Introduction
The Second Circuit and other courts have recognized that signatories may enforce under Sections 3 and 4 of the Federal Arbitration Act arbitration agreements against non-signatories whenever common-law principles of contract and agency would permit such enforcement, and that non-signatories may enforce arbitration agreements against signatories at least under an estoppel theory, and possibly under other theories of contract and agency. See, e.g., Ross v. American Express Co., 547 F.3d 137, 143 & n.3 (2d Cir. 2008); Ross v. American Express Co., 478 F.3d 96, 99 (2d Cir. 2007); Astra Oil Co. v. Rover Navigation, Ltd., 344 F.3d 276, 279-80 & n.2 (2d Cir. 2003); Thomson-CSF, S.A. v. American Arbitration Assoc., 64 F.3d 773, 776-80 (2d Cir. 1995). The Second Circuit likewise allows interlocutory appeals from the denial of Section 4 motions to compel arbitration, or Section 3 motions to stay litigation in favor of arbitration, brought by or against non-signatories. See, generally, 478 F.3d at 99.
Certain other circuits have held that nonsigatories may not invoke Section 3 or 4 based on an estoppel theory, or at least cannot appeal on an interlocutory basis the denial of an estoppel-based Section 3 or 4 application. See, e.g., DSMC Inc. v. Convera Corp., 349 F.2d 679, 683-84 (D.C. Cir. 2003) (then Roberts, J.); Re Universal Service Fund Tel. Billing Practice Litigation v.Sprint Communications Co., 428 F.3d 940, 945 (10th Cir. 2005) (limiting holding to whether Court of Appeals had appellate jurisdiction at interlocutory stage). These Courts have relied on Section 3’s and 4’s requirement that the relief sought must be “under” a written agreement to arbitrate, and their determination that an estoppel claim by a non-signatory is not one “under” a written agreement to arbitrate.
Arthur Andersen: Issues and Holding
On May 4, 2009, in Arthur Andersen LLP v. Carlisle, ___ U.S. ___ (2009) (Scalia, J.), the United States Supreme Court resolved the circuit split in favor of the courts permitting non-signatories to avail themselves of Federal Arbitration Act Sections 3 and 4. There were two issues before the Court:
- Whether the federal appellate courts have jurisdiction under Federal Arbitration Act Section 16(a) to review denials of stays of litigation requested by litigants who were not parties to the arbitration agreement; and
- Whether Federal Arbitration Act Section 3 can ever mandate a stay sought by a nonsignatory to an arbitration agreement.
The Court held that federal appellate courts have jurisdiction to review appeals from denials of stays sought by non-signatories and that Section 3 can mandate a stay where applicable state law allows the enforcement of an agreement by or against a non-signatory. Justice Souter dissented in an opinion joined by Chief Justice Roberts and Justice Stevens.
Facts and Procedural History
Arthur Andersen was an appeal from a Sixth Circuit decision dismissing for lack of jurisdiction an appeal of a denial of a motion for a stay brought by a non-signatory to an arbitration agreement on an estoppel theory. The plaintiffs had hired Arthur Andersen to provide tax and accounting advice concerning how to minimize their tax liabilities arising out of their sale of their construction-equipment company. Andersen introduced the plaintiffs to Bricolage Capital, LLC, which referred them to a well-known law firm for legal advice. Bricolage and the plaintiffs entered into investment-management agreements containing broad arbitration clauses. These relationships and agreements resulted in plaintiffs investing in a tax shelter scheme, which the Internal Revenue Service ultimately disapproved, and which resulted in the plaintiffs investing in stock warrants that turned out to be worthless. For a period, the IRS offered conditional amnesty to others who had invested in like schemes, but Andersen and the law firm allegedly did not timely inform the plaintiffs of this option, which resulted in plaintiffs settling with the IRS and paying all back taxes, penalties and interest.
