The Eighth Circuit Court of Appeals reversed an Arkansas federal court July 22, ruling that the Federal Arbitration Act bars discovery and dispositive motions on the merits of a dispute until a court first decides whether the parties agreed to arbitrate. The decision hands Solid Financial Technologies, Inc. a procedural victory in its litigation with BSI Group LLC over an alleged website agreement.
Writing for a unanimous three-judge panel, Circuit Judge Erickson held that the district court erred when it ordered discovery on arbitrability and the merits to proceed in tandem. The FAA, not a trial court's docket-management discretion, controls the sequence, the panel concluded. The case was remanded to the U.S. District Court for the Eastern District of Arkansas.
The dispute traces to an earlier appeal in which the Eighth Circuit reversed the district court's denial of the defendants' motions to compel arbitration and sent the case back for a trial on a single question: whether a 'pop-up' or other aspects of EZBanc's website show that BSI agreed to be bound by the terms of the Evolve Agreement. On remand, the district court entered a scheduling order that required discovery on arbitrability and the merits to move forward together, allowed dispositive motions before the arbitrability jury trial, and set a merits trial to begin immediately if the jury found no agreement to arbitrate.
Solid moved to stay all pretrial deadlines and the merits trial date pending resolution of the motion to compel arbitration. The district court denied that motion, and Solid appealed. The panel reviewed the denial de novo, rejecting BSI's contention that the more deferential abuse-of-discretion standard applied. The court noted BSI cited no cases involving discovery or pretrial management orders while arbitrability remained unresolved, and added that the outcome would be the same either way because an error of law is itself an abuse of discretion.
Before reaching the central issue, the court dispatched BSI's argument that Solid had waived its right to arbitrate. BSI contended that Solid forfeited arbitration by complying with the district court's e-mailed instruction that the parties jointly propose new pretrial deadlines. A party waives arbitration only if it knew of the right and acted inconsistently with it, the panel explained, and a party acts inconsistently by substantially invoking the litigation machinery rather than promptly seeking arbitration. Solid moved to compel arbitration before filing an answer and, six days after the scheduling order issued, moved to stay the merits deadlines. It never filed a motion to dismiss on the merits. Complying with the court's direction to propose deadlines did not amount to substantially invoking the litigation machinery, the panel held, finding no waiver.
Turning to what it called the crux of the appeal, the court anchored its analysis in the statute's text. Under the FAA, when there is a dispute over whether an arbitration agreement exists, "the court shall proceed summarily to the trial thereof." Because the statute does not define "summarily," the panel gave the word its ordinary meaning, citing dictionary definitions describing something done "without delay or formality: quickly executed." Other circuits, including the Ninth and Tenth, have read the term the same way, the court noted. The upshot is that a trial on arbitrability must occur without delay, before the parties reach the merits.
The panel likened the arbitrability question to deciding the correct venue, after which the parties can litigate the underlying dispute in the proper forum. Allowing merits discovery and dispositive motions to proceed first, Erickson wrote, would sacrifice the efficiency and reduced discovery burdens that arbitration is meant to provide, and would violate both the plain language and the intent of the statute. The court observed that Sections 3 and 4 of the FAA provide for "only restricted inquiry into factual issues."
The court was not persuaded by BSI's efficiency argument. BSI contended that combined discovery made sense because arbitrability and the merits share witnesses and documents. But the arbitrability inquiry is narrow, the panel said: whether anything on EZBanc's website establishes that BSI agreed to the Evolve contract. That limited question differs sharply in scope from the extensive discovery needed to assess Solid's alleged liability for unauthorized withdrawals and failure to process third-party payments.
The panel also rejected BSI's claim that a stay amounts to a forbidden judge-made rule favoring arbitration, citing the Supreme Court's decision in Morgan v. Sundance, Inc. The court did not invent a special, arbitration-preferring procedure, Erickson wrote, because the sequencing is required by statute.
For the parties, the ruling means the Eastern District of Arkansas must first resolve the narrow question of whether BSI is bound to arbitrate before any merits discovery or trial can proceed. Chief Judge Colloton and Circuit Judge Grasz joined the opinion. The court reversed the denial of the stay and remanded for proceedings consistent with its decision.