Commercial Litigation and Arbitration

While Motion to Compel Arbitration Should Reference §3 or §4 of the FAA, Absence Does Not Preclude Appellate Jurisdiction under § 16 — Party Does Not Default on Right to Arbitrate by Delay and Participation, Alone — Actual Prejudice Essential

Wheeling Hosp., Inc. v. The Health Plan of the Upper Ohio Valley, Inc., 683 F.3d 577 (4th Cir. 2012):

Appellees Wheeling Hospital and Belmont Hospital***, along with other medical providers, commenced this putative class action in West Virginia state court on May 19, 2010, against the Ohio Valley Health Services and Education Corporation, Ohio Valley Medical Center and East Ohio Regional Hospital, (collectively, the "OV Health System Parties"), and appellant The Health Plan of the Upper Ohio Valley, Inc. ("The Health Plan"). The plaintiffs sued in order to collect amounts allegedly owed to them by employee benefit plans established by the OV Health System Parties, for which The Health Plan acted as administrator.

After pretrial activity***, The Health Plan moved to dismiss the claims brought against it by the hospital plaintiffs pursuant to an arbitration agreement between the parties. The district court denied this motion, holding that The Health Plan had defaulted on its right to arbitrate. This appeal ensued. After assuring ourselves of appellate jurisdiction, we conclude that the district court erred in its determination that The Health Plan defaulted on its right to arbitrate. ***

"Ordinarily, courts of appeals have jurisdiction only over 'final decisions' of district courts." Arthur Andersen LLP v. Carlisle, 556 U.S. 624, 627, 129 S. Ct. 1896, 173 L. Ed. 2d 832 (2009) (quoting 28 U.S.C. § 1291). The FAA, however, makes an exception to that finality requirement, providing that "[a]n appeal may be taken from . . . 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[.]

9 U.S.C. § 16(a)(1). ***

We have not addressed the exact issue presented here, whether we have appellate jurisdiction to review a denial of a motion to dismiss that demands arbitration without specifically invoking §§ 3 or 4. However, in Choice Hotels Int'l., Inc. v. BSR Tropicana Resort, Inc., 252 F.3d 707 (4th Cir. 2001), we addressed a related question, i.e., whether a party had "properly invoked" § 3 of the FAA, under which a party may seek a stay of proceedings pending arbitration, even though it had styled its motion as a motion to dismiss. Id. at 709. We held that "[n]otwithstanding the terms of § 3, . . . dismissal is a proper remedy when all of the issues presented in a lawsuit are arbitrable." Id. "Moreover," we added,

a hypertechnical reading of [the defendant's] pleadings would be inconsistent with the liberal federal policy favoring arbitration agreements. [The defendant] made it clear during proceedings in the district court that it was seeking enforcement of the arbitration clause of the Agreement. This is sufficient to invoke the full spectrum of remedies under the FAA, including a stay under § 3.

Id. at 709-10 (internal quotation marks and citations omitted). Notably, Choice Hotels concerned whether dismissal was an authorized remedy under § 3, and we did not specifically frame our discussion in the terms of appellate jurisdiction, presumably because the appellee did not challenge our jurisdiction. Nevertheless, the opinion's reasoning with respect to what a defendant must do in order to invoke the full spectrum of remedies under the FAA is instructive with regard to our appellate jurisdiction.

Although we have not considered the specific question of appellate jurisdiction over a motion to dismiss that does not specifically invoke §§ 3 or 4, several other circuits have done so. In their analysis, they have adopted an approach similar to the one we articulated in Choice Hotels, focusing on whether the defendant made it clear that it was seeking enforcement of the arbitration clause contained within an applicable agreement. In Conrad v. Phone Directories Co., 585 F.3d 1376 (10th Cir. 2009), the Tenth Circuit adopted a two-step process for determining whether a court of appeals has appellate jurisdiction under § 16(a).

The first, simplest, and surest way to guarantee appellate jurisdiction under § 16(a) is to caption the motion in the district court as one brought under FAA §§ 3 or 4. See Fed.R.Civ.P. 10(a) ("Every pleading must have a caption with the court's name, a title, a file number, and a Rule 7(a) designation.") (emphasis added). This simple rule should dispose of the vast majority of cases in this area, and those hoping to avail themselves of the immediate appeal provided for in the FAA would do well to follow it.

