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When Arbitration-Fee Nonpayment Derails the Process: Tenth Circuit says the Default Lifts the Section 3 Stay, Allowing Litigation to Proceed | Myers v. Papa Texas, LLC, _ F.4th _, No. 25-2020, slip op. (10th Cir. Feb. 12, 2026)

February 18th, 2026 Arbitration Fees, Arbitration Law, Arbitration Practice and Procedure, Default in Proceeding with Arbitration, FAA Chapter 1, FAA Section 3, Federal Arbitration Act Enforcement Litigation Procedure, Federal Arbitration Act Section 3, Section 3 Default, Stay of Litigation, Stay of Litigation Pending Arbitration, Uncategorized, United States Court of Appeals for the Tenth Circuit, Waiver of Arbitration No Comments »

Introduction: a Section 3 Default in Case Where Arbitration Proponent Failed to Pay Arbitration Fees

Default Under FAA Section 3 in Nonpayment of Arbitration Fees Case Default in the FAA Section 3 context is not limited to litigation conduct that establishes waiver of arbitration. In Myers v. Papa Texas, LLC, ___ F.4th ___, No. 25-2020, slip op. (10th Cir. Feb. 12, 2026) the U.S. Court of Appeals for the 10th Circuit made three key points about Section 3 default in a nonpayment of fees case:

A party that fails to pay required arbitration fees and thereby causes the arbitration administrator (here, the American Arbitration Association (the “AAA”) to close the case risks being found “in default in proceeding with such arbitration” under FAA § 3, allowing the district court to lift an the stay of litigation and resume the litigation.
In the Tenth Circuit, the “default” inquiry under § 3 is not the same thing as waiver-by-litigation (the usual “did you litigate too much before seeking arbitration?” question). A party can avoid waiver-by-litigation and still default in arbitration by not performing the steps needed to arbitrate, especially payment of arbitration fees.
If you want arbitration, you must be prepared to fund it, comply with the forum’s rules, and build a record showing any inability to pay or good-faith efforts to make arrangements.

What Happened

Luke Myers brought an action against his employer, Papa Texas, LLC, in federal district court. Papa Texas obtained a stay pending arbitration under FAA § 3, and the case moved toward arbitration administered by the AAA.

But arbitration is not free, particularly for business entity defendants. It runs on process—and fees, which (all too often) can be quite substantial.

The AAA demanded payment. Papa Texas did not tender it. After repeated notices and extensions, AAA closed the arbitration for nonpayment—what would one expect? Myers understandably wanted to proceed to litigation and so he asked the Court to lift the stay. Why? Because, said Myers, Papa Texas had “default[ed] in proceeding with arbitration” within the meaning of Section 3.

The district court agreed and lifted the stay. Papa Texas appealed and the Tenth Circuit affirmed.

What Arbitration-Law Issues did the Tenth Circuit Principally Address?

Myers resolved two closely-related and important FAA issues:

What “default in proceeding with such arbitration” means under FAA § 3 when arbitration is derailed by nonpayment; and
Whether and to what extent that § 3 “default” inquiry differs from waiver-by-litigation-conduct, especially after the U.S. Supreme Court’s instruction that courts must avoid arbitration-specific procedural rules? See Morgan v. Sundance, 596 U.S. 411, 414, 419 (2022).

Discussion

FAA § 3: “Default in Proceeding with such Arbitration” is a Real, Independent Off-Ramp for Arbitration Opponents

Most FAA practitioners instinctively think about waiver when a party engages in litigation conduct that is materially inconsistent with their agreement to arbitrate. But FAA § 3 contains specific limiting language that contemplates waiver not only by litigation conduct but other kinds of “default:” a court “shall…stay the trial…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.” 9 U.S.C. § 3.

That last clause is not window dressing or surplusage. The Tenth Circuit treated it as an independent basis to terminate a previously ordered stay and to allow the litigation to proceed. (For more on Section 3 default, see here , here, and here.)

