Today we’re going to focus on Section 3 of the Federal Arbitration Act, which authorizes a Court to stay litigation.
In the last segment of this series we answered the following FAQs about how gateway disputes are decided by courts and arbitrators:
- What is the Presumption of Arbitrability?
- Does the Presumption of Arbitrability Apply to all Questions of Arbitrability?
- What Law Applies to Determine Gateway Disputes about Arbitrability to which the Presumption of Arbitrability does not Apply?
- How is the Presumption of Arbitrability Applied to Resolve Gateway Questions about the Scope of an Arbitration Agreement?
- What Defenses, if any, Can Parties Assert against Enforcement of an Arbitration Agreement, and what Law Governs these Defenses?
The answers to these questions, along with those provided in prior segments, were designed to provide you with a solid foundation for understanding how pre-award Federal Arbitration Act litigation works and what to expect if your business is or becomes embroiled in it.
The segment of which this post is Part I answers FAQs about the nuts and bolts of pre-award Federal Arbitration Act practice and procedure under Sections 2, 3, and 4 of the Act, the Sections that address gateway disputes about whether arbitration should proceed.
In this Part I we address the following FAQs, which focus on Section 3 stays of litigation:
- What Gateway Disputes do Sections 2, 3, and 4, Address, and How do they Address them?
- How does Section 3 Work in Practice?
Future parts of this segment will address questions concerning Section 4 of the Federal Arbitration Act, which authorizes courts to compel arbitration. And we’ll move forward from there.
What Gateway Disputes do Sections 2, 3, and 4, Address, and How do they Address them?
Section 2, as we’ve said, is the enforcement command of the Federal Arbitration Act, which deems all arbitration agreements falling within its scope to be “valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” 9 U.S.C. § 2. (See here and here.) Section 2 requires, as a matter of federal law, that arbitration agreements falling within its scope are to be enforced to the same extent as contracts generally. (See here.)
But the Federal Arbitration Act does more than require the enforcement of arbitration agreements by putting them on “an equal footing with all other contracts.” Kindred Nursing Centers Ltd. P’ship v. Clark, 137 S. Ct. 1421, 1424 (2017) (quotations and citations omitted). It provides for specific performance of arbitration agreements, both in the form of an order staying litigation of an arbitrable controversy under Section 3 of the FAA, and an order directing a party to proceed with arbitration in accordance with their agreement. 9 U.S.C. §§ 3 & 4.
Section 3 provides for a stay of litigation in the event that a party commences a lawsuit asking the Court to resolve disputes that the parties agreed to submit to arbitration. 9 U.S.C. § 3.
Section 4, which sometimes used in tandem with Section 3, but which is available as an independent remedy when a party simply refuses to arbitrate without attempting to litigate the allegedly arbitrable dispute, authorizes courts to compel parties to arbitrate the disputes they’ve promised to submit to arbitration.
How does Section 3 Work in Practice?
Section 3 provides that “If [A] any suit or proceeding be brought in any of the courts of the United States upon [B] any issue referable to arbitration under an agreement in writing for such arbitration, [C] the court in which such suit is pending, upon being satisfied that the issue involved in such suit or proceeding is referable to arbitration under such an agreement, shall [D] 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, [E] providing the applicant for the stay is not in default in proceeding with such arbitration.” 9 U.S.C. § 3 (bracketed text added for discussion purposes].
Section 3’s first requirement is that there be a “suit or proceeding. . . brought in any of the courts of the United States. . . .” This requirement is straightforward save for the meaning of “courts of the United States. . . .”
Recall that at least the substantive provisions of the Federal Arbitration Act apply in state court. But the U.S. Supreme Court has never determined whether Sections 3 or 4 apply in state court, and if so, to what extent. Volt Information Sciences, Inc. v. Board of Trustees, 489 U.S. 468, 476-77 & n.6 (1989).
That said, many state courts, have ruled that Section 3 applies in state court. See Moses H. Cone Hospital v. Mercury Constr. Corp., 460 U.S. 1, 26-27 & n.34 (1983) (“Although § 3 refers ambiguously to a suit ‘in any of the courts of the United States,’ the state courts have almost unanimously recognized that the stay provision of § 3 applies to suits in state as well as federal courts, requiring them to issue the same speedy relief when a dispute is referable to arbitration.”); see, e.g., Lenz v. FSC Sec. Corp., 391 Mont. 84, 91, 92, 103 (2018); Frohberg Elec. Co. v. Grossenburg Implement, Inc., 297 Neb. 356, 365 & n.16, 366 (2017); Auto Owners Ins., Inc. v. Blackmon Ins. Agency, Inc., 99 So.3d. 1193, 1198 & n.4, 1199 (Ala. 2012).
