Arbitration Can Be Compelled by Non-Parties to Agreement

   The Supreme Court has once again firmly planted itself on the side of enforceability of arbitration agreements.  We have previously written about this tendency (here) -- prohibiting parties from changing the scope of review of awards, allowing arbitration of claims based on statutory rights, and allowing arbitrators to determine the scope of arbitration agreements. 

   Now, the Supreme Court has gone one step farther, writing about the ability of non-parties to the arbitration agreement to insist on arbitration of claims asserted by and against it. In this case, Arthur Anderson  LLP v. Carlisle, arising from Northern Kentucky and the Eastern District, the Supreme Court considered whether an entity that was not a party to the arbitration agreement could nevertheless rely on the agreement to insist on a stay pending arbitration and, when the stay was denied, insist on interlocutory appeal of that decision to the Court of Appeals.  On both of these questions the Supreme Court squarely supported the broad scope of arbitration and, where necessary, broad appellate jurisdiction to enforce it.

   As most seasoned arbitration practitioners know, the Federal Arbitration Act permits a "party" to seek a stay of judicial proceedings in favor of arbitration.  When a court denies the stay, the FAA permits an interlocutory appeal of that decision, as an exception the the final judgment rule. The issue in the Carlisle case was whether the term "party" meant "party to the action" or "party to the agreement" where the stay was sought by a party to the judicial action, but who was not named in the underlying agreement that provided for arbitration.

   In an opinion written by Justice Scalia, the majority held that a "party to the action" may seek the stay and, if denied, seek review by interlocutory appeal.  It was not automatically disqualified from doing so by virtue of not being a named party in the agreement -- the view of the dissenting opinion and the Court of Appeals decision reversed by the majority opinion.

  The majority held that the precise question -- whether the Court of Appeals had jurisdiction to entertain the interlocutory appeal -- should not be "conflated" by inquiring into the merits of the underlying claim -- whether the party seeking the stay was a "party to the agreement."  Whether the litigant was a party to the agreement was a substantive matter, based on state law questions of "assumption, piercing the corporate veil, alter ego, incorporation by reference, third party beneficiary, waiver, and estoppel." But that question should not be prejudged by the jurisdictional question, whether the Court of Appeals could review a denial of a stay.    It remanded to the Court of Appeals for further proceedings -- presumably whether, on the specifics of that case, and by reference to state contract rules, a non-party to the agreement was entitled to rely on the agreement and its arbitration provision.

  After this decision, it is enough for a party appealing the denial of a a stay to be party to the case.  The dissent would have opted for a bright line -- one appealing the denial of a stay would have had to be a party named in the agreement.  It would also have held that a non-signatory to the agreement was not entitled, by that fact alone, to a stay of judicial proceedings. But that opinion --  by the strange bed fellows of Justices Souter, Stevens, and Roberts, was rejected by the rest.

  Many, but not all, arbitration proceedings are governed by the FAA.  But most state arbitration statutes have similar stay and interlocutory appeal procedures.  This decision is likely to be influential in the interpretation of those statutes on these questions.