Default is not Limited to “Waiver by Litigation”

Papa Texas tried to reframe the § 3 default question as if it were the familiar waiver framework: multi-factor tests, litigation conduct, and (prior to Morgan) prejudice. But the Tenth Circuit rejected this category error. Default in arbitration is about whether the party who asked the court to halt litigation and send the dispute to arbitration proceeded with arbitration in a manner consistent with the agreement and the forum’s requirements.

Put differently, a party can “win” the waiver-by-litigation fight but still “lose” under § 3 if it does not move the arbitration forward as required by the agreement and applicable arbitration rules.

Nonpayment that Causes the Administrator to Close the File is Compelling Evidence of Default

The panel relied heavily on practical reality: the AAA closed the case because Papa Texas didn’t pay—despite repeated warnings.

The employer tried to blunt that with alternative glosses (including arguments drawn from other circuits’ approaches and attempts to import broader “totality of the circumstances” standards). But the court viewed the facts as straightforward:

The arbitration forum demanded payment;
The payment obligation was clearly communicated;
The AAA granted extensions;
Nonpayment persisted; and
The forum closed the case.

That sequence supported the district court’s conclusion that the party seeking arbitration had defaulted in proceeding with arbitration.

Ability to Pay can Matter—But You Must Prove it

A notable aspect of the Tenth Circuit’s analysis is what it emphasized as missing: evidence that Papa Texas could not afford the fees or tried to make alternative arrangements.

That matters for two reasons.

First, courts are understandably reluctant to let a party weaponize arbitration costs—especially when the party invoked arbitration to stop litigation—and then refuse to pay, leaving the opposing party with nowhere to go. That’s the kind of “heads, I win, tails you lose” tactic that waiver or default doctrine abhors. Cf. Cabinetree of Wisconsin, Inc. v. Kraftmaid Cabinetry, Inc., 50 F.3d 388, 391 (7th Cir. 1995) (party opposing waiver “wanted to play heads I win, tails you lose”).

Second, a genuine inability to pay, documented contemporaneously, could change the equities and sometimes the analysis. But the Tenth Circuit found no record support for that kind of inability here.

The Court Resisted “Arbitration-Specific” Procedural Requirements Without Weakening § 3’s Default Clause

Papa Texas attempted to draw energy from the Supreme Court’s insistence that courts not craft arbitration-specific procedural rules. The panel did not disagree with that principle. Instead, it treated § 3’s default clause as plain statutory text: if you’re the one who asked for the stay, you must not be in default while arbitration is pending.

That framing is doctrinally important. It positions § 3 default as a text-based limit on the stay remedy—not a court-made, arbitration-hostile overlay.

Seen through that lens, Section 3 is not a special judge-made procedural rule favoring arbitration agreements over other contracts. If anything, it is an FAA procedural rule that neither favors nor disfavors arbitration and simply prescribes the circumstances under which a stay is either unavailable in the first place or subject to early termination.

The Default Argument was not Waived

Papa Texas also tried a different tack: even if nonpayment could support § 3 default, Myers supposedly waived the default argument by not emphasizing it when Papa Texas first sought the stay. According to Papa Texas, Myers waived the default argument by intentionally opting not to make at the first available opportunity.

The Tenth Circuit affirmed the district court’s rejection of that contention, finding that the district court did not abuse its discretion. The Court said that the district court “was well within its discretion to conclude that nothing about Myer’s counsel’s explanation [for having earlier argued waiver rather than default], or Myer’s behavior before raising the default argument[]” evidenced an intentional relinquishment of the default argument. Slip op. at 18.

Practice Considerations for Arbitration Proponents and Arbitration Opponents

Arbitration Proponents

If you prefer to arbitrate, budget for it and document any inability to pay.

Assume the court will expect the party who demanded arbitration to pay its share of arbitration fees promptly.
If you cannot, create a record: declare the inability, propose structured payment, request fee relief if the rules permit it, and document pertinent communications.
Do not let the administrator close the case and then argue later that you still want arbitration.

