11th Circuit: How A Court Should Handle an Employer Who Has Second Thoughts About Arbitration and Refuses to Pay Arbitration Fees

In Hernandez v. Acosta Tractors Inc., Nos. 17-13067, 17-13673 (11th Cir. Aug. 8, 2018) (click here for a copy of the decision), the Eleventh Circuit addressed an overtime wage dispute involving an unusual, turn-the-tables role reversal – where an employer at first seeks to compel arbitration, but then has second thoughts during arbitration and refuses to pay about $100,000 in forum fees (for a series of related cases).  In addition to the high forum fees, the employer apparently disliked the number of depositions allowed by the arbitrator, as well as the arbitrator’s refusal to consolidate the similar cases. Troubled by the arbitration proceedings and claiming that arbitration had morphed “into an overly-expensive, completely inefficient method of dispute resolution,” the employer asked the court to lift the litigation stay and reopen the case so that the case could proceed in court.  However, the court refused the employer’s request to reopen the litigation. Instead, citing section 3 of the FAA, the district court granted a default judgment in favor of the employee.

On appeal, the Eleventh Circuit found that the district court had no power to enter a default judgment against the employer pursuant to the FAA.  Instead, when faced with this scenario of an employer defaulting in arbitration by failing to pay forum fees, a district court should find that the employer can no longer force the employee to continue in arbitration.  (“Once [the employer] defaulted in the arbitration, the District Court would have been within its power to find that [the employer] could no longer require [the employee] to proceed in arbitration.”). The Eleventh Circuit could have been clearer and more detailed in its explanation of what should happen next, but I believe the Eleventh Circuit was suggesting that the ball is now in the employee’s court, with the choice of litigating or arbitrating in the hands of the employee.  In other words, if the employee wants to continue in arbitration, the employee can ask the court to compel the employer to arbitrate pursuant to the FAA because the employer is now in default of its arbitration obligations. (If the employee pursues the arbitration route, there is still the issue of forum fees, and the employee may have to upfront the fees. Also, depending on the rules of the arbitral forum, perhaps the employee could seek a default in the arbitration proceeding and later attempt to confirm the arbitrator’s award in court).  And if the employee wants to proceed in court, the employee would also have that option because the employer appears to have waived the right to arbitrate.

Although the Eleventh Circuit held that a default judgment in court was not automatically appropriate solely on the basis of a default in arbitration, the Eleventh Circuit left open the possibility of sanctions, including a default judgment, if the district court finds that the employer acted in bad faith or vexatiously.  The Eleventh Circuit remanded the case so that the district court could consider such findings.

I’m not sure if this was part of the plaintiffs’ strategy from the beginning in this case, but filing multiple arbitration proceedings against a common defendant may trigger the reaction by the employer in this case.  An attorney’s filing of several arbitration cases against the same employer effectively could allow the plaintiff employees to avoid arbitration.