Opinion
January 1, 1989
APPEALS FROM ARBITRABILITY DETERMINATIONS UNDER THE NEW § 15 OF THE U.S. ARBITRATION ACT by DAVID D. SIEGEL
Copyright (c) 1989 David D. Siegel.
The statute on which this article is based was part of the Judicial Improvements and Access to Justice Act, which was the subject of an earlier article in 123 F.R.D. 399 and a series of commentaries by Professor Siegel in 28 U.S.C.A. on the various statutes affected. The extensive Commentaries on Rule 4 of the Federal Rules of Civil Procedure, another part of the 28 U.S.C.A. set, are also the work of Professor Siegel, who is the editor of the New York State Law Digest and the author of New York Practice in the West Hornbook Series and the Conflict of Laws treatise in the West Nutshell Series.
Earlier this year, in the March advance sheet of the FRD, we noted a number of "Changes in Federal Jurisdiction and Practice Under the New Judicial Improvements and Access to Justice Act". The act became law on November 19, 1988, and one of its provisions added a § 15 to the U.S. Arbitration Act, which is Title 9 of the U.S. Code. We mentioned § 15 only briefly in the earlier article, noting that we would return to it at a later time. We return to it now.
Section 15 is a pro-arbitration statute designed to prevent the appellate aspect of the litigation process from impeding the expeditious disposition of an arbitration. Its inherent acknowledgment is that arbitration is a form of dispute resolution designed to save the parties time, money, and effort by substituting for the litigation process the advantages of speed, simplicity, and economy associated with arbitration, and that judicial involvement in the process should be kept to the barest minimum to avoid undermining those goals.
There were in fact two § 15's added to Title 9 in 1988, the other one dealing with attempted use of the Act of State doctrine to bar arbitration. The duplication was inadvertent and both are apparently good law. The only one we deal with here is the § 15 added by the Judicial Improvements Act.
Of course, if a dispute arises about whether the controversy is arbitrable, it is necessary to have a court determine the issue. The very power of the arbitrators to arbitrate depends on that. Hence Title 9 of the U.S. Code, the arbitration act, permits the arbitrability issue to be litigated promptly in a U.S. district court. The mission of § 15, however, is to assure that if the district court upholds arbitration, the court system's interference with the arbitral process will terminate then and there, leaving the arbitration free to go forward. To accomplish this, § 15 provides that there may be no appeal from the pro-arbitration determination until after the arbitration has gone forward to a final award.
The purpose of this article is to review § 15 and its background, to integrate in the discussion a U.S. Supreme Court case, Gulfstream Aerospace Corp. v. Mayacamas Corp., 485 U.S. 271, 108 S.Ct. 1133, 99 L.Ed.2d 296 (March 22, 1988), which relates to the same issue, and to note the failure of § 15 even to address one of the most important of the situations in which the appellate process has been impeding arbitration: the independent proceeding brought in court to test arbitrability.
The new § 15 reads as follows:
§ 15. Appeals
(a) An appeal may be taken from —
(1) an order —
(A) refusing a stay of any action under section 3 of this title,
(B) denying a petition under section 4 of this title to order arbitration to proceed,
(C) denying an application under section 206 of this title to compel arbitration,
(D) confirming or denying confirmation of an award or partial award, or
(E) modifying, correcting, or vacating an award;
(2) an interlocutory order granting, continuing, or modifying an injunction against an arbitration that is subject to this title; or
(3) a final decision with respect to an arbitration that is subject to this title.
(b) Except as otherwise provided in section 1292(b) of title 28, an appeal may not be taken from an interlocutory order —
(1) granting a stay of any action under section 3 of this title;
(2) directing arbitration to proceed under section 4 of this title;
(3) compelling arbitration under section 206 of this title; or
(4) refusing to enjoin an arbitration that is subject to this title.
There is an appeals provision in the Uniform Arbitration Act (see Unif.Arb. Act § 19), but it offered little help in fashioning § 15 of the U.S. Arbitration Act. Some of the complications of federal appellate jurisdiction, to be discussed in this article, show why.