Arbitration Opponents

If the other side doesn’t pay, move fast. If your opponent is stalling arbitration by nonpayment:

Request administrator enforcement (warnings, deadlines, and closure).
Return to court and seek an order lifting the stay under FAA § 3 once default is clear.
Preserve the record: notices, invoices, extensions, closure and other communications.

Conclusion

Myers is a clean, practitioner-facing reminder that arbitration is not self-executing. The FAA favors arbitration, but it does not require courts to keep cases on pause while the party who demanded arbitration refuses to do what the arbitration agreement requires.

Contacting the Author

If you have any questions about this article, arbitration, arbitration-law, or arbitration-related litigation, then please contact Philip J. Loree Jr., at (516) 941-6094. PJL1@LoreeLawFirm.com.

Philip J. Loree Jr. is principal of the Loree Law Firm, a New York attorney who focuses his practice on arbitration and associated litigation. A former BigLaw partner, he has 35 years of experience representing a wide variety of corporate, other entity, and individual clients in matters arising under the Federal Arbitration Act, as well as in insurance- or reinsurance-related, and other, matters.

ATTORNEY ADVERTISING NOTICE: Prior results do not guarantee a similar outcome.

Photo Acknowledgment

The photo featured in this post was licensed from Yay Images and is subject to copyright protection under applicable law.

Hot Topics in Appellate Arbitration: Supreme Court Review, Jurisdictional Fault Lines, and a Look Ahead to 2026

appellate arbitration-law developments In late 2025, the International Institute for Conflict Prevention and Resolution (“CPR”) presented a CPR Speaks YouTube program entitled “Hot Topics: Year-End Wrap-Up, and 2026 Look-Ahead, on Appellate Arbitration Cases.” Moderated by our friend and colleague, Russ Bleemer, Editor of Alternatives to the High Cost of Litigation, Newsletter of CPR (“CPR Alternatives”), the program brought together a panel of highly experienced arbitration practitioners to discuss recent appellate arbitration developments and to assess issues likely to command attention in the current 2025 Supreme Court Term and beyond.

The panel included Professor Angela Downes, University of North Texas-Dallas College of Law(“UNTD”) Professor of Practice, UNTD Assistant Director of Experiential Education, and JAMS Neutral (arbitrator and mediator); Richard D. Faulkner, veteran arbitration and appellate practitioner, arbitrator, mediator, former trial judge, prosecutor, and law professor; and the author, Philip J. Loree Jr., principal of The Loree Law Firm; founder, author, and editor of the Arbitration Law Forum; and former BigLaw partner, who focuses his practice on arbitration and appellate and trial-court arbitration litigation.

You can review the video of the presentation here. This was the 17th arbitration-related, CPR-sponsored video presentation in which Mr. Loree and other members of the panel have participated. Russ is to be thanked profusely not only for hosting and moderating the program, but also posting links and citation references to blog posts, articles and cases relevant to the matters discussed.

While the discussion canvassed a wide range of cases, the panel placed particular emphasis on two matters in which the United States Supreme Court (“SCOTUS”) has granted certiorari: Jules v. Andre Balazs Properties, No. 25-83 (U.S.) and Flowers Foods, Inc. v. Brock, No. 24-935 (U.S.). Together, those cases underscore the Court’s renewed engagement with arbitration-related procedural and jurisdictional questions under the Federal Arbitration Act (the “FAA”).

This post summarizes the panel’s discussion of these important appellate arbitration developments, focusing primarily on Jules and Flowers and the issues they present. It then turns to other appellate decisions that have recently shaped the arbitration-law landscape.

Appellate Arbitration Developments: Supreme Court Certiorari as the Organizing Principle

A central premise of the CPR program was that Supreme Court certiorari activity is itself a critically important signal indicating the direction in which arbitration law is trending at the appellate level. . Even where arbitration doctrine appears settled, the Court’s willingness to take certain cases—and its refusal to take others—often reveals where doctrinal fault lines have emerged or are emerging.

