Written By: Scott A. Fenton
Lane, Alton & Horst, LLC
In a construction defect case we are currently defending in the United States District Court for the Southern District of Ohio, we moved to compel arbitration pursuant to Federal Arbitration Act (FAA), 9 U.S.C. § 1, et seq. The purchase agreement for the construction and sale of a single family home contained a provision requiring that all disputes be decided by arbitration conducted by the American Arbitration Association. The magistrate judge assigned to the case was concerned that the arbitration provision itself, as opposed to the underlying purchase agreement, may be unconscionable because of a lack of mutuality of obligation. The plaintiff purchaser had not argued a lack of mutuality as a defense to the arbitration provision. The specific point of concern was that the arbitration provision contained a judicial “carve-out” allowing the defendant seller, but not the plaintiff, to file a foreclosure action in civil court or to seek further judicial relief to protect the collateral in the event of default. Because of the lack of mutuality in the carve-out, the magistrate judge denied our motion to compel arbitration “without prejudice” and invited us to refile our motion with briefing on the mutuality issue.
We were initially amenable to refiling our motion with authority showing that mutuality, although required in the underlying contract, was not required in the arbitration provision itself. We were familiar with another recent Southern District of Ohio decision in which the court also denied a motion to compel arbitration “without prejudice” and then later granted a refiled motion to compel after further briefing. See e.g., Hagy v. Demers & Adams, LLC, 2:11-cv-530, 2012 U.S. Dist. LEXIS 12699 (SDOH 2012). This approach, however, seemed to conflict with Section 16 of the FAA which governs the right to appeal decisions denying a motion to compel arbitration and stay proceedings.
In Snowden v. Checkpoint Check Cashing, 290 F.3d 631 (4th Cir. 2002), cert denied, 537 U.S. 1087 (2002), an appeal was filed after the district court denied a motion to compel arbitration and stay proceedings “without prejudice” and "stated its intention to revisit the ruling at a later time." Id. at 635. The Fourth Circuit noted that this "triggered alarm bells of a premature appeal," but ultimately concluded that it possessed jurisdiction because "the FAA expressly permits an immediate appellate challenge to a district court's denial of a motion to compel arbitration and stay proceedings." Id. The court found that other circuits had reached the same conclusion. See, e.g., Sandvik AB v. Advent Int'l Corp., 220 F.3d 99, 103-04 (3d Cir. 2000) (finding jurisdiction under section 16 to review the denial of a motion to compel arbitration where the district court indicated that it could not order arbitration until it determined the validity of the underlying contract); Koveleskie v. SBC Capital Mkts., Inc., 167 F.3d 361, 363 (7th Cir. 1999) (holding that, despite the district court's indication "that discovery was needed before a decision could be reached on the arbitration issue," there was no doubt that the order denied the motion to compel arbitration, and was thus appealable).
The Second Circuit’s decision in Cotton v. Slone, 4 F.3d 176 (2d Cir. 1993) illustrates the danger of not immediately appealing an order denying a motion to compel arbitration, even when such denial is made “without prejudice.” In Cotton, after the district court denied a motion to compel arbitration and stay proceedings, the defendant moved for certification of an interlocutory appeal under 28 U.S.C. § 1292(b). The district court denied the motion to certify, and the defendant thereafter answered the complaint and pleaded arbitrability as a defense. The defendant then proceeded to actively participate in three-years of litigation and filed an appeal at the end of the case asserting as error the trial court’s denial of the motion to compel arbitration. Id. at 178. The Second Circuit held that the defendant waived the right to arbitrate by actively participating in the litigation without having sought immediate appellate review available under the FAA. Id. at 179-80. Such review, while not available as of right under 28 U.S.C. § 1292(b), was available as of right under section 16(a) of the FAA. Section 16(a) of the FAA provides that an interlocutory appeal may be taken from an order that denies a motion either to compel arbitration or for a stay pending arbitration, and explicitly disallows an appeal as of right from an interlocutory order that grants a stay. 9 U.S.C. §§ 16(a)(1) and (b). The Court of Appeals explained that Section 16(a) is designed both "to streamline the appellate aspect of the litigation process so that parties may realize their arbitration rights at the earliest possible moment," and to further the liberal federal policy favoring arbitration by authorizing interlocutory appeals only from orders denying arbitration. Cotton, 4 F.3d at 180. Applying section 16(a) to the facts before it, the Cotton Court concluded that "the aims of section 16(a) would be defeated if a party could reserve its right to appeal an interlocutory order denying arbitration, allow the substantive lawsuit to run its course (which could take years), and then, if dissatisfied with the result, seek to enforce the right to arbitration on appeal from the final judgment." Id.
However, a somewhat middle approach is illustrated by Cont'l Cas. Co. v. Staffing Concepts, Inc., 538 F.3d 577, 580 (7th Cir. Ill. 2008). In this case, the Seventh Circuit affirmed the district court which neither granted nor denied a motion to compel arbitration. Instead, the district court issued an order striking the motion, without prejudice and inviting the defendant to later refile the same motion. Id. The Court of Appeals held that this approach did not trigger an immediate appeal under 9 U.S.C. §16 because the trial court’s order did not deny a petition requesting arbitration or for a stay pending the arbitration proeedings. Id. The practial effect, however, is the same as denying the motion without prejudice.
After we realized the danger of not filing an immediate appeal, we decided that a more efficient course was to first approach opposing counsel with the authority demonstrating that perfect mutuality was not required for an arbitration provision. Because the plaintiff also wanted to avoid an unnecessary appeal, we together approached the magistrate judge and convinced him to withdraw his order denying our motion to compel, without prejudice, and allow the additional briefing on the issue of mutuality. The end result was that the magistrate judge agreed to this approach and eventually granted our motion to compel arbitration and stay the proceedings pending the outcome of arbitration.
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