Arthur Andersen, LLP, et al. v. Wayne Carlisle, et al. (08-146)

Oral argument: 
March 3, 2009

Oral argument: Mar. 3, 2009

Appealed from: United States Court of Appeals, Sixth Circuit (Apr. 9, 2008)

FEDERAL ARBITRATION ACT, STAY OF TRIAL, NON-PARTY, NON-SIGNATORY, ARBITRATION CLAUSE, AGREEMENT TO ARBITRATE, APPEAL, APPELLATE JURISDICTION

Section 3 of the Federal Arbitration Act ("FAA") allows parties who have agreed to arbitrate to move for a stay of trial proceedings until they have had a chance to attempt arbitration. In addition, Section 16 of the FAA allows an immediate appeal of judgments denying stay under such circumstances. At issue in this case is whether these sections of the FAA extend to non-signing parties affected by an arbitration agreement. Petitioner Arthur Andersen advised Respondent Wayne Carlisle on a business transaction. As a result of this transaction, Carlisle eventually signed a contract, to which Andersen was a not party, that contained an arbitration agreement. After a dispute developed, Andersen sought a stay in the litigation proceedings in order to arbitrate with Carlisle, despite the fact that Andersen had not signed the arbitration agreement. After Andersen appealed the initial denial of its request for a stay, the United States Court of Appeals for the Sixth Circuit held that it did not have jurisdiction to hear Andersen's appeal because Sections 3 and 16 of the FAA only apply to signatories of arbitration agreements. The Supreme Court's decision in this case may clarify the scope of the FAA's application to non-signatories, including the availability of appellate review of denials of stays.

Questions presented

(1) Whether Section 16(a)(l)(A) of the FAA provides appellate jurisdiction over an appeal from an order denying an application made under Section 3 to stay claims involving non-signatories to the arbitration agreement.

(2) Whether Section 3 of the FAA allows a district court to stay claims against non-signatories to an arbitration agreement when the non-signatories can otherwise enforce the arbitration agreement under principles of contract and agency law, including equitable estoppel.

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Issues

Whether Section 3 of the Federal Arbitration Act entitles parties who are not signatories to an arbitration agreement to receive a stay of trial for arbitration, and whether Section 16 of the Act entitles non-signatories to an immediate appeal if the court refuses them a Section 3 stay.

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Facts

Arbitration is a form of alternative dispute resolution, outside litigation proceedings, in which parties submit a dispute to an impartial decision-maker for a binding decision. See American Arbitration Association, Arbitration & Mediation. The Federal Arbitration Act ("FAA"), as part of Congress's pro-arbitration policy, gives power to arbitration agreements. See Congress Considers Bill To Invalidate Pre-Dispute Arbitration Clauses for Consumers, Employees, and Franchises, Harvard Law Review, June 2008, at 2262-2263, 2269. For example, Section 3 allows parties who have agreed to arbitrate to obtain a court order to stay any trial proceedings until the parties have attempted arbitration. See Federal Arbitration Act, 9 U.S.C. § 3. Section 16 of the FAA further protects arbitration agreements by allowing the immediate appeal of judgments denying a motion for a stay. See 9 U.S.C. § 16. At issue in this case is whether these provisions of the FAA apply to non-signing parties to an arbitration agreement.