Subdivision (a) of § 15 enumerates the situations in which an immediate appeal from an arbitrability determination is allowed. It applies for the most part to determinations against arbitration. Subdivision (b) enumerates the situations in which an appeal is not to be allowed, and all of them are decisions in favor of arbitration. In trumpeting its pro-arbitration view, however, note that subdivision (b) addresses only an "interlocutory" order. Hence a pro-arbitration decision that amounts to a final disposition in its particular judicial context remains appealable, very much at odds with what § 15 is designed to accomplish. In this regard, § 15 has failed to carry out what many thought would be one of its principal missions. This requires some background.
The question of whether a dispute is arbitrable can arise as an incident to a pending action or as an entirely independent proceeding. In the first situation, sometimes referred to as an "embedded" proceeding to denote that the arbitrability issue has been raised in some broader context — usually an ordinary plenary action on the underlying substantive dispute brought in disregard of the arbitration commitment — the proponents of arbitration have had their way in § 15. The statute appears to cover all of the various possible "embedded" situations and allows an immediate appeal only from decisions against arbitration. It bars an immediate appeal when the decision is in favor of arbitration, thus letting the arbitration go forward unobstructed. Of course, the party aggrieved by the decision to let the arbitration go forward is not altogether barred from appellate review of the issue. He must merely await the outcome of the arbitration on the merits, and, if the award goes against him, raise the arbitrability point on an application to vacate or modify the award or in opposition to the other side's application to confirm the award.
Hence the pro-arbitration aims of the statute's advocates have been achieved in the "embedded" proceeding. They have not been, however, in the independent proceeding. There, a decision in favor of arbitration can be appealed forthwith, tying the parties down in continued litigation of the issue and swelling the cost — in time, effort, and money — of resolving the dispute, which is wholly at war with the purpose of arbitration and wholly inconsistent with what the sponsors of § 15 wanted to accomplish.
The misfortune is that Congress may have been quite receptive to including in § 15 a provision curing the appellate-delay problem in the independent as well as in the embedded proceeding. In the Judicial Improvements Act, Congress's attention was focused on federal jurisdiction and practice more intensely than it had been for a long time. The failure to take advantage of that attention may well be a missed boat, and the boat may not come back to port for a while.
However that be, § 15 effectively bars an appeal from holding up arbitration only when the matter has been determined in an embedded proceeding. When the proceeding is an independent one, a decision in favor of arbitration may still be appealed forthwith. Subdivision (a)(3) of § 15 seems to assure this, although it is not altogether clear that it intended to. It makes "a final decision with respect to an arbitration" appealable, and while it may have meant to assure only that a final award be appealable, its impact seems to be that any determination "with respect to an arbitration" is appealable, including, as long as it is a "final" determination in its own judicial setting, a mere determination that the dispute is subject to arbitration.
To understand § 15 in all its parts — and subdivision (a)(3) on appealing a "final" decision is only one of its parts — it is necessary to take a broad look at the law of appellate jurisdiction in federal practice.
Before § 15 was adopted in 1988, the appeal of a determination about arbitrability was governed by the same statutes that govern appeals in general in federal practice: §§ 1291 and 1292(a) of Title 28 of the U.S. Code. Section 1291 allows appeals from all final decisions. Section 1292(a), on the other hand, in authorizing an appeal from a nonfinal (or "interlocutory") decision, authorizes it in only a precious few instances, and a decision about whether a dispute is arbitrable is not among them, at least not explicitly. When, for example, a decision about the arbitrability of an issue arises in an ordinary action in a U.S. district court, such as on a motion by one of the parties to stay the action and compel the arbitration of its issues, the decision in that context is merely interlocutory: the action, whichever way the court may rule on the motion, is not finally determined and the decision therefore qualifies as just an intermediate one. As such, it would not be appealable unless it fell under one of the exceptions listed in § 1292(a). Since it does not fall under any of those exceptions, the barring of an appeal from the arbitrability ruling would advance the aims of arbitration only if the ruling was in favor of arbitration. No appeal could then stand in the way of the arbitration. But it would frustrate those aims if the decision was against arbitration because the whole substantive dispute would then have to go through ordinary court litigation, which could take years, only to have whatever judgment it produces overturned on appeal if and when, at last, a court of appeals were to address the arbitrability point as part of its review of the final judgment, and to reverse and uphold arbitrability.
Some intricate case law, known as the Enelow-Ettelson doctrine, had conjured up a way to sustain an appeal even in that situation. We return to that case law later, and to its overruling by the U.S. Supreme Court in 1988 in the Gulfstream case.
