Arthur Andersen v. Carlisle

The Supreme Court held today that the Federal Arbitration Act gives federal circuit courts jurisdiction to rule on the denial of compelled arbitration motions by non-parties to the agreement.

After Wayne Carlisle and his partners sold their construction equipment business, they hired multiple consultants in order to set up a tax shelter for the proceeds. The IRS later determined the tax shelter was illegal, but offered amnesty under certain conditions.

Carlisle was never informed of these developments and was ultimately required to pay taxes and penalties that exceeded $25 million. Carlisle filed suit in a federal district court against nine parties alleging fraud, negligence, civil conspiracy and breach of fiduciary duty.

Before trial, one of the defendants motioned to stay the proceedings pending arbitration with Carlisle per a written agreement with Carlisle. Stay was granted. The remaining defendants motioned seeking their own stay arguing that allowing one party to arbitrate with Carlisle and not allowing the rest would be contradictory.

The district court denied the motion. On interlocutory appeal, the U.S. Court of Appeals for the Sixth Circuit denied it had jurisdiction to review the matter.

The parties then appealed the denial of jurisdiction. They argued that Section 3 of the Federal Arbitration Act applies and makes available a stay of proceedings in order to arbitrate when there is a written agreement that directs litigated issues into arbitration.

On May 4, 2009, the Supreme Court reversed the lower court order, which held for the company owners, in a 6-3 opinion by Justice Antonin Scalia.

“We hold that the Sixth Circuit had jurisdiction to review the denial of petitioners’ request for a §3 stay and that a litigant who was not a party to the relevant arbitration agreement may invoke §3 if the relevant state contract law allows him to enforce the agreement,” Scalia wrote.

Justice David Souter filed a dissenting opinion, joined by Chief Justice John G. Roberts Jr. and Justice John Paul Stevens.

Question presented:

1) Does Section 16(a)(1) of the Federal Arbitration Act confer appellate jurisdiction over an appeal from a motion to stay proceedings under Section 3 of the FAA when appellants are non-signatories to the arbitration agreement?

2) Does Section 3 of the Federal Arbitration Act allow a federal district court to stay proceedings when non-signatories to an arbitration agreement can attempt to enforce the arbitration agreement under contract and agency law?