In a 6-3 Decision, The Supreme Court Finds that Non-signatories to an Arbitration Agreement Are Allowed to Invoke The Federal Arbitration Act (FAA)

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ARTHUR ANDERSEN LLP V. WAYNE CARLISLE

(CIVIL ACTION NO.:   08-146 – MAY 4, 2009)

 

At issue before the Supreme Court is whether a non-party to an arbitration agreement is nonetheless allow to invoke Section 3 of the Federal Arbitration Act (FAA). 

 

The issue arose from a tax dispute in which the respondents attempted to minimize their tax liability exposure from the sale of their construction equipment company.  The petitioner assisted them as their accountant to establish designated tax shelters “designed to create illusory losses through a foreign currency-exchange options.”  In 2000, however, the Internal Revenue Service (IRS) determined that this scheme was an illegal tax shelter and the IRS initially offered conditional amnesty to any taxpayers using this scheme but the petitioner failed to inform the respondents of this offer.  As a result, the respondents ultimately entered into a settlement agreement with the IRS to pay the IRS all the taxes, penalties and fees as a result. 

 

Soon thereafter, the respondents commenced an action against the petitioner for fraud, civil conspiracy, malpractice, breach of fiduciary duty, and negligence.  Petitioner moved to stay the action and demanded arbitration under Article 3 of the FAA pursuant to the investment agreements the respondents executed with a third party.  The district court originally denied petitioners request on the basis that it was not a party to those agreements and, thus, the FAA did not allow for such relief.

 

On appeal, the 6th Circuit denied petitioner’s appeal on the basis of jurisdiction.

Justice Scalia, writing for the majority, stated that language of the FAA did not usurp state law to deny a non-signatory the ability to enforce any arbitration rights under an agreement.  The majority determined that Sections 3 (which allows litigants to stay any action that is referable to arbitration under an agreement in writing) and 16(a)(1)(A) (which allows an appeal from “an order … refusing a stay of any action under section 3) of the FAA did not prevent a non-party the ability to move for a stay if state law allows such conduct.  As such, the Court reversed the Sixth Circuit Decision finding that the court had jurisdiction and remanded it to determine whether state law allows for such relief.

 

Justices Souter, Roberts and Stevens dissented arguing that the Sixth Circuit was correct in limiting the scope of FAA to not include non-signatories to an agreement

 

By Daniel Gerber and Jeffrey Kingsley

 

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