American Bar Association
Forum
on the Construction Industry
Seeking Emergent Relief Pending A
Mandatory Arbitration Subject To The Federal
Arbitration Act
Joel B. Rosen, Esq.
Fabiana Pierre-Louis, Esq.
Montgomery, McCracken, Walker
& Rhoads, LLP
Liberty View
457 Haddonfield Road, Suite 600
Cherry Hill, NJ 08002-2220
John M. Tedder, Esq.
Duane Morris LLP
600 Grant Street, Suite 5010
Pittsburgh, Pennsylvania
15219-2811
April 24-26, 2008
La Quinta Resort and
Club—Palm Springs, California
©2008 American Bar
Association
I. INTRODUCTION
Most all construction
law practitioners have been involved with a dispute that is subject to a
mandatory arbitration provision in a construction contract. However, what happens in the event exigent
circumstances exist whereby your client is in need of injunctive relief to
preserve the “status quo” pending completion of that arbitration
proceeding? Specifically, may a federal
court properly entertain a request for temporary injunctive relief or are you
limited to whatever interim relief your arbitration panel may or may not
grant? Moreover, under what
circumstances may a federal court appropriately consider a request for
expedited discovery typically sought in connection with injunctive
proceedings? While the answers to these
questions will undoubtedly vary depending on your particular facts and
applicable law, this article will examine the leading decisions in the federal
circuits regarding a federal court’s jurisdiction to grant injunctive relief in
an arbitrable dispute governed by the Federal Arbitration Act (“FAA”)[1] as
well as the factors which may impact the issuance of injunctive relief in this
scenario. This article will also examine
the standards considered by a federal court in evaluating an expedited discovery
request in conjunction with injunctive proceedings, including the impact, if
any, that a parallel arbitration proceeding may have on such a request.
II. MAY A FEDERAL COURT GRANT INJUNCTIVE RELIEF IN A CONSTRUCTION
DISPUTE SUBJECT TO MANDATORY ARBITRATION?
A. Traditional
Role Of Courts In An Arbitrable Dispute Governed By The FAA
The Supreme Court of the
United States has “long recognized and enforced a ‘liberal federal policy
favoring arbitration agreements’” with one notable exception.[2] Namely, the “question whether the parties
have submitted a particular dispute to arbitration, i.e., the ‘question of
arbitrability,’ is ‘an issue for judicial determination unless the parties
clearly and unmistakably provide otherwise.’”[3] To that end, the Supreme Court has held that
the “‘question of arbitrability’” is limited in scope and “applicable in the
kind of narrow circumstance where contracting parties would likely have
expected a court to have decided the gateway matter, where they are not likely
to have thought that they had agreed that an arbitrator would do so, and,
consequently, where reference of the gateway dispute to the court avoids the
risk of forcing parties to arbitrate a matter that they may well not have
agreed to arbitrate.”[4] Conversely, “‘procedural’ questions which
grow out of the dispute and bear on its final disposition’ are presumptively not for the judge, but for an
arbitrator, to decide.”[5]
The FAA is consistent
with these well-established principals enunciated by our highest court.[6] Indeed, it is widely recognized that a
fundamental purpose of the FAA was to eliminate “any bias in favor of judicial
resolution of disputes.”[7] As such, “the FAA ‘leaves no place for the
exercise of discretion by a district court, but instead mandates that district
courts shall direct the parties to
proceed to arbitration on issues as to which an arbitration agreement has been
signed.’”[8] Pursuant to the FAA, “‘any doubts concerning
the scope of arbitrable issues should be resolved in favor of arbitration.’”[9]
B. Standard
For Obtaining A Preliminary Injunction Or A Temporary Restraining Order
The decision whether to grant a preliminary injunction or a temporary restraining order (TRO) “is a matter for the discretion of the district court and is reversible only for an abuse of discretion.”[10] “The purpose of a temporary restraining order is to preserve the status quo and prevent imminent harm pending” a full adjudication of the parties’ dispute.[11] In determining whether to grant preliminary injunctive relief, federal courts must consider the following four factors:
(1) whether there is a substantial likelihood that plaintiffs will succeed on the merits of their claims, (2) whether plaintiffs will suffer irreparable injury absent an injunction, (3) the harm to defendants or other interested parties (the balance of harms), and (4) whether an injunction would be in the public interest or at least not be adverse to the public interest.[12]
In a matter involving a binding arbitration agreement, “the traditional
test to determine whether the case is an appropriate one to issue injunctive
relief” should be applied.[13] “The injunction shall issue only if the [movant]
produces evidence sufficient to convince the district court that all four
factors favor preliminary relief.”[14]
C. A Conflicting Message Regarding The
Propriety Of Court Ordered Injunctive Relief In An Arbitrable Dispute
Whether a federal district court will exercise its authority to grant emergent relief to parties that are subject to a binding arbitration agreement in a public works construction contract pursuant to the FAA depends upon the circuit in which the matter is pending. The overwhelming majority of federal circuit courts that have examined the issue have concluded that federal district courts have jurisdiction to grant preliminary injunctive relief pending a binding arbitration. In reaching that conclusion, the courts have further held that the general rules applicable to granting emergent relief apply to a situation where the parties are subject to a binding arbitration agreement.
