Facts
- After selling their construction-equipment company, several individuals and LLCs they formed sought advice to reduce tax liability on the sale proceeds.
- Their accountant and tax adviser (Arthur Andersen) introduced them to Bricolage Capital, LLC, and they were also referred to a law firm involved in the planning.
- The advisers allegedly recommended a leveraged foreign-currency options strategy designed to create losses to offset capital gains.
- To implement the strategy, the LLCs entered into investment-management agreements with Bricolage containing arbitration clauses covering any controversy arising out of or relating to the agreement, to be arbitrated in New York under AAA Commercial Rules.
- The IRS later determined the strategy was an illegal tax shelter; the taxpayers ultimately paid over $25 million in taxes, penalties, and interest.
- The taxpayers sued Arthur Andersen, Bricolage, the law firm, and others in federal district court (diversity jurisdiction), alleging fraud, conspiracy, malpractice, breach of fiduciary duty, and negligence.
Issues
- Whether FAA § 16(a)(1)(A) grants appellate jurisdiction over an interlocutory appeal from an order denying a requested FAA § 3 stay when the movant is a nonsignatory to the arbitration agreement.
- Whether FAA § 3 permits a stay at the request of a nonsignatory when applicable state contract law would allow that nonsignatory to enforce the arbitration agreement (including via equitable estoppel).
Decision
- The Supreme Court held that § 16(a)(1)(A) permits an immediate appeal from an order denying a requested § 3 stay whenever the order is one “refusing a stay of any action under section 3,” without regard to whether the stay request is ultimately meritorious.
- The Court held that a nonsignatory may seek a § 3 stay if applicable state contract law allows the nonsignatory to enforce the arbitration agreement.
- The Court vacated the Sixth Circuit’s dismissal for lack of jurisdiction and remanded for consideration of whether, under applicable state law, petitioners could enforce the arbitration clause and therefore qualify for a § 3 stay.
Legal Principles
- FAA § 16(a)(1)(A) jurisdiction turns on the category of the appealed order (denial of a § 3 stay), not on the movant’s likelihood of success on the stay’s merits.
- The FAA does not displace state contract and agency doctrines governing who may enforce an arbitration agreement; arbitration clauses are subject to generally applicable state-law rules on enforceability.
- The requirement in FAA § 3 that a dispute be referable to arbitration “under an agreement in writing” is satisfied where a written arbitration agreement exists and state law makes it enforceable by the party seeking the stay, including a nonsignatory under doctrines such as equitable estoppel, agency, or third-party beneficiary theories.
- Whether a nonsignatory is entitled to a § 3 stay is a merits question for application of state law, not a jurisdictional prerequisite to appeal under § 16.
Conclusion
The Court ruled that denial of a requested FAA § 3 stay is immediately appealable under § 16(a)(1)(A) even when the movant is a nonsignatory, and that nonsignatories may obtain a § 3 stay if state contract law permits them to enforce the arbitration agreement; it remanded for state-law analysis of enforceability.