On May 26, 2015, in Pre-Paid Legal Services, Inc. v. Cahill, the US Court of Appeals for the Tenth Circuit affirmed an order lifting the stay of the district court's proceedings and resuming the litigation, after the arbitrators terminated the arbitration due to defendant's failure to pay his share of the arbitration fees (No. 14-7032, (10th Cir. May 26, 2015)).

The defendant, Todd Cahill, was a sales associate for the plaintiff, Pre-Paid Legal Services, Inc. (PPLS). Pursuant to his employment contract, Cahill agreed not to recruit other sales associates and further agreed to arbitrate all claims or causes of action arising between the parties. PPLS alleged that shortly after leaving the firm, Cahill began recruiting PPLS associates and misusing trade information. PPLS sued in Oklahoma state court alleging breach of contract and tortious interference with business relations.

Cahill removed the action to federal court and then successfully moved to stay the district court proceedings pending arbitration under section 3 of the Federal Arbitration Act (FAA). PPLS initiated arbitration proceedings, but Cahill refused to pay his share of the fees required by the Commercial Arbitration Rules of the American Arbitration Association (AAA) (the Rules).

Under the Rules, the party that has paid its fees may request that the arbitrator take measures relating to a party's non-payment, including limiting the non-paying party's ability to assert or pursue its claim, but the arbitrator may not prevent a non-paying party to defend against a claim or counterclaim (AAA Rule 57(b)). The arbitrators may also suspend the arbitration if all deposits have not been received (AAA Rule 57(e)). Where, as here, the respondent fails to pay the fees, the claimant may advance the respondent's portion of the fees so that the arbitration may proceed. There is no AAA procedure for a default award.

The arbitration was suspended and eventually terminated due to Cahill's failure to pay his portion of the arbitration fees and PPLS's election not to advance Cahill's share of the fees and proceed with the arbitration. After the arbitration was terminated, PPLS filed a motion to lift the stay of the district court proceedings, which was granted. Cahill appealed.

The Tenth Circuit affirmed the lifting of the stay, finding that section 3 of the FAA did not require the court to maintain the stay following Cahill's failure to pay the fees (9 U.S.C. § 3).

The stay was no longer required because the arbitration "has been had in accordance with the terms of the agreement," as required by the statute. The panel terminated the arbitration due to Cahill's refusal to pay the fees, as required by the Rules. The Tenth Circuit held, consistent with other courts that considered the issue, that termination after one party's persistent failure to comply with the Rules meets the statute's requirement of 'having' the arbitration.

The court found an additional statutory basis for lifting the stay. Cahill's failure to pay the arbitration fees constituted a default in the proceeding of an arbitration. As a result of this default, section 3's mandate to keep the stay in place was no longer operable.

The court rejected Cahill's arguments, noting that:

Because there was no default award available under the Rules, PPLS had only two options:

Here, where the arbitrator's fees were substantial, PPLS chose the second option.