Section 15 effectively addresses that "embedded" proceeding by explicitly allowing an immediate appeal from an anti-arbitration decision while precluding it when the decision is in favor of arbitration.
But when the determination about arbitrability is made by a district court in an independent proceeding, such as on a petition under § 4 of the U.S. Arbitration Act directing arbitration to proceed, whatever decision the court renders on the point is a disposition of the whole proceeding and as such is a final decision that qualifies for appeal under § 1291 of Title 28. That suits the purposes of arbitration if the decision is against arbitration because it permits appellate review promptly. But if the decision is in favor of arbitration, and directs it to proceed, the allowance of an appeal now impedes the arbitral process. It is apparently going to continue to impede the arbitral process, because on this score § 15 makes no change.
Under paragraph 3 of subdivision (a), a "final decision with respect to an arbitration" is made appealable, and that presumably embraces not only an arbitral award on the merits of the underlying controversy, but also a simple disposition of the issue of arbitrability itself. A decision directing arbitration would seem to be a decision "with respect to an arbitration" within the meaning of that paragraph, and, if it is, off goes the point to a court of appeals while the arbitration itself gets held up for another round in court.
The arbitration is usually stayed while a court test of arbitrability is pending.
One may hear the argument that the phrase "with respect to an arbitration" should be construed to relate only to an award made by the arbitrator or arbitrators on the merits, but not to include a mere determination of whether the dispute is arbitrable. That would be a difficult interpretation at best. And while it might make arbitration advocates happy in cases in which the decision is in favor of arbitration (by barring any appeal at all from the determination), it would probably send them into advanced melancholy in cases in which the decision has gone against arbitration (by similarly making the decision final and barring any appellate review of it at all).
A proposed § 15 had been bandied about for several years, reviewed and reviewed by committees of various groups, including committees of the American Bar Association (ABA) and the American Arbitration Association (AAA). This writer, as a member of the AAA's commercial law committee, was on a subcommittee of it appointed to review a 1986 draft of the proposed § 15. The draft was substantially the same as the § 15 that finally got through in 1988 and is presently law. Our subcommittee gave much thought to expanding the provision, not to bar the appeal of a pro-arbitration decision made in an independent proceeding, but to postpone it in that setting until the arbitration has proceeded to an award on the merits. There was some trepidation about how that could work. There was apparently some kind of rampant assumption that since any decision on arbitrability is a "final" one in the context of an "independent" proceeding, it has to be appealable now if it is ever to be appealable at all.
That assumption is of course mistaken. Congress can allow the appeal of an issue at any juncture it chooses, and, indeed, can bar an appeal altogether. Without suggesting for a moment that a pro-arbitration decision should be altogether barred from appellate review, and limiting attention only to postponing the appeal so that arbitration can now get under way on the merits with all further appellate review postponed until after the merits are decided, we suggested an amendment of § 15 to accomplish that result.
An amendment of § 15 can easily secure the desired postponement of an appeal from a final decision in an independent proceeding. And, ironically, far from undermining § 1291 and its policy of allowing appeals only from final decisions, the deferral of an appeal from a "final" district court decision in favor of arbitration would advance that policy by getting the case expeditiously before the arbitrators on the merits and letting the arbitrability point go up only afterwards.
The premise of § 1291 of Title 28 is a general Congressional policy to allow one appellate review as a matter of right. A further part of the premise is that a "final" determination is the end-all of the dispute between the parties and that it therefore must be allowed to go to appeal now if it is ever to go to appeal at all. The premise loses its validity, however, when applied to a facially "final" decision that does no more than compel arbitration. Such a decision does not end the dispute in the substantive sense that § 1291 has in mind. On the contrary, it just sets the stage for the dispute's hearing. Hence, postponing appeal from a decision directing arbitration actually furthers the federal policy against interlocutory appeals.
But wouldn't it undermine the policy of allowing appeal of right from a "final" disposition? It would, if there were no other routing to an appellate review of the determination. Perhaps the assumption of those who gave up the fight to apply § 15 to an independent proceeding — or who never tried for it in the first place — is that there would be no later appellate route when the decision compelling arbitration is made in an independent proceeding. The assumption would probably be based on the time restriction on appeals contained in Rule 4 of the Federal Rules of Appellate Procedure, which ordinarily mandates appeal within 30 days after entry of the objectionable determination.
