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Lawyers who like to handle disputes on a basis that shares risk with their clients often prefer the speed and lower cost of arbitration. The process has its drawbacks; some people worry about fuzzy standards and the lack of review for legal errors. And some general counsel even swear that it costs just as much and takes every bit as long as a lawsuit.

To which I say: hire somebody who will work on a contingent-fee or hybrid basis. You’ll get better, more efficient results faster.

But sometimes courts render rulings that seem to put arbitration into a second-class legal stratum, a minor league of law, a dustbin of dispute resolution. The Eighth Circuit did such a thing just this week.

Zarecors’ losses

The case arose from an $800,000 investment by Herschel and Mona Zarecor and their son in mutual funds that Morgan Keegan served as lead underwriter for. They filed an arbitration case against Morgan Keegan for fraud under Arkansas and New Jersey blue sky laws and the federal Securities Exchange Act of 1934. They won more than $500,000 in damages, but the district court vacated the award, holding that Financial Industry Regulatory Authority rules did not require Morgan Keegan to arbitrate the dispute.

The Zarecors tried again a week later in federal court. This time, the district court dismissed their case — which alleged the same claims — on the ground that thy sued too late.

Appellate ruling

The court of appeals upheld that ruling as to the Zarecors’ claims under Arkansas and federal law. The panel reasoned thus:

We conclude that pursuit of arbitration did not toll the federal statute of limitations. Although the Supreme Court has applied tolling under a different federal statute when a plaintiff initially brought suit in a state court where venue was improper, Burnett v. N.Y. Cent. R.R. Co., 380 U.S. 424, 428-32 (1965), arbitration is different. A plaintiff who pursues arbitration is not required to await the outcome to bring an action in court, and there is an accepted procedure for pursuing arbitration and a lawsuit simultaneously. As the Fifth Circuit observed in an analogous situation, a plaintiff may file suit within the statute of limitations and then seek a stay of the action pending arbitration: “Such a course would have guaranteed that the lawsuit was brought within the limitations period without waiving any right to arbitration which may have existed.” Fonseca v. USG Ins. Servs., 467 F. App’x 260, 261 (5th Cir. 2012). The First Circuit similarly explained that there is a means to give procedural priority to arbitration without foreclosing a plaintiff’s right to bring a timely action in court—“the bringing of suit within the limitations period, followed by a stay of such proceedings pending the results of arbitration.” United States ex. rel. Wrecking Corp. of Am. v. Edward R. Marden Corp., 406 F.2d 525, 526 (1st Cir. 1969) (per curiam). We believe that this reasoning is sound and should be applied in the context of the federal securities statutes. The district court thus properly dismissed the Zarecors’ federal claim as time-barred.

Zarecor v. Morgan Keegan & Co., Inc., No. 13-3315, slip op. at 9 (8th Cir. Sept. 1, 2015).

Disrespecting arbitration?

Did you catch that? Although filing a lawsuit in the wrong place will toll the running of the limitations period until you file the lawsuit in the right court or bring it in arbitration, filing an arbitration does not have the same effect. You get tolling from the improper lawsuit but not from the improper arbitration. To cover yourself, you must “pursu[e] arbitration and a lawsuit simultaneously.”

That does not make sense. Court’s should treat a good-faith effort to assert a claim in any tribunal that the law recognizes the same for tolling purposes. You don’t have to file a protective arbitration while you try to move ahead in court, and you shouldn’t have to file a protective lawsuit as you prosecute claims in arbitration either.

New Jersey agrees with me

The same panel that disregarded, for purposes of the federal and Arkansas, the tolling rule that I would apply proceeded to adopt my rule for purposes of the Garden a State claim. The decision in Galligan v. Westfield Centre Service, Inc., 412 A.2d 122 (N.J. 1980), the panel believed, made all the difference. Their honors explained:

The district court acknowledged Galligan but thought equitable tolling was unavailable here, because the Zarecors failed to file suit at all, choosing instead to pursue arbitration. That is a reasonable distinction that would be persuasive in some jurisdictions, but our best evidence of New Jersey law is that a diligent pursuit of a claim in arbitration also tolls the statute of limitations. In Schwartz v. Travelers of New Jersey Insurance Co., 2009 WL 1405861 (N.J. Super. Ct. App. Div. May 21, 2009), a New Jersey appellate court, considering an insured’s claim against an insurer for uninsured motorist benefits, agreed with a trial judge that a “demand for arbitration—even if inconsistent with the type of arbitration required by the policy—was sufficient to toll the statute of limitations.” Id. at *2. The court in Schwartz ultimately held that the action was untimely, because the plaintiff waited nearly six years after the defendant refused to arbitrate before suing, id. at *3, but it is significant that both the trial court and the intermediate appellate court concluded that a demand for arbitration tolled the statute of limitations. Given the breadth of Galligan and the broad reading given to that decision by other New Jersey courts, our best prediction of New Jersey law is that the Zarecors’ timely and diligent pursuit of their claim in arbitration was sufficient to toll the statute of limitations. That a federal court later concluded that the arbitration panel lacked jurisdiction does not preclude equitable tolling under the reasoning of Galligan.

Zarecor, slip op. at 12.