But whether or not Section 3 technically applies in both state and federal courts is not an issue that matters that much in practice. While Section 3 of the Federal Arbitration Act permits a stay of litigation independent from an order to compel arbitration, state arbitration laws typically provide for stays of litigation in cases where a party has sought and obtained an order compelling arbitration. See, e.g., New York Civ. Prac. L. § 7503(a).
Section 3’s second requirement (“[B]” per the bracketed text we added) is that the “suit” “be brought” “upon any issue referable to arbitration under an agreement in writing for such arbitration. . . .”
Whether an something is an “issue referable to arbitration” is a gateway question, and more specifically, a “question of arbitrability” for the court, unless the parties clearly and unmistakably agree otherwise. The requirement that the issue be so referable “under an agreement in writing for. . . arbitration” simply reiterates Section 2’s requirement that arbitration agreements within its scope be “in writing.” 9 U.S.C. § 2; See, generally, Arthur Andersen LLP v. Carlisle, 556 U.S. 624, 629-31 (2009).
Section 3’s next aspect, embodied in the text following our added brackets [C] and [D], is fairly straightforward and flows from the Court’s determination whether there is an “issue referable to arbitration.” This text provides that “[C] the court in which such suit is pending, upon being satisfied that the issue involved in such suit or proceeding is referable to arbitration under such an agreement, shall [D] 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. . . .”
This text simply defines what occurs if the Court determines there is an “issue involved in . . . [the] suit or proceeding” that “is referable to arbitration” under the parties’ agreement.
Faced with an “application” under Section 3, the Court should determine whether the parties have clearly and unmistakably agreed to submit the arbitrability question to an arbitrator to decide, that is, whether they’ve entered into a “delegation agreement.” (See here.) If the Court determines that the parties have clearly and unmistakably agreed to submit arbitrability questions to arbitration, then it will have determined that there is an issue “referable to arbitration”—the issue of arbitrability—and the arbitrator will decide whether the parties agreed to arbitrate the issue that gave rise to the arbitrability dispute.
In the meantime, the Court “shall. . . stay the trial of the action until such arbitration has been had in accordance with the terms of the agreement. . . .”
Where the issue to be arbitrated is a question of arbitrability, what the Court does after the arbitrator determines the arbitrability question depends on the outcome of arbitrator’s ruling on arbitrability. If the arbitrator finds the issue is arbitrable, then the stay will remain in place until the parties arbitrate not only the arbitrability issue, but also the merits. If the arbitrator determines that the issue is not arbitrable, then the court will lift the stay and allow litigation on the merits of the issue to proceed.
If the Court determines that the parties have not clearly and unmistakably agreed to arbitrate arbitrability issues, then the Court determines whether there is an issue referable to arbitration, that is, whether the issue is arbitrable. The presumption in favor of arbitration will guide that determination. (See here.)
If the Court determines that the issue is arbitrable, then the Court must stay the action until the arbitration has been had. But if the Court determines that the issue is not arbitrable, then the Court will not stay the litigation.
The text following added bracketed text “[E]” conditions a Section 3 stay on the applicant not being “in default in proceeding with such arbitration.” 9 U.S.C. § 3 (court shall grant stay “[E] providing the applicant for the stay is not in default in proceeding with such arbitration”) (bracketed text added for discussion purposes).
Probably the most common application of this section occurs when a defendant in a lawsuit delays seeking a Section 3 stay and litigates on the merits. See, generally, Ehleiter v. Grapetree Shores, Inc., 482 F.3d 207, 217-19 (3d Cir. 2007); Doctor’s Associates, Inc. v. Distajo, 66 F.3d 438, 454-56 (2d Cir. 1995). The plaintiff resisting the stay may then argue that the defendant has waived its right to arbitrate and therefore is “in default in proceeding with . . . arbitration.” 9 U.S.C. § 3; see 482 F.3d at 218; 66 F.3d at 454-56.
There is a substantial body of law concerning the circumstances under which parties may or may not be deemed to have waived arbitration, the U.S. Supreme Court has not yet ruled on the issue, and approaches to the question sometimes differ from one U.S. Circuit Court of Appeals to another. A thorough discussion is beyond the scope of this post, but there are some general points that are worth highlighting briefly.
