Ninth Circuit Rules that Employer’s Failure to Pay Advance Arbitration Fees Results in Waiver of Right to Arbitrate and Clears the Way for Litigation in the Courts

Volume 2, Issue 19
December 18, 2003

Todd Sink sued his employer, Aden Enterprises, alleging that Aden breached Sink's employment agreement by not providing agreed-to payments and stock options. As the employment agreement contained an arbitration clause, the federal district court stayed Sink's action and referred the matter to arbitration. While the parties subsequently agreed to utilize the United States Arbitration & Mediation of Oregon ("USA&M") to arbitrate the case, Aden failed to timely pre-pay the estimated costs of the arbitration. There was no dispute that Aden, the employer, was obligated to pay these costs. USA&M informed the parties that it was canceling the scheduled arbitration due to the non-payment of fees.

Sink proceeded to file motions in the district court to lift the stay of the court proceedings in Sink's action and for judgment to be entered against Aden. In response, Aden informed the court that it had obtained the money needed to pay the costs of arbitration and sought to have the matter referred back to arbitration. The court found Aden had waived its right to arbitrate, and denied Aden's motion that the parties be ordered to return to arbitration, thus allowing the case to proceed to trial.

On appeal to the United States Court of Appeals for the Ninth Circuit, Aden argued that the Federal Arbitration Act ("FAA"), 9 U.S.C. §§ 1-16, which governs various aspects of arbitration agreements that touch upon interstate commerce, including many types of employment agreements, required the district court to return the parties to arbitration. However, in addressing this issue for the first time, the Ninth Circuit held that when a party fails to take the necessary steps to proceed to arbitration after an initial stay of court proceedings (referred to as a default), a district court can vacate the stay of court proceedings and does not have to again order arbitration upon a new motion brought by the defaulting party. The Ninth Circuit reasoned that if it accepted Aden's reading of the FAA, a party refusing to cooperate with arbitration could indefinitely postpone litigation, which is contrary to the FAA's goal of promoting the efficient and expeditious resolution of claims through arbitration.

This case illustrates the dangers of not properly and timely complying with the requirements of arbitrations covered by the FAA. Defaulting employers can quickly lose the benefits of arbitration and find themselves trying to justify their actions to a judge or jury.

Sink v. Aden Enterprises, Inc., --- F.3d ---, No. 02-35323 (9th Cir. Dec. 10, 2003).

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