To stay or not to stay – the arbitration jurisdictional split is on the docket

In federal courts, a party may move to compel arbitration pursuant to the Federal Arbitration Act (Title 9 of the United States Code). If the trial court agrees that an arbitration agreement exists, it must compel arbitration. Such a decision is not immediately appealable. However, if the trial court finds the alleged agreement unenforceable, it may deny the motion to compel arbitration and proceed with the federal action. In the latter circumstances, the unsuccessful moving party may immediately appeal the trial court's decision under Section 16 of the Federal Arbitration Act.

What happens next is unsettled, for now.

On Dec. 9, 2022, the Supreme Court granted certiorari in response to a petition filed by Coinbase, Inc, one of the largest cryptocurrency exchanges in the United States. The joint petition seeks to overturn the Ninth Circuit's decisions in two separate matters denying stays of district court proceedings pending appeals of orders denying motions to compel arbitration. The Court will resolve the following question: "Does a non-frivolous appeal of the denial of a motion to compel arbitration oust a district court's jurisdiction to proceed with litigation pending appeal, as the Third, Fourth, Seventh, Eleventh and D.C. Circuits have held, or does the district court retain discretion to proceed with litigation while the appeal is pending, as the Second, Fifth, and Ninth Circuits have held?"

The existing circuit split hinges largely upon the application of Griggs v. Provident Consumer Discount Co., 459 U.S. 56 (1982) (per curiam). 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."

Under the minority view, trial courts retain the power to determine, on a case-by-case basis, whether proceedings should be stayed until the appeal regarding the arbitration has been resolved. In the 1990 decision Britton v. Co-op Banking Group, 916 F.2d 1405 (9th Cir. 1990), the Ninth Circuit first stated two reasons that an automatic stay should not lie in such circumstances. First, arbitrability, as opposed to the merits of the underlying case, is the only substantive issue presented on appeal. Second, a defendant could unscrupulously delay trial by bringing frivolous appeals. Thus, the court reasoned, whether to stay proceedings is a proper subject for the exercise of discretion by the trial court.

The majority, on the other hand, states that the district court is divested of jurisdiction pending a non-frivolous appeal from a denial of a motion to compel arbitration. The Seventh Circuit, in Bradford-Scott Data Corp., Inc. v. Physician Computer Network, Inc., 128 F.3d 504 (7th Cir. 1997), addressed the two justifications raised by the Britton Court. According to Bradford-Scott, whether the litigation may go forward in the district court is precisely what the court of appeals must decide, rather than an issue ancillary to the underlying case. And, while frivolous appeals are a serious concern, an appellee may ask the court of appeals to dismiss the appeal as frivolous or to affirm summarily. Therefore, the court reasoned, a stay is mandatory until the court of appeals renders a decision, unless the district court or the appellate court declares that the appeal is frivolous. The court also explained that the presumed cost savings of arbitration may be eroded or even reversed if trial court proceedings are not stayed pending an ultimately successful appeal.

Federal courts have operated under fundamentally divergent understandings of what precisely is at issue in an appeal from an order denying a motion to compel arbitration - with both the majority and minority understandings presenting practical predicaments. In the situation where the appeal is unsuccessful, any district court proceedings are months behind where they could have been if the matter had proceeded concurrently. The majority's broad application of Griggs is attractive in that it necessarily avoids potentially unnecessary and contradictory litigation during the appeal. However, the minority's narrow application of Griggs preserves the court's discretion to make a decision that may preserve the parties' resources.

Coinbase sides with the majority view, lamenting in its petition that it has been forced to answer two complaints that seek to proceed as class actions and face imminent discovery. A respondent argued in opposition that, among other things, any individual discovery completed in the district court while the appeal is pending would apply to any arbitration, should the Ninth Circuit reverse the district court's decision on arbitrability. Whatever the High Court decides, whether adopting the majority or minority view or fashioning its own resolution, the thirty-year circuit split will soon be over.