Courts
In Favor Of Preliminary Relief Pending Arbitration
First Circuit
In Teradyne, Inc. v. Mostek Corp.,[15] the defendant sought review of the district court’s order which enjoined the defendant from disposing or encumbering its assets pending arbitration in an ongoing breach of contract dispute. The First Circuit held that the district court did not err in issuing a preliminary injunction prior to ruling on whether the dispute was arbitrable because a district court can grant injunctive relief in an arbitrable dispute pending arbitration.[16] In a detailed opinion, the court examined precedent from several circuits and the U.S. Supreme Court in concluding that “the congressional desire to enforce arbitration agreements would frequently be frustrated if the courts were precluded from issuing preliminary injunctive relief to preserve the status quo pending arbitration.”[17] The court further noted that allowing courts to grant injunctive relief pending arbitration reinforces rather than detracts from the FAA’s policy of enforcing arbitration agreements.[18]
Second Circuit
The Second Circuit has similarly
held that injunctive relief is attainable although the matter is subject to a
binding arbitration. In Roso-Lino Beverage Distributors, Inc. v. The
Coca-Cola Bottling Company of N.Y.,[19] a
case involving the termination of the plaintiff’s Coca-Cola distributorship,
the distributorship agreement in question required arbitration of all disputes
except those relating to the “revision of prices and deposit requirements.”[20] The district court believed that its decision
to refer the matter to arbitration had stripped it of its power to grant
injunctive relief.[21] The appeals court reversed the district
court’s denial of a preliminary injunction and held that “[t]he fact that a
dispute is to be arbitrated . . . does
not absolve the court of its obligation to consider the merits of a requested
preliminary injunction.”[22]
Third Circuit
The Third Circuit reached the same result as the First and Second Circuits in Ortho Pharmaceutical Corp. v. Amgen, Inc.[23] In that case, the agreement required the parties to submit to arbitration on “all disputes arising under the Agreement.”[24] The court held that the arbitration agreement did not constitute a “‘waiver’ by either party of the right to seek preliminary injunctive relief necessary to prevent one party from unilaterally eviscerating the significance of the agreed-upon procedures.”[25] In examining whether the federal district court had “subject matter jurisdiction to entertain a motion for preliminary injunctive relief in a dispute that the parties agree[d] was arbitrable,” the court held that “a district court has the authority to grant injunctive relief in an arbitrable dispute, provided that the traditional prerequisites of such relief are satisfied.”[26]
The defendant had claimed that Section 3 of the FAA precluded the district court from issuing emergent relief except to stay other related proceedings.[27] Section 3 of the FAA provides:
§3: Stay of proceedings where issue therein referable to arbitration.