In this respect, Jules and Flowers Foods are especially significant. Both cases present issues that go to the scope and operation of the FAA, but neither involves a frontal assault on arbitration enforceability. To be sure, their outcomes will in Flowers determine whether, under the facts, Section 1 of the FAA exempts from the FAA certain end-point workers who transport goods without crossing borders, and in Jules, whether an FAA-governed arbitration award must be confirmed in a state, rather than federal, forum. Instead, they raise jurisdictional questions that can determine whether arbitration-related disputes are heard in federal court at all (Jules) or in any court under the FAA (Flowers).

Key Appellate Arbitration-Law Development I: Jules v. Andre Balazs Properties—Continuing or Anchor Subject Matter Jurisdiction Following a Section 3 Stay and a Section 4 Motion to Compel

In Jules, the Supreme Court granted certiorari to address whether a federal court that stays an action pending arbitration under FAA § 3, and compels arbitration under Section 4, retains subject-matter jurisdiction to adjudicate post-arbitration applications to confirm or vacate the award under FAA §§ 9 or 10.

Although narrow in formulation, the question is complex and has sweeping practical consequences, particularly in light of the Court’s 2022 decision in Badgerow v. Walters, 596 U.S. 1 (2022), which sharply limited federal courts’ ability to exercise so-called “look-through” jurisdiction over post-arbitration proceedings.

As the panel emphasized, Jules sits at the intersection of two doctrinal developments in appellate arbitration law:

Mandatory stays under FAA § 3, increasingly reinforced by Supreme Court precedent, which apply only when a party requests the stay and a court finds referable to arbitration a claim that is the subject or part of a pending federal-court lawsuit on the merits; and
Following Badgerow, restricted federal jurisdiction over pre- or post-award arbitration enforcement proceedings, at least where those proceedings are standalone, independent proceedings that do not arise out of a preexisting but stayed federal-court lawsuit.

If a federal court in a lawsuit on the merits of a dispute compels arbitration, and if a party requests a stay of the federal lawsuit pending arbitration, then under Smith v. Spizzirri, 144 S. Ct. 1173 (2024), the federal court must grant the stay. But if the same court lacks jurisdiction to confirm or vacate the resulting award, the practical utility of the initially selected and stayed federal forum is substantially diminished, and serious questions arise about whether Congress intended the FAA to permit such a result.

This is especially so since finding jurisdiction based on the preexisting jurisdiction of the federal lawsuit does not implicate any concerns about “looking through” to the underlying arbitration proceeding. As long as jurisdiction is based on the jurisdiction of the Court in the underlying lawsuit, then there is no “look through”—it’s really just “look at”—if there was subject matter jurisdiction over the stayed lawsuit, then there should presumably be subject matter jurisdiction over a motion made in that stayed lawsuit for relief under the FAA relating to the subject matter of that stayed lawsuit. See Badgerow, 596 U.S. at 15 (“Jurisdiction to decide the case includes jurisdiction to decide the motion; there is no need to “look through” the motion in search of a jurisdictional basis outside the court.”) The tension associated with all of this is what Jules brings to the fore.

CPR’s discussion of the case highlights how lower courts have divided on this issue and why the Supreme Court guidance is required. (See CPR’s analysis of Jules here.)

SmartSky Networks v. DAG Wireless: Context for the Jules Question

Against that backdrop, the panel discussed SmartSky Networks LLC v. DAG Wireless Ltd., 70 F.4th 615 (4th Cir. 2023), a Fourth Circuit decision addressing whether a federal court that compelled arbitration, and stayed proceedings pending arbitration, retained jurisdiction to confirm or vacate the resulting award. The U.S. Court of Appeals for the Second Circuit ruled in Jules that the district court, which had federal question jurisdiction over a lawsuit on the merits, had continuing subject matter or anchor jurisdiction over post-award enforcement proceedings because it had granted a Section 3 stay and a Section 4 motion to compel arbitration. In SmartSky, however, the U.S. Court of Appeals for the Fourth Circuit reached the diametrically opposite conclusion in a case involving essentially the same material facts as Jules.

