The Second Circuit just held that a federal court has the power to enjoin an ongoing arbitration. In re Am. Express Fin. Advisors Sec. Litig., ___ F.3d ___, 2011 WL 5222784 (2nd Cir. 2011). While many litigants would no doubt like a federal court to enjoin their arbitrations — especially when arbitrators refuse to dismiss frivolous claims — application of this case’s holding is limited to a very unique set of facts.

In the American Express case, a couple filed a FINRA arbitration against Ameriprise, alleging multiple claims relating to Ameriprise’s management of their assets. Ameriprise notified the arbitrators that the couple was part of a class action that had been settled, and because they had never opted out of the class, they were bound by the settlement agreement’s release of their claims. The arbitrators did not blink and ordered that the arbitration should proceed full speed ahead.

Ameriprise then took the unusual step of asking the Southern District of New York, which retained jurisdiction of any disputes over the class action settlement, to enjoin the arbitration. And the district court took the unusual step of granting that injunction and ordering the couple to dismiss their arbitration claims.

The Second Circuit affirmed much of the trial court’s decision. The court framed the dispute between the parties as one of arbitrability, and therefore appropriate for the court (not an arbitrator) to decide. That was because “the Class Settlement revoked Ameriprise’s consent to arbitrate certain claims. The question therefore is not whether those claims had been settled, thus precluding arbitration, but whether there was a surviving agreement, following the settlement, to arbitrate those claims at all.” Furthermore, the Second Circuit placed emphasis on the fact that the trial court had specifically retained jurisdiction over all matters relating to the Class Settlement.

Interestingly, neither party had briefed or argued the court’s power to enjoin an arbitration, a power that the FAA does not specifically grant to federal courts. Having considered the issue sua sponte, the Second Circuit concluded that the district court possessed “the authority to order the cessation of an arbitration by parties within its jurisdiction where such authority is necessary in order for a court to enforce the terms of the parties’ own agreement.”

Can this decision be used by parties in future arbitrations who may be frustrated by an arbitration panel’s refusal to dismiss claims that are time-barred or otherwise subject to a strong legal defense? Probably only if the legal defense can be said to call into question the validity of the agreement to arbitrate. And even then I imagine courts would be skittish.

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by Liz Kramer

Liz Kramer is a shareholder at Leonard, Street and Deinard, one of the largest law firms in Minnesota, where she litigates complex business and construction disputes. Liz graduated from Yale Law School and is deeply knowledgeable on arbitration law. Website: www.arbitrationnation.com