11.14Judicial Power to Enjoin Arbitration: Clear Analysis from the Second Circuit
Arbitration Commentaries has written on more than one occasion on the question, not consistently decided in the US courts, of whether the Federal Arbitration Act (“FAA”) provides authority for a federal court to enjoin a pending arbitration. In a significant recent decision, the US Second Circuit Court of Appeals affirmed a District Court’s order enjoining an arbitration, but did so based on analysis that clearly stops short of saying that an action to enjoin arbitration is an implied cause of action conferred by the FAA. (In Re American Express Financial Advisors Securities Litigation, 2011 WL 5222784 (2d Cir. Nov. 3, 2011)).
There is certainly clear logic to the position that if arbitration is a matter of contract, the federal courts should have authority to enforce the arbitration agreement where it exists, is valid, and covers the dispute, and also the power to prevent an illegitimate arbitration where the agreement does not exist, or is invalid, or does not cover the dispute.
But if an implied cause of action to enjoin arbitration is to be found in the FAA – that is to say if the FAA is to be the source of judicial power to enjoin arbitration — courts should be fully satisfied that Congress’s intent to encourage arbitration as an alternative to litigation will be advanced by recognizing such a right of action. But it is arguably true that in the situations in which injunctive relief to stay a pending arbitration would be most often sought, there might indeed be more interference with arbitration than advancement of it, if such a cause of action based on the FAA were recognized.
Consider first a domestic arbitration between two New York companies, commenced through the New York office of the AAA. Respondent claims the arbitration clause was revoked when the parties signed another contract with no arbitration clause. Respondent brings an action in New York state court to enjoin the arbitration, and obtains an ex parte temporary restraining order, which the Respondent then serves on the AAA together with a letter asking the AAA to suspend the arbitrator selection process. (The TRO is sought on the basis of the FAA, not New York arbitration law. New York’s CPLR Article 7503 authorizes an action to stay arbitration but only on the ground that no valid arbitration agreement was made, or that the cause of action is time-barred. Thus in our hypothesis an injunction under CPLR 7503 is not available). The AAA elects to respect the Court’s order. The Movant asks the New York judge for discovery in advance of an evidentiary hearing. The request is granted; the hearing is held; and seven weeks after the hearing the Court issues its decision denying the injunction motion. Four months have elapsed from the filing of the Request for Arbitration.
Consider next how an arbitrability contest in an international dispute might play out, if the party disputing arbitrability could rely on the FAA as a basis to ask a court to enjoin a newly-filed arbitration. Korean company X files an ICC arbitration against New York company Y. The arbitration clause relied upon provides for ICC arbitration in New York. Respondent contends that it is a successor to the signatory of the contract and that it never agreed to arbitration. Respondent files an action to enjoin arbitration in the Southern District of New York and obtains a TRO. The ICC declines to halt the case; Respondent files its Answer and names an arbitrator; the ICC appoints a Chair; and the Respondent in the first procedural conference asks the Tribunal to stay the case until the New York court decides arbitrability. The Tribunal reluctantly agrees. Respondent moves in the Southern District to have claimant held in contempt for violating the the TRO. After discovery and an evidentiary hearing, the Court dissolves the TRO, denies the injunction, and denies the contempt motion. The arbitration is delayed four months.
In both situations, Respondent had two other options to contest arbitrability. Respondent could have raised a jurisdiction objection in the arbitral proceedings, at the case-intake stage with the administering institution and thereafter with the tribunal. The applicable rules in each case provided that the tribunal has power to decide issues of its own jurisdiction. Respondent, in addition or alternatively, could have filed a state or federal court complaint seeking relief on the merits of the dispute, forcing Claimant to respond with a motion to compel arbitration. Both of these options promote the arbitration system effectively while permitting an arbitrability challenge to be resolved well before the arbitration reaches the merits. If the injunction option based only on the FAA is unavailable, Respondents will often be reluctant to invest the effort required to present a merits lawsuit to a court. Respondents’ objectives often will be to scuttle the Claimant’s arbitration claim, not to force the merits dispute into a judicial forum. On balance, then, by declining to find an implied power to enjoin arbitration in the FAA itself, courts would promote the doctrine of compétence-compétence, because tactical considerations will motivate Respondents more often than not to lodge jurisdictional objections within the arbitral process.
