Powershare, Inc. v. Syntel, Inc.

• Decision Date: 01 March 2010
• Docket Number: No. 09-1625.,09-1625.
• Citation: 597 F.3d 10
• Parties: POWERSHARE, INC., Plaintiff, Appellee, v. SYNTEL, INC., Defendant, Appellant.
• Court: U.S. Court of Appeals — First Circuit

597 F.3d 10

POWERSHARE, INC., Plaintiff, Appellee, v. SYNTEL, INC., Defendant, Appellant.

No. 09-1625.

United States Court of Appeals, First Circuit.

Heard January 6, 2010.

Decided March 1, 2010.

Steven P. Perlmutter, with whom Christopher S. Feudo, Robinson & Cole LLP, Dennis M. Haffey, Stephen W. King, and Dykema Gossett PLLC were on brief, for appellant.

Paul Mark Sandler, with whom Robert B. Levin, John J. Lovejoy, Shapiro Sher Guinot & Sandler, Rory Fitzpatrick, and Cetrulo & Capone were on brief, for appellee.

Before LYNCH, Chief Judge, SOUTER,^* Associate Justice, and SELYA, Circuit Judge.

SELYA, Circuit Judge.

Two corporations, one based in Massachusetts, and the other in Michigan, entered into a business arrangement (the Agreement). After a falling-out, one of the contracting parties, PowerShare, Inc., commenced a civil action in the district court to enforce the Agreement. The defendant, Syntel, Inc., countered by instituting a parallel arbitration proceeding and moving to stay litigation pending arbitration. The district court denied the motion, and Syntel now appeals. We have jurisdiction pursuant to the Federal Arbitration Act to review the interlocutory order denying Syntel's motion to stay litigation pending arbitration. See 9 U.S.C. § 16(a)(1)(A); Combined Energies v. CCI, Inc., 514 F.3d 168, 170 (1st Cir.2008).

The question that lies at the heart of the appeal is whether the Agreement contains a mandatory arbitration provision. The district court thought not. We hold that the Agreement does so provide and therefore reverse. Along the way, we address, as a matter of first impression at the federal appellate level, an issue concerning the standard of review to be applied by a district judge when reviewing a magistrate judge's disposition of a motion to stay litigation pending the completion of a parallel arbitration proceeding.

I. BACKGROUND

PowerShare and Syntel entered into the Agreement on July 16, 2003. Their evident purpose was to form a joint venture to handle the outsourcing needs of third parties. Paragraph 18 of the Agreement reads in relevant part:¹

All disputes, controversies and claims directly or indirectly arising out of or in relation to this Agreement or the validity, interpretation, performance, breach, enforceability of the Agreement (collectively referred to as "Dispute") shall be resolved amicably between Syntel and PowerShare at an operational level in consultation with the top management of both companies. If any such Dispute cannot be resolved, as stated above, the same shall be settled in accordance with the principles and procedures of the American Arbitration Association and per the decision of an accredited arbitrator acceptable to both parties. Nothing in this clause shall prejudice Syntel or PowerShare's right to seek injunctive relief or any other equitable/legal relief or remedies available under law.

Some five years after the execution of the Agreement, a dispute arose. On August 8, 2008, PowerShare invoked diversity jurisdiction, 28 U.S.C. § 1332(a), and filed suit against Syntel, claiming breach of the Agreement, in the United States District Court for the District of Massachusetts. PowerShare accompanied its complaint with a request for jury trial. See Fed. R.Civ.P. 38(b).

In response, Syntel lodged a demand for arbitration with the American Arbitration Association (AAA). It simultaneously moved in the district court to stay PowerShare's action pending resolution of the parallel arbitration proceeding. Not to be outdone, PowerShare filed a motion to stay the arbitration.

The district court assigned the motions to a magistrate judge, who denied Syntel's motion to stay the litigation and granted PowerShare's cross-motion to stay the arbitration. PowerShare, Inc. v. Syntel, Inc., 607 F.Supp.2d 240, 244 (D.Mass. 2008). In her rescript, the magistrate judge concluded that, under the Agreement, arbitration was optional. Id. at 241. She reasoned that the third sentence of Paragraph 18, which refers to "any other equitable/legal relief or remedies available under law," made manifest the parties' intention to allow litigation because a jury trial is a remedy "available under law." Id. at 243. In so holding, the magistrate judge rejected Syntel's argument that the federal policy favoring arbitration should be given weight. Rather, she declared that this policy applies only to the resolution of "scope" questions, not to questions about whether a contract calls for mandatory arbitration at all. Id. at 244.

Syntel appealed this decision to the district judge, Fed R. Civ. P. 72(a), who issued an electronic order stating that the decision was "not clearly erroneous or contrary to law." This timely appeal followed.

