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Emphasizing how critical it is to avoid a jury in this inhospitable locale, the general counsel asks you what AJAX can do to enforce its arbitration rights if, as anticipated, the plaintiff refuses to arbitrate and insists on pressing its lawsuit. Your initial impulse is to advise AJAX to move in the state court to stay the lawsuit pending arbitration, but you remember hearing about something called the “Federal Arbitration Act.” You therefore refrain from blurting out your gut reaction and gracefully suggest that the general counsel fax you the arbitration clause and the complaint. Then you race to the law library for help.

After the Supreme Court decided Worcester v. Georgia in 1832, President Andrew Jackson is said to have remarked, “John Marshall has made his decision: now let him enforce it!” Parties to arbitration agreements often act on a similar sentiment. No matter how well-crafted a contract’s arbitration clause may be, the provision is a meaningless gesture unless it can be enforced when a dispute arises. The legion of published decisions dealing with arbitration agreements attests to the obstacles that an obdurate opponent can strew in the path of a party invoking its arbitration rights. Moreover, despite the recent surge of interest in alternative dispute resolution, judicial opposition to arbitration persists and, in some jurisdictions, has grown more virulent. A 1995 state supreme court decision refusing to enforce an arbitration agreement condemned standard AAA arbitration as “inconvenient, expensive and devoid of procedural safeguards,” and the author of the opinion wrote his own concurrence to declare that arbitration “subvert[s] our system of justice as we have come to know it.” See Doctor’s Associates, Inc. v. Casarotto, 901 P.2d 596 (Mont. 1995) rev’d, 116 S. Ct 1652 (1996).

How then does AJAX enforce its arbitration agreement? Depending upon the jurisdictional facts, there are three basic approaches:

1. AJAX can seek a stay based on the arbitration clause in the state court where the action is pending;
2. it can remove the state court case to federal court in the plaintiff’s jurisdiction and move that court to stay the case pending arbitration under section 3 of the Federal Arbitration Act (FAA); or
3. it can file a petition to compel arbitration under section 4 of the FAA in the federal district court where the arbitration is supposed to occur – in this instance, AJAX’s home state.

Knowing the mechanics, pitfalls and advantages of each of these approaches may well determine whether AJAX arbitrates in its own jurisdiction, or suffers the high anxiety of awaiting a jury verdict in the plaintiff’s hometown.

Getting Started.
A Chinese proverb instructs that a journey of a thousand miles begins with the first step. The first step in enforcing an arbitration agreement is to get familiar with the FAA, 9 U.S.C. §§ 1-16. Congress enacted the FAA in 1925 to reverse centuries of judicial opposition to arbitration, a hostility derived from the practice of English courts, which were “opposed to anything that would altogether deprive them of jurisdiction.” Bernhardt v. Polygraphic Co. of Am., 350 U.S. 198, 211 n.5 (1956) (Frankfurter, J., concurring). Particularly in recent years, the FAA has become the ultimate weapon in the arsenal of a lawyer seeking to compel arbitration.

Section 2, the primary substantive provision of the FAA, unequivocally declares that written arbitration provisions within the purview of the Act are “valid, irrevocable and enforceable,” except for grounds that may exist for the revocation of contracts generally. The balance of the Act sets forth the procedural mechanisms for implementing this congressional directive. In particular, section 3 permits any party to the arbitration agreement to seek a stay of a lawsuit involving issues subject to the agreement. Section 4 authorizes the filing of a petition to compel a recalcitrant party to arbitrate a dispute covered by the agreement, and federal courts granting petitions to compel also have the power to enjoin the state court lawsuit as the arbitration proceeds.

While the language of the FAA has remained essentially unchanged for over sixty years, enforcement of the Act’s provisions has undergone profound change in the courts, especially the United States Supreme Court, prompting Justice Stevens to protest more than once that the Court has effectively rewritten the statute. The Supreme Court has frequently examined the scope and protections of the FAA. In a little over a decade, the Court has decided thirteen cases involving the Act, with three FAA decisions in its 1995 Term alone. And there are scores of decisions by the lower federal courts as well. If counsel fails to understand and to make smart use of this abundant jurisprudence, AJAX may well lose the battle over how its dispute with the plaintiff will be resolved.