Petitioner Arthur Andersen, LLP ("Andersen") is one of several firms that advised respondents Wayne Carlisle, James Bushman, and Garry Strassel ("Carlisle") on minimizing taxes during sale of their heavy construction equipment business. See Carlisle v. Curtis et al., 521 F.3d 597, 599 (6th Cir. 2008); Brief of Respondent, Wayne Carlisle et al. at 2. Those individuals, acting on advice from accounting firm Andersen, law firm Curtis, Mallet-Prevost, Colt & Mosle, LLP ("Curtis Mallet"), and financial firm Bricolage Capital LLC ("Bricolage"), each created separate business entities. See Carlisle, 521 F.3d at 599. These new business entities signed investment management contracts with Bricolage that included arbitration agreements. See id. Andersen and Curtis Mallet, however, did not sign the contracts with Carlisle containing the arbitration agreements. See id. The Internal Revenue Service ("IRS") eventually determined these tax shelters to be "abusive," and Carlisle paid an IRS settlement of over $25 million. See id. Carlisle sued Andersen, Curtis Mallet, Bricolage, and six other defendants in the United States District Court for the Eastern District of Kentucky for negligence and fraud, among other claims. See id.; Brief of Petitioner, Arthur Andersen, LLP et al. at 9. After Bricolage filed for bankruptcy and left the district court proceeding, Andersen and the other defendants moved to stay the lawsuit proceedings under Section 3 of the FAA to allow the parties to arbitrate under the arbitration agreement. See Carlisle, 521 F.3d at 599.The district court denied this motion on substantive grounds; Andersen then immediately appealed the denial of the stay under Section 16 of the FAA. See id.

On appeal, the United States Court of Appeal for the Sixth Circuit determined that it lacked jurisdiction to hear Andersen's interlocutory appeal, holding that Sections 3 and 16 of the FAA do not apply to non-signing parties. See id. at 598, 600-02. Citing the plain language of the statute, which reads that a stay of proceedings for arbitration is available to any party to "an agreement in writing for such arbitration," and to the narrow scope upon which interlocutory appeals are granted, the Sixth Circuit explained that Section 3 stays only applied to those parties who were signatories to the written agreement. See id. The Sixth Circuit determined that the exception to appealing interlocutory orders provided for by Section 16 did not apply to non-signatories to an arbitration agreement. See id. at 602.

Andersen then appealed to the United States Supreme Court, contending that Sections 3 and 16 of the FAA do apply to non-signing parties in appropriate circumstances, and that appellate courts do have jurisdiction to hear non-signatories' appeals. The Supreme Court granted certiorari on November 7, 2008.

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Discussion

Does the Federal Arbitration Act ("FAA") provide protections of arbitration agreements to parties who have not signed those agreements? The FAA allows signatories to arbitration agreements to stay trial proceedings until the parties have gone through arbitration, and authorizes the immediate appeal of judgments denying a motion for such a stay. See Federal Arbitration Act , 9 U.S.C. §§ 3, 16. Petitioner Arthur Anderson, LLP ("Andersen") argues that Sections 3 and 16 of the FAA apply to non-signing parties, based on legislative intent and through Section 2, which applies principles of state contract law to arbitration agreements and would thus give relevant non-signatories enforcement power. See Brief for Petitioners, Arthur Andersen, LLP et al. at 31-34. Respondents Wayne Carlisle and others ("Carlisle") counter that, based on the FAA's plain language, the statute sections at issue provide arbitration rights to signatories only. See Brief for Respondent, Wayne Carlisle et al. at 17. The Supreme Court's decision has implications both for third parties to arbitration agreements, and for the scope of arbitration agreements overall.

A decision for Carlisle, argues amicus United States Chamber of Commerce ("Chamber of Commerce"), would contradict federal policy, embodied in the FAA, promoting arbitration. See Brief of Amicus Curiae United States Chamber of Commerce ("Chamber of Commerce") in Support of Petitioner at 2. The Chamber of Commerce argues that the FAA dictates that arbitration agreements be treated like contracts, and thus these agreements should have the same protections that are afforded to contracts. See id. at 16. In addition, the Chamber of Commerce maintains that the strict, formalistic restraints on arbitration agreements supported by Carlisle deny arbitration in cases where all affected parties did not happen to sign the agreement. See id. at 16.

In contrast, Carlisle argues that a decision for Andersen would take the policy of promoting arbitration too far. See Brief for Respondent at 19. Carlisle argues that Andersen's interpretation would give any non-signing party claiming to be covered by an arbitration agreement an automatic right to an interlocutory appeal. See Brief for Respondent at 19. Such a decision, Carlisle contends, might create a flood of interlocutory appeals that could incapacitate appellate courts. See id. at 22. In addition, Carlisle maintains that a decision for Andersen would contradict federal policy governing interlocutory appeals-that Congress, and not courts, determine the narrow exceptions for allowing interlocutory appeals. See id. at 22.