Plaintiffs filed suit in the Eastern District of Kentucky against Andersen, the law firm, Bricolage and others, and the defendants — other than Bricolage and its employees — moved to stay the litigation based on the arbitration agreements in Bricolage’s contracts, even though they were not signatories to those contracts (Bricolage also moved for a stay but subsequently filed for bankruptcy, which mooted its application). The District Court denied the non-signatories’ motions. On appeal to the United States Court of Appeals for the Sixth Circuit, the Court dismissed the appeal for want of jurisdiction because the appellants were not signatories to the Bricolage agreements.
Appellate Review under Federal Arbitration Act Section 16(a)
Federal Arbitration Act Section 16(a) provides that “an appeal may be taken from an order. . . refusing a stay of any action under Section 3 of this title.” (emphasis added). The Arthur Andersen Court pointed out that the Sixth Circuit, and other courts that have withheld enforcement by non-signatories, reasoned that stay motions premised on an equitable estoppel theory “seek to expand (rather than simply vindicate) agreements” to arbitrate and thus are not cognizable under Section 3. Slip op. at 3. They are, therefore, not “under Section 3” for the purposes of Federal Arbitration Act Section 16(a), and thus not subject to interlocutory appeal.
But the Arthur Andersen Court rejected this reasoning, holding that Section 16(a) expressly authorizes interlocutory appeals of motions denying Section 3 stays, irrespective of whether the moving party was a signatory to the arbitration agreement. Jurisdiction over an appeal, said the Court, “‘must be determined by focusing on the category of order appealed from, rather than upon the strength of the grounds for reversing the order.” Slip op. at 4 (quoting Behrens v. Pelletier, 516 U.S. 299, 311 (1996)). And Section 16(a) “unambiguously makes the underlying merits irrelevant, for even the utter frivolousness of the underlying request for a § 3 stay cannot turn a denial into something other than ‘an order. . . refusing a stay of any action under section 3. . . .” Slip op. at 4.
Non-Signatories’ Right to Invoke Federal Arbitration Act Section 3
The Court also held that a non-signatory to a written arbitration agreement can successfully invoke Section 3 if state law would allow it to enforce an ordinary contract under the same circumstances:
Section 2 – the FAA’s substantive mandate – makes written arbitration agreements ‘valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.’ That provision creates substantive federal law regarding the enforceability of arbitration agreements, requiring courts ‘to place such agreements upon the same footing as other contracts.’ Section 3, in turn, allows litigants already in federal court to invoke agreements made enforceable by §2. That provision requires the court, ‘on application of one of the parties,’ to stay the action if it involves an ‘issue referable to arbitration under an agreement in writing.’
Neither provision purports to alter background principles of state contract law regarding the scope of agreements (including the question of who is bound by them). Indeed §2 explicitly retains an external body of law governing revocation (such grounds ‘as exist at law or in equity’). And we think §3 adds no substantive restriction to §2’s enforceability mandate. ‘[S]tate law,’ therefore, is applicable to determine which contracts are binding under §2 and enforceable under §3 ‘if that law arose to govern issues concerning the validity, revocability, and enforceability of contracts generally.’ Because ‘traditional principles’ of state law allow a contract to be enforced by or against nonparties to the contract through ‘assumption, piercing the corporate veil, alter ego, incorporation by reference, third-party beneficiary theories, waiver and estoppel,’ the Sixth Circuit’s holding that nonparties to a contract are categorically barred from §3 relief was error.
Slip op. at 5-7 (emphasis in original; citations and footnotes omitted).
The Court rejected the argument that, under Section 3, claims by nonparties to enforce an arbitration agreement are not “referable to arbitration under an agreement in writing” because they seek to bind a signatory to an obligation beyond that signatory’s obligation to arbitrate with other signatories. See Slip op. at 7; 9 U.S.C. § 3 (emphasis supplied). The Court pointed out that Section 3 provided otherwise:
Perhaps that would be true if §3 mandated stays only for disputes between parties to a written arbitration agreement. But that is not what the statute says. It says that stays are required if the claims are ‘referable to arbitration under an agreement in writing.’ If a written arbitration provision is made enforceable against (or for the benefit of) a third party under state contract law, the statute’s terms are fulfilled.
