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Pre-Paid Legal Servs., Inc. v. Cahill

United States Court of Appeals, Tenth Circuit

May 26, 2015

PRE-PAID LEGAL SERVICES, INC., Plaintiff - Appellee,
TODD CAHILL, Defendant - Appellant


Gary E. Smith, Gary E. Smith, P.C., Dallas, Texas, appearing for Appellant.

Timila S. Rother (Harvey D. Ellis, Jr. and Melanie Wilson Rughani, with her on the brief), Crowe & Dunlevy, Oklahoma City, Oklahoma, appearing for Appellee.

Before MATHESON, SEYMOUR, and McHUGH, Circuit Judges.


MATHESON, Circuit Judge.

Pre-Paid Legal Services, Inc., d.b.a. LegalShield (" Pre-Paid" ), sued Todd Cahill, its former employee, alleging tort and contract violations. Mr. Cahill removed the case from state to federal court based on

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diversity jurisdiction, and moved to stay the district court proceedings under the Federal Arbitration Act (" FAA" ) so the parties could pursue arbitration. The FAA requires a court to stay its proceedings pending arbitration provided " the applicant for the stay is not in default in proceeding with the arbitration." 9 U.S.C. § 3. The district court granted Mr. Cahill's motion to stay the proceedings.

Mr. Cahill, however, failed to pay his share of the arbitration fees, and the arbitrators directed termination of the arbitration proceedings. Pre-Paid moved the district court to lift the stay and resume with litigation. The court granted the motion, adopting a magistrate judge's report and recommendation. The magistrate judge had recommended lifting the stay because the arbitrators " elected to terminate" the proceedings and " [i]t is clear under these circumstances that the arbitrators considered Cahill's failure to pay to be a default in arbitration." App. at 603.

Mr. Cahill appeals the district court's order, arguing the court violated § 3 of the FAA by lifting the stay. He asks this court to reinstate the stay. Pre-Paid argues we lack jurisdiction to hear this appeal. It also opposes the appeal on the merits.

We have jurisdiction to hear this appeal under 9 U.S.C. § 16(a)(1)(A). On the merits, we affirm.


A. Factual History

Pre-Paid sells legal services contracts through which members have access to the assistance of provider attorneys. Independent sales associates sell these contracts through a network marketing system. Mr. Cahill became an independent sales associate with Pre-Paid in 2004.

In his employment contract with Pre-Paid, Mr. Cahill agreed not to solicit or recruit Pre-Paid's other sales associates during the term of his contract or for two years after its termination. The contract also required

[a]ll disputes and claims relating to [Pre-Paid], [this] Agreement, . . . or any other claims or causes of action between [Cahill and Pre-Paid] . .., whether in tort or contract, shall be settled totally and finally by arbitration . . . in accordance with the Commercial Arbitration Rules of the American Arbitration Association . . . .

App. at 120.

In 2012, Mr. Cahill left Pre-Paid to join another network marketing company. Pre-Paid alleges Mr. Cahill began to misuse trade secret information, contact other Pre-Paid associates, and solicit them to join his new place of employment.

B. Procedural History

On August 14, 2012, Pre-Paid filed an action in Oklahoma state court claiming Mr. Cahill had breached his contract, unlawfully misappropriated Pre-Paid's trade secrets, and tortiously interfered with contract and business relations. Mr. Cahill removed the action to the District Court for the Eastern District of Oklahoma.

On August 24, 2012, Mr. Cahill moved to stay the district court proceedings pending arbitration. Pre-Paid did not object. A magistrate judge recommended granting Mr. Cahill's motion for a stay. On February 12, 2013, the district court adopted the magistrate judge's recommendation and entered the stay pending arbitration.

On February 13, 2013, Pre-Paid initiated arbitration proceedings before the American Arbitration Association (" AAA" ). Pre-Paid paid its share of arbitration fees, but Mr. Cahill did not. Pre-Paid declined

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to pay Mr. Cahill's share of the fees. The Director of ADR Services at the AAA repeatedly warned Mr. Cahill's attorney that if Mr. Cahill did not pay, the arbitration proceedings would be suspended, which is exactly what happened.

On June 27, 2013, the arbitration panel suspended the arbitration, warning the parties that if the deposits were not paid by a certain date, the arbitration would be terminated. Mr. Cahill still refused to pay and did not request any form of accommodation from the arbitrators. On July 10, 2013, the AAA terminated the arbitration: " As advised in our correspondence dated June 27, 2013, the outstanding balance remains unpaid. . . . By direction of the Panel, we have closed our file pursuant to R-54." Id. at 441.

On July 16, 2013, Pre-Paid moved to lift the stay of district court proceedings. Mr. Cahill filed a response opposing Pre-Paid's motion to lift the stay. On March 31, 2014, a magistrate judge recommended the motion be granted. On April 16, 2014, the district court adopted that recommendation and lifted the stay.

Mr. Cahill appeals the district court's lifting of the stay. He argues this court has jurisdiction under 9 U.S.C. § 16(a)(1)(A). Pre-Paid moves to dismiss the appeal for lack of jurisdiction. If we reach the merits, Pre-Paid urges us to affirm the lifting of the stay.

C. Legal Background

Two FAA provisions and two AAA rules are relevant to this case. Section 16(a)(1)(A) of the FAA provides: " (a) An appeal may be taken from--(1) an order--(A) refusing a stay of any action under section 3 of this title." 9 U.S.C. § 16(a)(1)(A). Section 3, in turn, mandates a stay of federal court proceedings pending 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.

9 U.S.C. § 3.

AAA Rule 50 requires parties to share arbitration expenses equally " unless they agree otherwise or unless the arbitrator in the award assesses such expenses or any part thereof against any specified party or parties." App. at 486. AAA Rule 54 provides that if the payments are not made, " the AAA may so inform the parties in order that one of them may advance the required payment." Id. at 487. But if the payments remain unpaid, " the arbitrator may order the suspension or termination of the proceedings." Id.


We have jurisdiction under 9 U.S.C. ยง 16(a)(1)(A) to hear this appeal. On the merits, we ...

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