The Chamber of Commerce also maintains that a decision for Carlisle would contradict general contract principles by frustrating the general expectations of parties in business agreements. See Brief of Chamber of Commerce at 17. The Chamber of Commerce and amicus Washington Legal Foundation ("WLF") argue that many contractual relationships give rise to third parties or non-signatories that are still governed by those agreements, as signing parties often represent other interested parties to which the signatories intend the agreements to apply. See id. at 23-24; Brief of Amicus Curiae Washington Legal Foundation in Support of Petitioner at 6-7. This rule, the Chamber of Commerce argues, could even preclude enforcement of arbitration agreements that specifically provide for non-signing parties. See Brief of Chamber of Commerce at 19. Such a situation, according to the WLF, implicitly urges those parties to resort to the courts to solve their disputes, contradicting Congress's intention for the FAA to reduce litigation. See id. at 7.

Carlisle counters that a decision holding that Sections 3 and 16 of the FAA apply only to signing parties would create serious potential for manipulation by non-signing parties. See Brief for Respondents at 17. Carlisle contends that these non-signatories could request a stay and force an appeal of a denial by a mere allegation that the arbitration agreement applies to them. See id. at 17-18. In addition, Carlisle argues that a decision for Andersen could essentially force parties to a dispute into arbitration with parties with whom they never agreed to arbitrate. See id. at 18.

The Chamber of Commerce, however, maintains that a bright-line rule that FAA Sections 3 and 16 only apply to signatories is not needed; instead, the appropriate principles for non-signatories are those that govern whether a non-signing party can enforce the terms of that specific contract. See Brief of Chamber of Commerce at 11. Therefore, the Chamber of Commerce argues that, far from standards that are vague and open to manipulation, principles to determine whether non-signing parties can enforce contracts already exist. See id.

The Supreme Court recently has heard other arbitration-related issues. For example, during its 2008 spring term, the Court held that the FAA trumped state law in determining when arbitration awards can be reversed. See Hall Street Associates, L.L.C. v. Mattel, Inc., 128 S. Ct. 1396 (2008). In addition, in December 2008, the Court heard oral arguments on whether collective bargaining agreements can include mandatory arbitration clauses, barring court litigation. See Petition for Certiorari, 14 Penn Plaza, L.L.C. v. Pyett. In addition, a circuit court split exists on the issue in the current case: the United States Court of Appeals for the Second Circuit has interpreted Sections 3 and 16 of the FAA to apply to non-signatories, while the Courts of Appeals for the Tenth and District of Columbia Circuits have held that these FAA sections do not apply to non-signing parties. See Carlisle v. Curtis et al., 521 F.3d 597, 600-02 (6th Cir. 2008). This decision by the Supreme Court may resolve this difference in interpretation among the circuit courts.

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Analysis

Statutory background

Parties entering a contract can agree that, should any dispute arise between them, the parties will resolve it through arbitration. Arbitration, a method of alternative dispute resolution, occurs outside court, rather than in litigation. See Alternative Dispute Resolution. The Federal Arbitration Act ("FAA") enables private parties to enforce these agreements to arbitrate, and gives courts a role in doing so. See Federal Arbitration Act, 9 U.S.C. § 2. In the current case, petitioner Arthur Andersen, LLP ("Andersen") and respondent Wayne Carlisle ("Carlisle") are concerned with three provisions of the FAA:

Section 2 of the FAA makes written arbitration agreements enforceable based on principles of state contract law, which puts arbitration agreements on equal footing with other types of contracts. See 9 U.S.C. § 2.

