Supreme Court Holds FAA Allows Non-Signatories to Appeal

Dispute Resolution Journal, May-Jul 2009 by Kelly, Justin

In a decision dated May 4, 2009, a divided U.S. Supreme Court (6-3) held that non-signatories to an arbitration agreement may appeal the denial of a motion to stay litigation under Section 16(a)(1)(A) of the Federal Arbitration Act (FAA).

The ruling in Arthur Andersen v. Wayne Carlisle (No. 08-146), written by Associate Justice Antonin Scalia, and joined in by Associate Justices Anthony Kennedy, Clarence Thomas, Ruth Bader Ginsburg and Samuel Alito, reversed a decision by the 6th Circuit. The Court concluded that Section 16(a)(1)(A) clearly and unambiguously states that any litigant who petitions for a stay under Section 3 is entitled to an immediate appeal of the denial of that petition, regardless of the petitioner's eligibility for a stay. This is an exception to the rule that courts of appeals have jurisdiction only over "final" decisions of district courts, the Court stated.

It explained that appeals courts that have wrongly decided this issue did so by "conflating the jurisdictional question with the merits of the appeal." It stressed that the right to appeal depends on the "category of order being appealed from, rather than upon the strength of the grounds for reversing the order." The Court categorically stated that the underlying merits of the Section 3 petition are irrelevant to the issue of appellate jurisdiction.

Finally, it said that even if this decision would enmesh the federal courts of appeal in fact-intensive jurisdictional inquiries (i.e., a "parade of horribles"), it would not change its reading of Section 16.

Alternative Holding

Next, the Court ruled that the 6th Circuit erred in concluding that non-signatories are categorically barred from seeking a stay under Section 3. The reason is that background state law contract principles could apply to Sections 2 and 3, including the principle allowing the corporate veil to be pierced under several legal theories.

The Court emphasized that Section 3 does not mandate stays only for parties to a written arbitration agreement. The statute only provides that stays are required if the claims are referable to arbitration under an agreement in writing. The Court concluded from this that if a written arbitration agreement is enforceable against, or in favor of, a third party under state law, then "the statute's terms are fulfilled."

Miller Baker of McDermott Will & Emery, who argued the case for the respondents in this case, said, "We are very pleased with the Court's decision. The Court completely accepted, without qualification, our argument both as to appellate jurisdiction and the enforcement rights of non-parties under the Federal Arbitration Act. This decision stabilizes what had been a very unstable area of Federal Arbitration Act law."

The Dissent

Associate Justice David Souter, who announced his retirement from the High Court at the end of the Court's current term, wrote a dissent, in which Chief Justice John Roberts and John Paul Stevens joined. Souter argued that the better reading of Section 16 would employ the "longstanding congressional policy limiting interlocutory appeals" and not allow non-signatories to appeal the denial of a Section 3 stay of litigation.

Earlier Proceedings

Wayne Carlisle and his partners (Carlisle) sought to reduce their taxes on the sale of their construction business. They claim that advisers Arthur Andersen, Bricolage Capital, and Curtis Mallet Prevost Colt & Mosle (Andersen) recommended a tax shelter called a "leveraged option strategy." Carlisle implemented the strategy, which included entering into an investment management agreement with Bricolage. That agreement contained an arbitration provision.

The IRS later ruled that the leveraged option strategy was an abusive tax shelter. It offered an amnesty program but respondents did not notify Carlisle of the program's existence. As a result, Carlisle ended up paying the IRS over $25 million in taxes and penalties. Carlisle then sued Andersen on a number of grounds, including fraud and malpractice.

Respondent Bricolage filed a motion for a stay of litigation pending arbitration under FAA Section 3. Shortly thereafter it filed for bankruptcy. Then, Arthur Andersen and Curtis Mallet, which were not parties to an arbitration agreement with Carlisle, filed their own Section 3 motion for a stay pending arbitration. The district court denied the stay.

Andersen filed an interlocutory appeal of that ruling under Section 16 with the 6th Circuit. On April 9, 2008, the court ruled that it did not have jurisdiction to hear the appeal. It reasoned that the "plain language" of Section 16(a)(1) requires a written agreement to arbitrate between the parties; but Arthur Andersen and Curtis-Mallet, as non-signatories, could not meet this requirement. The Supreme Court granted review on Nov. 7, 2008.

Adapted in part from ADRworld.com, a subsidiary of the AAA.