If any suit or
proceeding be brought in any of the courts of the United States upon any issue
referable to arbitration under an agreement in writing for such arbitration,
the court in which such suit is pending, upon being satisfied that the issue
involved in such suit or proceeding is referable to arbitration under such an
agreement, shall on application of one of the parties stay the trial of the
action until such arbitration has been had in accordance with the terms of the
agreement, providing the applicant for the stay is not in default in proceeding
with such arbitration.[28]
The court held that Section 3 of the FAA does not expressly address the issue of preliminary relief because Section 3 “declares only that the court shall stay ‘the trial of the action’ [but] it does not mention preliminary injunctions or other pre-trial proceedings.”[29] The court found that the Teradyne court’s rationale of issuing injunctive relief in order to preserve the status quo pending arbitration was convincing and the court concluded that there was no conflict, and therefore, no implicit prohibition to granting a preliminary injunction in an arbitrable dispute.[30]
Fourth Circuit
In Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Bradley,[31] the parties entered into an employment agreement which provided that any controversy arising out of the employment or the termination of employment “shall be settled by arbitration.” The Fourth Circuit held that “where a dispute is subject to mandatory arbitration under the Federal Arbitration Act, a district court has the discretion to grant a preliminary injunction to preserve the status quo pending the arbitration of the parties’ dispute.”[32] The court found that Section 3 of the FAA “does not preclude a district court from granting one party a preliminary injunction to preserve the status quo pending arbitration.”[33] The court noted that Section 3 does not mention preliminary injunctions and “nothing in the statute’s legislative history suggests that the word ‘trial’ should be given a meaning other than its common and ordinary usage.”[34] The court further pointed out that “Congress would [not] have enacted a statute intended to have the sweeping effect of stripping the federal judiciary of its equitable powers in all arbitrable commercial disputes without undertaking a comprehensive discussion and evaluation of the statute’s effect.”[35]
Sixth Circuit
In a breach of contract action in which the parties agreed that arbitration would be “the sole and exclusive remedy for resolving any disputes between the parties,” the Sixth Circuit held that in “a dispute subject to mandatory arbitration under the Federal Arbitration Act, a district court has subject matter jurisdiction under § 3 of the [Federal Arbitration] Act to grant preliminary injunctive relief provided that the party seeking the relief satisfies the four criteria which are prerequisites to the grant of such relief.”[36] After reviewing the relevant case law, the court adopted the reasoning of the First, Second, Third, Fourth, and Seventh Circuits in reaching its decision.[37] The court concluded that allowing courts the power to grant injunctive relief pending arbitration is “particularly appropriate and furthers the Congressional purpose behind the Federal Arbitration Act, where the withholding of injunctive relief would render the process of arbitration a meaningless or hollow formality because an arbitral award, at the time it [is] rendered, ‘could not return the parties substantially to the status quo ante.’”[38] The court further held that “once the arbitration begins, it is for the arbitrators to decide how to maintain the status quo during the pendency of the arbitration process.”[39]
Seventh Circuit
In a case involving an international commercial contract which required the parties to arbitrate “any and all” contractual disputes, the Seventh Circuit examined “whether one party waive[d] its rights to arbitration by filing suit to enjoin the other party from breaching [the] contract pending arbitration.”[40] The court held that the plaintiff’s right to seek injunctive relief and its right to arbitrate were not incompatible and plaintiff “need not have abandoned one to pursue the other.”[41]
In a later case, the Seventh Circuit affirmed its holding in Sauer-Getriebe that “district courts are not precluded as a general matter from issuing preliminary injunctive relief pending arbitration.”[42] The court cautioned, however, that the authority of district courts to grant preliminary relief does not extend indefinitely.[43] The court noted that “courts are ill-advised to extend the injunction once arbitration proceeds.”[44] The court held that the district court erred in extending the temporary restraining order after arbitration proceedings in the matter had commenced and noted that an arbitration panel, once assembled, could “enter whatever temporary injunctive relief it deems necessary to maintain the status quo.”[45]
Courts
Not In Favor Of Preliminary Relief Pending Arbitration
Eighth Circuit
