Earlier this week, the Supreme Court, in a 6-3 decision, resolved a circuit split involving the Federal Arbitration Act.  In Arthur Andersen LLP v. Carlisle, 2009 WL 1174853 (May 4, 2009), the Court interpreted section 16(a)(1)(A) of the Federal Arbitration Act, which provides a right to interlocutory appeal from “an order … refusing a stay of any action under section 3.”   (FAA section 3 allows a disputant in federal court to obtain a stay of any action that a court finds to be “referable to arbitration under an agreement in writing.”)  An interesting twist: on one side of the split was an opinion by Chief Justice Roberts, written when he was a Court of Appeals judge on the D.C. Circuit.

The underlying dispute arose out of a failed complex tax shelter involving foreign currency options and the purchase of stock warrants.  Plaintiffs, three individual clients of Andersen, contracted with an investment manager to carry out the leveraged option strategy, and that contract had a predispute arbitration clause.  When their tax writeoffs from the investments ultlimately were disallowed as illusory by the IRS, plaintiffs sued Andersen, among other entities, for numerous claims including negligence.   Defendants, who had not signed the arbitration agreement, moved for a section 3 stay on the grounds of equitable estoppel.  The district court denied the stay, and defendants filed an interlocutory appeal.  

The Sixth Circuit dismissed the appeal for lack of jurisdiction, following the reasoning of those circuits, including the D.C. Circuit under Justice Roberts’ opinion, that had held that Courts of Appeal do not have jurisdiction to consider appeals from section 3 denials by nonsignatories.  Those circuits had concluded that, in order to decide a section 16 appeal, they had to consider the merits of the underlying section 3 stay application.  These courts ruled that a non-meritorious stay application by nonsignatories was not “under” section 3 and thus did not qualify as appealable under section 16.  Any other interpretation, they reasoned, would permit nonsignatories to unnecessarily expand the federal court’s jurisdiction.

Justice Scalia, writing for the majority, reversed the Sixth Circuit’s dismissal.  Justice Scalia held that the Circuit Court had “conflated the jurisdictional question with the merits of the appeal.”  Instead, the plain meaning of section 16(a) bestows appellate jurisdiction from any denial of an application under section 3, and the court should not consider the merits of the stay application when ruling on jurisdiction.

To avoid awarding petitioners “a remarkably hollow victory,” Justice Scalia then examined the Sixth Circuit’s “underlying determination” that the appeal was meritless because nonsignatories are “categorically ineligible” for section 3 relief.  He concluded that whether a nonsignatory can invoke section 3 is a matter requiring tha application of traditional principles of state contract law as to the “scope of agreements.”  Because those principles allow a contract to be enforced by or against nonparties under theories of, among other, estoppel, the Sixth Circuit’s erred in holding that nonsignatories can never invoke section 3.  The Court then remanded the case for consideration of those relevant state law principles, as court below had not considered them in ruling on the stay application.

Earlier this year, I was asked about the case for an article in Alternatives (Bleemer & Loh, “Arbitration Back at the Supreme Court, again, on Nonsignatories’ Rights,” Jan. 2009).  I stated (presciently, apparently!):

the case is a close call… There are valid arguments on both sides…I don’t think the [D.C. Circuit] Roberts decision is so outrageous that it is dead wrong, but I think the stronger of the arguments is the Second Circuit approach. It’s more pro arbitration, stricter construction. It says ‘Let’s just look at section 16 on its face.’ [Under that statutory construction analysis,] it’s clear that this appeal should have been heard. Then the Court of Appeals can consider the argument that section 3 does or does not apply to nonsignatories, which [then-]Judge Roberts conflated into one decision.

(To be fair, I did hedge, and added that I “wouldn’t be surprised if the Chief Justice sticks with his six-year-old view, and the majority falls in line behind him–despite the Roberts Courts’ pro-FAA stance.”)