The United States Court of Appeals for the Ninth Circuit has issued a decision stating a law firm’s client may pursue a legal malpractice case against her former attorneys despite that she was unable to pay her share of mandatory arbitration expenses. In Tillman v. Rheingold, Valet, Rheingold, Shkolnik & McCartney, No. 13-56624 (9th Cir., June 15, 2016), a woman, Tillman, signed a retainer agreement with a law firm, Rheingold, Valet, Rheingold, Shkolnik & McCartney (“Rheingold”), in order to secure legal representation. The retainer agreement contained a mandatory arbitration clause. Later, Tillman filed a lawsuit against Rheingold for legal malpractice and the dispute was stayed pending arbitral proceedings.
The parties engaged in arbitration until Tillman ran out of money. Due to Tillman’s inability to pay more than $18,000 in expenses, the proceedings were terminated by the arbitrator without judgment or entry an award. Next, Tillman sought to pursue legal action in the United States District Court for the Central District of California. Although Tillman successfully demonstrated her inability to pay her share of the costs associated with the arbitration, the district court ultimately dismissed Tillman’s case.
According to the district court, because the AAA’s rules required Tillman and the firm to bear the costs of arbitration equally and allowed the arbitrator to suspend the proceedings, the Federal Arbitration Act (FAA), 9U.S.C. § 1 et seq., deprived the district court of authority to hear “the claims that would have been subject to the arbitration agreement,” and dismissal was required.
On appeal, a Ninth Circuit panel reversed the district court’s decision and remanded the legal malpractice case. The appellate court stated:
“[C]ourts must rigorously enforce arbitration agreements according to their terms.” Am. Express Co. v. Italian Colors Rest., 133 S. Ct. 2304, 2309(2013) (citing Dean Witter Reynolds Inc. v. Byrd, 470 U.S. 213, 221 (1985)) (internal quotation marks removed). When a party petitions a court to compel arbitration under the FAA, “the district court’s role is limited to determining whether a valid arbitration agreement exists and, if so, whether the agreement encompasses the dispute at issue. If the answer is yes to both questions, the court must enforce the agreement.” Lifescan, 363 F.3d at 1012. Here, there is no dispute that both these conditions were initially met, and no challenge to the original referral of the dispute to arbitration.
Although the validity of the arbitration agreement between Tillman and the Rheingold firm is not at issue, it is not immediately clear what it means to “enforce the agreement,” id., in the context before us. The firm seeks to lift the district court’s stay of proceedings and to dismiss Tillman’s complaint. We agree that it is appropriate to lift the stay but conclude that Tillman’s case should be allowed to proceed.
Next, the Ninth Circuit examined whether arbitration was “had in accordance with the terms of the agreement.” The court said arbitration was “had” because the parties engaged in arbitral proceedings until they were terminated by the arbitrator for non-payment. The appeals court then applied its prior holding in Lifescan to the case and discussed Tenth Circuit precedent:
Lifescan petitioned the district court to compel arbitration under the FAA. Id. On appeal, we directed that the petition be dismissed. Id. at 1013. As the AAA’s rules allowed the arbitrators to suspend the proceedings when Lifescan declined to pay Premier’s costs, we concluded, “the arbitration ha[d] proceeded pursuant to the parties’ agreement.” Id. Lifescan left matters there. It did not treat the suspension of arbitration proceedings as an award in favor of one party or the other, as no award had issued. Id.
The Tenth Circuit recently reached a similar conclusion in Pre-Paid Legal Services, Inc. v. Cahill, 786 F.3d 1287, 1293–94 (10th Cir. 2015), cert denied 136 S. Ct. 373 (Oct.19, 2015). Cahill also concerned a scenario in which an arbitration under the AAA’s rules was terminated for non-payment of the AAA’s fees. Id. at 1294. The Tenth Circuit held that because the AAA’s rules allowed for such a termination of the proceedings, “the arbitration ‘ha[d] been had in accordance with the terms of the agreement,’ 9 U.S.C. § 3, removing the § 3 requirement for the district court to stay the proceedings.” Id.
After ultimately ruling that arbitration was “had in accordance with the terms of the agreement,” the appellate court panel stated the district court did not abuse its discretion under Rule 41(b). Finally, the Court of Appeals held the district court committed error when it dismissed Tillman’s case based on Lifescan. According to the court:
As Tillman’s arbitration terminated before the merits were reached or any award issued, allowing her case to proceed in district court is the only way her claims will be adjudicated.
The outcome would likely be different if Tillman were the one seeking a stay of the district court proceedings, as that would frustrate the Rheingold firm’s attempts to have the case heard in either the court or the arbitral forum. See Sink, 352 F.3d at 1201. But Tillman had not sought a stay, so 9 U.S.C. § 3’s reference to a party “in default” does not apply. See 9 U.S.C. § 3 (providing for a stay of federal court proceedings pending arbitration so long as “the applicant for the stay is not in default in proceeding with such arbitration.”).
As Lifescan noted, there is “no totally satisfactory solution” to a party’s nonpayment of its share of arbitration fees. 363 F.3d at 1013. But parties have the right under then FAA to choose the rules under which their arbitration will be conducted. See Italian Colors Rest., 133 S. Ct. at 2309. Here, Tillman and the firm chose rules that allowed the arbitrator to terminate their arbitration in the event of non-payment without any resulting award or judgment. Tillman cooperated with those rules as long as she was able to. No section of the FAA compelled the district court to dismiss her case once the arbitration had concluded in accordance with the agreed upon rules governing but without resolution. We therefore remand to the district court with instructions to allow Tillman’s case to continue in court.
This case is especially remarkable because its holding may be applied to a wide variety of mandatory arbitration agreements that use AAA or other rules which state a neutral may terminate arbitral proceeding based on non-payment by a party.
It is currently unknown whether Rheingold will file a petition for certiorari with the United States Supreme Court. If the case makes it to the current eight-member Supreme Court, however, the Ninth Circuit’s ruling will likely stand.
Texas attorneys interested in learning more about how to handle disputes with clients using arbitration are encouraged to tune in to an upcoming Texas Bar CLE live webcast on August 25th:
Date/Time: August 25th – 2:00 to 3:00 p.m.
We hope you can make it!