The Eight Circuit Court of Appeals has held that federal courts do not have jurisdiction to grant preliminary injunctive relief in an arbitrable dispute pursuant to the FAA. In Merrill Lynch, Pierce, Fenner & Smith v. Hovey,[46] former Merrill Lynch employees sought arbitration pursuant to the FAA based on New York Stock Exchange Rule 347 which stated that “[a]ny controversy . . . arising out of the employment or termination of employment . . . shall be settled by arbitration.”[47] In relying on U.S. Supreme Court precedent which stood for the proposition that Congress intended the FAA to facilitate quick and expeditious arbitration, the court held that the district court abused its discretion in granting a preliminary injunction because “the judicial inquiry requisite to determine the propriety of injunctive relief necessarily would inject the court into the merits of issues more appropriately left to the arbitrator.”[48] The court noted that “where the Arbitration Act is applicable and no qualifying contractual language has been alleged, the district court err[ed] in granting injunctive relief.”[49] The court stated that it was sustaining not only “‘the plain meaning of the statute but also the unmistakably clear congressional purpose that the arbitration procedure, when selected by the parties to a contract, be speedy and not subject to delay and obstruction in the courts.’”[50]
In Hovey, the court indicated that its decision may have been different had the parties included qualifying contractual language to allow for preliminary relief pending arbitration.[51] In a later case, the Eighth Circuit found that the contract at issue contained qualifying contractual language permitting injunctive relief and held that the district court erred in refusing to issue an injunction ordering the parties to continue performance of the contract pending arbitration proceedings. In Peabody Coalsales Co. v. Tampa Electric Co.,[52] the court found the term “qualifying contractual language” to mean “language which provides the court with clear grounds to grant relief without addressing the merits of the underlying arbitrable dispute.”[53] The agreement between the parties stated that “[u]nless otherwise agreed in writing . . . performance of their respective obligations under [the] Agreement shall be continued fully by the parties during the dispute resolution process.”[54] The court held that the contract clearly required continued performance during the arbitration process.[55] The court found that the judicial inquiry involved in ordering performance was limited because the court “need only read the contract and order arbitration according to its provisions. Such an inquiry does not implicate Hovey’s concern with becoming entangled in the merits of the underlying dispute.”[56] Because ordering continued performance of the contract did not require the court to reach the merits, a preliminary injunction should have been granted.[57]
Ninth Circuit
A decision of the Ninth Circuit Court of Appeals indicates that a federal court’s issuance of a preliminary injunction may be inappropriate where the underlying dispute is subject to mandatory arbitration and where the rules applicable to the arbitration proceeding provide for the arbitrators’ to award injunctive relief. In Simula, Inc. v. Autoliv, Inc.,[58] the parties entered into an agreement containing an arbitration provision mandating that “[a]ll disputes arising in connection with this Agreement” shall be finally resolved under the arbitration rules of the International Chamber of Commerce (“ICC”).[59] The district court subsequently granted defendant’s motion to compel arbitration filed in response to plaintiff’s request for injunctive relief, having construed the broad language of the arbitration clause as reaching “every dispute between the parties having a significant relationship to the contract and all disputes having their origin or genesis in the contract.”[60]
On appeal, plaintiff argued that the
district court abused its discretion in denying the request for a preliminary
injunction. As specifically stressed by
plaintiff, “preliminary injunctive relief should have been granted by the
district court because the arbitrators cannot grant such relief.”[61] The court of appeals noted, however, that the
district court had “correctly concluded that all of [plaintiff’s] claims were
arbitrable and the ICC arbitral tribunal is authorized to grant the equivalent
of an injunction pendente lite” under
the ICC arbitration rules.[62] Consequently, the court of appeals affirmed
the district court’s denial of plaintiff’s request for injunctive relief having
determined that there was no abuse of discretion on this record.[63]
Simula raises some interesting questions regarding the propriety of court ordered injunctive relief in arbitrable disputes which are governed by rules providing an arbitral tribunal the right to award injunctive relief. Indeed, the arbitration rules published by the American Arbitration Association, JAMS and the ICC all contain provisions allowing for an arbitrator to award “interim” relief or measures and to require the posting of security for such interim relief. Clearly, an argument can be made that only an arbitral tribunal, once empanelled, has the authority to grant injunctive relief in arbitrable disputes governed by these arbitration entities.
III. UNDER WHAT CIRCUMSTANCES WILL A FEDERAL
COURT GRANT AN EXPEDITED DISCOVERY REQUEST ADVANCED IN CONNECTION WITH
INJUNCTIVE PROCEEDINGS WHERE THE UNDERLYING DISPUTE IS SUBJECT TO MANDATORY
ARBITRATION?