Circuits may differ over the extent to which, if at all, a party asserting waiver of arbitration must demonstrate that the other side’s delay in seeking arbitration, or its conduct during the litigation, prejudiced the party asserting waiver. Strictly speaking, waiver is the “intentional relinquishment of a known right,” which is a contractual concept that doesn’t rest on equitable considerations, such as detrimental reliance or prejudice. See Professional Staff Congress-City University v. New York State Public Employment Relations Board, 7 N.Y.3d 458, 465 (2006) (“A waiver is the intentional relinquishment of a known right with both knowledge of its existence and an intention to relinquish it. . . . Such a waiver must be clear, unmistakable and without ambiguity”) (citations and quotations omitted);
The concept that another’s untimely assertion of a right has prejudiced a person is one that is central to the equitable doctrine of laches, not waiver. See Capruso v. Village of Kings Point, 23 NY 3d 631, 641 (2014) (“Laches is defined as such neglect or omission to assert a right as, taken in conjunction with the lapse of time, more or less great, and other circumstances causing prejudice to an adverse party, operates as a bar in a court of equity. The essential element of this equitable defense is delay prejudicial to the opposing party.”) (citations and quotations omitted).
Thus, Courts that require prejudice to establish “waiver” are effectively blending together the contractual doctrine of waiver with the equitable doctrine of laches. Engrafting a laches-like requirement of prejudice tends to make it more difficult to establish that a party has, through its conduct in the litigation, waived its right to arbitrate (and thus to seek a stay under Section 3).
Certain courts, such as the U.S. Court of Appeals for the Seventh Circuit, analyze waiver principally from a contractual perspective and, in the absence of an express waiver (such as a written agreement to forgo arbitration), the Court “determine[s]” whether, “considering the totality of the circumstances, a party acted inconsistently with the right to arbitrate.” Kawasaki Heavy Indus., Ltd. v. Bombardier Recreational Prods., Inc., 660 F.3d 988, 994 (7th Cir. 2011) (citation omitted).
The Court considers “several factors,” with “diligence of the lack thereof” “weigh[ing] heavily in the decision.” 660 F.3d at 994 (citation omitted). Also “consider[ed]” are, “whether the allegedly defaulting party participated in litigation, substantially delayed its request for arbitration, or participated in discovery. 660 F.3d at 994 (citation omitted). The Seventh Circuit does not “require a showing of prejudice[,]” but considers “it. . . a relevant factor in the totality-of-the-circumstances analysis.” 660 F.3d at 994
The Second Circuit, like a number of others, requires the arbitration opponent show conduct inconsistent with arbitration, and, in addition, resulting prejudice. The Second Circuit analyses whether a party has implicitly waived arbitration by considering “(1) the time elapsed from when litigation was commenced until the request for arbitration; (2) the amount of litigation to date, including motion practice and discovery; and (3) proof of prejudice.” Louisiana Stadium Exposition Dist. v. Merrill, Lynch, Pierce, Fenner Smith, Inc., 626 F.3d 156 (2d Cir. 2010) (quotation and citations omitted).
While the Second Circuit uses “no rigid formula or bright-line rule for identifying when a party has waived its right to arbitration[,]” and “the above factors must be applied to the specific context of each particular case[,]” the “key” is whether there is “prejudice.” 626 F.3d at 159 (citations and quotation omitted). Courts in the Second Circuit will find waiver “due to participation in litigation” “only when prejudice to the other party is demonstrated.” 626 F.3d at 159 (citations and quotation omitted).
Waiver of arbitration, when raised in opposition to a Section 3 motion to stay, potentially raises a question of arbitrability: Who gets to decide the waiver issue? In Howsam the Supreme Court noted that “the presumption is that the arbitrator should decide ‘allegation[s] of waiver, delay, or a like defense to arbitrability.’” Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 84 (2002) (quoting Moses H. Cone, 460 U.S. at 24-25) (emphasis added).
That would, at first glance, suggest that waiver claims based on conduct in the litigation are to be decided by arbitrators. But waiver based on litigation conduct, when raised in opposition to a motion under Section 3, are for the Court, at least in part because an express statutory prerequisite for a Section 3 is that “the applicant for the stay is not in default in proceeding with such arbitration.” 9 U.S.C. § 3; Distajo,66 F.3d at 454-55. That implies that judicial consideration of waiver is “statutorily mandated” “in Section 3 cases.” 66 F.3d at 456; see Carcich v. Rederi A/B Nordie, 389 F.2d 692, 696 (2d Cir. 1968); Kulukundis Shipping Co. v. Amtorg Trading Corp., 126 F.2d 978, 989 (2d Cir. 1942).
