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UPDATED: Supreme Courts Backs Nonsignatories' Federal Arbitration Act Right to Stay Litigation (Web).

May 4, 2009

The U.S. Supreme Court today ruled that Federal Arbitration Act Section 3 provides federal courts with the jurisdiction to review petitions to stay arbitration by nonparties.

The decision in Arthur Andersen LLP v. Carlisle, No. 08-146 (available here) reverses a Sixth U.S. Circuit Court of Appeals opinion that dismissed the case last year.  

FAA Section 3 gives litigants a right to ask for a stay of litigation for matters “referable to arbitration under an agreement in writing."  FAA Section 16(a)(1)(A) entitles litigants asking for a Section 3 stay to an immediate appeal if they’re denied a stay. 

The Court, in a 6-3 opinion by Associate Justice Antonin Scalia, ruled that the Section 16 right provides nonparties “an immediate appeal from denial of that motion—regardless of whether the litigant is in fact eligible for a stay.”

The Court said that federal courts can’t “look through” to the merits of the stay request, but rather must focus “’upon the category of order appealed from, rather than upon the strength of the grounds for reversing the order.’ Behrens v. Pelletier, 516 U. S. 299, 311 (1996).”

“The jurisdictional statute here unambiguously makes the underlying merits irrelevant,” wrote Scalia.

Associate Justice David H. Souter dissented, noting that not all interim orders are the same.  “While it is hornbook contract law that third parties may enforce contracts for their benefit as a matter of course,” wrote Souter, “interlocutory appeals are a matter of limited grace.  Because it would therefore seem strange to assume that Congress meant to grant the right to appeal a [Section]  3 stay denial to anyone as peripheral to the core agreement as a nonsignatory, it follows that Congress probably intended to limit those able to seek a [Section] 3 stay.”

Chief Justice John G. Roberts Jr. and Associate Justice John Paul Stevens joined Souter’s dissent.

The Court took the case to decide whether FAA Section 16(a)(l)(A) provides appellate jurisdiction over an appeal involving nonsignatories to an arbitration agreement, and whether Section 3 allows a court to stay claims against nonsignatories when the nonsignatories can otherwise enforce the arbitration agreement under contract and agency law.

The cert petition in the case was brought by parties who advised the respondent, Carlisle, and two of his business partners, on setting up a tax shelter for proceeds from a business sale. The parties included Arthur Andersen, an accounting firm now in dissolution; Curtis, Mallet-Prevost, Colt & Mosle LLP, a New York-based law firm, and three others.

 The only arbitration agreement in the transactions was between the respondent and its investment adviser, Bricolage Capital LLC, which filed for bankruptcy and was not involved in the proceedings.

Carlisle originally filed suit against the petitioners for fraud, civil conspiracy, professional and legal malpractice, and negligence claims, after the Internal Revenue Service found the tax shelters illegal.  After Bricolage filed for bankruptcy and left the proceedings, the petitioners motioned to compel arbitration under the agreement.  The district court denied the motion and the Sixth Circuit dismissed for lack of jurisdiction, citing the fact that petitioners were not signatories to the arbitration agreement between Carlisle and Bricolage.

In his majority opinion, Justice Scalia also discounted the Sixth Circuit's view that nonsignatories are "ineligible" for injunctive relief under the FAA.  The opinion addresses the federal appeals court findng that the appeal was baseless "since if the Court of Appeals is correct on the merits point we will have awarded petitioners a remarkably hollow victory."

The opinion notes that an interpretation of the FAA's view of arbitration contracts' binding nature and enforceability can be based on state law.   So, the opinion reasons, if state law would give nonsignatories contractual enforcement rights via, for example, assumption, piercing the corporate veil, or alter ego theories, among others, then "the Sixth Circuit’s holding that nonparties to a contract are categorically barred from [Section] 3 relief was error."

"If a written arbitration provision is made enforceable against (or for the benefit of) a third party under state contract law," Scalia concluded, "the statute’s terms are fulfilled."

For an in-depth discussion of the facts and issues involved, see “Arbitration Back at the Supreme Court, Again, on Nonsignatories’ Rights,” 27 Alternatives 14 (January 2009), available free with membership here, for purchase by article here as part of the ADR Briefs feature, and on Lexis and Westlaw.

For the briefs, the Sixth Circuit's opinion in the case, and the transcript, see Scotusblog’s Andersen v. Carlisle wiki, here

--Russ Bleemer, Editor, Alternatives

CPR Intern Jason Frank assisted in the research.