Slip op. at 7.
Analysis and Conclusion
The Court’s opinion is significant for at least four reasons. First, it reaffirms in no uncertain terms that questions concerning the validity, scope and enforceability of an agreement to arbitrate are governed by state law applicable to contracts generally. The only exception is that an ambiguity in the scope of the agreement itself must be resolved in favor of arbitration.
Second, the Court reaffirmed what a number of courts have taken for granted, namely, that Section 3 stays may be sought by non-signatories on an estoppel theory, provided that applicable state law would authorize the enforcement of the agreement on that ground under the same circumstances. Had the Court ruled otherwise, it would have interpreted the Federal Arbitration Act less expansively than its plain language permits. We suspect the Court was particularly reluctant to depart from a textual analysis simply to reduce the number of appeals in Federal Arbitration Act satellite litigation. For more than 20 years, the Court’s arbitration jurisprudence has focused on enforcing arbitration agreements to the same extent as contracts generally, and Arthur Andersen is no exception.
Third, the Court’s broad pronouncement strongly suggests that a non-signatory may enforce an arbitration agreement against a signatory on contract and agency grounds other than estoppel, including assumption, piercing the corporate veil, alter ego, incorporation by reference, and third-party beneficiary theories. Prior to the Court’s decision, whether a non-signatory could avail itself of a theory other than estoppel was an open question in the Second Circuit. See 547 F.3d at 143 n.3.
Fourth, although the Court did not address Section 4 motions to compel arbitration, its reasoning is equally applicable in that context. Federal Arbitration Act Section 4 provides, in pertinent part:
A party aggrieved by the alleged failure, neglect, or refusal of another to arbitrate under a written agreement for arbitration may petition any United States district court which, save for such agreement, would have jurisdiction under Title 28, in a civil action or in admiralty of the subject matter of a suit arising out of the controversy between the parties, for an order directing that such arbitration proceed in the manner provided for in such agreement. . . .
9 U.S.C. § 4 (emphasis supplied)
Not unlike Section 3, Section 4 does not require the petitioner or movant to be a signatory to a written agreement to arbitrate, but merely that there be an “alleged failure, neglect, or refusal of another to arbitrate, under a written agreement” to arbitrate. Section 4 says that “[a] party . . . . may petition any United States district court. . . .”, and one might argue that “party” means “party to the arbitration agreement”, not “party to a Section 4 proceeding.” But the Andersen Court eschewed that interpretation. See Slip op. at 6 n.4.
In any event, limiting Section 4’s availability to formal parties to written arbitration agreements would frustrate the pro-enforcement policy of the Federal Arbitration Act. Sections 3 and 4 are designed to work together in appropriate cases as a dual enforcement mechanism: If one unwilling to arbitrate brings suit in federal court, then Section 3 enables the other to obtain a stay of litigation, and Section 4 enables that other to compel arbitration in the same action, assuming that the Section 4 movant has been aggrieved by the other litigant’s failure to proceed to arbitration and is not in default itself.
Denying that dual enforcement mechanism in cases involving non-signatories would make arbitration agreements less enforceable than ordinary contracts. Consider the position of A, a non-signatory, seeking to enforce an agreement against B, a signatory. A would be unable to move to compel B to arbitrate, which would force it to bring suit against B. Or if B happened to bring suit against A first, A’s only recourse would be a motion for a stay. If the stay was granted, B could refuse to proceed to arbitration despite the stay, which would effectively force A to choose between moving to vacate the stay, and proceeding with the litigation, or leaving the stay in place and not vindicating its contractual rights under state law.
Tags: Appellate Review, Arthur Andersen LLP v. Carlisle, contract and agency, estoppel, Federal Arbitration Act, motion to compel, non-signatory, Section 3, Section 4, signatory, stay, Supreme Court
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