But another route to the appeal of such a decision is easily mapped out, far more consistent with the purpose of preventing appellate delay of the arbitral process. It entails nothing more than extending the time for the appeal. The appellate review of a decision directing arbitration, even if rendered in an "independent" proceeding, could merely be postponed until after the arbitration has proceeded on the merits and gone to award, with the person aggrieved by the pro-arbitration determination permitted to bring it before the appellate court only when (and if) the award itself has gone to district court review and the district court's determination upon that review is being appealed.
It may well happen, of course, that the person opposing the arbitration has won it on the merits, either in full or at least in sufficient measure to accept the award, and that the victory will induce the abandonment of the objection to the arbitral forum. (Winning the battle always helps the winner forget who chose the battlefield.) That result would also be welcome, and is another fond hope on which § 1291 is premised.
An amendment of § 15 to accomplish a postponement of appellate review after a decision in favor of arbitration has been made in an independent proceeding can be accomplished in two steps. The first is an amendment of the present subdivision (a)(3), the second the addition of a subdivision (c).
Under paragraph 3 of subdivision (a) of the present § 15, an appeal is presently permitted from
a final decision with respect to an arbitration that is subject to this title.
It should be amended to change the period to a comma and to add the phrase
except as otherwise provided in subdivision (c).
The subdivision (c) that should then be added would read as follows:
(c) An appeal may not be taken from a decision or order, or that part of a decision or order, final or otherwise, directing or compelling arbitration made under section 4 or section 206 of this title even if made in an independent proceeding, but the decision or order or part thereof barred from immediate appeal by this subdivision may be reviewed as part of an appeal from a post-award decision or order confirming, modifying, correcting, or vacating an award, or refusing to do any of those things. The party seeking such review shall obtain, and shall include as an appendix to his or her brief, the relevant portions of the record in the proceeding that directed or compelled arbitration.
Making review of the arbitration-compelling determination part of the appeal of the district court decision or order that reviews the award itself gives it a ready context that even answers the time problem. As long as the appeal from the district court determination reviewing the award is timely, so is review of the old decision or order compelling arbitration.
An appendix seems an ideal way of injecting the prior proceeding's record, and of seeing to it that the expense, or at least the initial expense, of doing so is on the party who wants the prior decision or order reviewed.
The suggested amendment can easily divest the "independent" proceeding of what amounts to a power to impede arbitration in a way no "embedded" proceeding can. Nor is there anything substantively unique about the "independent" proceeding that should earn it an expedited appellate review.
The phrase "confirming, modifying, correcting, or vacating an award" merely tracks the language of the various phrases used in subparagraphs (D) and (E) of § 15(a)(1) to cover the award's routes into court.
Having attempted to redress what is perceived to be one of § 15's failures, we return for a moment to an irony connected with one of its successes. This one gets us back into § 1292(a), the statute that permits appeals from district court interlocutory decisions in only a handful of situations. The major of them is in paragraph (1) of the statute, concerning the interlocutory order granting or denying an injunction pendente lite. We have already noted the main provisions of § 15 that now allow or disallow appeals from interlocutory orders. The two main contexts from which the orders so addressed arise are the application to stay an action in deference to arbitration ( 9 U.S.C.A. § 3) and the petition or motion directing that arbitration proceed ( 9 U.S.C.A. §§ 4, 206). But note now that there is a separately denominated third category in § 15: the interlocutory order granting or denying an outright "injunction" against arbitration. This order is covered in subdivision (a)(2), which allows an appeal when an anti-arbitration injunction is granted, and subdivision (b)(4), which bars an appeal when an anti-arbitration injunction is refused.
Both steps are consistent with the mission of § 15, but why a separate set of provisions for an "injunction"? Aren't the remedies of an order compelling or refusing to compel arbitration, or an order staying or refusing to stay an action (in deference to arbitration), sufficient to send the needed signal? If X proceeds with an arbitration after a holding that arbitration is not required, the arbitration — if, indeed, the arbitrator is willing to proceed in these circumstances — will produce an award that has no worth: the courts will not enforce it. And if X tries to proceed with a litigation after it has been stayed in an order "compelling" arbitration, X will find the court refusing to proceed with the action. The message to X in either situation is not to try to do what the "stay" or "compel" order opposes; the result will be a futility. Then why "enjoin" X? It would not be an "injunction" in the conventional sense, anyway. It would not ordinarily invoke the contempt penalty against X, for example. The "stay" and "compel" remedies suffice. Again the question, then: why speak in terms of "enjoining" a party in the arbitration setting at all?
