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Arbitration: Fifth Circuit Finds Order Compelling Arbitration Under the FAA (Web)

The Fifth U.S. Circuit Court of Appeals affirmed an order from a Louisiana federal court that stayed litigation proceedings and compelled arbitration of plaintiff-investors’ claims against Citigroup Global Markets, Inc., formerly Smith Barney, G.E. Life & Annuity Insurance Co., and Pacific Life Insurance Co. Brown v. Pacific Life Insurance Co., No. 05-30090, 2006 WL 2424749 (5th Cir. Aug. 23, 2006)(available at

The case is significant because the Fifth Circuit finds that an order compelling arbitration by the lower court is an appealable final order under Federal Arbitration Act Section 16(a)(3). In a unanimous opinion by Circuit Judge Emilio M. Garza, the appeals panel states that the lower court “granted the sole remedy sought by the plaintiffs”--an order compelling arbitration.

Since there “was nothing left for the court to do but execute the judgment,” Garza wrote, the order compelling arbitration for federal matters in the case “ended the litigation in federal court on the merits and was a final appealable decision under 9 U.S.C. § 16(a)(3).”

The determination allowed the appeals court to find that no stay was issued by the federal court in the federal actions in the case; assess and then reject the original plaintiff’s arguments against the district court’s actions, and compel arbitration.

Lonnie Brown, Nettie Brown, Jerry Brown, and Pat Brown, referred to below as the Browns or the appellants, are investors in and beneficiaries of Smith Barney securities brokerage accounts. Patrick Holt, a Smith Barney representative, managed the Browns' accounts, investing in variable annuities from GE and Pacific, and stocks.

The Browns became upset with Holt's investment decisions and filed suit in Louisiana state court against Smith Barney, GE, Pacific, and Holt, referred to in this item as the defendants or appellees. The Browns alleged fraud, negligence, and breach of various common law and statutory duties.

The defendants removed the case to federal district court. Soon after, Smith Barney, with interveners GE and Pacific, filed two separate civil actions against the Browns in federal court : one against Lonnie and Nettie Brown, and one against Jerry and Pat Brown.

Both suits sought an order compelling arbitration of the Browns' claims based on the arbitration clauses in Smith Barney's client agreement. Both also sought to stay the state case in favor of arbitration.

The district court consolidated the state action with the federal actions. The defendants filed a motion to compel arbitration and to stay the consolidated action. The district court remanded the state action, but denied the motion to dismiss the federal actions, not considering the arbitrability issue. The court stayed the federal actions pending the outcome in the remanded state action to avoid multiple proceedings.

The defendants asked the federal court to alter or amend the stay order on ground that the policy favoring arbitration required lifting the stay and ordering arbitration, “despite the threat of piecemeal litigation in state and federal court,” according to the Fifth Circuit opinion. The district court agreed and vacated the stay. It held that the defendants were bound by an arbitration clause in their client agreements, and were compelled to arbitrate their claims against Smith Barney. It said that the actions of Smith Barney, interveners GE and Pacific, and Holt were “inextricably intertwined’ because "[t]here is no way to bring actions against either [GE or Pacific] without considering the actions of Smith Barney and its employee, Patrick Holt.”

The court applying the principle of equitable estoppel, ordered arbitration of the claims against Pacific and GE as well and stayed the Browns' actions against all the defendants within its jurisdiction.”

The Browns appealed to the Fifth Circuit. The defendant-appellees contended that the appellate court has no jurisdiction. The appeals court established its jurisdiction, and observed “a final decision with respect to an arbitration” is appealable under Federal Arbitration Act Section 16(a)(3).

Circuit Judge Garza held that the district court granted the sole remedy sought by the plaintiffs in the federal actions, the order compelling arbitration. Although the district court did not dismiss the case, there was nothing left for the court to do but execute the judgment. The opinion added that the arbitration order amounted "to a final disposition in this context and ends the litigation." (Citation omitted.)