Section 3 enables a party to a lawsuit who believes the dispute is subject to an arbitration agreement to request that the court stay the trial, or put the trial on hold, so the parties can arbitrate. See 9 U.S.C. § 3. If the court finds that the issue is indeed "referable to arbitration under [a written agreement to arbitrate]," it must grant a stay so the parties can carry out their agreement. See id.

Section 16 provides that, if a court issues "an order refusing a stay . . . under section 3," the requesting party may immediately appeal that order; this is an exception to the general rule against appealing interlocutory orders, or decisions made in the course of a trial, until a case has been fully decided. See 9 U.S.C. §§ 16(a)(1)(A) & (B);; 28 U.S.C. § 1292; see also Wex: Appellate Procedure. However, the section prohibits the immediate appeal of an interlocutory order granting a Section 3 stay. See 9 U.S.C. §§ 16(b)(1) &(2). Section 16 allows immediate appeal of orders that are unfavorable to arbitration in subsection (a), and prohibits immediate appeal of several that are favorable to arbitration in subsection (b). See 9 U.S.C. § 16.

Circuit courts currently disagree about how to apply the FAA when people or organizations seek to enforce an arbitration agreement to which they are not signatories. For instance, a person may seek to enforce an arbitration agreement because the contract containing the agreement affects him and he believes the signatories intended the agreement to apply to him as well. See Carlisle v. Curtis et al., 521 F.3d 597, 600 (6th Cir. 2008); Brief for Petitioners, Arthur Andersen, LLP, et al. at 11. This case will clarify whether Section 3 stays can ever be granted to non-signatories, and whether Section16 permits non-signatories to immediately appeal the denial of a stay request. See Brief for Petitioners at i.

Interpreting Section 3 of the FAA

Andersen argues that the right to enforce an arbitration agreement by obtaining a Section 3 stay extends to non-signatories by virtue of Section 2. See Brief for Petitioners at 31-34. Andersen notes that Section 2 bases the validity and enforceability of arbitration agreements on principles of state law, and that state law principles of agency, equitable estoppel,and third-party beneficiaries have long enabled non-signatories to enforce and be bound by contracts. See id. at 34. Based on these principles, Andersen reasons that non-signatories are entitled to enforce arbitration agreements by obtaining Section 3 stays. See id.

Andersen finds support in Supreme Court cases and legal treatises asserting that state law determines the rights and obligations of non-signatories as well as signatories to arbitration agreements. See id. at 32-36; see also Brief of Amicus Curiae the United States Chamber of Commerce in Support of Petitioners at 14. Anderson also points to a lack of express language requiring the presence of signatures to have an enforceable arbitration agreement under Section 2, or to receive a stay for arbitration under Section 3. See Brief for Petitioners at 37-39. In addition, Andersen contends that Congress implicitly rejected a signature requirement for enforcing arbitration agreements when it fashioned the FAA after the 1920 New York Act: that Act contained an informal writing requirement for arbitration agreements, in contrast to an earlier New York law which required signatures to create a binding agreement. See id. at 39-41.

Carlisle contends that Section 3 entitles only signatories to written arbitration agreements to stays. See Brief for Respondents at 26-28. Carlisle locates this limitation in the Section 3 text instructing courts to grant a requested stay upon finding that the dispute is subject to arbitration "under a written agreement." See id. Carlisle maintains that non-signatories cannot operate under a written arbitration agreement because the agreement does not apply to them. See id. If written agreements did apply to non-signatories, Carlisle argues, non-signatories would not need to base a stay request on principles such as equitable estoppel, which make it possible to enforce contracts beyond their express terms. See id. at 28.

In addition, Carlisle contends that other elements of Section 3 also presuppose and implicitly require that only signatories can receive Section 3 stays. See Brief for Respondents at 28-31. Section 3 provides that a stay should last until arbitration has taken place "in accordance with the terms of the agreement," and cannot be granted to parties who are themselves in default of the arbitration agreement. See id. at 29. According to Carlisle, just as non-signatories cannot act "under" an agreement that does not pertain to them, they cannot act in accordance with its terms, nor be in default of the agreement. See id. at 29-31. Thus,Carlisle maintains that non-signatories fall outside the scheme that Section 3 contemplates. See id. at 30-31.

