Certain entities (“Petitioners”) provided Respondents with advice to minimize taxes from the sale of their company. See Arthur Andersen LLP, et al. v. Carlisle, et al., 129 S.Ct. 1896 (May 4, 2009). As part of the tax shelter that was ultimately created to accomplish this goal, certain Respondents entered into investment-management agreements with Bricolage Capital LLC, which specified that “[a]ny controversy arising out of or relating to [the agreements] or the breach thereof, shall be settled in arbitration conducted in New York, New York.”
After the Internal Revenue Service found the tax shelter illegal, the Respondents filed an action in the U.S. District Court for the Eastern District of Kentucky against the Petitioners, Bricolage and its employees (“Bricolage”). Claiming that the principle of equitable estoppel required Respondents to arbitrate their claims under their investment agreements with Bricolage, the Petitioners and Bricolage moved to stay the action under Section 3 of the Federal Arbitration Act. The District Court denied the motion on the merits as to the Petitioners and, as to Bricolage, denied the motion as moot since Bricolage had filed for bankruptcy while the motion was pending.
Petitioners filed an interlocutory appeal of the District Court’s ruling, pursuant to Section 16(a)(1)(A) of the FAA, which allows an appeal from “an order…refusing a stay of any action under section 3.” As a matter of first impression, the U.S. Court of Appeals for the Sixth Circuit dismissed for want of jurisdiction, finding that Petitioners’ motion to stay based upon the principle of equitable estoppel was not appealable under the FAA because it was meritless. 521 F.3d at 601-02 (recognizing a split in federal circuit courts on this issue, but following cases in the Tenth Circuit and District of D.C.).
The U.S. Supreme Court granted certiorari and reversed, finding that the clear and unambiguous language of 9 U.S.C. § 16(a)(1)(A) entitled any litigant moving under that section to an immediate appeal from the denial of a motion for stay under Section 3 of the FAA. 129 S.Ct. at 1900 (noting that the question of jurisdiction should not be conflated with the merits of the appeal). The mere fact that Petitioners were nonsignatories to the relevant arbitration agreements did not trump the plain language of § 16. Thus, the Supreme Court held that the Sixth Circuit had jurisdiction to review the District Court’s denial of the Petitioners’ motion.
Further, the Supreme Court found that the Sixth Circuit’s ruling that nonsignatories to an arbitration agreement are categorically barred from relief under 9 U.S.C § 3 was in clear error. The Supreme Court held that where the relevant state law allows a contract to be enforced by or against nonsignatories to a contract based upon principles of assumption, piercing the corporate veil, alter ego, incorporation by reference, third-party beneficiary theories, waiver and/or equitable estoppel, a nonsignatory has standing to invoke Section 3 of the FAA to seek enforcement of the arbitration agreement.