The Supreme Court has repeatedly emphasized that the FAA embodies a congressional declaration of a liberal federal policy favoring arbitration agreements. According to the Court, the Act expresses Congress’s intent “to mandate enforcement of all covered arbitration agreements.” Moses H. Cone Memorial Hosp. vs. Mercury Constr. Co., 460 U.S. 1, 24, 26 n.34 (1983). Since the FAA extends to the full reach of the Commerce Clause, a “covered arbitration agreement” effectively means the arbitration provision in virtually every written commercial contract, including a contract as seemingly local as an agreement to inspect a home for termites. Allied-Bruce Terminix Cos. v. Dobson, 115 S. Ct. 834, 840 (1995).

Moreover, the Supreme Court has recently reaffirmed that in enacting the FAA, Congress created a body of federal substantive law controlling all questions about the validity and enforceability of arbitration agreements within the Act’s scope. Accordingly, the substantive command of the FAA — that “courts rigorously enforce agreements to arbitrate” — applies in state and federal courts alike. Terminix, 115 S. Ct. at 838-39. The Court has also reiterated of late that the Act preempts all state laws in conflict with the FAA’s requirements. The FAA, therefore, preempts all state laws (and there are dozens of them) that impose heightened notice or signature requirements or special formats for arbitration clauses; states must place agreements to arbitrate “upon the same footing as other contracts.” Casarotto,116 S. Ct. at 1656.

Moving in State Court.
Recall that the first reaction of AJAX’s outside counsel was to recommend filing a motion in state court to enforce the agreement to arbitrate. The authors’ personal experience teaches that filing such a motion should, in fact, be the absolute last resort.

Why? Because in certain jurisdictions, state court obedience to United States Supreme Court precedent on arbitration is reluctant at best, and sometimes nonexistent. A vivid example of this attitude was provided recently by two justices of the Montana Supreme Court, who refused to sign their names to an order on remand from the United States Supreme Court. “We cannot in good conscience be an instrument of a policy which is as legally unfounded, socially detrimental, and philosophically misguided as the United States Supreme Court’s decision in this and other cases which interpret and apply the Federal Arbitration Act.” Casarotto v. Lombardi, No. 93-488 (Mont. Sup. Ct. July 16, 1996). Particularly in states that have always been hostile to arbitration (for example, until 1995 when the Supreme Court told it otherwise, Alabama made all predispute arbitration agreements unenforceable), theoretical rights under the FAA can prove cold comfort in practice. Without in any way suggesting that all state courts are inhospitable to arbitration, the fact remains that federal courts have generally proved more receptive to arbitration than have their state counterparts. Thus, federal judges are likely to wax almost poetic about arbitration, extolling it as a valuable “device that relieves some of the organic pressure on our [legal] system,” while a state supreme court justice has denounced those views as a “type of arrogance [that] not only reflects an intellectual detachment from reality, but a self-serving disregard for the purposes for which courts exist.” Compare Securities Indus. Ass’n v. Connolly, 883 F.2d 1114, 1116 (1st Cir. 1989), cert. denied, 495 U.S. 956 (1990) with Casarotto v. Lombardi, 886 P.2d 931, 940 (Mont. 1994) (Trieweiler, J., concurring). If AJAX is able to get to federal court, it should do so immediately.

As discussed below, however, AJAX may have to litigate arbitrability in state court because there is no basis for federal subject matter jurisdiction. If so, counsel will no doubt consider seeking relief under the state’s arbitration act. After all, section 2 of the Uniform Arbitration Act, a version of which has been enacted in virtually every state, establishes a procedure to compel arbitration that is similar FAA’s. Nevertheless, unless the state law precedent on arbitration is overwhelmingly positive (and it is difficult to conceive of authority more favorable than the leading decisions interpreting the FAA), AJAX’s counsel would for several reasons be well advised to rely only upon federal law in seeking to enforce the arbitration agreement. (State courts, even those openly hostile to arbitration, have uniformly assumed that the procedures of section 3 of the FAA apply to them, even though the United States Supreme Court has never definitively ruled on this issue.)

First, many states’ laws contain exceptions to enforceability or other provisions that may compromise the agreement to arbitrate. These laws are of questionable validity as applied to a contract subject to the FAA, but counsel’s reliance on state law may erroneously and unnecessarily suggest to a state judge that the protections of federal law can be ignored, or, worse yet, have been waived. That is precisely what happened in Yates v. Doctor’s Associates, Inc., 549 N.E.2d 1010, 1014 (Ill. App. Ct. 1990), where the appellate court held that a party had waived its rights under the FAA by moving for a stay in the trial court based on state arbitration law only. While the Yates decision is undoubtedly wrong, the last thing AJAX wants is to have to go all the way to the United States Supreme Court to vindicate its right to arbitrate.

