Introduction
Today we look at federal appellate jurisdiction over orders compelling arbitration and staying litigation.
Sections 3 and 4 of the Federal Arbitration Act (the “FAA”) provide remedies for a party who is aggrieved by another party’s failure or refusal to arbitrate under the terms of an FAA-governed agreement. FAA Section 3, which governs stays of litigation pending arbitration, requires courts, “upon application of one of the parties,” to stay litigation of issues that are “referable to arbitration” “until arbitration has been had in accordance with the terms of the parties’ arbitration agreement, providing [the party applying for a stay] is not in default in proceeding with such arbitration.” 9 U.S.C. § 3. Faced with a properly supported application for a stay of litigation of an arbitrable controversy, a federal district court must grant the stay. 9 U.S.C. § 3.
Section 4 of the FAA authorizes courts to make orders “directing arbitration [to] proceed in the manner provided for in [the [parties’ written arbitration] agreement[,]” and sets forth certain procedures for adjudicating petitions or motions to compel arbitration. 9 U.S.C. § 4. It provides that when a court determines “an agreement for arbitration was made in writing and that there is a default in proceeding thereunder, the court shall make an order summarily directing the parties to proceed with the arbitration in accordance with the terms thereof.” 9 U.S.C. § 4 (emphasis added). Just as courts must grant properly supported applications for relief under Section 3, so too must they grant properly supported applications for relief under Section 4. See 9 U.S.C. §§ 3 & 4.
There is much to be said about the many issues that may arise out of applications to stay litigation, compel arbitration, or both, but our focus here is on the appellate jurisdiction of the U.S. Circuit Courts of Appeals over appeals from the grant or denial of such applications. Before a U.S. Circuit Court of Appeals can hear an appeal on the merits of a federal district court’s order and judgment, it must be satisfied that: (a) the federal district court had original subject matter jurisdiction (e.g., diversity jurisdiction or federal question jurisdiction); (b) there is still a “case or controversy” within the meaning of Article III of the U.S. Constitution (e.g., the controversy has not become moot by settlement or otherwise); and (c) the order or judgment appealed from is one over which it has appellate jurisdiction.
Appellate Jurisdiction and the FAA
Appellate jurisdiction refers to a Circuit Court of Appeals’ power to review, amend, vacate, affirm, or reverse the orders and judgments of the district courts within the judicial circuit over which the Court of Appeals presides. Generally, and outside the context of injunctions and the certification procedure of 28 U.S.C. § 1292(b), U.S. Courts of Appeal have jurisdiction to review only “final decisions” of district courts. See 28 U.S.C. §§ 1291, 1292. A “final decision” “is a decision that ends the litigation on the merits and leaves nothing more for the court to do but execute the judgment.” Green Tree Financial Corp. v. Randolph, 531 U.S. 79, 86 (2000) (citations and quotations omitted).
But Federal Arbitration Act litigation is quite different from ordinary litigation from both a substantive and procedural prospective, and so it comes as no surprise that the FAA features its own set of appellate jurisdiction rules.
Appellate Jurisdiction: Section 16 of the FAA
Section 16 of the FAA governs the appellate jurisdiction of the U.S. Circuit Courts of Appeal over orders and decisions concerning applications for relief under the FAA. Section 16 reflects, for the most part, a Congressional policy to: (a) facilitate appeals as early as possible of certain decisions finding disputes not to be arbitrable; and (b) delay appeals of certain decisions finding disputes to be arbitrable, at least until the arbitration has taken place. This pro-arbitration policy is in line with the general federal policy in favor of arbitration that is the bedrock of the FAA.
Section 16(a) of the FAA provides that “[a]n appeal may be taken from an order[:]”
(A) refusing a stay of any action under section 3 of this title[;]
(B) denying a petition under section 4 of this title to order arbitration to proceed[;] [and]
(C) denying an application under section 206 of this title to compel arbitration….
9 U.S.C. § 16(a)(1)(A)-(C).
To much the same effect is Section 16(a)(2), which provides that an appeal may be taken from “an interlocutory order granting, continuing, or modifying an injunction against an arbitration that is subject to this title. . . .” 9 U.S.C. § 16(a)(2).
Section 16(b) compliments 16(a) by prohibiting certain interlocutory appeals not authorized by Section 16(a). Section 16(b) states that “[e]xcept as otherwise provided in section 1292(b) of title 28, an appeal may not be taken from an interlocutory order—
(1) granting a stay of any action under section 3 of this title;
(2) directing arbitration to proceed under section 4 of this title;
(3) compelling arbitration under section 206 of this title; or
(4) refusing to enjoin an arbitration that is subject to this title.
