A Default in Proceeding with Arbitration Does Not Necessarily Authorize a Default Judgment in Federal Court

In Hernandez v. Acosta Tractors Inc., 2018 WL 3761126 (11th Cir. Aug. 8, 2018), the Eleventh Circuit held that a party’s default in proceeding with arbitration after requesting it did not necessarily warrant entry of default judgment against that party in federal court.

Julio Hernandez sued his former employer, Acosta Tractors, and two of its officers under the Fair Labor Standards Act.  The employer moved pursuant to the parties’ arbitration agreement to compel arbitration of the claims.  The district court granted the motion, and arbitration proceedings began.

A year later, the employer asked the district court to lift the stay and reopen the case.  It claimed that the arbitration proceeding had “failed of its essential purpose.”  The arbitrator apparently had denied the employer’s request to consolidate the arbitration with two similar cases, and the employer claimed that the arbitrator’s fees and the discovery permitted by the arbitrator had made the arbitration “an overly-expensive, completely inefficient method of dispute resolution.”  The district court denied the motion.  The employer moved for reconsideration, telling the court that the arbitrator had suspended the two related arbitrations because of the employer’s failure to pay the arbitration fees.

In response to the employer’s motion for reconsideration, Hernandez sought entry of a default against the employer in the federal court case.  He argued that the employer “vexatiously caused unnecessary arbitration proceedings” and had “in bad faith refused to arbitrate.”  The district court denied both parties’ motions as premature, given that the arbitration proceedings had not yet terminated.

A few months later, the employer filed another motion in court, again seeking to lift the stay and consolidate the three related cases that had been proceeding in separate arbitrations.  The employer told the court that all three arbitrations had been suspended because the employer had not paid the arbitration fees; that the defendants waived their right to arbitrate; and that they wanted Hernandez’s claims to be resolved in court.  The district court denied the employer’s motion and entered a default judgment against the defendants, finding that their “failure to pay the arbitration fees constitutes a default under the Federal Arbitration Act” and that “[t]his remedy is appropriate as the Defendants did not provide evidence establishing their inability to pay the costs of arbitration or showing they attempted to establish a payment plan.”  After Hernandez submitted an affidavit setting forth his claimed damages, the court entered a default judgment.  The defendants appealed.

The Eleventh Circuit, in an opinion written by Judge Martin and joined by Judge William Pryor and Judge James Randal Hall visiting from the Southern District of Georgia, vacated the default judgment.  The court held that Section 3 of the FAA does not govern entry of a default judgment in federal court:  “Section 3 only concerns when a court must compel arbitration.  It says nothing about what a court should do when the party that first asked the court to compel arbitration now wants to come back to court. . . .We find no basis in the FAA, the caselaw, or anywhere else to support a court’s decision to enter a default judgment solely because a party defaulted in the underlying arbitration.”

The court noted, however, that a district court has the power to enter a default judgment, inherently and pursuant to several Federal Rules of Civil Procedure.  But the district court had not relied on those sources, and had not made the findings necessary to support entry of default judgment under any of them.  So the Eleventh Circuit remanded the case for determination whether the default judgment could be entered on any permissible basis, noting that while “[a] calculated choice to abandon arbitration after getting adverse rulings from the arbitrator certainly looks like forum shopping” to be considered in evaluating the appropriateness of a default judgment, “a party’s good faith inability to afford the arbitration fees would be a factor properly considered to weigh against such a sanction.”

Posted by Valerie Sanders.

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