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Arbitration: Second Circuit Denies a Motion to Dismiss a Request to Compel (Web)

In Robert Ross and Randal Wachsmuth, et al. v. American Express Co., Docket No. 06-4598-cv(L), 06-4759-cv(XAP) (2nd Cir. Feb. 13, 2007)(available at, the Second U.S. Circuit Court of Appeals, examining its own jurisdiction, ruled that a nonsignatory to a written arbitration agreement could seek an interlocutory appeal from the denial of a motion to compel arbitration against a signatory to the agreement.

The appellate court held that when a court finds that a signatory to a written arbitration agreement is equitably estopped from avoiding arbitration with a nonsignatory, the writing requirement of the Federal Arbitration Act is met, and the court maintains jurisdiction over the case.

This ruling highlights a circuit split over appellate jurisdiction under the Federal Arbitration Act, with the D.C. Circuit and Tenth Circuit ruling that interlocutory appeals can only be brought based on written agreements to arbitrate, not based on equitable estoppel. DSMC Inc. v. Convera Corp., 349 F.3d 679 (2003); In re Universal Service Fund Tel. Billing Practice Litigation, 428 F.3d 940 (2005).

The unanimous panel opinion says that the matter began with more than 20 class-action complaints that have been filed against VISA and Mastercard and their member banks–the “MDL Defendants”--alleging Sherman Act violations arising from an alleged conspiracy to fix fees for conversion of foreign currencies.
The cases were consolidated in New York's southern district. The district court granted a motion by the MDL Defendants to compel arbitration. 

In July 2004, the Ross appellees filed a class action complaint against the appellants--Amex and its related companies--which wasn't part of the original case. They asserted the same claims raised in the MDL suit, alleging that appellants had conspired with the MDL Defendants to “‘impose compulsory arbitration clauses on [their] cardholders’ . . . in order ‘to suppress competition and deprive their cardholders of a meaningful choice concerning the arbitration of disputes.’”

In April 2005, the Amex appellants moved to dismiss the complaint and compel arbitration or stay the proceedings pending arbitration. The Amex appellants acknowledged that they were not signatories to an express arbitration agreement with the appellees, but argued that the arbitration clauses contained in the cardholder agreements with the MDL Defendants bound the Ross appellees to arbitrate their dispute with the appellants in accordance with those clauses, under principles of equitable estoppel.

The district court agreed with Amex. But the court still refused to stay the litigation against the Amex appellants, or compel arbitration, holding that because the Ross appellees had raised an antitrust claim concerning the arbitration clause's validity, a jury trial was necessary, specifically on the arbitration clauses' validity, prior to enforcement.

Amex appealed to the Second Circuit, invoking FAA Section 16 to review the interlocutory appeal. The Ross appellees argued that because the obligation to arbitrate arises from principles of estoppel, and FAA Sections 3 and 4 apply only to failures to arbitrate pursuant to a “written” contract, Section 16 doesn't give the court appellate jurisdiction.

The Second Circuit opinion notes that “arbitration is strictly a matter of contract.” Thomson-CSF S.A. v. Am. Arbitration Ass'n, 64 F.3d 773, 779 (2d Cir. 1995) (citing United Steelworkers of America v. Warrior & Gulf Navigation Co., 363 U.S. 574, 582 (1960)).

Ordinary principles of contract law apply, and the opinion notes that the Second Circuit has recognized a number of common law principles that may allow nonsignatories to enforce an arbitration agreement, including equitable estoppel.

The panel agrees with the district court's holding that the Amex appellants are entitled to the benefit of a written arbitration agreement because the claims against the nonsignatory appellants are “inextricably intertwined” with the cardholder agreements. The opinion also agrees that it would be inequitable for parties who have signed a written arbitration agreement–that is, the Ross appellees--not to abide by that agreement with regard to a nonsignatory to the agreement–the appellants. Therefore, the finding meets the FAA's writing requirement, permitting the Second Circuit's jurisdiction.

The Court of Appeals held that “[b]oth the language of the FAA requiring a writing and all possible policy reasons underlying that requirement are thus satisfied in the present matter,” and, “[i]n every relevant sense, . . . appellants are appealing from the refusal to compel arbitration under a written arbitration agreement.”

The Second Circuit denied the Ross appellees' motion to dismiss on the ground that it lacks jurisdiction under FAA Section 16, and determined that it has interlocutory jurisdiction.

It also held that when a district court finds that a signatory to a written arbitration agreement is equitably estopped from avoiding arbitration with a nonsignatory, the FAA's writing requirement is met, and the nonsignatory is authorized to seek an interlocutory appeal to a refusal to compel arbitration against a signatory.

As a result, the panel denied the Ross appellee's motion to dismiss the case. It qualified the scope of the ruling in a footnote: “[W]e make no determination as to whether the district court was correct in holding that appellants are entitled to arbitration via equitable estoppel--a determination that will only be made following full briefing and argument on appeal. This ruling touches only upon our jurisdiction under the FAA to hear such an appeal.”

–Jennie Chen, CPR Intern