Arthur Andersen LLP v. Carlisle

(Slip Opinion) OCTOBER TERM, 2008 1

Syllabus

NOTE: Where it is feasible, a syllabus (headnote) will be released, as is

being done in connection with this case, at the time the opinion is issued.

The syllabus constitutes no part of the opinion of the Court but has been

prepared by the Reporter of Decisions for the convenience of the reader.

See United States v. Detroit Timber & Lumber Co., 200 U. S. 321, 337.

SUPREME COURT OF THE UNITED STATES

Syllabus

ARTHUR ANDERSEN LLP ET AL. v. CARLISLE ET AL.

CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR

THE SIXTH CIRCUIT

No. 08–146. Argued March 3, 2009—Decided May 4, 2009

After consulting with petitioners, respondents Wayne Carlisle, James

Bushman, and Gary Strassel used a shelter to minimize taxes from

the sale of their company. Limited liability corporations created by

Carlisle, Bushman, and Strassel (also respondents) entered into in

vestment-management agreements with Bricolage Capital, LLC, that

provided for arbitration of disputes. After the Internal Revenue Ser

vice found the tax shelter illegal, respondents filed a diversity suit

against petitioners. Claiming that equitable estoppel required re

spondents to arbitrate their claims per the agreements with Brico

lage, petitioners invoked §3 of the Federal Arbitration Act (FAA), 9

U. S. C. §3, which entitles litigants to stay an action that is “referable

to arbitration under an agreement in writing.” Section 16(a)(1)(A) of

the FAA allows an appeal from “an order . . . refusing a stay of any

action under section 3.” The District Court denied petitioners’ stay

motions, and the Sixth Circuit dismissed their interlocutory appeal

for want of jurisdiction.

Held:

1. The Sixth Circuit had jurisdiction to review the denial of peti

tioners’ requests for a §3 stay. By its clear and unambiguous terms,

§16(a)(1)(A) entitles any litigant asking for a §3 stay to an immediate

appeal from that motion’s denial—regardless of whether the litigant

is in fact eligible for a stay. Jurisdiction over the appeal “must be de

termined by focusing upon the category of order appealed from,

rather than upon the strength of the grounds for reversing the order,”

Behrens v. Pelletier, 516 U. S. 299, 311. The statute unambiguously

makes the underlying merits irrelevant, for even a request’s utter

frivolousness cannot turn a denial into something other than “an or

der . . . refusing a stay of any action under section 3,” §16(a)(1)(A).

2 ARTHUR ANDERSEN LLP v. CARLISLE

Syllabus

Pp. 3–5.

2. A litigant who was not a party to the arbitration agreement may

invoke §3 if the relevant state contract law allows him to enforce the

agreement. Neither FAA §2—the substantive mandate making writ

ten arbitration agreements “valid, irrevocable, and enforceable, save

upon such grounds as exist at law or in equity for the revocation of a

contract”—nor §3 purports to alter state contract law regarding the

scope of agreements. Accordingly, whenever the relevant state law

would make a contract to arbitrate a particular dispute enforceable

by a nonsignatory, that signatory is entitled to request and obtain a

stay under §3 because that dispute is “referable to arbitration under

an agreement in writing.” Because traditional state-law principles

allow enforcement of contracts by (or against) nonparties through,

e.g., assumption or third-party beneficiary theories, the Sixth Circuit

erred in holding that §3 relief is categorically not available to nonsig

natories. Questions as to the nature and scope of the applicable state

contract law in the present case have not been briefed here and can

be addressed on remand. Pp. 5–8

521 F. 3d 597, reversed and remanded.

SCALIA, J., delivered the opinion of the Court, in which KENNEDY,

THOMAS, GINSBURG, BREYER, and ALITO, JJ., joined. SOUTER, J., filed a

dissenting opinion, in which ROBERTS, C. J., and STEVENS, J., joined.

Cite as: 556 U. S. ____ (2009) 1

Opinion of the Court

NOTICE: This opinion is subject to formal revision before publication in the

preliminary print of the United States Reports. Readers are requested to

notify the Reporter of Decisions, Supreme Court of the United States, Wash

ington, D. C. 20543, of any typographical or other formal errors, in order

that corrections may be made before the preliminary print goes to press.

SUPREME COURT OF THE UNITED STATES

_________________

No. 08–146

_________________

ARTHUR ANDERSEN LLP, ET AL., PETITIONERS

v. WAYNE CARLISLE ET AL.