Second, many state courts have shown a disturbing willingness to construe their own arbitration laws, or the parties’ agreement, so as to defeat a party’s right to arbitrate. Perhaps the best known example of this occurred in Volt Info. Sciences, Inc. v. Board of Trustees of Leland Stanford Junior Univ., 489 U.S. 468 (1989), where California state courts interpreted a contract’s choice of law clause as incorporating the procedures of California’s arbitration statute. That law allowed a California court to stay arbitration pending resolution of a related suit between parties to the arbitration agreement and litigants not party to the contract — a procedure completely at odds with the FAA’s requirements (see below). The Supreme Court refused to review the California courts’ interpretation of the choice of law clause and concluded that the FAA permitted the courts to stay the arbitration in favor of litigation, because this was consistent with both the parties’ agreement, as construed by the California courts, and the FAA, which merely requires enforcement of an agreement to arbitrate on whatever terms the parties have chosen.

In addition to the priorities between litigation and arbitration, there are many other areas, such as consolidation and class actions (also discussed below), where state arbitration law varies, or may be construed to vary, significantly from the FAA. In the past, many state courts have taken Volt as providing carte blanche to apply their own arbitration laws, even when doing so thwarts a party’s contractual right to arbitrate. In two decisions within the past year, the Supreme Court has signaled that Volt did no such thing. Casarotto, 116 S. Ct. at 1656-57; Mastrobuono v. Shearson-Lehman Hutton, Inc., 115 S. Ct. 1212, 1216 (1995). Nonetheless, there is no reason for AJAX’s counsel to focus the court’s attention on state arbitration law. Federal law under the FAA is uniform, well developed, extremely favorable to arbitration, and applies in state court. AJAX should take full advantage of it.

AJAX’s lawyer might also be tempted to forum shop, first testing the state court’s views on arbitration and then, if things go poorly jumping into federal court. Resist temptation. Under the full faith and credit statute, 28 U.S.C. § 1738, depending upon the states law on res judicata and collateral estoppel, a state court decision on arbitrability in connection with a section 3 motion to stay may have preclusive effect, so that an adverse ruling in state court would bar any later attempt by AJAX to compel arbitration in a more hospitable federal court. The Second Circuit’s decision in Doctor’s Associates, Inc. v. Distajo, 66 F.3d 438, 446-51 (2d Cir. 1995) illustrates the risks. There, franchisees had filed state court suits in various jurisdictions, including Alabama and Illinois. While the franchisor’s petitions to compel arbitration were pending in federal court, the Alabama and Illinois state courts ruled in response to motions by the franchisees that the arbitration clause in the franchise agreement was unenforceable. The federal district judge concluded that he was not bound by those decisions and compelled all the franchisees to arbitrate. On appeal, the Second Circuit held that, because of differences in Illinois and Alabama law on res judicata and collateral estoppel, the Illinois decisions did not control under the full faith and credit statute, but the Alabama decision did-leaving the franchisor with no recourse on the question of arbitrability in the Alabama case but to appeal to the state’s supreme court. Experience counsels, therefore, that if AJAX can assert its arbitration rights in a federal forum, it should do so and do it promptly, taking steps (such as a preliminary injunction motion, discussed below) to ensure that the federal court addresses arbitrability before the state court does.

Federal Court Remedies.
Since the FAA creates substantive federal rights, one would logically assume that a federal forum is always available to enforce those rights. One would be wrong, however. The FAA is, in Justice Brennan’s polite formulation, “something of an anomaly in the field of federal court jurisdiction,” Moses H. Cone, 460 U.S. at 25 n32 because the rights established by the Act cannot be the basis for invoking federal court jurisdiction under 28 U.S.C. § 1331. Do not bother trying to understand why this is so. Many pages of the U.S. and federal reports are devoted to this “anomaly.” Suffice it to say that to get into federal court, AJAX must find an independent basis for subject matter jurisdiction.