Importantly, as the panel made clear, SmartSky was not discussed as an end in itself. Rather, it served as a concrete illustration of the jurisdictional problem now before the U.S. Supreme Court in Jules. The resolution of Jules will most likely determine whether SmartSky is a good law, a very important question to appellate and trial-court arbitration law practitioners.

SmartSky, unlike Jules, concluded that the district court lacked jurisdiction over post-arbitration proceedings, notwithstanding the Section 3 stay. That approach reflects a strict reading of Badgerow and highlights the risk that federal courts may become jurisdictionally stranded after compelling arbitration. That would leave a significant amount of additional FAA litigation to the state courts, who would be expected to apply the FAA to substantive matters but be free to apply state arbitration law to procedural matters.

The panel discussed how courts have taken different approaches, creating uncertainty for practitioners and litigants alike. These divergent outcomes underscore why Supreme Court review is warranted.

As CPR’s year-end materials explain, SmartSky and Jules, taken together, demonstrate the kind of materially different approaches to the same important issue that often prompt a grant of certiorari. (See CPR’s overview here.)

Key Appellate Arbitration-Law Development II: Flowers Foods, Inc. v. Brock— FAA § 1 and the Scope of the Transportation Worker Exemption

The panel also discussed Flowers Foods, Inc. v. Brock, No. 25-121 (U.S.), the other case in which the Supreme Court has granted certiorari. Flowers Foods concerns the scope of the FAA § 1 exemption for certain “transportation workers” and the criteria courts should apply in determining whether that exemption applies.

The question before the Court is: “[a]re workers who deliver locally goods that travel in interstate commerce—but who do
not transport the goods across borders nor interact with vehicles that cross borders—’transportation workers’ ‘engaged in foreign or interstate commerce’ for purposes of the Federal Arbitration Act’s § 1 exemption?”

Continuing Uncertainty Under FAA § 1

Although the Supreme Court has addressed FAA § 1 in recent years, the panel noted that lower courts continue to struggle with its application, particularly in cases involving workers who perform mixed or indirect transportation-related functions, or where (as here) a bona fide question arises concerning whether the workers are engaged in interstate commerce within the meaning of FAA § 1.

Flowers Foods presents an opportunity for the Court to clarify how broadly—or narrowly—the exemption should be construed, with significant implications for employment arbitration and independent contractor agreements.

The panel emphasized that FAA § 1 litigation has become one of the most active areas of appellate arbitration law, making the Court’s intervention both timely and consequential.

Other Appellate Developments Discussed

With the cert-granted-recently Supreme Court cases as the anchor, the panel surveyed several additional appellate decisions that illustrate broader trends:

International arbitration and sovereign immunity, including the U.S. Supreme Court’s decision in CC/Devas (Mauritius) Ltd. v. Antrix Corp. Ltd., 145 S.Ct. 1572 (2025), addressing a Foreign Sovereign Immunities Act of 1976 (“FSIA”), 28 U.S.C. §§ 1330, 1602 et seq., personal jurisdiction issue arising out of an award enforcement matter.
FAA preemption of State Law, as reflected in Hohenshelt v. Superior Court, 18 Cal.5th 310 (2025) (finding no preemption of state law concerning prompt payment of arbitrator fees).
Consumer arbitration and unconscionability, including Live Nation v. Heckman, 69 F.4th 1257 (9th Cir. 2023).
Severability of illegal arbitration agreement provisions and contract enforcement, discussed through Mungo Homes LLC v. Huskins, 379 S.C. 199, 665 S.E.2d 590 (S.C. 2023). (For a discussion of Mungo Homes, see here.)
FAA §3 stays and procedural consequences, as discussed in Smith v. Spizzirri, 144 S. Ct. 1173 (2024). (For a discussion of Spizzirri, see here.)
Flores v. New York Football Giants, Inc.,104 F.4th 205 (2d Cir. 2024), in which the U.S. Court of Appeals for the Second Circuit refused to enforce an arbitration agreement that required disputes to be arbitrated by an arbitrator who lacked independence from the parties. (For a discussion of Flores, see here.)

