United States: Ninth Circuit Allows Dispute To Proceed In Court After Arbitration Dismissed For Failure To Pay Deposit

In mid-June, the U.S. Court of Appeals for the Ninth Circuit issued an opinion which holds that where an arbitration proceeding is dismissed because one side is unable to pay their share of the arbitration, the case may proceed in court—even though there is an arbitration clause. The case involved a claim for legal malpractice, and the retainer agreement had a mandatory arbitration provision. The federal district court compelled the case to arbitration, where it proceeded, until the underlying plaintiff was unable to pay AAA's required deposit of $ 18,562.50. AAA then inquired as to whether the law firm defendant was willing to cover the deposit, but the firm declined.

Accordingly, the AAA arbitrator terminated the arbitration due to the missing deposit. The law firm moved to lift the stay and have the case dismissed for the plaintiff's failure to comply with a court order under Federal Rule of Civil Procedure 41(b). Although the district court explicitly found that the plaintiff was "unable to pay for her share of arbitration," it ultimately dismissed the complaint because the AAA rules required the parties to bear the costs of arbitration equally and the FAA deprived the court of authority to hear "the claims that would have been subject to the arbitration agreement."

The Ninth Circuit panel found ample guidance in its 2004 ruling in Lifescan, Inc. v. Premier Diabetic Servs., Inc., 363 F.3d 1010, in which it held that, where the arbitration rules agreed to by the parties allow an arbitrator to dismiss an arbitration for failure to pay costs, such dismissal of the arbitration is "pursuant to the parties' agreement." The Ninth Circuit thus reversed, finding that the FAA's "silence is telling," with no provision compelling dismissal under such circumstances. The Ninth Circuit went on to limit its holding, noting that it did not apply where parties refused to arbitrate by choosing not to pay the costs of arbitration, but noting that requiring dismissal would deprive the plaintiff of a forum in which to have her claims adjudicated.

Tillman v. Rheingold, Valet, Rheingold, Shkolnik & McCartney, Case No. 13-56624 (9th Cir. June 15, 2016).

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