This brings us to the Gulfstream case and to the intriguing history of the "injunction" route to an appeal that the case finally closes off. This all has to do with the interlocutory appeal of an order disposing of an application for an interlocutory injunction under § 1292(a)(1). Gulfstream overrules the so-called Enelow-Ettelson line of cases, which drew on the old distinctions between law and equity and with the separate court systems of law and chancery before the two were merged. Here, again, we need some background.
At common law, the court of chancery (equity), in which there was no jury, could enjoin a proceeding in a law court, in which the mode of trial was of course by jury. There was no vice-versa, however. A court of law could not enjoin the chancellor. After the merger of the two systems, situations arose (and continue to) in which the plaintiff pleaded a law claim and the defendant interposed an equitable defense. When the trial court allowed the equitable defense to be tried first, and without a jury, incidentally staying the trial of the law claim until the equitable matter was resolved, Enelow-Ettelson held that this was in effect the granting of an "injunction" against a law action and that it invoked § 1292(a)(1) to allow an immediate appeal from the injunction order. Enelow v. New York Life Ins. Co., 293 U.S. 379, 55 S.Ct. 310, 79 L.Ed. 440 (1935); Ettelson v. Metropolitan Life Ins. Co., 317 U.S. 188, 63 S.Ct. 163, 87 L.Ed. 176 (1942). It would not amount to an injunction, however, if the positions of the two matters were reversed — if the main claim was in equity, for example, and a "stay" of its trial was sought so as to let a legal counterclaim interposed by the defendant get tried first, and to a jury. In that case, the order disposing of the "stay" would not then parallel a law court disposing of a request for an injunction against chancery because there was no such thing at common law. (See City of Morgantown v. Royal Ins. Co., 337 U.S. 254, 69 S.Ct. 1067, 93 L.Ed. 1347.)
In Baltimore Contractors, Inc. v. Bodinger, 348 U.S. 176, 75 S.Ct. 249, 99 L.Ed. 233 (1955), the law/equity distinction was extended into the arbitrability realm. If the court action sought to be stayed in deference to an arbitration involved a claim at law, the application for the stay amounted to a suit for an equitable "injunction" against a law action and the order to which it gave rise was appealable as such under § 1292(a)(1). If it involved an equitable claim, however (as it did in Baltimore, where the main claim was for an accounting), the analogy to how things were at common law would not hold and the application for a stay of the equity claim, so that arbitration could proceed, would not amount to an "injunction" and hence would not be appealable under § 1292(a)(1).
The court in Baltimore acknowledged, however, that in following the precedents that produced these conclusions it was following "outmoded procedural differentiations". It held it best to leave any corrections to Congress. But the court then apparently ran out of patience, which brings us at last to the Gulfstream case. It was in Gulfstream that the U.S. Supreme Court abandoned the Enelow-Ettelson doctrine. Gulfstream holds that an order in which a court grants or denies a stay of the proceeding before it is not to be deemed an "injunction" and may therefore not be appealed as such under § 1292(a)(1).
Gulfstream came down on March 22, 1988. In just a few months, with the adoption of § 15 of Title 9 as part of the Judicial Improvements Act on November 19, 1988, Congress was to make Gulfstream, and the case law that it overruled, largely academic on the arbitration scene. With § 15 and its more explicit directions, Congress superseded § 1292(a)(1) of Title 28 in respect of the arbitration injunctions, abandoning altogether the law/equity distinction and substituting a pro-arbitration/anti-arbitration distinction in its place. The two provisions of § 15 dealing with an application for an "injunction" against an arbitration between them say what has to be said about trying to appeal an "injunction" ruling in an arbitration setting. Under subdivision (a)(2), an appeal is permitted when the injunction against arbitration has been granted. Under subdivision (b)(4), an appeal is barred when the injunction against arbitration has been denied. In this locale, § 15 has the full-time job and § 1292(a)(1) is now unemployed.