Practical Implications for Arbitration Practitioners

The panel’s discussion yielded several practical takeaways, including:

Arbitration law disputes increasingly turn on procedural and jurisdictional mechanics rather than on arbitration’s legitimacy as a dispute resolution mechanism.
At least until the Supreme Court decides Jules, federal subject matter jurisdiction based on an “anchor” or “continuing jurisdiction” theory cannot be assumed simply because the court has compelled arbitration and stayed litigation pending arbitration.
Strategic decisions at the motion-to-compel stage may determine whether other FAA litigation will proceed in state, rather than federal court.
Arbitration clause drafting should account for jurisdictional endgames—including vertical (state vs. federal) choice of law—not just enforceability generally.

Looking Ahead to 2026

As the panel concluded, the Supreme Court’s decisions in Jules and Flowers Foods are likely to shape arbitration practice well beyond the this 2025 Term, and the Court’s 2026 Term, which starts later next year. Together, they reflect a Court that is less concerned with whether arbitration is favored, and more concerned with how arbitration fits within the text of the FAA concerning subject matter jurisdiction and exemptions to FAA applicability.

For arbitration practitioners, staying attuned to these developments is critical. Programs like CPR’s year-end “Hot Topics” discussion provide an invaluable forum for understanding not just where arbitration law has been—but where it is heading.

Contacting the Author

If you have any questions about this article, arbitration, arbitration-law, or arbitration-related litigation, then please contact Philip J. Loree Jr., at (516) 941-6094 or PJL1@LoreeLawFirm.com.

Philip J. Loree Jr. is principal of the Loree Law Firm, a New York attorney who focuses his practice on arbitration and trial court and appellate arbitration-related litigation. A former BigLaw partner, he has 35 years of experience representing a wide variety of corporate, other entity, and individual clients in matters arising under the Federal Arbitration Act, as well as in insurance- or reinsurance-related, and other, matters.

This blog features links to several arbitration-related videos and webinars in which Mr. Loree appears.

ATTORNEY ADVERTISING NOTICE: Prior results do not guarantee a similar outcome.

Photo Acknowledgment

The photo featured in this post was licensed from Yay Images and is subject to copyright protection under applicable law.

Eleventh Circuit: Arbitration Provider’s Decision not to Administer Means Arbitration is no Longer Required

July 1st, 2025 American Arbitration Association, Application to Compel Arbitration, Application to Stay Litigation, Arbitration Fees, Arbitration Law, Arbitration Practice and Procedure, Arbitration Provider Rules, Arbitration Providers, Arbitration Risks, Challenging Arbitration Agreements, Charles Bennett, FAA Section 3, FAA Section 4, Federal Arbitration Act Enforcement Litigation Procedure, Federal Arbitration Act Section 3, Federal Arbitration Act Section 4, Petition to Compel Arbitration, Practice and Procedure, Richard D. Faulkner, Section 3 Default, Section 3 Stay of Litigation, Section 4, Section 4 "Aggrieved" Requirement, Small and Medium-Sized Business Arbitration Risk, Small Business B-2-B Arbitration, Stay of Litigation, United States Court of Appeals for the Eleventh Circuit, Waiver of Arbitration Comments Off

Introduction

Section 3 Default | Section 4 Aggrieved From time-to-time, arbitration providers may decline to administer an arbitration. What happens then according to Federal Arbitration Act “FAA”) Section 3 and Section 4? Must the parties arbitrate before an alternative provider or can a party insist on litigating the dispute in court?