AJAX has two potential avenues for enforcing its arbitration rights in federal court. If the requirements of 28 U.S.C. § 1441 can be met, AJAX can remove the plaintiff’s lawsuit to the federal court in the jurisdiction where the case is pending and then move the federal court to stay the action under section 3. Frequently, however, this option is not available because an alert plaintiff has limited the complaint to state law claims and named a local party (perhaps a local agent or employee) as an additional defendant, thereby eliminating both federal question and diversity jurisdiction.

AJAX can also file a petition to compel arbitration under section 4 in the federal district court with jurisdiction over the arbitration site designated in the parties’ contract. This course has many important advantages, not the least of which is that it is easier to establish subject matter jurisdiction. Because section 4 actions only involve the parties to the arbitration agreement, the presence of other non-diverse parties in the state court action will not, of itself, defeat federal court jurisdiction over the petition to compel. See Distajo, 66 F.3d at 44-46.

Motion to Stay.
Under section 3 of the FAA, AJAX is entitled to a stay if the court is satisfied that the issue in the pending action “is referable to arbitration under [the parties’] agreement” and the party seeking to invoke arbitration “is not in default in proceeding with … arbitration,” a requirement that can be met by filing a demand for arbitration with the supervising organization designated in the contract (in our example, the AAA). Significantly, section 3, like section 4, “call[s] for an expeditious and summary hearing, with only restricted inquiry into factual issues” so as not to “frustrate[] the statutory policy of rapid and unobstructed enforcement of arbitration agreements.” Moses H. Cone, 460 U.S. at 22-23.

Absent a specific clause to the contrary, it is for the court, not the arbitrators, to decide whether an issue is “referable” to arbitration. As a matter of federal law, any doubts about the scope of arbitrable issues must be resolved in favor of arbitration. Because of this presumption and because courts are required to construe arbitration agreements liberally, federal courts generally find issues to be arbitrable unless it is clear that the arbitration clause does not cover them. Courts have regularly read contract clauses like the standard AAA language (“any controversy or claim arising out of or relating to this contract or the breach thereof”) to reach all aspects of the parties’ relationship and to encompass tort and even statutory claims-including RICO and securities causes of action-as well as those for breach of contract. E.g., National Union Fire Ins. Co. v. Bleco Petroleum Corp., 88 F.3d 129 (2d Cir. 1996). If the dispute is within the scope of the arbitration clause, the court may not delve further into the merits of the parties’ dispute.

Once the movant demonstrates that the issue in the pending action is referable to arbitration, the burden shifts to the party opposing arbitration to establish that the court should not enforce the arbitration clause. That burden is enormously difficult to carry. Two of the most common defenses in proceedings under either section 3 or section 4 are waiver and fraudulent inducement; these are addressed in more detail below. Defenses based on unconscionability, lack of consideration, mistake, lack of mutuality, adhesion contract principles, duress, and the like are also regularly trotted out in an effort to defeat arbitration rights. A detailed discussion of these defenses is beyond the scope of this article, but they rarely succeed, particularly in federal courts, owing to the presumption in favor of arbitration and the other special rules that courts have developed as a way to increase the burden on the opponent of arbitration. Doctor’s Associates, Inc. v. Jabush, 89 F.3d 109 (2d Cir. 1996).

Once a court considering a section 3 motion is satisfied that a claim in the underlying action is arbitrable and that no defense to arbitration exists, the court must stay the litigation of the arbitrable claim in favor of arbitration. The court has no discretion. Unlike the California arbitration law in Volt, section 3 does not permit the federal court to stay an arbitration in favor of related litigation. Even if the lawsuit includes nonarbitrable issues or parties who are not parties to the arbitration agreement, the court must permit the arbitration to proceed; the policies underlying the FAA require piecemeal litigation if that is necessary to give effect to an arbitration clause. Dean Witter Reynolds, Inc. vs. Byrd, 470 U.S. 213, 221 (1985). More often, however, where there are issues of fact common to the pending lawsuit and the arbitration, the court will stay the entire lawsuit in order to conserve judicial resources, limit confusion, and avoid the risk that the litigation may have a collateral estoppel effect on the arbitration. E.g., Kroll vs. Doctor’s Associates, Inc., 3 F.3d 1167, 1171-72 (7th Cir. 1993); American Home Assur. Co. v. Vecco Concrete Constr. Co., 629 F.2d 961, 964 (4th Cir. 1980).

