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In dismissing an interlocutory appeal for lack of jurisdiction, the First Circuit Court of Appeals held that a district court did not effectively deny a party's motion to compel arbitration by issuing a written opinion explaining its ruling on the party's earlier motion for summary judgment. As the Court explained, the merits of an arbitrable dispute are generally off limits to a court, but this principle did not apply in this case because the party seeking arbitration requested a ruling on the merits.
In Berenson v. National Financial Services LLC, No. 06-1112, 2007 WL 1228788 (1st Cir. Apr. 27, 2007), the Berensons frequently transferred funds between two accounts using an electronic bill payment service offered by National Financial Services and Fidelity Brokerage Services (collectively, Fidelity).
Since the transfers did not occur instantaneously, there was always a time lag when the funds were in neither account. The Berensons objected that the interest earned during the time lag was not credited to either account. They subsequently brought a putative class action against Fidelity, alleging a violation of the Electronic Funds Transfer Act (EFTA), and several other causes of action.
The customer agreement contained an arbitration clause that covered all disputes except for any claims proceeding as a class action. Accordingly, Fidelity reserved the right to compel arbitration if class certification were denied.
During the hearing on the motion for class certification, the judge questioned whether the Berensons could adequately protect the interests of the class since their son was a partner in the law firm representing the class. In discussing this issue, the judge suggested deferring the motion for class certification and trying the matter as an "exemplar case." Fidelity agreed to this proposal.
Fidelity subsequently filed a motion for summary judgment, arguing that the Berensons' EFTA claim was time-barred. After the court granted partial summary judgment on the EFTA claim, Fidelity filed another motion for summary judgment, arguing that the remaining claims should be dismissed. Ruling from the bench, the judge dismissed the class claims but otherwise denied Fidelity's motion for summary judgment.
With the class claims dismissed, Fidelity filed a motion to compel arbitration, which was granted. However, two months after ordering arbitration, the judge issued a written opinion explaining the ruling on Fidelity's motion for summary judgment. In response, Fidelity filed a motion asking the judge to either vacate the summary judgment ruling or certify it for interlocutory appeal. The judge denied both requests.
Nevertheless, Fidelity filed an interlocutory appeal, arguing that by issuing the written opinion explaining its summary judgment ruling, the district court effectively denied Fidelity's motion to compel arbitration. In making this argument, Fidelity cited the principle that when parties have agreed to submit a dispute to arbitration, the court must not rule on the merits of the underlying claims.
The Court found that this principle, though generally sound, was not applicable in this case because Fidelity agreed to the "exemplar case" proposal. Specifically, the Court explained that the principle cited by Fidelity "was intended as a shield, protecting parties from an overzealous court that did not understand its limited role in deciding a motion to compel arbitration." However, in this case, Fidelity "wield[ed] this principle as a sword, seeking not only to undermine the court's legitimate – indeed necessary – role in explaining the summary judgment ruling Fidelity requested, but also to undo the series of tactical decisions Fidelity made in defending itself against the Berensons' claims."
Since there was no denial of Fidelity's motion to compel arbitration, there was no basis for an interlocutory appeal. Accordingly, the Court dismissed the appeal for lack of jurisdiction.
This case is a manifestation of the principle that courts will not allow parties to an arbitration agreement to seek a "second bite of the apple." Ordinarily, courts cite this principle in rebuking an attempt to relitigate matters that were resolved in arbitration. See, e.g., U.S. ex rel. Watkins v. AIT Worldwide Logistics, Inc., 441 F.Supp.2d 762, 768 (E.D. Va. 2006). In this case, the sequence was reversed because Fidelity wanted to undo an adverse court ruling.
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