Key Points

  • The Fourth Circuit vacated the denial of leave and remanded for consideration of Illinois Union’s proposed arbitration-stay motion.
  • An MDL court may require pre-motion conferral, but may not make filing an FAA Section 3 motion contingent on lead counsel’s consent.
  • The court treated the order as an appealable refusal of a stay because it barred the insurer from seeking one.
  • The ruling leaves arbitrability and the applicability of the policy arbitration clauses for the district court.

The Court of Appeals for the Fourth Circuit vacated and remanded an order that had prevented Illinois Union Insurance Company from filing a motion to stay claims against it pending arbitration in the aqueous film-forming foam products liability MDL. The court held that, although an MDL court has substantial authority to manage centralized litigation, it could not require Illinois Union to obtain defendants’ lead counsel’s consent before seeking relief under the Federal Arbitration Act.

The appeal arose from claims by the City of Wausau and other plaintiffs alleging injuries connected to aqueous film-forming foam products. The plaintiffs alleged that Illinois Union issued excess liability policies to BASF Corp., which they alleged designed, manufactured, marketed, distributed or sold components of the foam products. The claims were removed from Wisconsin state court and consolidated in the District of South Carolina AFFF MDL.

Illinois Union sought leave to file a motion to stay the actions against it pending arbitration. It maintained that its policies with BASF contained valid arbitration agreements and that the claims were being pursued under those policies without arbitration. Under the MDL’s case-management orders, a party seeking to file a motion without lead counsel’s signature had to confer with lead counsel, state whether counsel consented and first obtain leave of court to file the proposed motion.

The insurer initially did not seek lead counsel’s position, explaining that lead counsel represented manufacturer defendants including BASF and was directly adverse to Illinois Union on coverage issues. After Illinois Union sought leave, it contacted lead counsel, who declined to consent. The district court denied leave, first citing the insurer’s failure to confer before filing and then emphasizing the need to keep motion practice within protocols administered through court-appointed lead counsel.

The Fourth Circuit held that it had jurisdiction over the appeal under Section 16(a)(1)(A) of the FAA, which authorizes appeals from orders refusing a stay pending arbitration. Although Illinois Union had appealed denial of leave rather than denial of a formal stay motion, the court concluded that the ruling effectively foreclosed its ability to seek a stay. The court distinguished a denial based on a curable procedural defect, which may not amount to a refusal of a stay, from a ruling that leaves the applicant with no avenue to request one.

“This appeal involves the tension between the discretion afforded a district court to manage multi-district litigation and the commands of the Federal Arbitration Act,” the court wrote. “While a district court rightly has broad discretion in administering its MDL docket, it cannot do so in a way that prevents a party from asserting its rights under the FAA.”

The court accepted that a requirement to confer with lead counsel before filing a motion is a permissible case-management tool. But it found that the district court’s order went further after recognizing that Illinois Union had subsequently conferred with lead counsel. The operative barrier was not a failure to confer, the court said, but lead counsel’s refusal to give the insurer authority to proceed.

“Perhaps the district court did not intend for its order to go that far. But as written, conditioning Illinois Union’s ability to a file a § 3 motion on the consent of lead counsel, that order neutered the mandatory provisions of the FAA.” The court said that, if a court finds a dispute is subject to arbitration and a party requests a stay, Section 3 requires a stay pending arbitration.

The panel did not decide whether the City of Wausau’s claims are arbitrable or whether the plaintiffs are bound by arbitration provisions in the policies between Illinois Union and BASF. It directed the district court on remand to allow Illinois Union to file its stay motion and to resolve its merits. If the court is satisfied that the disputed issue is referable to arbitration under the relevant agreement, the Fourth Circuit said, it must grant the stay.