Many federal courts considering section 3 stay motions have recognized that the real question under this section is whether the issue in the litigation is subject to an arbitration agreement, not whether each defendant is or could be a party to the agreement. For example, the Seventh Circuit has upheld a section 3 stay even though the defendant in the stayed action had not agreed to arbitrate with the plaintiff, but was only a guarantor for a party to an arbitration agreement with the plaintiff. Judge Wood concluded that, since the liability of the non-party to the arbitration agreement turned on the liability of the party to the agreement, the action should be stayed as to the non-party because “the extent of such liability is completely dependent upon the arbitrable issues of fact.” Morrie Mages & Shirlee Mages Foundation vs. Thrifty Corp., 916 F.2d 402, 407 (7th Cir. 1990).

Petition to Compel Arbitration.
Though section 4 of the FAA is not a model of clarity in identifying where a petition to compel arbitration must be filed, case law has now established that the petition may be brought only in the federal district with jurisdiction over the contractually specified site of arbitration. In our example, therefore, section 4 gives AJAX access to the federal court in its home state (at least in a dispute with an out-of-state plaintiff). Section 4 also contemplates a prompt decision on the petition to compel arbitration, eliminating most of the delaying tactics normally available to defendants in federal litigation.

At first blush, a section 4 petition seems functionally the equivalent of a complaint in any other case. It is not. Consistent with the Supreme Court’s admonition that courts are to direct “arbitrable dispute[s] out of the court and into arbitration as quickly as possible,” Moses H. Cone, 460 U.S. at 22, section 6 of the FAA requires the district court to consider such a petition expeditiously, “in the manner provided [for] motions.” Because section 4 provides that the party resisting arbitration must receive five days’ written notice of the petition to compel, at least two federal circuits have held that a section 4 petition is ripe for decision as soon as those five days are up, and that the standard timetables of the Federal Rules of Civil Procedure and district court local rules do not apply.

Engaging in Fraud
Obtaining personal jurisdiction over the plaintiff in AJAX’s home state will not be a problem. Federal courts have uniformly held that by agreeing to arbitrate in a given jurisdiction, each party to the contract consents to personal jurisdiction and venue in the courts of that jurisdiction. Immediate service should be easily accomplished as well. Section 4 requires that notice of the petition be served ‘In the manner provided by the Federal Rules of Civil Procedure.” But many arbitration agreements incorporate the AAA’s Commercial Arbitration Rules, which authorize service of all process, in the arbitration and in related judicial proceedings, by regular mail and fax. At least two courts considering section 4 petitions have upheld service under this AAA provision, and decided that, because the party resisting arbitration had consented to personal jurisdiction and venue by agreeing to arbitrate in the jurisdiction, service could be made in any manner consistent with basic notions of due process, including regular mail and fax. Doctor’s Associates, Inc. v. Stuart, 85 F.3d 975, 982 (2d Cir. 1996).

A federal court also need not tarry long on a suggestion that it abstain under the Colorado River doctrine from addressing the section 4 petition because there is already a state court action. The Supreme Court established some time ago in Moses H. Cone that abstention on that ground would usually be an abuse of discretion, even though the state court might be able to grant the party seeking to enforce the arbitration agreement the same relief (albeit under state law) available in federal court. While abstention is still theoretically possible, “the presence of the federal-law [FAA] issues must always be a major condition weighing against surrender” of jurisdiction. 460 U.S. at 24-35. Just this past Term, the Supreme Court held that the importance of providing a federal forum for resolving FAA issues carries the same weight under the Burford abstention doctrine. Quackenbush v. Allstate Ins. Co., 64 U.S.L.W. 4379, 4385 (June 3, 1996).

Though section 4 allows the party resisting arbitration to demand a jury trial “[i]f the making of an arbitration agreement or the failure, neglect, or refusal to perform the same be in issue,” 9 U.S.C. § 4, a party resisting arbitration is not entitled to a jury trial merely by demanding one, but must instead produce specific evidence to substantiate the factual defenses to arbitrability. Published decisions under section 4 show that jury trials are rarely granted. Unless there is a genuine factual dispute about whether the party actually agreed to arbitrate, there is only the slightest chance that a district court will allow a jury trial, thus further speeding the process of resolution. Eg., Jabush, 89 F.3d at 114; Stuart, 85 F.3d at 983-84.

