Last week, the U.S. Supreme Court held in a 5-4 decision that an appeal of the denial of a motion to compel arbitration automatically stays lower court proceedings pending the outcome of the appeal.  The decision in Coinbase, Inc. v. Bielski resolves a split between the Third, Fourth, Seventh, Tenth, Eleventh, and D.C. Circuits, which hold that a district court may not proceed with litigation pending appeal, and the Second, Fifth, and Ninth Circuits, which hold that a stay is subject to the lower court’s discretion.

In this case, cryptocurrency investors filed separate putative class actions against Coinbase in the Northern District of California alleging violations of California consumer protection laws and federal regulations.  In each case, the district court denied a motion to compel arbitration filed by Coinbase, which then appealed to the Ninth Circuit and asked the district court to stay further district court proceedings pending appeal.  In seeking a stay, Coinbase relied upon Section 16(a) of the Federal Arbitration Act (FAA), which authorizes an interlocutory appeal from the denial of a motion to compel arbitration, and on Griggs v. Provident Disc. Co., in which the Supreme Court ruled that an appeal “divests the district court of its control over those aspects of the case involved in the appeal.” 

Nevertheless, the district court in each case refused to issue a stay.  In one case, the court denied a stay because “Coinbase is a large company,” while “[plaintiff] is a single individual” and “would suffer if forced to wait for a remedy.”  In the other case, a stay was denied because there was another corporate defendant in the case which was not subject to arbitration.  Both courts relied upon earlier Ninth Circuit precedent which, notwithstanding Griggs, held that a district court’s order denying a motion to compel arbitration does not automatically result in a mandatory stay of proceedings pending appeal, and that a stay pending appeal is a matter of judicial discretion, not of right.  In each case Coinbase renewed its stay motion with the Ninth Circuit, which summarily denied a stay.  Coinbase then filed a petition for a writ of certiorari with the Supreme Court, which was granted.  Today’s ruling reversed the Ninth Circuit.

Writing for the majority, Justice Kavanaugh concluded that “[t]he Griggs principle resolves this case” because “‘it makes no sense for trial to go forward while the court of appeals cogitates on whether there should be one.’”  Thus, “Griggs dictates that the district court must stay its proceedings while the interlocutory appeal on arbitrability is ongoing.”  Indeed, “[a]bsent an automatic stay of district court proceedings, Congress’ decision in § 16(a) to afford a right to an interlocutory appeal would be largely nullified.”  The Court further emphasized:

If 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.  Absent 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 Friendly called “blackmail settlements” …. 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.

Moreover, the Court explained, from the Judiciary’s “institutional perspective,”  allowing a case to proceed simultaneously in the district court and the court of appeals “creates the possibility that the district court will waste scarce judicial resources— which could be devoted to other pressing criminal or civil matters—on a dispute that will ultimately head to arbitration in any event.”  Such as scenario represents the “‘worst possible outcome’ for parties and the courts: litigating a dispute in the district court only for the court of appeals to ‘reverse and order the dispute arbitrated.’ The Griggs rule avoids that detrimental result.”

According to the Court, when Congress wants an interlocutory appeal to automatically stay the district court proceedings, it “need not say anything about a stay” because “the background Griggs principle already requires an automatic stay of district court proceedings that relate to any aspect of the case involved in the appeal.”  By contrast, “when Congress wants to authorize an interlocutory appeal, but not to automatically stay district court proceedings pending that appeal, Congress typically says so.”  The Court strongly suggested, however, that courts of appeal should “proceed with appropriate expedition” when considering appeals from the denial of a motion to compel arbitration.

The Court’s decision provides welcome guidance to arbitration practitioners because it provides a uniform rule for interlocutory appeals under Section 16(a) of the FAA.  Companies employ arbitration agreements to promote efficient and cost effective solutions when disputes arise with their customers.  Under the Ninth Circuit’s approach which has now been overruled by the Supreme Court, they could be forced to litigate massively expensive cases, including putative class actions, while attempting to appeal the threshold issue of arbitrability. 

One question that appears to remain open is whether the Court’s opinion affects state court practice.  As we observed when the Court granted certiorari in this case, many if not most states have their own statutes or decisional law concerning appeals from the denial of a motion to compel arbitration and the stay of trial court proceedings pending appeal.  There is a question whether procedural aspects of the FAA preempt analogous state court rules.  Hopefully, state court judges will find the logic of the Court’s opinion to be persuasive even if not binding.

[View source.]