July 05, 2023

The High Court Weighs in on Litigation Stays When the Merits of Arbitration Are on Appeal

By Alexander Safyan

On June 23, the U.S. Supreme Court issued a ruling likely to have significant benefits for companies attempting to impose arbitration in federal class action, employment, and other high-stakes litigation. Resolving a longstanding circuit split, the high court in Coinbase, Inc. v. Bielski held that cases are automatically stayed (or halted) during an appeal of a denied motion to compel arbitration. The practical effect of the outcome in Coinbase is that plaintiffs in certain actions where arbitrability is a question will not be able to use discovery or further litigation as a cudgel to force a defendant to settle.

In the wake of the Supreme Court’s decision, if a district court denies a defendant’s attempt to move a legal dispute into arbitration and the defendant appeals, the lower court must stay all further proceedings (such as discovery) while the appeal is pending. This was not always the case.

Prior to Coinbase, certain district courts—particularly those in the Ninth Circuit—used their discretion to refuse to stay pre-trial and trial proceedings while defendants appealed denied bids to compel arbitration. Consequently, plaintiffs would often attempt to apply pressure on defendants by driving up the costs of litigation, through discovery, motion practice and other tactics, before a decision on whether the case belonged in court or arbitration was even made. The Coinbase ruling will allow defendants to put a stop to such maneuvers and largely keep plaintiffs at bay while appeals play out, which in some cases could take a year or more.

A Deeper Dive

Under the Federal Arbitration Act, when a federal district court denies a motion to compel arbitration, the losing party has a statutory right to appeal. However, the FAA is silent as to whether such an appeal stays pre-trial and trial proceedings while the appeal is ongoing. For years, there had been a circuit split in which most circuits around the country recognized an automatic stay in such situations while other circuits, including the Ninth, did not. Courts in the Ninth Circuit, for example, used a discretionary standard to determine whether a stay was appropriate in a particular case (considering factors such as whether the defendant could show it was likely to succeed on the merits of the appeal, whether the defendant would suffer irreparable harm absent a stay, and whether a stay would injure other parties to the proceedings). In practice, courts in the Ninth Circuit—where many class action and employment cases get filed—often denied stays, allowing discovery and other pre-trial proceedings to continue while the defendant’s appeal was pending.

The Supreme Court in Coinbase recognized that if pre-trial and even trial proceedings were allowed to proceed while an appeal on arbitrability was pending, 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.” Additionally, absent a stay, parties “could be forced to settle to avoid the district court proceedings (including discovery and trial) that they contracted to avoid through arbitration.” The high court observed that this “potential for coercion is especially pronounced in class actions, where the possibility of colossal liability can lead to … blackmail settlements.”

Thus, the Supreme Court snuffed out exactly the types of pressure tactics plaintiffs like to use in large cases that involve an arbitrability dispute. The ruling in Coinbase takes the decision of whether to stay a case during a negative arbitration order appeal out of the hands of individual judges and imposes a uniform requirement across all federal district courts nationwide.

A Takeaway for Businesses

The Coinbase ruling is “business-friendly” to the extent it gives companies that rely on arbitration provisions in contracts with their customers or employees another tool to use in litigation to push back against overzealous plaintiffs. It is also a useful reminder for businesses that do not currently have arbitration provisions in their contracts to consider adding them. While there are certainly pros and cons to arbitration in different contexts, companies would be wise to evaluate their contractual relationships and determine whether an arbitration provision makes sense for their businesses.

This blog post is not offered, and should not be relied on, as legal advice. You should consult an attorney for advice in specific situations.