Employers rejoice as U.S. Supreme Court expands its pro-arbitration precedents

The U.S. Supreme Court recently issued a decision that is a major victory for businesses and employers moving to compel arbitration under the Federal Arbitration Act (FAA), 9 U.S.C. § 16(a).

Appealing an order denying arbitration stays district court proceedings

The FAA expressly permits an interlocutory appeal from the denial of a motion to compel arbitration. However, it is silent as to whether a district court must grant a stay once an appeal is filed or whether it may proceed with the litigation. In a 5-4 decision issued on June 23, 2023, the Supreme Court in Coinbase, Inc. v. Bielski, 599 U.S. ___ (2023), resolved a circuit split by holding that the appeal of an order denying a motion to compel arbitration automatically stays district court proceedings pending resolution of the appeal.

Background

Previously, courts in the Second, Fifth and Ninth Circuits all refused to grant such automatic stays. Instead, deciding on a case-by-case basis, these courts held that district court proceedings could proceed while an interlocutory appeal over arbitrability was ongoing unless the district court, in its discretion, granted a stay. The test for discretionary stays considers four factors, including: 1) the likelihood of success on the merits; 2) the prospect of irreparable injury absent a stay; 3) the balance of the equities; and 4) the public interest. Nken v. Holder, 556 U.S. 418, 433 (2009).

Meanwhile, courts in the Third, Fourth, Seventh, Tenth, Eleventh, and D.C. Circuits held that district courts must stay the pretrial and trial proceedings while the appeal over arbitrability is pending.

Supreme Court decision

In Griggs v. Provident Consumer Discount Co., 459 U.S. 56 (1982), the Supreme Court held that an appeal typically “divests the district court of its control over those aspects of the case involved in the appeal.” Griggs, 459 U.S. at 58. When the issue to be resolved on appeal is whether the case belongs in the court or in arbitration, “the entire case is essentially ‘involved in the appeal.’” Coinbase, 599 U.S. ___ (2023) (quoting Griggs).

Relying on the “Griggs principle,” pointing to “common sense” logic, and recognizing the many benefits of arbitration, the Supreme Court in Coinbase agreed with the majority of the federal circuit courts and held that district courts must stay the proceedings when a party appeals the denial of a motion to compel arbitration. As the majority opinion stressed, “[i]f the district court could move forward with pre-trial and trial proceedings while the appeal on arbitrability was ongoing, then many of the asserted benefits of arbitration (efficiency, less expense, less intrusive discovery, and the like) would be irretrievably lost – even if the court of appeals later concluded that the case actually had belonged in arbitration all along.”

The Court further highlighted that “[a]bsent a stay, parties also could be forced to settle to avoid the district court proceedings (including discovery and trial) that they contracted to avoid through arbitration. That potential for coercion is especially pronounced in class actions, where the possibility of colossal liability can lead to what Judge [Henry] Friendly called ‘blackmail settlements.’”

Finally, the Court noted that “[a] right to interlocutory appeal of the arbitrability issue without an automatic stay of the district court proceedings is therefore like a lock without a key, a bat without a ball, a computer without a keyboard – in other words, not especially sensible.”

What this means for employers

The Coinbase decision reinforces the Supreme Court’s support and protection of contractual arbitration as a favored means of dispute resolution. As the Court recognized, there are many benefits of arbitration, including efficiency, cost-savings, and conservation of judicial resources. And, while Coinbase involves consumer arbitration agreements, the decision is also significant for companies that utilize arbitration agreements to resolve employment-related disputes, especially class actions.

Moving forward, an appeal of the denial of a motion to compel arbitration will keep the trial case stayed – including any impending discovery deadlines – and will help parties avoid unnecessary litigation in district court if the appeals court ultimately decides that arbitration is appropriate. This is a noteworthy change for litigants in the Second, Fifth and Ninth Circuits and provides a key protection to arbitration. Without a mandatory stay, any appeal would be moot if the parties continued to litigate. Now, however, employers faced with an arbitration enforcement challenge in court can rest assured that they will not be forced to engage in active, costly litigation pending appeal.

In sum, this decision is another important pro-arbitration precedent, and an overall win for employer defendants seeking to compel arbitration.