U.S. Supreme Court Permits Employees to Immediately Appeal a Dismissal of Complaint in Favor of Arbitration

U.S. Supreme Court Permits Employees to Immediately Appeal a Dismissal of Complaint in Favor of Arbitration

The United States Supreme Court recently held that when a court compels arbitration and dismisses the underlying action rather than simply refraining from deciding the dispute until after the arbitration occurs and retaining jurisdiction, the employee may immediately bring an appeal. This decision resolved a conflict in the federal courts and changed the law in the Third Circuit. reen Tree Financial Corp.-Alabama v. Randolph, 531 U.S. 79, 121 S.Ct. 513 (2000). This will permit an employee to obtain immediate appellate review of an order requiring arbitration before the arbitration has taken place, probably making it more likely that an appellate court would reverse an order compelling arbitration than if the review did not take place until after the arbitration had also occurred.

The FAA, 9 U.S.C. § 1, et seq., sets forth rules as to when arbitration orders are subject to appeal. 9 U.S.C. § 16. At issue in Green Tree was whether an order of dismissal in favor of the arbitration is a final order, permitting an immediate appeal. 9 U.S.C. § 16(a)(3). Although the resolution of this question is unclear under the New Jersey Arbitration Act, the Third Circuit's opinion regarding the FAA in Smith v. The Equitable, 209 F.3d 268 (3d Cir. 2000) was to the contrary. In Smith, the Third Circuit recognized that the FAA generally distinguishes between orders issued in ongoing proceedings that permit the litigation to proceed (and denying arbitration) and those that require arbitration to proceed. The former were immediately appealable but the latter were not. The Third Circuit had held that an order of dismissal is "the functional equivalent of a stay" and was not to be considered a final order for appeal purposes; i.e. the proceedings were ongoing so the order was not immediately appealable.

In Green Tree, the Supreme Court held that such an order is, in fact, final, since the court is disposing of the entire case, leaving nothing pending before it. The Supreme Court rejected the employer's contention that such a ruling would be antithetical to the FAA's policy favoring arbitration and moving a dispute out of court and into arbitration as quickly as possible. The practical result of Green Tree is that employers may now want to seek a stay rather than a dismissal, when seeking to enforce an arbitration agreement, since an order granting a stay and compelling arbitration is not immediately appealable under the FAA. Once the parties have gone through the time and expense of an arbitration, it may be less likely that an appellate court would find an arbitration agreement to be unenforceable.

The Green Tree Court also addressed an issue relating to the enforceability of arbitration agreements, holding that it would not invalidate an arbitration agreement because it did not address the issue of arbitration costs and fees. The Supreme Court acknowledged that large arbitration costs might prevent an employee from being able to pursue an arbitration, thereby preventing an employee from being able to vindicate statutory rights. According to the Supreme Court, however, a party seeking to invalidate an arbitration agreement on the grounds that arbitration would be prohibitively expensive must actually demonstrate the likelihood of incurring such costs. Thus, the failure of the agreement to address the cost issues does not render an agreement automatically unenforceable.