If FAA Section 3 and Section 4, as applied to the parties’ agreement and the facts, authorize an order compelling arbitration and staying litigation, arbitration will (or at least should) ordinarily proceed. But as the U.S. Court of Appeals for the Eleventh Circuit’s decision in Merritt Island Woodwerx, LLC v. Space Coast Credit Union, No. 24-10019, slip op. (11th Cir. May 21, 2025) shows, if arbitration cannot be compelled, and litigation stayed—and the agreement can be legitimately construed as not to require further arbitration—then one or more parties can insist on Court resolution of their dispute, including, in an appropriate case, by jury trial.

That’s a big “if,” and an equally big “and,” but if all conditions are satisfied, then an arbitration opponent may have a solid basis for seeking judicial resolution of its dispute. That is ordinarily a big win, and one that is not otherwise easy to come by.

Understanding Merritt Island Woodwerx—and cases of like ilk—can help you identify opportunities to argue that a provider’s decision to proceed no further means arbitration proceed no further. Successfully taking advantage of those opportunities is the key, but if you do not spot them at the outset, then you may lose them.

If you’re an arbitration proponent, then understanding Merritt Island Woodwerx—and how to avoid or mitigate its consequences—is equally important. The stakes are big: loss of arbitration rights a arbitration proponent had or should have can be an expensive and unwelcome proposition.

**Background: What Transpired in Merritt Island Woodwerx?**

The dispute was between a credit union (the “Arbitration Proponent”) Continue Reading »

Some Things to Consider Seriously Before You Agree to Arbitrate: An Arbitration Award may Direct You to Pay Your Adversary’s Attorney’s Fees

March 7th, 2025 Arbitration Agreements, Arbitration as a Matter of Consent, Arbitration Fees, Arbitration Law, Arbitration Practice and Procedure, Arbitration Provider Rules, Arbitration Providers, Arbitration Risks, Attorney Fee Shifting, Attorney Fees and Sanctions, Authority of Arbitrators, Awards, Bad Faith, Charles Bennett, Drafting Arbitration Agreements, Judicial Review of Arbitration Awards, Outcome Risk, Practice and Procedure, Richard D. Faulkner, Small and Medium-Sized Business Arbitration Risk, Small Business B-2-B Arbitration, Uncategorized Comments Off

Attorney's Fees in Arbitration Those who agree to arbitration expose themselves to potential awards of attorney’s fees in cases where courts would likely not award fees.

If you’re a small business or an individual there’s a good chance you’re not fully familiar with certain of the risks associated with arbitration. Clients frequently consult with me when they find themselves saddled with unfavorable awards, and some of these persons are ones who, through no fault of their own, did not appreciate the risks involved and might consequently have missed opportunities to better manage them. In many instances these persons were represented by attorneys who understood that subject matter of the arbitrated disputes, and who were skilled courtroom litigators, but who were not necessarily as well-versed in arbitration-law as are arbitration and arbitration-law practitioners.

This is more than simply an anecdotal observation. My good friends, colleagues, and sometimes co-counsel, Richard D. Faulkner and Charles (“Chuck”) Bennett, who also practice in this field, tell me they share this view and that their experiences are aligned with my own. (Here is a post concerning a Federalist-Society-sponsored webinar Rick, Chuck, and I participated in last year.) Other arbitration attorneys with whom I have spoken also agree.

Readers armed with some practical knowledge may be better able to avoid, mitigate or otherwise manage arbitration risks. It is in that spirit that we discuss a risk that tends to be more severe in arbitration than it is in court litigation: your exposure to an award of attorney’s fees. As always, nothing we say here is or should be construed as legal advice. If you require legal advice you should engage and consult with an attorney.

Exposure to Liability for Your Adversary’s Legal Fees

A commonly overlooked risk associated with agreeing to arbitrate is that, if you lose, you might be on the wrong end of an award that requires you to reimburse your adversary for some or all of the fees it incurred in the arbitration. To be sure, there is a risk that in court litigation, the court may assess attorney’s fees against a losing party, but as we’ll see, the risk is generally higher in arbitration than it is in court litigation. Worse yet, in arbitration the ability to challenge meaningfully such an award (or any other award) in court is extremely circumscribed under the Federal Arbitration Act (“FAA”). The same is generally so where state arbitration law applies.

