May 04, 2009

Supreme Court Decides Arthur Andersen LLP v. Carlisle

On May 4, the Supreme Court decided Arthur Andersen LLP v. Carlisle, No. 08-146.

The plaintiffs consulted Arthur Andersen LLP about ways they could minimize the tax they would pay upon the sale of their company. Arthur Andersen referred them to other advisors who recommended that they engage in a "leveraged option strategy" involving the creation of new limited-liability corporations (LLCs) that invested in various stock warrants. The investment-management contracts between the LLCs and one of the several advisors contained arbitration provisions covering "any controversy arising out of or relating to" the contracts.

When the IRS eventually declared the "leveraged option strategy" to be an illegal tax shelter, the investors had to pay substantial taxes, penalties and interest—and they sued all of the entities that had advised them about the transactions. Although most of the defendants were not parties to the contracts containing the arbitration provisions, all of them moved to stay the litigation under § 3 of the Federal Arbitration Act (FAA), claiming that principles of equitable estoppel required the investors' claims to be arbitrated.

The district court denied the motion to stay, and the U.S. Court of Appeals for the Sixth Circuit dismissed the appeal for lack of jurisdiction, holding that the moving parties could not invoke the FAA because they were not parties to the contract.

The Supreme Court reversed, holding, first, that appellate jurisdiction did not, as the Sixth Circuit believed, depend on the merits of the demand for arbitration. Rather, section 16 of the FAA permits an appeal from any order denying a motion for a stay pending arbitration. Whether the motion has merit is irrelevant to the question of appellate jurisdiction. The Court also held that the Sixth Circuit was mistaken on the underlying merits question. The fact that the parties to the litigation who were seeking a stay pending arbitration were not parties to the contract that required arbitration did not make them categorically ineligible for relief under the FAA. "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." The Court remanded for consideration of this state-law question.

Justice Scalia delivered the opinion of the Court, in which Justices Kennedy, Thomas, Ginsburg, Breyer and Alito joined. Justice Souter filed a dissenting opinion, in which Chief Justice Roberts and Justice Stevens joined.

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