9 U.S.C. § 16(b).
In addition to addressing the appealability of interlocutory orders concerning stays of litigation, stays or injunctions of arbitration, and orders compelling or refusing to compel arbitration, Section 16 addresses three other types of orders or decisions: (a) orders confirming or denying confirmation of awards; (b) orders vacating, modifying, or correcting awards; and (c) “final decision[s] with respect to…arbitration….” 9 U.S.C. § 16(a)(3).
Section 16(a)(1)(D) makes appealable an order “confirming or denying confirmation of an award or partial award.” 9 U.S.C. § 16(a)(1)(d). Section 16(a)(1)(E) authorizes appeals of an order “modifying, correcting, or vacating an Award.” In many or most instances these provisions make FAA litigation concerning final arbitration awards appealable, irrespective of the outcome.
Section 16(a)(3) is a catch-all provision of sorts. It makes appealable “a final decision with respect to an arbitration that is subject to this title.” 9 U.S.C. § 16(a)(3).
Appellate Jurisdiction: Application of Section 16 to Orders made under Sections 3 and 4
While Section 16’s provisions are relatively easy to apply in many situations, they can cause some confusion in others, principally ones involving stays of litigation under Section 3 of the FAA and orders compelling arbitration under Section 4.
Suppose A parties A and B have a dispute on which A has demanded arbitration, and B has failed or refused to arbitrate the dispute. Neither party has commenced an action on the merits of the dispute. A commences a summary proceeding to compel arbitration pursuant to Section 4 of the FAA, but does not seek a stay of litigation because there is no merits litigation to stay pending arbitration. The application is briefed and the Court determines that it should compel arbitration, grants A’s application, and renders a final decision entering final judgment in favor of A, leaving the Court with nothing to do other than execute the judgment.
Is the district court’s decision immediately appealable under the FAA, or must an appeal await the conclusion of the arbitration? It is immediately appealable because it is a “final decision with respect to” arbitration within the meaning of 9 U.S.C. § 16(a)(3). See Randolph, 531 U.S. at 89. Indeed, even without Section 16(a)(3) it would be appealable under 28 U.S.C. § 1291(a). See 531 U.S. at 86-89.
Now suppose A and B have a dispute, A demands arbitration, B not only refuses to arbitrate but files a lawsuit asking a court to resolve the dispute. A then moves to compel arbitration, but does not seek a stay of litigation. The Court grants the motion and dismisses the case, leaving nothing for the Court to do but execute the judgment.
Like our first hypothetical, the district court’s decision is appealable, because it is a “final decision with respect to” arbitration. Randolph, 531 U.S. at 89.
But let’s modify our second hypothetical so that A seeks not only an order compelling arbitration, but also requests a stay of litigation under Section 3. The Court grants A’s motion, compels arbitration, and directs the Clerk of the Court to “close the case.” The clerk enters judgment in favor of A, which “closes the case.” The clerk attaches to the judgment official forms notifying B of its right to appeal the judgment.
Is that judgment appealable? According to the Second Circuit Court of Appeals in Bernardino v. Barnes & Noble Booksellers, Inc., No. 18-607, slip op. (2d Cir. March 7, 2019) (summary order), the answer is “no.”
Bernardino is a non-precedential, summary order. While the answer it gave to the appellate jurisdiction question might seem controversial to some,
Bernardino actually involves a relatively noncontroversial application of settled law to facts, which is presumably the reason that it was decided by summary order. But it is instructive and pertinent here because it demonstrates in fairly simple terms the interplay between Sections 3 and 4 and 16.
Plaintiff Bernardino sued Defendant Barnes & Noble Booksellers, Inc. and Barnes & Noble moved to compel arbitration and for a stay of litigation. The district court granted Barnes & Noble’s motion and directed the Clerk to “close the case.” Slip op at *1 (citation and quotation omitted). Bernardino appealed and Barnes & Noble argued that the appeal should be dismissed for lack of appellate jurisdiction. The Court dismissed the appeal for lack of jurisdiction, finding that the district court’s order was an interlocutory one compelling arbitration and granting a stay of the litigation, not a “final decision with respect to… arbitration….” Slip op. at *3; 9 U.S.C. § 16(a)(3).
