The Supreme Court Contemplates Ending the Automatic Stay During an Arbitration Appeal

In December, this blog noted that the Supreme Court, in Coinbase, Inc. v. Bielski,  would consider whether federal law requires courts to automatically stay litigation during an arbitration appeal.  The Supreme Court heard oral argument on the issue yesterday and several justices expressed a willingness to potentially end the automatic stay during an arbitration appeal.  Such a decision would likely increase the cost of defending class-action lawsuits in most jurisdictions.

Arbitration generally provides a less costly and more efficient procedure for resolving disputes than litigation.  Arbitration clauses, a staple of business contracts, compel would-be litigants to resolve their disputes through arbitration instead of the courts.  The arbitration clause offers a particularly effective defensive tool in class action litigation.  A defendant may ask the court to stay the class action and move to compel arbitration instead.  If the court denies the motion to compel arbitration, the Federal Arbitration Act (“FAA”) entitles the defendant to immediately appeal the decision.  The question before the Supreme Court is whether the FAA also requires the court to automatically stay the litigation while the arbitration appeal proceeds.

Based on oral argument, the Supreme Court justices appear split on the interpretation of the FAA.  Chief Justice John Roberts articulated some skepticism that the FAA required an automatic stay.  In his questioning, he suggested that the FAA already provided a “huge benefit” by allowing the immediate appeal of a denial of arbitration.  He expressed doubt about whether the FAA also mandated an automatic stay.  Justice Elena Kagan appeared to agree and stated to the defendants, “You know you’ve gotten a pretty valuable thing – you just haven’t gotten the whole ball of wax.”

On the other hand, Justices Kavanaugh and Gorsuch indicated the automatic stay was an integral feature of the law because it furthered principles of fairness and judicial efficiency.  Without the automatic stay, Justice Kavanaugh reasoned that defendants could be coerced into unfavorable settlements to avoid the expense and uncertainty of two parallel proceedings—one contesting the underlying litigation and another appealing the denial of arbitration.  Justice Gorsuch observed that the automatic stay could prevent a case from being heard in two courts simultaneously, which also helps to ensure courts do not reach inconsistent decisions.

While it is difficult to predict how the majority of justices will interpret the FAA, it is clear that the Supreme Court’s decision will have nationwide implications on the cost of defending class actions.