The in terrorem effect on Claimants of temporary restraining orders provides another reason to disfavor the position that the FAA authorizes an order enjoining arbitration. A Claimant with a good faith belief that it has an arbitrable claim should not be forced to stand down from its claim temporarily or risk a citation for civil contempt. Faced with that calculus, even Claimants who are likely to succeed on arbitrability will usually err on the side of caution to avoid contempt of court. Permitting injunction orders under the FAA therefore would tend, on balance, to inject significant delay into proceedings that ultimately will be resolved in arbitration. The quantum of properly avoided arbitral proceedings, on the other hand, is not likely to be much greater under a regime of judicial injunctions, rather than a regime where Respondent must either pursue the objection in the arbitration or file a merits lawsuit.
This brings us to a discussion of what the Second Circuit Court of Appeals decided, and did not decide, in the American Express case earlier this month. The procedural posture was far from the prototype scenarios described above. The District Court had overseen a class action by investors in Amex-affiliated managed funds, who claimed fraudulent and negligent investment advice and breach of fiduciary duty. The Court had approved a class action settlement. An Illinois couple, class members, had heeded bad advice, from their local Amex-affiliated investment manager, to ignore the notice of class action settlement they received, refrain from signing an opt-out as was their right, and instead file a FINRA arbitration. The District Court granted Amex’s request for a declaration that all of the Illinois couple’s FINRA arbitration claims were covered by the class action settlement and had been released. And to implement that determination, the District Court granted Amex’s request to enjoin the further prosecution of the arbitration.
The Second Circuit affirmed as to all but one of the claims asserted in the FINRA arbitration. Only its analysis upholding the Distirct Court’s injunction against prosecuting the other claims in the FINRA arbitration concerns us in this Commentary.
The Court framed the question to be whether the FAA “(or any other authority)” furnished the District Court with “remedial power” to enjoin the arbitration. The Court cited a number of earlier Second Circuit and Southern District of New York decisions that “suggested” the FAA authorizes such relief. But the Court did not adopt the holdings of those cases as the governing rule in this case; it is important to distinguish between the Court’s approval of the outcomes in those cases, and its ultimate adoption of a narrow non-FAA rationale for sustaining the district court’s injunction in this case. The case most centrally relied upon was a First Circuit case from the 1980s, authored by then-Circuit Judge Stephen Breyer, which held that an order enjoining arbitration where the matter is not arbitrable is a “concomitant” power with the power to compel arbitration and is not inconsistent with the FAA — but that case did not hold that the FAA was the source of the Court’s power to issue the injunction. Instead, the Court held that there was adequate authority under Massachusetts law to enjoin the arbitration, and that such law was not in conflict with the FAA.
In the Amex case, the Second Circuit did not find it necessary to rely upon the FAA alone as a source of judicial remedial power to enjoin the pending arbitration FINRA arbitration between the Illinois couple and American Express. It found such power by implication from the combination of the FAA, the FINRA Arbitration Rules, and, critically, the class action settlement agreement to which the Illinois couple were parties, an agreement which provided expressly for the district court’s retention of jurisdiction to enforce the settlement agreement. In a footnote, the Court proceeded to discuss a provision of the federal judicial code known as the All-Writs Act (28 U.S.C. § 1651), noting that several courts have had occasion to rely upon that Act as the basis for judicial power to enjoin a pending arbitration where such an injunction is necessary to protect the jurisdiction of the federal court. The Court indicated that in some cases reliance upon the All-Writs Act to enjoin arbitration would be appropriate, but such reliance was not necessary in this case because of the class action settlement agreement.
The Second Circuit’s decision prudently respects the border between what the FAA permits (by not prohibiting), and what the FAA mandates. It may be hoped that other courts will follow the Second Circuit’s lead and develop a consistent legal approach to judicial power to enjoin arbitration. That power is not found in the FAA, although there is consistency between the contractual basis for enforcement and non-enforcement of arbitration agreements under the FAA and the power to enjoin arbitration that may be found in other sources. Those sources include an agreement of the parties, state arbitration law that may expressly permit a cause of action for a stay of arbitration (such as New York’s CPLR 7503), and potentially the All-Writs Act. A well-developed understanding in the courts and the bar that these are the proper sources of power to enjoin arbitration will serve to discourage undesirable judicial intervention in newly-filed arbitrations and the disruptive use of injunction applications by Respondents who seek tactical advantage through collateral litigation.