Bernadino argued that because the district court granted the motion to compel arbitration and ordered the case closed, the district court’s order was not an “interlocutory order” granting a stay and compelling arbitration, but a “final decision with respect to… arbitration. . .,” and thus was appealable on that basis.
The Court rejected that argument, explaining that “a district court is required to enter a stay when a party has so requested and ‘all claims have been referred to arbitration.’” Slip op. at *2 (quoting Katz v. Cellco P’ship, 794 F.3d 341, 345 (2d Cir. 2015)).
Barnes & Noble requested both an order compelling arbitration and a stay of the litigation, and the Court granted that relief. Barnes & Noble’s motion, which was docket entry 39 on the district court docket, “sought an ‘order compelling arbitration of [Bernadino’s] claims against [B&N] and staying all proceedings.’” Slip op. at *1-2 (quoting motion; bracketed text in original). The district court’s memorandum and order expressly identified that motion by docket entry and granted it, accepting a magistrate judge’s Report and Recommendation. The “Report and Recommendation ‘respectfully recommend[ed]’ that the district court ‘grant [Barnes & Noble’s] motion to compel arbitration and stay all proceedings.’” Slip op. at *1-2 (quoting Report & Recommendation).
The Court said this was “clear evidence” that the district court compelled arbitration and stayed litigation pending arbitration, which was the relief that Barnes & Noble requested. Slip op. at *2.
Bernadino, however, argued “that the district court actually ‘entered judgment dismissing, rather than staying, the action,’ because the [district court’s] Memorandum and Order directed that ‘[t]he Clerk shall close the case.’” Slip op. at *2 (quoting Appellant’s Br. and Memorandum and Order).
The Court rejected that argument, explaining that “there is ‘no jurisdictional significance to [a] docket entry marking [a] case as “closed,” which we will assume was made for administrative or statistical convenience.’” Slip op. at *2 (quoting Filanto, S.p.A. v. Chilewich Int’l Corp., 984 F.2d 58, 61 (2d Cir. 1993)). Likewise, there was no “jurisdictional significance” to the district court: (a) entering judgment on the docket or (b) attaching “Right to Appeal” documents to the judgment, “as these were administrative actions taken by the Clerk of the Court following the district court’s direction that the case be closed.” Slip op. at *2.
Even apart from that, the Second Circuit explained that passages from district court transcripts, and the district judge’s handwritten notation on a proposed briefing schedule, showed “that the district court repeatedly made clear that it interpreted [Barnes & Noble’s] motion as a motion to stay all proceedings pending arbitration.” Slip op. at *2. By definition, the grant of a stay of litigation pending arbitration is an interlocutory order, not a final decision with respect to arbitration. And having found the matter referable to arbitration, the district court was required to enter a stay.
Holding that the “district court’s order was an interlocutory order, rather than a final decision and is not appealable under the FAA,” the Second Circuit “dismissed the appeal for lack of jurisdiction.” Slip op. at *3.
Appellate Jurisdiction: the Takeaway
A person seeking to compel arbitration in an action that seeks to determine in court issues that may be arbitrable should be sure to request not only an order compelling arbitration under Section 4, but also a stay of litigation under Section 3. For if the motion to compel is granted, and the Court dismisses the action, then the arbitration proponent will not only have to proceed with the arbitration, but may also have to defend an appeal of the order compelling arbitration. By contrast, if the arbitration proponent requests a stay of litigation and an order compelling arbitration, and the court rules the issues are referable to arbitration, then the losing party will not have a right to appeal until the conclusion of the arbitration.
That may provide the arbitration proponent with significant strategic advantages over the arbitration opponent. For example, the arbitration will proceed without the need for the arbitration proponent to defend an appeal, and the arbitration may focus both parties on the merits of the dispute, perhaps thereby increasing the probability of settlement.
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Did you know…
Before a district court can confirm, vacate, modify, or correct an award, the award must be final. Read about what constitutes a “final award” here.
Photo Acknowledgments
The photos featured in this post were licensed from Yay Images and are subject to copyright protection under applicable law.
Tags: Appeals, Appellate Jurisdiction, Confirm, Correct, Decisions, FAA Section 16, FAA Section 3, FAA Section 4, Federal Arbitration Act, Final Award, Final Decision, Final Decision with respect to an arbitration, Final Decision with respect to Arbitration, Green Tree Financial Corp v Randolph, Modify, Order Compelling Arbitration, Orders, Second Circuit, Section 16(a), Section 16(b), Stay of Litigation Pending Arbitration, United States Court of Appeals for the Second Circuit, Vacate
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