A party resisting a petition to compel may plead fraudulent inducement as a defense, since section 4 requires the court to be “satisfied that the making of the agreement for arbitration is not in issue.” While there is no such language in section 3, the Supreme Court has construed that provision to allow parties to raise similar defenses. However, the Court has also made it clear that under either section 3 or 4, a court cannot consider a fraudulent inducement defense that relates to the contract as a whole; that issue is for the arbitrator alone to decide. Prima Paint Corp v. Flood & Conklin Mfg. Co., 388 U.S. 395, 404 (1967). Therefore, a court deciding a motion to compel or stay can address a fraudulent inducement defense only when the fraud was purportedly directed specifically to the arbitration clause itself.

In the real world, of course, it is hard to imagine one party engaging in fraud for the sole purpose of convincing the other to agree to arbitrate. If people are intent on fraudulent conduct, they are far more likely to direct their energies to contract clauses that provide more tangible and immediate financial rewards than to the right to present a possible future dispute to an arbitration panel. Prima Paint thus ensures that in most cases, a court will not be sidetracked for long with allegations of fraudulent inducement. And while it remains fairly routine for a party resisting arbitration to protest that “no one ever explained the meaning of the arbitration clause to me,” federal courts just as routinely reject such claims. Eg. Stuart, 85 F.3d at 979-80.

Waiver is also a defense of choice among the cognoscenti of arbitration avoidance, since a court cannot compel arbitration under section 4 unless it is satisfied that the “failure to comply [with the arbitration clause] is not in issue.” Similarly, section 3 requires the court to be satisfied that the party seeking a stay is not “in default in proceeding with” arbitration.

Here as well, however, courts have developed special rules to speed the inquiry and ensure enforcement of arbitration. The waiver determination must be made with a healthy regard to the policy promoting arbitration, and any doubts must be resolved in favor of arbitration, leading courts to pronounce with regularity that waiver of arbitration will not be lightly inferred. Accordingly, the burden of establishing waiver, which rests with the party opposing arbitration, is very difficult to sustain. The proponent of a waiver defense must show that the party seeking arbitration was aware of the existence of the arbitration agreement; that the party’s conduct was “inconsistent” with the intent to assert the right to arbitrate; and, in at least four federal circuits, that the party resisting arbitration has suffered prejudice. (The Seventh Circuit does not require a showing of prejudice, but admits that it is in the minority on this issue.) What constitutes “prejudice” is not entirely clear from the case law, but there is no question that establishing prejudice can be quite difficult. For example, the Second Circuit has held that even the pretrial expense and delay of defending a lawsuit, without more, does not rise to the level of prejudice needed to prove waiver. Rush v. Oppenheimer & Co., 779 F.2d 885, 887-88 (2d Cir. 1985).

Counsel should also keep in mind that the AAA rules (and perhaps those of other ADR providers), may help in rebuffing a waiver defense. Rule 47(a) of the AAA’s Commercial Arbitration Rules states that “no judicial proceedings by a party relating to the subject matter of the arbitration shall be deemed a waiver of the party’s right to arbitrate.” By expressly incorporating these rules in the arbitration agreement, a party may be able to rely upon this antiwaiver provision.

Waiver can be a trap for the unwary, however. The plaintiff might suggest, and AJAX might find appealing, court sponsored settlement or mediation efforts before “bothering” with the arbitration-court issue. Also, because arbitration usually allows only limited discovery, AJAX itself might ask its counsel to “do a little discovery” before pursuing arbitration. But any voluntary participation in activities before the state court is perilous for the party who wants to compel arbitration.

In practice, if AJAX promptly moves for a stay or petitions to compel arbitration, takes no affirmative steps in the state court action, and resists any efforts by the plaintiff to move the case, there will be no waiver. By contrast, if AJAX voluntarily participates to any significant degree in pretrial proceedings on the merits of the state court suit, a finding that it waived its right to arbitrate is a serious risk. Between these two poles, the decision on waiver depends upon the court and the particular facts. In the Thrifty Corp. case cited above, for example, the Seventh Circuit rejected a waiver claim based upon participation in settlement talks, what the party invoking arbitration had made a timely demand. 916 F.2d at 405. In Zwitserse Maatchappij van Levensverzerkering cn Lijfrente v. ABN Int’l Capital Markets Corp., 996 F.2d 1478, 1480 (2d Cir. 1993), on the other hand, the Second Circuit held that a party’s conduct of discovery not available in arbitration made “this one of those ‘rare cases’ where the policy favoring arbitration has been outweighed.”