ON WRIT OF CERTIORARI TO THE UNITED STATES COURT OF

APPEALS FOR THE SIXTH CIRCUIT

[May 4, 2009]

JUSTICE SCALIA delivered the opinion of the Court.

Section 3 of the Federal Arbitration Act (FAA) entitles

litigants in federal court to a stay of any action that is

“referable to arbitration under an agreement in writing.”

9 U. S. C. §3. Section 16(a)(1)(A), in turn, allows an ap

peal from “an order . . . refusing a stay of any action under

section 3.” We address in this case whether appellate

courts have jurisdiction under §16(a) to review denials of

stays requested by litigants who were not parties to the

relevant arbitration agreement, and whether §3 can ever

mandate a stay in such circumstances.

I

Respondents Wayne Carlisle, James Bushman, and

Gary Strassel set out to minimize their taxes from the

1999 sale of their construction-equipment company. Ar

thur Andersen LLP, a firm that had long served as their

company’s accountant, auditor, and tax adviser, intro

duced them to Bricolage Capital, LLC, which in turn

referred them for legal advice to Curtis, Mallet-Prevost,

Colt & Mosle, LLP. According to respondents, these ad

visers recommended a “leveraged option strategy” tax

2 ARTHUR ANDERSEN LLP v. CARLISLE

Opinion of the Court

shelter designed to create illusory losses through foreign

currency-exchange options. As a part of the scheme,

respondents invested in various stock warrants through

newly created limited liability corporations (LLCs), which

are also respondents in this case. The respondent LLCs

entered into investment-management agreements with

Bricolage, specifying that “[a]ny controversy arising out of

or relating to this Agreement or the br[ea]ch thereof, shall

be settled by arbitration conducted in New York, New

York, in accordance with the Commercial Arbitration

Rules of the American Arbitration Association.” App. 80–

81, 99–100, 118–119.

As with all that seems too good to be true, a controversy

did indeed arise. The warrants respondents purchased

turned out to be almost entirely worthless, and the Inter

nal Revenue Service (IRS) determined in August 2000 that

the “leveraged option strategy” scheme was an illegal tax

shelter. The IRS initially offered conditional amnesty to

taxpayers who had used such arrangements, but petition

ers failed to inform respondents of that option. Respon

dents ultimately entered into a settlement program in

which they paid the IRS all taxes, penalties, and interest

owed.

Respondents filed this diversity suit in the Eastern

District of Kentucky against Bricolage, Arthur Andersen

and others1 (all except Bricolage and its employees here

inafter referred to as petitioners), alleging fraud, civil

conspiracy, malpractice, breach of fiduciary duty, and

——————

1 Also

named in the suit were two employees of Bricolage (Andrew

Beer and Samyak Veera); Curtis, Mallet-Prevost, Colt & Mosle, LLP;

William Bricker (the lawyer respondents worked with at the law firm);

Prism Connectivity Ventures, LLC (the entity from whom the worthless

warrants were purchased); Integrated Capital Associates, Inc. (a prior

owner of the worthless warrants who had also been a client of the law

firm); and Intercontinental Pacific Group, Inc. (a firm with the same

principals as Integrated Capital Associates).

Cite as: 556 U. S. ____ (2009) 3

Opinion of the Court

negligence. Petitioners moved to stay the action, invoking

§3 of the FAA and arguing that the principles of equitable

estoppel demanded that respondents arbitrate their claims

under their investment agreements with Bricolage.2 The

District Court denied the motions.

Petitioners filed an interlocutory appeal, which the

Court of Appeals for the Sixth Circuit dismissed for want

of jurisdiction. Carlisle v. Curtis, Mallet-Prevost, Colt &

Mosle, LLP, 521 F. 3d 597, 602 (2008). We granted certio

rari, 555 U. S. ___ (2008).

II

Ordinarily, courts of appeals have jurisdiction only over

“final decisions” of district courts. 28 U. S. C. §1291. The

FAA, however, makes an exception to that finality re

quirement, providing that “an appeal may be taken from

. . . an order . . . refusing a stay of any action under section

3 of this title.” 9 U. S. C. §16(a)(1)(A). By that provision’s

clear and unambiguous terms, any litigant who asks for a

stay under §3 is entitled to an immediate appeal from

denial of that motion—regardless of whether the litigant

is in fact eligible for a stay. Because each petitioner in

this case explicitly asked for a stay pursuant to §3, App.

