Every financial institution dreads the discovery by a class action lawyer of a technical, albeit harmless, glitch in a widely used consumer contract that triggers exposure under a federal or state statute. The “express consent” requirement for auto-dialed calls under the infamous Telephone Consumer Protection Act (“TCPA”) provides just one example. Correspondingly, the class action attorney whose portal is crossed by a prospective client with such a contract has immediate visions of the Mother Lode. Under many of these draconian statutes, like the TCPA, liability is virtually automatic and the potential recovery exponentially greater than any conceivable harm. The class action is filed before anyone has time to blink or, more importantly, open the customer’s file.
Alas, once that customer’s file is opened, the class counsel’s glee turns to dread because the consumer contract contains an arbitration clause. In arbitration, class counsel confronts the task of actually learning something about the client’s real complaint and presenting it before a neutral. Dreams of early retirement following a large class fee award evaporate. Attorneys for the financial institution defendant immediately file a motion to compel arbitration under the Federal Arbitration Act (“FAA”). Assuming the court disregards class counsel’s checklist of standard attacks on the enforceability of such a clause, the case is ordered to arbitration on an individual basis. One would think the next step is to commence the arbitration, but not so fast! Keep in mind that class counsel is not interested in a resolution of the individual claim and would rather take a long shot by appealing the order compelling arbitration.
But an order to compel arbitration can’t be appealed, can it? The answer is not straightforward, either in the federal or California appellate systems.
Appeals in the Federal Court System. Section 16 of the FAA governs appeals of arbitration-related orders in federal courts. 9 U.S.C. § 16. Section 16(b)(1) provides that there shall be no appeal from an order under Section 3 of the FAA granting a stay of an action pending arbitration. So, in the typical case where the defendant responds to an action pending in federal court by filing a motion to compel arbitration, the granting of the order will stay the entire case and there can be no immediate appeal. (We will put aside the separate question of the appealability of separate petitions to compel arbitration under Section 4 of the FAA, which must have an independent basis of jurisdiction in federal courts and are subject to ordinary limitations on interlocutory review under 28 U.S.C. § 1292(b)).
Yet, the key to the non-appealability of an order compelling arbitration under Section 3 of the FAA is the corresponding grant of a stay. Where, instead of staying the underlying class action pending arbitration, the court dismisses the entire action, the order is immediately appealable. Under Section 16(a)(1)(3) of the FAA, it is a “final decision with respect to an arbitration.” Cf. Green Tree Financial Corporation-Alabama v. Randolph, 531 U.S. 79, 85 (2000). Whether a district court stays the rest of the case or dismisses it entirely determines whether the order compelling arbitration is appealable. So, are there any guidelines for a federal district court in deciding whether to stay or dismiss? Or is it purely in the judge’s discretion?
Katz v. Cellco Partnership, 794 F.3d 341 (2d Cir. 2015) recently spoke to the issue. According to the Second Circuit, Section 3 of the FAA mandates that an order compelling arbitration be accompanied by a stay of the underlying action. Put another way, the district court has no discretion to dismiss the action in order to reduce its docket. The court reasoned that such a dismissal would effectively convert “an otherwise-unappealable interlocutory stay order” into an appealable one, which would be inconsistent with the FAA’s mandate to move into arbitration as quickly as possible. Id. at 346. The Second Circuit found support from decisions in the Seventh and Tenth Circuits (for example, Lloyd v. Hovensa, LLC, 369 F.3d 263, 275 (3d Cir. 2004)), while noticing that the Eleventh, Ninth, Fifth and First Circuits had ruled to the contrary (for example, Lambert v. Austin Industries, 544 F.3d 1192, 1199-1200 (11th Cir. 2008)).
Whether an order compelling arbitration is ripe for appeal will depend on at least two factors: first, in which circuit the case is venued; and second, if that circuit permits dismissal, whether the district court can be convinced to enter one. Given the circuit split, this issue appears ripe for decision by the United States Supreme Court.
Appeals in California State Court System. It should come as no surprise that California has its own novel—some would say peculiar—approach to the appealability of arbitration orders. The general rule sounds familiar enough: a party may appeal only from a final judgment. Cal. Civ. Proc. Code § 904.1. Another more specific statutory provision makes it clear that an order denying arbitration meets the test of finality and, therefore, is appealable. Cal. Civ. Proc. Code § 1294(a). Finally, a simple order compelling arbitration ordinarily is not appealable because it is interlocutory. Zembsch v. Super. Ct., 146 Cal. App. 4th 153, 160 (2006). The uncertainty emanates from the word “ordinary,” which in the class action context creates an exception which largely swallows the rule.
Unlike the federal courts, the California appellate courts have embraced the so-called “death knell” exception to the rule against interlocutory appeals. Where it applies, the death knell doctrine allows immediate appeals from “orders that effectively terminate class claims but permit individual claims to continue.” In re Baycol Cases I & II, 51 Cal. 4th 751, 754 (2011). An appeal is allowed where “the plaintiff would have no financial incentive to pursue his or her case to final judgment just to preserve the ability to appeal the denial of the plaintiff’s class certification motion.” Munoz v. Chipotle Mexican Grill, Inc., 238 Cal. App. 4th 291, 308 (2015). Although the death knell doctrine traditionally applied to orders denying certification, its rationale has been cited in support of hearing appeals from the granting of motions to compel arbitration by California trial courts. Franco v. Athens Disposal Co., Inc., 171 Cal. App. 4th 1277, 1288 (2009), abrogated on other grounds in Iskanian v. CLS Transp. L.A., LLC, 59 Cal. 4th 348, 366); but see Nelsen v. Legacy Partners Residential, Inc., 207 Cal. App. 4th 1115, 1121-23 (2012).
And if that were not a big enough hole in the “finality” requirement for appealability, California courts have allowed class counsel an entirely different mechanism to pursue interlocutory appeals from orders compelling arbitration: the writ of mandate. While writs of mandate are rare to non-existent in federal appellate practice, they are commonplace in California. “California courts have held that writ review of orders compelling arbitration is proper in at least two circumstances: (1) if the matters ordered arbitrated fall clearly outside the scope of the arbitration agreement or (2) if the arbitration would appear to be unduly time consuming or expensive.” Zembsch, 146 Cal. App. 4th at 160. In fact, the California appellate courts even have the “power to treat [a] purported appeal as a petition for writ of mandate, [although it] should not exercise that power except under unusual circumstances.” Olson v. Cory, 35 Cal. 3d 390, 401 (1983).
Given California’s historic antipathy toward arbitration clauses with class action waivers, it is not surprising that, as often as not, orders compelling arbitration are reviewed, either on appeal under the death knell doctrine or through writ of mandate. The resulting delay and expense from such interlocutory review provide one more reason why defendants in class actions should seek removal to federal court wherever possible.
For more information on the appeals from successful motions to compel arbitration, please contact Donald J. Querio at firstname.lastname@example.org or Erik Kemp at email@example.com.