The appellees also argued that an appeal could not have arisen from an interlocutory order granting a stay under 9 U.S.C. § 3. The appeals court noted in its opinion that the district court did not state the authority for its stay, and that it was impossible to discern from the record whether the district court issued its order to stay pursuant to Section 3.

The appeals panel stated that the remand to district court to clarify its order to determine the appellate jurisdiction was not necessary in this case, though usually that would have been the case. It stated, however, that the stay could not have been issued pursuant to Section 3 and, furthermore, the arbitration order is a final decision. Thus, the order was appealable.

At the same time the appellants contended that the district court erred in denying their motion to dismiss the federal actions because nonparty Holt is an indispensable party under FRCP Rule 19, and his joinder would destroy the federal action’s diversity.

The appellate court addressed the factors to determine whether a person is an indispensable party. Holding that the district court did not abuse its discretion in finding that Holt was an indispensable party, it found the Browns’ argument about creating piecemeal, inconsistent litigation of claims and issues insufficiently prejudicial to render a party indispensable under Rule 19 given the preference for arbitration under the FAA.

The Browns argued that the district court should have abstained from exercising jurisdiction over the federal actions, and that the district court misapplied the abstention doctrine set forth in Colorado River Water Conservation District v. United States, 424 U.S. 800 (1976).

Under the Colorado River case a court may abstain from a case under the following six exceptional circumstances: (1) the assumption by either state or federal court over a res; (2) the forum’s relative inconvenience; (3) avoidance of piecemeal litigation; (4) the order in which jurisdiction was obtained by the concurrent forums; (5) the extent federal law provides the rules of decision on the merits; and (6) the adequacy of the state proceedings in protecting the rights of the party invoking federal jurisdiction.

The appellate court opined that Browns' sole argument in favor of abstention was the possibility of piecemeal litigation. The panel emphasized the congressional intent under the FAA was to favor arbitration and stated that “it would appear antithetical to the FAA's recognized purpose to require a district court to decline jurisdiction over a properly filed FAA action simply because a party to an arbitrable contract cannot be joined in the federal action."

The Browns also argued that the district court erred in ruling that the arbitration agreement was valid and binding, because their consent to arbitrate was vitiated by fraud and error. They also alleged that the arbitration clause itself was a contract of adhesion.

The Fifth Circuit held that the challenge to the arbitration agreement’s validity due to fraud and error did not distinguish between whether it was the clients’ agreement as a whole or the arbitration clause that was duly attacked. The panel declined to address the issue on whether fraud or error vitiated the Browns’ contract. But it addressed the Browns' argument that the arbitration clause was an adhesion contract and thus unenforceable.

The appeals court, relying on the Louisiana Supreme Court decision in Aguillard v. Auction Management Corp., 908 So.2d 1 (La.2005), ruled that the arbitration clauses in the Browns' client agreements was not unconscionable, and that the district court did not err in finding them valid. Circuit Judge Garza wrote: "[T]he Browns were not forced to agree to the terms of those clauses. They could have avoided arbitration by not engaging Smith Barney's services. There is nothing exceptional or burdensome about these clauses, and there is no reason to believe that the Browns did not knowingly and willingly accept their terms."

The Browns asserted that the lack of a written arbitration agreement precluded arbitration of their claims against GE and Pacific. The Fifth Circuit, applying the equitable estoppel principle established in Grigson v. Creative Artists Agency LLC, 210 F.3d 524, 528 (5th Cir.2000), observed that "Although arbitration is a matter of contract that generally binds only signatories, a party to an arbitration agreement may be equitably estopped from litigating its claims against non-parties in court and may be ordered to arbitration."

Quoting Grigson, the panel concluded that, "To constitute an abuse of discretion, the district court's decision must be either premised on an erroneous application of the law, or on an assessment of the evidence that is clearly erroneous." It ruled that, since the Browns failed to allege tortious acts by GE and Pacific separately from Holt's, the complaint only asserts concerted misconduct by all parties.

The panel affirmed the district court, and compelled arbitration.

--Ongmu Tshering, CPR Intern