II. ANALYSIS

We divide our analysis into two parts. First, we clarify the standard of review to be employed by a district judge when reviewing a magistrate judge's order on a motion to stay litigation pending the resolution of a parallel arbitration proceeding. Only then do we proceed to the merits.

A.

The Federal Magistrates Act confers authority upon district judges to designate magistrate judges to hear pretrial motions. 28 U.S.C. § 636(b)(1). Magistrate judges serve as aides to, and under the supervision of, district judges; but magistrate judges are not themselves Article III judicial officers. Given their status as Article I judicial officers, magistrate judges ordinarily may not decide motions that are dispositive either of a case or of a claim or defense within a case.² This is so because "[t]he Constitution requires that Article III judges exercise final decisionmaking authority." Ocelot Oil Corp. v. Sparrow Indus., 847 F.2d 1458, 1463 (10th Cir.1988); see Stauble v. Warrob, Inc., 977 F.2d 690, 693-94 (1st Cir. 1992). Dispositive motions include those enumerated in 28 U.S.C. § 636(b)(1)(A), but this list is not exhaustive; rather, it simply "informs the classification of other motions as dispositive or nondispositive." Phinney v. Wentworth Douglas Hosp., 199 F.3d 1, 5-6 (1st Cir.1999).

Consistent with this dichotomy between dispositive and non-dispositive motions Federal Rule of Civil Procedure 72 sets out two separate standards of review to be employed by a district judge in reviewing a magistrate judge's determinations. When a magistrate judge decides a non-dispositive motion, the district judge may, given a timely appeal, set aside the order if it "is clearly erroneous or is contrary to law." Fed.R.Civ.P. 72(a). Absent a timely appeal, the order stands. Id. When, however, a magistrate judge passes upon a dispositive motion, he or she may only issue a recommended decision, and if there is a timely objection, the district judge must engage in de novo review. Fed.R.Civ.P. 72(b). Absent a timely objection, the recommended decision ripens into an order. Id.

Here, the district judge employed the "clearly erroneous or contrary to law" standard applicable to non-dispositive motions under Rule 72(a). Syntel protests that its motion to stay the litigation to allow resolution of the parallel arbitration proceeding was, in effect, dispositive of the court case and, thus, should have engendered de novo review by the district judge pursuant to Rule 72(b).

No court of appeals has decided this precise question. Nevertheless, a number of district courts have held that motions to stay litigation and compel related arbitration are non-dispositive motions under Rule 72(a). See, e.g., Gonzalez v. GE Group Adm'rs, Inc., 321 F.Supp.2d 165, 166 (D.Mass.2004); Torrance v. Aames Funding Corp., 242 F.Supp.2d 862, 865 (D.Or.2002); All Saint's Brands, Inc. v. Brewery Group Den., A/S, 57 F.Supp.2d 825, 833 (D.Minn.1999); Herko v. Metro. Life Ins. Co., 978 F.Supp. 141, 142 n. 1 (W.D.N.Y.1997). But see Flannery v. Tri-State Div., 402 F.Supp.2d 819, 821 (E.D.Mich.2005) (concluding that such a motion, if granted, is dispositive because it "has the practical effect of allowing the case to proceed in a different forum").

Motions to stay litigation pending the resolution of parallel arbitration proceedings are not among the motions enumerated in 28 U.S.C. § 636(b)(1)(A). Nor are they of the same character as the listed motions. A federal court's ruling on a motion to stay litigation pending arbitration is not dispositive of either the case or any claim or defense within it. Although granting or denying a stay may be an important step in the life of a case (lawyers are keenly aware that there are substantive consequences to whether or not a stay is granted), in the last analysis a stay order is merely suspensory. Even if such a motion is granted, the court still retains authority to dissolve the stay or, after the arbitration has run its course, to make orders with respect to the arbitral award. See Federal Arbitration Act, 9 U.S.C. § 9 (permitting parties to apply to the court for an order confirming the award); id. § 10 (providing district courts with authority to vacate an arbitral award); id. § 11 (providing district courts with authority to modify an arbitral award). We acknowledge that the scope of judicial review of arbitral awards is very narrow, but that does not extinguish such review. See Advest, Inc. v. McCarthy, 914 F.2d 6, 8 (1st Cir.1990). Thus, there is no final exercise of Article III power at the time the court acts on the motion to stay. See Herko, 978 F.Supp. at 142 n. 1.

In light of these realities, we conclude that, from a procedural standpoint, the district judge acted appropriately in reviewing the magistrate judge's denial of Syntel's motion to stay under the "clearly erroneous or contrary to law" standard elucidated in Rule 72(a).

In this case arbitrability depended on interpreting a contractual term, a question of law for the courts. See Combined Energies, 514 F.3d at 171. Nothing in the contract expressly provided that an arbitrator would decide questions of arbitrability instead. See Coady v. Ashcraft & Gerel, 223 F.3d 1, 8-9 (1st...