6 May 2009
On May 4, 2009 the US Supreme Court released its opinion in Arthur Andersen LLP v. Carlisle, No. 08-146 (previously discussed in the November 10, 2008 Docket Report).
Section 3 of the Federal Arbitration Act (FAA or Act) provides for a stay of litigation in any action that is “referable to arbitration under an agreement in writing.” 9 U.S.C. § 3. The Act further provides that “an appeal may be taken from . . . an order . . . refusing a stay of any action” under that provision. 9 U.S.C. § 16(a)(1)(A). In Arthur Andersen LLP v. Carlisle, No. 08-146, the Supreme Court held (1) that a court of appeals has jurisdiction under Section 16(a) to review a denial of a stay requested by a litigant not a party to the arbitration agreement and (2) that such a litigant is entitled to a stay under Section 3 if the relevant state contract law allows the litigant to enforce the agreement.
In the case before the Court, a number of investors sought tax advice from the accounting firm of Arthur Andersen, which introduced them to the investment firm of Bricolage Capital, LLC, which in turn referred them to the law firm of Curtis, Mallet-Prevost, Colt & Mosle, LLP for legal advice. Limited-liability corporations created by the investors entered into investment-management agreements with Bricolage. Each agreement specified that “[a]ny controversy arising out of or relating to this Agreement . . . shall be settled by arbitration.” Slip op. 1-2. When the investment strategy carried out by Bricolage was deemed an illegal tax shelter by the Internal Revenue Service, the investors filed suit against Bricolage, Arthur Andersen, Curtis Mallet, and others. Arthur Andersen and Curtis Mallet moved for a stay under Section 3 of the FAA, which the district court denied. (Bricolage had filed for bankruptcy in the interim.) Arthur Andersen and Curtis Mallet then filed an interlocutory appeal of that denial, which the Sixth Circuit dismissed for lack of jurisdiction, concluding that nonparties to a written arbitration agreement are ineligible for relief under Section 3 of the FAA.
In an opinion by Justice Scalia, a six-Justice majority of the Supreme Court reversed. The Court held that the only consideration relevant to the jurisdictional question is whether the interlocutory appeal is in fact an appeal of “an order . . . refusing a stay of any action under section 3” and that the language of the FAA provision “unambiguously makes the underlying merits irrelevant.” Slip op. 4. Because the appeal indisputably concerned such an order, the Court concluded, jurisdiction existed regardless of the merits of the underlying motion for a stay. The Court went on to reject the Sixth Circuit’s conclusion that a nonsignatory could not seek to stay litigation and compel arbitration, confirming the long-established principle that Section 2 of the FAA places agreements to arbitrate on an equal footing with other types of contracts. The Court thus held that, to the extent that the relevant body of state contract law—such as under the equitable-estoppel principles invoked by Arthur Anderson and Curtis Mallet—allows an agreement to be enforced by nonparties to the agreement, those nonparties must be eligible for relief under Section 3 of the FAA in order to enforce it.
In a dissenting opinion joined by Chief Justice Roberts and Justice Stevens, Justice Souter suggested that the FAA’s grant of a right to an immediate appeal of a denial of a motion for a stay “under section 3” should be understood as more than “merely a labeling requirement,” particularly in light of the presumption against interlocutory, “piecemeal” appeals. Slip op. 1 (Souter, J., dissenting). Instead, the dissent argued, Section 3 itself should be understood to “offer a stay only to signatories of an arbitration agreement,” and Congress should not be assumed to have intended “to grant the right to appeal a § 3 denial to anyone as peripheral as a nonsignatory.” Id. at 2.
The decision in Arthur Andersen is significant because it resolves a mature circuit split over whether nonsignatories can compel arbitration under Section 3 of the FAA and appeal from the denial of a motion to compel arbitration. The decision ensures that third parties seeking to compel arbitration under a contract have a procedural avenue for doing so.
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