52, 54, 63, 65, the Sixth Circuit had jurisdiction to review

the District Court’s denial.

The courts that have declined jurisdiction over §3 ap

peals of the sort at issue here have done so by conflating

the jurisdictional question with the merits of the appeal.

They reason that because stay motions premised on equi

table estoppel seek to expand (rather than simply vindi

cate) agreements, they are not cognizable under §§3 and 4,

and therefore the relevant motions are not actually “un

der” those provisions. See, in addition to the opinion

——————

2 Bricolage also moved for a stay under §3, but it filed for bankruptcy

while its motion was pending, and the District Court denied the motion

as moot.

4 ARTHUR ANDERSEN LLP v. CARLISLE

Opinion of the Court

below, 521 F. 3d, at 602, DSMC Inc. v. Convera Corp., 349

F. 3d 679, 682–685 (CADC 2003); In re Universal Serv.

Fund Tel. Billing Practice Litigation v. Sprint Communi

cations Co., 428 F. 3d 940, 944–945 (CA10 2005). The

dissent makes this step explicit, by reading the appellate

jurisdictional provision of §16 as “calling for a look

through” to the substantive provisions of §3. Post, at 2.

Jurisdiction over the appeal, however, “must be deter

mined by focusing upon the category of order appealed

from, rather than upon the strength of the grounds for

reversing the order.” Behrens v. Pelletier, 516 U. S. 299,

311 (1996).3 The jurisdictional statute here unambigu

ously makes the underlying merits irrelevant, for even

utter frivolousness of the underlying request for a §3 stay

cannot turn a denial into something other than “an order

. . . refusing a stay of any action under section 3.” 9

U. S. C. §16(a).

Respondents argue that this reading of §16(a) will pro

duce a long parade of horribles, enmeshing courts in fact

intensive jurisdictional inquiries and permitting frivolous

interlocutory appeals. Even if these objections could

——————

3 Federal courts lack subject-matter jurisdiction when an asserted

federal claim is “ ‘so insubstantial, implausible, foreclosed by prior

decisions of this Court, or otherwise completely devoid of merit as not to

involve a federal controversy.’ ” Steel Co. v. Citizens for Better Envi

ronment, 523 U. S. 83, 89 (1998) (quoting Oneida Indian Nation of N. Y.

v. County of Oneida, 414 U. S. 661, 666 (1974)). Respondents have not

relied upon this line of cases as an alternative rationale for rejection of

jurisdiction, and there are good reasons for treating subject-matter

jurisdiction differently, in that respect, from the appellate jurisdiction

here conferred. A frivolous federal claim, if sufficient to confer jurisdic

tion, would give the court power to hear related state-law claims, see 28

U. S. C. §1367; no such collateral consequences are at issue here. And

while an insubstantial federal claim can be said not to “aris[e] under

the Constitution, laws, or treaties of the United States,” §1331, insub

stantiality of the merits can hardly convert a judge’s “order . . . refusing

a stay” into an “order . . . refusing” something else. But we need not

resolve this question today.

Cite as: 556 U. S. ____ (2009) 5

Opinion of the Court

surmount the plain language of the statute, we would not

be persuaded. Determination of whether §3 was invoked

in a denied stay request is immeasurably more simple and

less factbound than the threshold determination respon

dents would replace it with: whether the litigant was a

party to the contract (an especially difficult question when

the written agreement is not signed). It is more appropri

ate to grapple with that merits question after the court

has accepted jurisdiction over the case. Second, there are

ways of minimizing the impact of abusive appeals. Appel

late courts can streamline the disposition of meritless

claims and even authorize the district court’s retention of

jurisdiction when an appeal is certified as frivolous. See

Behrens, supra, at 310–311. And, of course, those inclined

to file dilatory appeals must be given pause by courts’

authority to “award just damages and single or double

costs to the appellee” whenever an appeal is “frivolous.”

Fed. Rule App. Proc. 38.

III

Even if the Court of Appeals were correct that it had no

jurisdiction over meritless appeals, its ground for finding

this appeal meritless was in error. We take the trouble to

address that alternative ground, since if the Court of

Appeals is correct on the merits point we will have

awarded petitioners a remarkably hollow victory. We

consider, therefore, the Sixth Circuit’s underlying deter

mination that those who are not parties to a written arbi

tration agreement are categorically ineligible for relief.

