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Appeal of Motion to Compel Arbitration Halts District Court Proceeding

By Sean E. Andrussier

Yesterday, in an opinion drafted by Judge Duncan and joined by Judges Niemeyer and Keenan, the Fourth Circuit Court of Appeals held that an appeal of a denial of a motion seeking to require a party to arbitrate its claims divests the district court of jurisdiction to proceed with the case unless the district court finds that the appeal is frivolous.  The case is Levin v. Alms and Associates, Inc.

The relevant facts in this case are fairly straightforward.  In 2009, Levin filed suit against his financial advisers.  His complaint contained claims of negligence, negligent misrepresentation, violation of the Investment Advisers Act of 1940, and breach of contract.  Alms moved to dismiss the case or, in the alternative, to stay the action pending arbitration.  Alms claimed that Levin was required to submit his claims to arbitration because a 2007 agreement that governed their relationship required that "[a]ny dispute shall be submitted to binding arbitration...."  Levin claimed that the arbitration clause did not apply to claims that accrued prior to 2007.  The district court agreed with Levin and ordered that while claims that accrued after January 1, 2007 must be handled through arbitration, claims that accrued prior to that date could be heard in the district court. 

Alms filed a notice of appeal and requested that the district court stay any further proceedings until the appeal was resolved.  The District Court denied the motion in part finding that the case could proceed "at least through discovery."  Alms then requested that the Fourth Circuit stay the district court proceedings until the appeal was heard.  The Fourth Circuit entered a temporary stay until the motion could be fully heard.

The opinion began by initially addressing whether the district court had jurisdiction to proceed with the case after Alms filed its notice of appeal.  The Fourth Circuit recognized that the circuits were split on this issue:

The Third, Seventh, Tenth, and Eleventh Circuits have held that an appeal regarding arbitrability of claims does divest the district court of jurisdiction over those claims, as long as the appeal is not frivolous. The Second and Ninth Circuit have held that no such divestiture occurs.

The Fourth Circuit determined that the view of the Third, Seventh, Tenth, and Eleventh Circuits was the more persuasive of the two.  The filing of a notice of appeal divests the lower court of "jurisdiction over 'those aspects of the case involved in the appeal,'" and because the "core subject of an arbitrability appeal is the challenged continuation of proceedings before the district court on the underlying claims" it would be inappropriate for the district court to proceed.  Additionally, allowing the case to continue while on appeal, even through discovery, "would cut against the efficiency and cost-saving principles of arbitration."

However, the panel was cognizant of the potential that some parties would file a frivolous appeal simply to delay the action below from moving forward.  A party who believes that an appeal has not been filed in good faith has the option to ask the district court to certify that the appeal is frivolous or forfeited.  If the district court finds in the moving party's favor, the case may proceed.  "In the event that such a certification occurs, the party alleging arbitrability may move [the Fourth Circuit] to stay the district court's proceedings pending a review of the frivolousness determination." 

After addressing whether the district court could proceed with the case while the arbitration aspect of the case was on appeal, the panel addressed the merits of the district court's decision.  The opinion held that the 2007 agreement's arbitration clause could apply to claims that accrued prior to 2007 because of the presumption in favor of arbitrability and prior decisions that "have generally applied broad 'any dispute' language retroactively, especially when combined with language that refers to all dealings between the parties.'"  Given this holding, the district court's opinion was reversed.

Full post as published by North Carolina Appellate Blog on February 11, 2011 (boomark / email).