Commercial Litigation and Arbitration

Supreme Court: If State Law Permits Non-Signatory to Compel Arbitration, Federal Arbitration Act Does Not Bar It and Permits Appeal of Denial of Stay of Litigation

From Arthur Andersen LLP v. Carlisle, 129 S. Ct. 1896 (May 4, 2009):

[Non-Party May Enforce Arbitration Agreement under FAA If Permitted to Do So under State Law]

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 a 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." Volt Information Sciences, Inc. v. Board of Trustees of Leland Stanford Junior Univ., 489 U.S. 468, 478, 109 S. Ct. 1248, 103 L. Ed. 2d 488 (1989) (internal quotation marks omitted). 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." 9 U.S.C. § 3.

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." Perry v. Thomas, 482 U.S. 483, 493, n. 9, 107 S. Ct. 2520, 96 L. Ed. 2d 426 (1987). See also First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 944, 115 S. Ct. 1920, 131 L. Ed. 2d 985 (1995). 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," 21 R. Lord, Williston on Contracts § 57:19, p. 183 (4th ed. 2001), the Sixth Circuit's holding that nonparties to a contract are categorically barred from § 3 relief was error.

[Footnote 5] We have said many times that federal law requires that "questions of arbitrability ... be addressed with a healthy regard for the federal policy favoring arbitration." Moses H. Cone Memorial Hospital v. Mercury Constr. Corp., 460 U.S. 1, 24-25, 103 S. Ct. 927, 74 L. Ed. 2d 765 (1983). Whatever the meaning of this vague prescription, it cannot possibly require the disregard of state law permitting arbitration by or against nonparties to the written arbitration agreement.

Respondents argue that, as a matter of federal law, claims to arbitration by nonparties are not "referable to arbitration under an agreement in writing," 9 U.S.C. § 3 (emphasis added), because they "seek to bind a signatory to an arbitral obligation beyond that signatory's strictly contractual obligation to arbitrate" …. 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.

[Appealability by Non-Party to Arbitration Agreement]

Ordinarily, courts of appeals have jurisdiction only over "final decisions" of district courts. 28 U.S.C. § 1291. The FAA, however, makes an exception to that finality requirement, providing that "an appeal may be taken from ... an order … refusing a stay of any action under section 3 of this title." 9 U.S.C. § 16(a)(1)(A). By that provision's clear and unambiguous terms, any litigant who asks for a stay under § 3 is entitled to an immediate appeal from denial of that motion — regardless of whether the litigant is in fact eligible for a stay. Because each petitioner in this case explicitly asked for a stay pursuant to § 3, App. 52, 54, 63, 65, the Sixth Circuit had jurisdiction to review the District Court's denial.

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