The bottom line for counsel asked to compel arbitration? Don’t mess around. Promptly assert your client’s right to arbitrate by demanding that your opponent arbitrate the dispute and filing the appropriate motions in court to accomplish that result. Talk settlement later, try to keep the state court action from progressing on the merits, and content yourself with whatever discovery the applicable arbitration rules will eventually allow.

A final area where the FAA will probably be advantageous for AJAX is in avoiding class actions and consolidation, particularly if the Act is being applied by a federal court. If AJAX is experiencing a surge of litigation with common claims, it may have a strong interest in forcing each plaintiff to present a separate case on the merits, while the plaintiffs may wish to proceed together, either as a class action or in some other consolidated fashion. Except for an anomalous decision by the First Circuit that is now of questionable validity in light of more recent Supreme Court precedent, federal courts are uniform in holding that, absent an express agreement between the parties, the FAA prohibits consolidated and class arbitrations. As the Seventh Circuit recently put it in “adopt[ing] the rationale of several other circuits,” “section 4 of the FAA forbids federal judges from ordering class arbitration where the parties’ arbitration agreement is silent in the matter.” Champ v. Siegel Trading Co., 55 F.3d 269, 275 (7th Cir. 1995). The few state courts to consider the issue have split on whether they can order class or consolidated arbitrations. Compare Keating v. Supreme Court of Almeda County, 31 Cal. 3d 584, 608 (1982), rev’d on other grounds, 465 U.S. 1 (1984) with Bay County, Bldg. Auth. V. Spence Bros., 362 NW.2d 739, 741 (Mich. 1984).

If AJAX’s counsel is unsuccessful in convincing the federal district court to grant a section 3 stay or a section 4 petition to compel, AJAX will have an immediate right to appeal. For under section 16 of the FAA, enacted in 1988, orders against arbitration are immediately appealable, whether they are interlocutory or final in nature. 9 U.S.C. § 16. By contrast, and consistent with the FAA’s policy of rapidly moving disputes out of court and into arbitration, orders in for of arbitration generally are not appealable, even if they otherwise constitute injunctions under 28 U.SC. § 1292(a)(1), until after the arbitration has gone forward to a final award. The sole exception to this general rule of non-appealability is for final judgments compelling arbitration where the arbitrability of the dispute was the sole issue in the district court. E.g., CNF Constructors, Inc. v. Donohue Const. Co., 57 F.3d 395, 398 (4th Cir. 1995). While there continue to be some inconsistent and perplexing decisions on appealability, particularly on when an order compelling arbitration may be appealed, section 16 has brought a considerable measure of clarity to an area beset with uncertainty before its enactment.

As should be obvious by now, section 4 of the FAA is by far the most powerful tool available to AJAX’s counsel. To ensure that the tool maintains its edge, however, it is crucial for the district court where AJAX files to decide the petition to compel as promptly as possible. In some districts with unusually crowded dockets or a shortage of judges, section 4 petitions can languish without decision for months, not with standing section 6 and the Supreme Court’s frequent pronouncements that these petitions must be decided as promptly as possible. If there is a delay in ruling on the petition, the plaintiff may seek some form of declaratory relief from the state court purporting to invalidate the arbitration clause. Fighting a “two-front war” not only will increase expense and inconvenience. In addition, as discussed above, any ruling by a state judge before the federal court acts on the section 4 petitions can create serious problems under the full faith and credit statute, 28 U.S.C. § 1738, even if AJAX appeals an adverse state court ruling.

The best way to limit that risk is to file a motion for a TRO or preliminary injunction along with the petition to compel and to request an immediate hearing. At the same time, AJAX should ask the state court to stay the lawsuit pending the federal court’s decision on the petition to compel, on the ground that arbitrability is an issue of federal law, best decided by the federal court, which has the power under the FAA to compel arbitration and to consider any defenses to arbitration that AJAX’s opponent wishes to assert. The request to stay the state case may provoke an assortment of judicial reactions, from relief and ready agreement to the same skepticism that, in certain jurisdictions, greets a motion to stay under section 3.

Of course, if AJAX had reason to suspect that its opponent was contemplating a lawsuit, it should have considered immediately filing a demand for arbitration and a section 4 petition in federal court, before its opponent had a chance to go to state court. Section 4 petitions can be brought even though no state court litigation is pending. Getting a jump on the race to the courthouse in this manner might have eliminated the state case altogether, and this strategy would in any event afford AJAX the additional argument that, since the federal case was pending first, the state court should stay its hand.

