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After denying a motion to compel arbitration on the ground that the dispute was outside the scope of the arbitration agreement, a federal district court in Maine ruled that an interlocutory appeal from the order denying arbitration required a stay of further proceedings and thus precluded the parties from conducting discovery during the pendency of the appeal.
In Combined Energies v. CCI, Inc., No. 07-17-B-W, 2007 WL 2028945 (D. Me. July 11, 2007), Combined Energies (CE) sued CCI, alleging that CCI raided its business. In response, CCI filed a motion to compel arbitration pursuant to an arbitration clause in a purchase order agreement between the two companies.
The Court denied the motion to compel arbitration on the ground that the alleged raid on CE’s business was outside the scope of the arbitration agreement. CCI filed a notice of appeal, thus exercising its right of appeal under the Federal Arbitration Act (FAA). After filing the notice, CCI filed a motion to stay further proceedings during the pendency of the appeal.
As the Court noted, there is a circuit split on the question of whether an interlocutory appeal under the FAA requires an automatic stay. According to the majority rule, a good faith appeal from an order denying arbitration requires a stay of further proceedings (e.g., discovery requests).
In keeping with the majority rule, the Court stayed further proceedings pending the appeal, thus precluding CE from conducting further discovery. Specifically, the Court was persuaded by the Seventh Circuit’s reasoning in Bradford-Scott Data Corp., Inc. v. Physician Computer Network, Inc., 128 F.3d 504 (7th Cir. 1997): “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.”
Even in those jurisdictions where a stay is not automatic (e.g., the Ninth Circuit), the party can seek a stay by arguing that the appeal raises a “substantial question.”
For instance, in Winig v. Cingular Wireless LLC, No. C-06-4297 MMC, 2006 WL 3201047 (N.D. Cal. Nov. 6, 2006), the court found that the appeal raised a “substantial question” and that the balance of harms warranted a stay. Specifically, the court found that the absence of a stay could result in irreparable harm to the aggrieved party because “if a party must undergo the expense and delay of a trial before being able to appeal an order denying a motion to compel arbitration, the advantages of arbitration – speed and economy – are lost forever.” Id. at *2.
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