But for reasons that need not detain us here, and which will be discussed in a little more detail when we address Section 4 of the FAA, the “not in default in proceeding” language of Section 3 does not, in our view, authorize courts to decide waiver defenses that are not based on litigation-related conduct, and which would, but for Section 3’s “default in proceeding” language, ordinarily be considered procedural matters for the arbitrator. See Distajo,66 F.3d at 454-55; Martin v. Yasuda, 829 F.3d 1118 (9th Cir. 2016) (collecting cases); Marie v. Allied Home Mtge. Corp., 402 F.3d 1, 14 (1st Cir. 2005); Ehleiter v. Grapetree Shores, Inc., 482 F.3d 207, 217–218, 221 (3d Cir. 2007); Bell v. Cendant Corp., 293 F.3d 563, 569-70 (2d Cir. 2002).
More to come. . .
In Part II of “Litigating Gateway Disputes about Whether Arbitration Should Proceed—The Nuts and Bolts of Pre-Award Federal Arbitration Act Practice under Sections 2, 3, and 4” we’ll answer FAQs about the nuts and bolts of pre-award Federal Arbitration Act practice and procedure under Section 4 of the Act, the FAA provision that authorizes courts to compel arbitration.
Please note. . .
This guide, including the instalments that will follow in later posts, and prior instalments, is not designed to be a comprehensive recitation of the rules and principles of arbitration law. It is designed simply to give clients, prospective clients, and other readers general information that will help educate them about the legal challenges they may face and how engaging a skilled, trustworthy, and experienced arbitration attorney can help them confront those challenges more effectively.
This guide is not intended to be legal advice and it should not be relied upon as such. Nor is it a “do-it-yourself” guide for persons who represent themselves pro se, whether they are forced to do so by financial circumstances or whether they voluntarily elect to do so.
If you want or require arbitration-related legal advice, or representation by an attorney in an arbitration or in litigation about arbitration, then you should request legal advice from an experienced and skilled attorney or law firm with a solid background in arbitration law.
About the Author
Philip J. Loree Jr. is a partner and founding member of Loree & Loree. He has nearly 30 years of experience handling matters arising under the Federal Arbitration Act and in representing a wide variety of clients in arbitration, litigation, and arbitration-related litigation. He is a former partner of the litigation departments of the New York City firms of Cadwalader, Wickersham & Taft LLP and Rosenman & Colin LLP (now known as Katten Munchin Rosenman LLP).
Loree & Loree represents private and government-owned-or-controlled business organizations, and persons acting in their individual or representative capacities, and often serves as co-counsel, local counsel or legal adviser to other domestic and international law firms requiring assistance or support.
Loree & Loree was recently selected by Expertise.com out of a group of 1,763 persons or firms reviewed as one of Expertise.com’s top 18 “Arbitrators & Mediators” in New York City for 2019, and now for 2020. (See here and here.)
You can contact Phil Loree Jr. at (516) 941-6094 or at PJL1@LoreeLawFirm.com.
ATTORNEY ADVERTISING NOTICE: Prior results do not guarantee a similar outcome.
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Tags: Arbitrable, Arbitration FAQs, Arbitration Law FAQs, Arthur Andersen LLP v. Carlisle, Bell v. Cendant Corp., Businesspersons Arbitration FAQs, Carcich v. Rederi, Compel Arbitration, CPLR Article 75, CPLR Section 7503, Default in Proceeding with, Delegation Agreement, Delegation Clause, Delegation Provision, Ehleiter v. Grapetree Shores, Gateway Disputes, Gateway Questions, Howsam, Kawasaki Heavy Indus. v. Bombardier Recreational, Kindred Nursing Centers v. Clark, Kulukundis, Laches, Louisiana Stadium v. Merrill Lynch, Marie v. Allied Home Mtg., Martin v. Yasuda, Moses H. Cone Memorial Hosp. v. Mercury Constr. Corp., Prejudice, Procedural Arbitrability, Procedural Matters, Section 2, Section 3, Section 4, Stay Litigation, Stay of Litigation, Valid irrevocable enforceable, Volt, Waiver, Waiver of Arbitration
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