Enjoining the State Court Action.
The final piece in the most effective strategy for compelling arbitration is a federal court injunction against the state court action. This may be especially important where AJAX’s opponent, seeking to defeat diversity, has sued not only AJAX, but also its local employee, representative, or other alleged agent. Allowing the state case to proceed against the other defendants, and go to judgment before the arbitration is completed, may effectively nullify any order compelling arbitration: if AJAX accepts, or is found to have, responsibility for the conduct of its employees or agents, an adverse result in the state court lawsuit could, by virtue of collateral estoppel, dictate the outcome of the arbitration. Federal courts deciding section 3 motions have recognized this problem, and have frequently stayed cases against all defendants, including those not party to the arbitration agreement. Eg., Kroll, 3 F.3d at 1171. As one federal circuit has recently recognized, the same principles apply under section 4, and warrant injunctions against state court cases in their entirety once a petition to compel has been granted. Stuart, 85 F.3d at 984-85.

The Anti-Injunction Act, 28 U.S.C. § 2283, narrowly circumscribes a federal court’s power to enjoin state court proceedings. But it expressly authorizes a district court to “stay proceedings in a state court . . . where necessary . . . to protect or effectuate its judgements.” This provision gives federal courts equivalent power to enjoin either parties to state court proceedings or the proceedings themselves. In order to preserve the meaning and effect of a federal judgment. District courts have, therefore, routinely issued injunctions staying parties from prosecuting parallel state court proceedings, or enjoining the proceedings themselves, “when the dispute in question has been found by the federal Court to be Subject to the arbitration process of 9 U.S.C. § 2.”

In McGuire, Cornwell & Blakey & Gtieler, 765 F. Supp. 1048 (D. Colo. 1987), for example, a law firm brought a petition under section 4 to compel arbitration of an attorney fee dispute and to stay a related malpractice action in Oklahoma state court. The district court granted the law firm’s request, finding that an injunction preempting the state court case from proceeding was justified “‘to protect or effectuate’ any order compelling arbitration.” Id. at 1052. The Second Circuit recently upheld a similar injunction against parallel state court proceedings, even though the state case involved defendants who were not parties to the arbitration agreement, because the court found that the naming of nonparty defendants by the plaintiff in the state court action was a “bald attempt to evade its duty to arbitrate.” Stuart, 85 F.3d at 985. Armed with this authority, AJAX’s counsel should take full advantage of the federal courts’ ample power to enjoin the state-court case from proceeding at all while the arbitration occurs.

Many business people and defense lawyers take a dim view of arbitration: In their experience, the law and rules of evidence are often irrelevant in arbitration; it is virtually impossible to eliminate or narrow claims by motion; and arbitrators are prone to award the claimant at least some damages, regardless of the merits. This article is not the occasion to weigh the comparative strengths and weaknesses of litigation and arbitration. Notwithstanding arbitration’s many warts, arbitration clauses have become a crucial element of risk management for many companies-especially large national enterprises that make such attractive targets before juries-because arbitration substantially reduces the chance of a runaway result with a big punitive damage award. For counsel to these companies, the task is to ensure that the client’s business judgment to arbitrate disputes is enforced.

In some legal circles, alternative dispute resolution, including arbitration, is now seen as almost a miracle cure for the storied ills of litigation, and in certain jurisdictions, AJAX’s counsel can expect a warm reception to an arbitration demand. But many judges rate the arbitration cure as worse than the litigation disease, and they eagerly embrace efforts to block enforcement of arbitration clauses and pre serve for home-state plaintiffs their day in court. In that environment, no arbitration clause is self-executing, the hurdles to enforcement are sometimes insurmountable, and uninformed tactical judgments can rob a client of the benefit of its arbitration bargain. When juries in many jurisdictions are regularly hitting large, out-of-state defendants with staggering punitive damage awards, failure to enforce a client’s arbitration rights can have devastating consequences. Fortunately, Congress passed the Federal Arbitration Act to ensure uniform national treatment — and enforcement — of agreements to arbitrate. If counsel takes full advantage of the FAA and all the precedent expansively interpreting that Act, courts equivalent power to enjoin either the parties to state AJAX should succeed in moving its dispute with the plaintiff to arbitration.