Interpreting Section 16 of the FAA

Andersen interprets Section 16 to permit immediate appeal whenever a court denies a motion for a Section 3 stay. See Brief for Petitioners at 19-21. Finding no further limitations in the text of the entire statute, Andersen infers that the merits of the Section 3 request are irrelevant to the requesting party's right to appeal. See id. Andersen cites authority from the United States Courts of Appeals for the Third and Seventh Circuits that a stay refusal can be appealed even if the refusal was proper. See id. at 20-23. Andersen also analogizes to claims of immunity from suit, noting that appellate courts do not consider the merits of a denied immunity claim before hearing its appeal. See id. at 25-27. In Andersen's estimation, the question of whether a non-signatory employing the theory of equitable estoppel is eligible to receive a Section 3 stay involves the merits of the stay request, and thus should be considered during, not before, the appeal. See id. at 20-21.

Moreover, Andersen argues that Section 16 permits immediate appeal of any court order that does not favor arbitration, including the denial of a stay. See Brief for Petitioners at 23-24. It notes that Congress passed Section 16 following Gulfstream Aerospace Corp. v. Mayacamas Corp., which restricted the appeal of court orders regarding arbitration, and that Congress deliberately structured Section 16 to provide different rules for appealing orders that either favor or do not favor arbitration. See id.; 485 U.S. 271 (1988). According to Andersen, Congress intended to reflect a definite preference for arbitration, and chose not to carve out an exception preventing non-signatories from appealing denials of stays for arbitration. See Brief for Petitioners at 24.

In contrast, Carlisle argues that Section 16 permits immediate appeal of an order denying a stay only if the requesting party was eligible for a Section 3 stay. See Brief for Respondents at 19-20; 24-26. Carlisle finds this limitation in Section 16's text, which allows for the appeal of "an order refusing a stay under . . . Section 3." See id. (emphasis in original). According to Carlisle, merely seeking a Section 3 stay does not bring an otherwise invalid stay request under Section 3. See id. at 32-33. Carlisle reasons that because non-signatories are ineligible to receive Section 3 stays, non-signatories' stay requests cannot fall under Section 3. See id. at 30.

In addition, while Carlisle agrees with Andersen that the merits of the underlying stay request do not affect the right to appeal, Carlisle considers an applicant's eligibility for a Section 3 stay to be a threshold matter apart from the merits. See Brief for Respondents at 41-46. Addressing Andersen's analogy to immunity claims, Carlisle notes that the mere assertion and rejection of an immunity claim does not afford immediate appeal. See id. at 45. Rather, appellate courts can hear such an appeal only if the party seeking immunity is among the class of individuals who are eligible for immunity. See id. According to Carlisle, similar to immunity, signatories to arbitration agreements are eligible for application of the FAA standards.

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Conclusion

This case invites the Supreme Court to clarify whether and to what extent the FAA entitles non-signatories to written arbitration agreements to enforce those agreements. This decision may establish whether non-signatories can request and receive stays of trial under FAA Section 3, and whether they can immediately appeal the denial of stay requests under Section 16. Petitioner Arthur Andersen, LLP and other petitioners, as well as their amici curiae, argue that non-signatories can request Section 3 stays based on principles such as equitable estoppel, and may immediately appeal under Section 16 if the stay is refused. Respondent Wayne Carlisle and the other respondents, however, contend that non-signatories are ineligible for both Section 3 stays and Section 16 appeals. By further defining non-signatories' rights to enforce arbitration agreements under the FAA, the Court's decision may clarify the scope of the relevant FAA sections and resolve the differing interpretations of these sections among the federal circuit courts.

Authors

Prepared by: Lara Haddad and Courtney Bennigson

Edited by: Courtney Zanocco

Additional Sources

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Edited by