Businesses that lose a motion to compel arbitration may be surprised to find that, in some federal courts, they will be required to proceed with litigation in court even while appealing their right to arbitrate the matter. A principal reason to agree to arbitration is to save the time and money spent in litigation. But in these courts, a business could be forced to incur those litigation costs and then find at the end of the concurrent appeal that the matter should never have been in court in the first place. Thousands of dollars and weeks of litigation may be wasted. Not every federal court of appeals has taken this approach, but the ones that have done so cover major business centers, including New York City, San Francisco, and Dallas.
Critical to reaping the benefits of an arbitration agreement is getting a case out of court and into arbitration. That is where the Federal Arbitration Act (FAA) comes in. Recognizing that courts can be hostile to efforts to remove a case from their jurisdiction, Congress enacted the FAA to ensure that arbitration agreements be enforced, AT&T v. Concepcion, 131 S. Ct. 1740, 1748 (2011). The FAA “embodies [a] national policy favoring arbitration,” Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 443 (2006), and its “principal purpose” is to “ensur[e] that private arbitration agreements are enforced according to their terms,” Volt Info. Sciences, Inc. v. Bd of Trustees of Leland Stanford Junior Univ., 489 U.S. 468, 478 (1989). Under the FAA, a party in court may move, pursuant to a written arbitration agreement, to compel arbitration and stay the court proceedings. See 9 U.S.C. § 3. If the court grants the motion, the court proceedings are stayed until the arbitration concludes. Id. On the other hand, if the court denies the motion, the FAA permits the moving party to immediately appeal that decision. Id. § 16(a)(1)(A). The FAA does not address, however, the effect of such an appeal on proceedings in the district court. The federal courts of appeals have divided over the question of whether an appeal of a district court’s decision denying arbitration automatically stays proceedings in the district court. The split turns on the application of Griggs v. Provident Consumer Discount Co., 459 U.S. 56 (1982). In Griggs, the Supreme Court held that “[t]he filing of a notice of an appeal is an event of jurisdictional significance—it confers jurisdiction on the court of appeals and divests the district court of its control over those aspects of the case involved in the appeal.” Id. at 58 (emphasis added). The courts of appeals have disagreed over what is “involved in” an appeal of an order denying arbitration.
The majority of the circuits that have considered the issue have concluded that an appeal of an order denying arbitration acts as an automatic stay of the district court proceedings. See Levin v. Alms & Assocs., Inc., 634 F.3d 260, 264-66 (4th Cir. 2011); Ehleiter v. Grapetree Shores, Inc., 482 F.3d 207, 215 n.6 (3d Cir. 2007); McCauley v. Halliburton Energy Servs., Inc., 413 F.3d 1158, 1160-62 (10th Cir. 2005); Blinco v. Green Tree Servicing, LLC, 366 F.3d 1249, 1251-52 (11th Cir. 2004); Bombadier Corp. v. Nat’l R.R. Passenger Corp., No. 02-7125, 2002 WL 31818924 (D.C. Cir. Dec. 12, 2002); Bradford-Scott Data Corp., Inc. v. Physician Computer Network, Inc., 128 F.3d 504, 505-06 (7th Cir. 1997); cf. Lummus Co. v. Commonwealth Oil Refining Co., 273 F.2d 613 (1st Cir. 1959). The appeal divests the district court of jurisdiction because “[t]he . . . aspect of the case involved in an appeal from an order denying a motion to compel arbitration is whether the case should be litigated at all in the district court.” Blinco, 366 F.3d at 1251 (emphasis added). All six courts have adopted the common-sense reasoning first articulated by the U.S. Court of Appeals for the Seventh Circuit. In Bradford-Scott, the Seventh Circuit explained that “[c]ontinuation of proceedings in the district court largely defeats the point of the appeal”:
Arbitration clauses reflect the parties’ preference for non-judicial dispute resolution, which may be faster and cheaper. These benefits are eroded, and may be lost or even turned into net losses, if it is necessary to proceed in both judicial and arbitral forums, or to do this sequentially. . . . Cases of this kind are therefore poor candidates for exceptions to the principle that a notice of appeal divests the district court of power to proceed with the aspects of the case that have been transferred to the court of appeals.