No one likes paying attorney fees but they are a necessary incident of dispute resolution, especially resolution of high-dollar disputes. But imagine not only having to pay your own attorney’s fees, but also those of your adversary, an adversary who, in effect, is reimbursed for the fees it incurred in making your life miserable. Continue Reading »

Seventh Circuit Blocks Mass Arbitration: Wallrich v. Samsung Electronics America, Inc.

July 16th, 2024 American Arbitration Association, Appellate Jurisdiction, Arbitrability, Arbitrability | Clear and Unmistakable Rule, Arbitrability | Existence of Arbitration Agreement, Arbitration Agreements, Arbitration as a Matter of Consent, Arbitration Fees, Arbitration Law, Arbitration Practice and Procedure, Arbitration Provider Rules, Arbitration Providers, Authority of Arbitrators, Class Action Arbitration, Class Action Waivers, Class Arbitration Waivers, Clear and Unmistakable Rule, Delegation Agreements, Equal Footing Principle, FAA Chapter 1, FAA Chapter 2, FAA Section 4, Federal Arbitration Act Enforcement Litigation Procedure, Federal Arbitration Act Section 202, Federal Arbitration Act Section 203, Federal Arbitration Act Section 4, Federal Subject Matter Jurisdiction, Mass Arbitration, Petition to Compel Arbitration, Practice and Procedure, Procedural Arbitrability, Questions of Arbitrability, Richard D. Faulkner, Section 4, United States Court of Appeals for the Seventh Circuit Comments Off

Introduction: Mass Arbitration

For many years consumers, employees, and others fought hard—with varying degrees of success—to compel class arbitration, and sellers, employers, and other more economically powerful entities fought equally hard to compel separate arbitrations in multi-claimant situations. Over time, companies included in their agreements—and courts enforced—clear class-arbitration waivers.

That might have been the end of the story but for a stroke of genius on the part of certain plaintiffs’ attorneys. These clever attorneys devised what is now known as “mass arbitration.”

In mass arbitration, as in class arbitration, multiple claimants—each represented by the same lawyer or group of lawyers—assert at the same time numerous claims against a corporate defendant.

The result is that business entity defendants may be are forced to pay upfront hundreds of thousands or millions of dollars in arbitration provider and arbitrator fees as a precondition to defending thousands of individual arbitration proceedings that raise one or more common issues.

Saddling the business entity defendants at the outset with those enormous arbitration fees obviously puts them in an untenable settlement position. The business entities also incur very substantial legal costs for arbitration-related litigation.

Given the vigor with which business entities have opposed class arbitration—which, despite its cumbersome nature, purports to be (but really isn’t) a workable mechanism for resolving multiple, similar, arbitral claims—one can hardly fault a judge for concluding that business entity defendants have reaped what they’ve sown. But it would be strange to think that Federal Arbitration Act (“FAA”) arbitration should, in multiple claimant situations, boil down to the business entity choosing one form of economic extortion (endless, inefficient, and prohibitively expensive class arbitration) over another (being forced to pay millions of dollars of arbitration fees upfront before being able to defend any of the individual arbitrations).

There have been some recent efforts on the part of arbitration providers to amend their rules to address mass arbitration in a more equitable manner. But those rules, and the ins, outs, and idiosyncrasies of mass arbitration are beyond this post’s ambit.

Our focus instead is on a very important mass-arbitration development: the first U.S. Circuit Court of Appeals decision to address mass arbitration, Wallrich v. Samsung Electronics America, Inc., No. 23-2842, slip op. (7^th Cir. July 1, 2024). The case is especially significant because it may portend the end of mass arbitration, at least in the form it typically takes.

The U.S. Court of Appeals for the Seventh Circuit derailed petitioners’ efforts to compel judicially the respondent to pay millions of dollars of arbitration fees demanded by mass arbitration claimants. It did so in two blows, the second more decisive than the first. Continue Reading »