A. Considerations
Governing Grant Of An Expedited Discovery Request Generally
Unless authorized by a
particular rule, court order or agreement of the parties, “a party may not seek
discovery from any source before the parties have conferred as required by Rule
26(f)” of the Federal Rules of Civil Procedure.[64] Unfortunately, however, the Federal Rules of
Civil Procedure do ‘not provide a standard under which a court should decide
expedited discovery motions.”[65] Nevertheless, and while there “is scant
authority on the standards governing the availability of expedited discovery
before the Rule 26(f) scheduling conference in civil cases,”[66]
it is uniformly recognized that federal courts “have wide discretion with
respect to discovery” matters and that “[e]xpedited discovery is particularly
appropriate when a plaintiff seeks injunctive relief because of the expedited
nature of injunctive proceedings.”[67]
Numerous courts have
considered the following four (4) factors enunciated in Notaro v. Koch as the standard to evaluate the propriety of
expedited discovery requests:
(1) irreparable injury, (2) some probability
of success on the merits, (3) some connection between the expedited discovery
and the avoidance of the irreparable injury, and (4) some evidence that the
injury that will result without expedited discovery looms greater than the
injury that the defendant will suffer if the expedited relief is granted.[68]
As is readily apparent, the aforementioned standard utilizes “factors
similar to those used for injunctive relief or specific performance”[69]
the only differences being “that causation is considered and the public
interest is not considered.”[70] In this regard, the Notaro standard has been criticized as an inappropriate standard
where expedited discovery is sought to prepare for a preliminary injunction
hearing.[71]
Some courts have
rejected the stringent Notaro
standard, opting instead to evaluate an expedited discovery request by way of a
“reasonableness” standard. The
“reasonableness” standard is recognized as “less demanding than the Notaro factors”[72]
and requires a court to review “the entirety of the record to date and the reasonableness
of the request in light of all of the surrounding circumstances....”[73] The factors utilized to evaluate an expedited
discovery request under the “reasonableness” standard have been articulated to
include:
(1) whether a preliminary injunction is
pending; (2) the breadth of the discovery requests; (3) the purpose for
requesting the expedited discovery; (4) the burden on the defendants to comply
with the requests; and (5) how far in advance of the typical discovery process
the request was made.[74]
As such, “[w]hether or not a preliminary injunction hearing is pending,
then, has become one factor to be evaluated among many, rather than an outcome
determinative fact” in deciding expedited discovery requests under the
“reasonableness” standard.[75]
Federal courts may also
employ an amorphous “good cause” standard to analyze an expedited discovery
request. Unlike the Notaro and “reasonableness” standards, courts have found “good
cause” for the granting of expedited discovery requests “where the need for
expedited discovery, in consideration of the administration of justice,
outweighs the prejudice to the responding party.”[76]
The foregoing discussion
makes it abundantly clear that, while federal courts across the country
recognize their inherent discretion to grant or deny an expedited discovery
request, the appropriate standard to be applied and precise factors to be
considered in determining how best to exercise that discretion varies. What does not appear open for debate,
however, is that, regardless of the standard to be applied, it is incumbent
upon the requesting party to “make some prima
facie showing of the need for the
expedited discovery” insofar as “[e]xpedited discovery is not the norm.”[77] As it specifically relates to expedited
discovery requests in connection with preliminary injunction proceedings, the
requesting party’s failure “to tailor the discovery sought to the time
constraints proposed by the plaintiff, or to the specific issues that will be
determined at the preliminary injunction hearing” may prove fatal.[78]
B. The
Arbitration “Variable” In An Expedited
Discovery Request
The question remains as
to what impact, if any, the existence of a parallel arbitration proceeding may
have on whether and to what extent a federal court exercises its inherent
discretion to grant an expedited discovery request in connection with
injunctive proceedings. Like the varying
judicially-created standards used to evaluate an expedited discovery request
generally, there is no hard and fast rule as to how a federal court accounts
for the arbitration variable in disposing of an expedited discovery
request. However, a review of several
decisions involving the three components of this issue—i.e. a federal court
injunction proceeding; an expedited discovery request advanced in connection
with that proceeding; and a mandatory arbitration provision governing the
underlying dispute—reveals that the existence of a pending arbitration
proceeding may be a factor considered by a federal court in determining whether
the grant of an expedited discovery request is appropriate.
Indeed, in Independence Blue Cross v. Health Systems Integration, Inc., the defendant argued that plaintiff’s motion for expedited discovery should be denied because the underlying dispute was subject to “a currently pending arbitration proceeding” and, as such, “all decisions concerning the availability and scope of discovery” were within the arbitration panel’s authority and “should not be usurped” by the court.[79] While putting off for another day the question regarding the court’s jurisdiction over the injunction proceeding in light of the mandatory arbitration agreement, the United States District Court for the Eastern District