other scenario that arises when a plaintiff files a civil action, the defendant successfully compels arbitration, and the court stays the civil action: Can plaintiff manufacture appellate jurisdiction by voluntarily dismissing the action under Federal Rule of Civil Procedure 41(a)(1)? The 9th Circuit recently said no. Langere v. Verizon Wireless Servs., LLC, 983 F.3d 1115, 1124 (9th Cir. 2020). In Langere, after the district court granted a stay of all claims pending arbitration, the plaintiff voluntarily dismissed the case without leave from the district court. Under a previous 9th Circuit decision, the plaintiff would have been permitted to appeal the order compelling arbitration as part of the appeal from a "final decision," i.e., the dismissal of the action. However, Langere held that in light of superseding Supreme Court precedent, a party can no longer "create appellate jurisdiction" by voluntarily dismissing claims after being ordered to arbitration. The 4th Circuit also refuses to allow appeals from voluntary dismissal following orders to arbitrate all claims; such a maneuver frustrates the purpose of the FAA by allowing a plaintiff to "transform" an interlocutory order into a "final decision." Keena v. Groupon, Inc., 886 F.3d 360, 364 (4th Cir. 2018).
If the Supreme Court resolves the circuit split regarding whether a stay is mandatory, the circuits requiring a stay are likely to be the winners. Indeed, the statutory language stating that the court "shall" stay claims "until such arbitration has been had in accordance with the terms of the agreement," is difficult to read in any other way. And such a straight forward reading is more consistent with Congress's pro-arbitration policy goals driving the FAA.
Permitting courts to dismiss may have some intuitive appeal. It may seem inconvenient to require a court to retain jurisdiction, keeping the case on its docket while the parties arbitrate all claims. But is that so unreasonable given the likelihood that the parties will return to the court for post-arbitration petition battles? And what of the inequities of some parties having to proceed to arbitration without resort to an immediate appeal, while other parties can immediately appeal because the district court dismissed the action? It makes little sense for a party successfully compelling arbitration to actually commence arbitration while an appeal is hanging over its head.
The takeaways for litigants? Get current on the circuit law that will apply. When seeking arbitration, request a stay as well, citing FAA Section 3 and the circuit authority supporting a stay. In circuits where it is possible, if opposing arbitration fails, seek dismissal of the action in order to create appellate jurisdiction under the "final decision" language of the FAA. Ultimately, when preparing for the battle over arbitration versus district court litigation, the parties should also be considering how the district court will deal with the pending civil action, and what that will mean for appellate jurisdiction.
Arbitration Angle is a bi-monthly column by Hanson Bridgett's Appellate Group.