Supreme Court Allows Interlocutory Appeal to a Non-Signatory Seeking to Enforce an Arbitration Agreement
May 7, 2009
Resolving a surprisingly vigorous circuit split, on May 4, 2009, the Supreme Court held that § 16(a)(1) of the Federal Arbitration Act (the FAA) permits a non-signatory seeking to enforce a written arbitration agreement to bring an interlocutory appeal of a district court’s denial of a motion to stay litigation pending arbitration. Arthur Andersen LLP et al. v. Wayne Carlisle et al., 556 U.S. ___, No. 08-146 (May 4, 2009).
The case arose in the context of the sale of a construction equipment business. The sellers and several limited liability companies (the LLCs) they formed for purposes of the sale followed tax advice from several advisors, including a financial boutique. When the IRS later determined that the strategy was an abusive tax shelter and assessed penalties, the sellers and LLCs sued their advisors.
The defendants moved for a stay of litigation pursuant to FAA § 3, which provides that the district court shall “stay the trial of the action” if a suit is brought “upon any issue referable to arbitration under an agreement in writing for such arbitration.” The predicate for the motion was a clause in investment-management contracts between the LLCs and the financial boutique that required arbitration of all disputes arising under or related to the contracts. Even though not signatories of those contracts, all defendants sought to enforce the arbitration clause against all plaintiffs based on a claim of equitable estoppel. The district court denied the motion on the ground that, as non-signatories, the defendants were not entitled to enforce the arbitration agreements.
The defendants appealed, basing jurisdiction on § 16(a)(1), which allows interlocutory appeals of orders “refusing a stay of any action under section 3” of the FAA. The Sixth Circuit held that it did not have jurisdiction over the appeal, however, on the ground that, as non-signatories to the arbitration agreement, the advisors’ motion was not under § 3 because it was not brought “under an agreement in writing for such arbitration.” The Sixth Circuit’s decision was aligned with those of the D.C., Seventh and Tenth Circuits. In reversing, the Supreme Court sided with the Second, Third and Fifth Circuits.
Justice Scalia’s majority opinion held that when a non-signatory to an arbitration agreement invokes the agreement as a basis for a stay under § 3 of the FAA, that party is entitled to invoke FAA § 16 to bring an interlocutory appeal of a district court’s refusal of the stay. The Court focused on the language of § 16, stating that “even utter frivolousness of the underlying request for a § 3 stay cannot turn a denial into something other than an ’order … refusing a stay of an action under section 3.’” The circuits that had held otherwise were “conflating the jurisdictional question with the merits of the appeal.”
While the Court did not resolve whether this particular attempt to invoke equitable estoppel was frivolous or well founded on the merits, it rejected the Sixth Circuit’s categorical view that a non-signatory could never invoke an arbitration agreement under § 3, clarifying instead that state law will determine whether the arbitration agreement is enforceable by or against the non-signatory. Thus, such theories as assumption, piercing the corporate veil, alter ego, incorporation by reference, third-party beneficiary, waiver or estoppel – if available under state law – could be invoked to tie a non-signatory to an arbitration agreement and seek a § 3 stay of litigation pending arbitration.
Although the Court’s decision was technically limited to appellate jurisdiction over the denial of a motion to stay under FAA § 3, the Court’s rationale applies equally to the denial of a motion for an order to compel arbitration under FAA § 4, appellate jurisdiction for which is based on comparable language in § 16.
The Court’s conclusions stem from a straightforward reading of the statute that is hard to dispute. But the decision holds open the door to interlocutory appeals where the trial court would otherwise have allowed the case to proceed toward trial. Thus even unsuccessful attempts to stay litigation by or against third parties can lead to delay, which was a concern of the dissent. The majority opinion recited a variety of tools the courts of appeals could use to minimize abusive appeals, such as “streamlining” those with no merit or authorizing the district court to retain jurisdiction when an appeal is certified as frivolous, and it also observed that sanctions are available for frivolous conduct. But third-party practice with respect to arbitration clauses remains complex and controversial.
If you have any questions, please feel free to contact any of your regular contacts at the firm or any of the partners and counsel listed under Litigation and Arbitration on this website.
The case arose in the context of the sale of a construction equipment business. The sellers and several limited liability companies (the LLCs) they formed for purposes of the sale followed tax advice from several advisors, including a financial boutique. When the IRS later determined that the strategy was an abusive tax shelter and assessed penalties, the sellers and LLCs sued their advisors.
The defendants moved for a stay of litigation pursuant to FAA § 3, which provides that the district court shall “stay the trial of the action” if a suit is brought “upon any issue referable to arbitration under an agreement in writing for such arbitration.” The predicate for the motion was a clause in investment-management contracts between the LLCs and the financial boutique that required arbitration of all disputes arising under or related to the contracts. Even though not signatories of those contracts, all defendants sought to enforce the arbitration clause against all plaintiffs based on a claim of equitable estoppel. The district court denied the motion on the ground that, as non-signatories, the defendants were not entitled to enforce the arbitration agreements.
The defendants appealed, basing jurisdiction on § 16(a)(1), which allows interlocutory appeals of orders “refusing a stay of any action under section 3” of the FAA. The Sixth Circuit held that it did not have jurisdiction over the appeal, however, on the ground that, as non-signatories to the arbitration agreement, the advisors’ motion was not under § 3 because it was not brought “under an agreement in writing for such arbitration.” The Sixth Circuit’s decision was aligned with those of the D.C., Seventh and Tenth Circuits. In reversing, the Supreme Court sided with the Second, Third and Fifth Circuits.
Justice Scalia’s majority opinion held that when a non-signatory to an arbitration agreement invokes the agreement as a basis for a stay under § 3 of the FAA, that party is entitled to invoke FAA § 16 to bring an interlocutory appeal of a district court’s refusal of the stay. The Court focused on the language of § 16, stating that “even utter frivolousness of the underlying request for a § 3 stay cannot turn a denial into something other than an ’order … refusing a stay of an action under section 3.’” The circuits that had held otherwise were “conflating the jurisdictional question with the merits of the appeal.”
While the Court did not resolve whether this particular attempt to invoke equitable estoppel was frivolous or well founded on the merits, it rejected the Sixth Circuit’s categorical view that a non-signatory could never invoke an arbitration agreement under § 3, clarifying instead that state law will determine whether the arbitration agreement is enforceable by or against the non-signatory. Thus, such theories as assumption, piercing the corporate veil, alter ego, incorporation by reference, third-party beneficiary, waiver or estoppel – if available under state law – could be invoked to tie a non-signatory to an arbitration agreement and seek a § 3 stay of litigation pending arbitration.
Although the Court’s decision was technically limited to appellate jurisdiction over the denial of a motion to stay under FAA § 3, the Court’s rationale applies equally to the denial of a motion for an order to compel arbitration under FAA § 4, appellate jurisdiction for which is based on comparable language in § 16.
The Court’s conclusions stem from a straightforward reading of the statute that is hard to dispute. But the decision holds open the door to interlocutory appeals where the trial court would otherwise have allowed the case to proceed toward trial. Thus even unsuccessful attempts to stay litigation by or against third parties can lead to delay, which was a concern of the dissent. The majority opinion recited a variety of tools the courts of appeals could use to minimize abusive appeals, such as “streamlining” those with no merit or authorizing the district court to retain jurisdiction when an appeal is certified as frivolous, and it also observed that sanctions are available for frivolous conduct. But third-party practice with respect to arbitration clauses remains complex and controversial.
If you have any questions, please feel free to contact any of your regular contacts at the firm or any of the partners and counsel listed under Litigation and Arbitration on this website.