Id. at 1385. Although "an approach that looks exclusively to the caption of a motion may seem tempting," Conrad observed, "it would be unworkable" because it "would violate the spirit of notice pleading embodied in our Federal Rules of Civil Procedure" and "create incentives for litigants to 'game' the captions of their motions in an effort to gain an interlocutory appeal where none is warranted." Id. It therefore articulated a second step in the process of determining appellate jurisdiction:

If a motion denied by the district court is not explicitly styled as a motion under the FAA, or the court suspects that the motion has been mis-captioned in an attempt to take advantage of § 16(a), the court must look beyond the caption to the essential attributes of the motion itself. The goal of this inquiry is to determine whether it is plainly apparent from the four corners of the motion that the movant seeks only the relief provided for in the FAA, rather than any other judicially-provided remedy.

Id. (citations omitted). The Tenth Circuit favored a focus on "the relief requested in the motion," concluding that "[i]f the essence of the movant's request is that the issues presented be decided exclusively by an arbitrator and not by any court, then the denial of that motion may be appealed under § 16(a)." Id. at 1385-86.

If, on the other hand, the movant in the district court requests a judicial remedy that is inconsistent with the position that the issues involved may be decided only by the arbitrator, the movant is no longer proceeding exclusively under the FAA and has forfeited their right to interlocutory review under § 16(a).

Id. at 1386. We find this analysis persuasive.

The second step of the Conrad test thus strikes a balance between form and substance, and is in harmony with the other circuits to have considered the issue.

Footnote 2. Even the D.C. Circuit, which has focused on the plain language of § 16(a) and construed the provision narrowly, has nevertheless acknowledged that it may construe a motion to dismiss more broadly in some circumstances, particularly if it were based on the FAA's requirement that arbitration agreements be strictly enforced. See Bombardier Corp. v. AMTRAK., 333 F.3d 250, 254, 357 U.S. App. D.C. 129 (D.C. Cir. 2003). On the facts in Bombardier, the court declined to construe the motion broadly because it "exhibited no intent to pursue arbitration--indeed, it sought outright dismissal with no guarantee of future arbitration." Id. Similarly, the Second Circuit dismissed for lack of appellate jurisdiction where a motion to dismiss neither explicitly nor implicitly petitioned the district court to compel arbitration. Wabtec Corp. v. Faiveley Transp. Malmo AB, 525 F.3d 135, 140 (2d Cir. 2008). The First Circuit in Fit Tech, Inc. v. Bally Total Fitness Holding Corp., 374 F.3d 1 (1st Cir. 2004), found appellate jurisdiction where the movant clearly argued that the case had to be arbitrated, and noted that if the movant had wanted a dismissal but no decision by the arbitrator, then it would have refused to entertain the appeal. Id. at 5-6.

Accordingly, when a motion is not styled in a dispositive manner, we hold that our inquiry into appellate jurisdiction should be based on the principle articulated in Choice Hotels, as well as Conrad. In other words, we must determine whether The Health Plan made it clear within the four corners of its motion to dismiss that it was seeking enforcement of the arbitration agreement. ***

So viewed, we conclude that The Health Plan clearly stated in its motion to dismiss that it was seeking to enforce the arbitration agreement. ***


Turning now to the merits, we must determine whether the Health Plan defaulted on its right to arbitration. ***

"Under section 3 of the FAA, a party loses its right to a stay of court proceedings in order to arbitrate if it is 'in default in proceeding with such arbitration.'" Forrester, 553 F.3d at 342 (quoting 9 U.S.C. § 3). "Default in this context resembles waiver, but, due to the strong federal policy favoring arbitration, courts have limited the circumstances that can result in statutory default." Id. "[D]elay and participation in-will not alone constitute default." Id. at 343. "But a party will default its right to arbitration if it so substantially utilize[s] the litigation machinery that to subsequently permit arbitration would prejudice the party opposing the stay." Id. (internal quotation marks omitted). "The heavy burden of showing default lies with the party opposing arbitration." Id. (internal quotation marks omitted).

"Where a party fails to demand arbitration during pretrial proceedings, and, in the meantime, engages in pretrial activity inconsistent with an intent to arbitrate, the party later opposing a motion to compel arbitration may more easily show that its position has been compromised, i.e., prejudiced." Fraser, 817 F.2d at 252 (internal quotation marks omitted). "But, even in cases where the party seeking arbitration has invoked the 'litigation machinery' to some degree, 'the dispositive question is whether the party objecting to arbitration has suffered actual prejudice.'" Microstrategy, 268 F.3d at 249 (quoting Fraser, 817 F.2d at 252); Patten Grading & Paving, Inc. v. Skanska USA Bldg., Inc., 380 F.3d 200, 205 (4th Cir. 2004) (same).

In determining what constitutes actual prejudice, we have emphasized that the amount of "delay and the extent of the moving party's trial-oriented activity are material factors in assessing a plea of prejudice." Microstrategy, 268 F.3d at 249. ***

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