Section 2—the FAA’s substantive mandate—makes

written arbitration agreements “valid, irrevocable, and

enforceable, save upon such grounds as exist at law or in

equity for the revocation of a contract.” That provision

creates substantive federal law regarding the enforceabil

ity of arbitration agreements, requiring courts “to place

such agreements upon the same footing as other con

6 ARTHUR ANDERSEN LLP v. CARLISLE

Opinion of the Court

tracts.” Volt Information Sciences, Inc. v. Board of Trus

tees of Leland Stanford Junior Univ., 489 U. S. 468, 478

(1989) (internal quotation marks omitted). Section 3, in

turn, allows litigants already in federal court to invoke

agreements made enforceable by §2. That provision re

quires the court, “on application of one of the parties,”4 to

stay the action if it involves an “issue referable to arbitra

tion under an agreement in writing.” 9 U. S. C. §3.

Neither provision purports to alter background princi

ples of state contract law regarding the scope of agree

ments (including the question of who is bound by them).

Indeed §2 explicitly retains an external body of law gov

erning revocation (such grounds “as exist at law or in

equity”).5 And we think §3 adds no substantive restriction

to §2’s enforceability mandate. “[S]tate law,” therefore, is

applicable to determine which contracts are binding under

§2 and enforceable under §3 “if that law arose to govern

issues concerning the validity, revocability, and enforce

ability of contracts generally.” Perry v. Thomas, 482 U. S.

483, 493, n. 9 (1987). See also First Options of Chicago,

Inc. v. Kaplan, 514 U. S. 938, 944 (1995). Because “tradi

——————

4 Respondents do not contest that the term “parties” in §3 refers to

parties to the litigation rather than parties to the contract. The adja

cent provision, which explicitly refers to the “subject matter of a suit

arising out of the controversy between the parties,” 9 U. S. C. §4,

unambiguously refers to adversaries in the action, and “identical words

and phrases within the same statute should normally be given the

same meaning,” Powerex Corp. v. Reliant Energy Services, Inc., 551

U. S. 224, 232 (2007). Even without benefit of that canon, we would not

be disposed to believe that the statute allows a party to the contract

who is not a party to the litigation to apply for a stay of the proceeding.

5 We have said many times that federal law requires that “questions

of arbitrability . . . be addressed with a healthy regard for the federal

policy favoring arbitration.” Moses H. Cone Memorial Hospital v.

Mercury Constr. Corp., 460 U. S. 1, 24–25 (1983). Whatever the mean

ing of this vague prescription, it cannot possibly require the disregard

of state law permitting arbitration by or against nonparties to the

written arbitration agreement.

Cite as: 556 U. S. ____ (2009) 7

Opinion of the Court

tional principles” of state law allow a contract to be en

forced by or against nonparties to the contract through

“assumption, piercing the corporate veil, alter ego, incor

poration by reference, third-party beneficiary theories,

waiver and estoppel,” 21 R. Lord, Williston on Contracts

§57:19, p. 183 (4th ed. 2001), the Sixth Circuit’s holding

that nonparties to a contract are categorically barred from

§3 relief was error.

Respondents argue that, as a matter of federal law,

claims to arbitration by nonparties are not “referable to

arbitration under an agreement in writing,” 9 U. S. C. §3

(emphasis added), because they “seek to bind a signatory

to an arbitral obligation beyond that signatory’s strictly

contractual obligation to arbitrate,” Brief for Respondents

26. Perhaps that would be true if §3 mandated stays only

for disputes between parties to a written arbitration

agreement. But that is not what the statute says. It says

that stays are required if the claims are “referable to

arbitration under an agreement in writing.” 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.6

Respondents’ final fallback consists of reliance upon

dicta in our opinions, such as the statement that “arbitra

tion . . . is a way to resolve those disputes—but only those

disputes—that the parties have agreed to submit to arbi

tration,” First Options, supra, at 943, and the statement

that “[i]t goes without saying that a contract cannot bind a

——————

6 We thus reject the dissent’s contention that contract law’s long

standing endorsement of third-party enforcement is “a weak premise

for inferring an intent to allow third parties to obtain a §3 stay,” post,

at 2. It seems to us not weak at all, in light of the terms of the statute.

There is no doubt that, where state law permits it, a third-party claim

is “referable to arbitration under an agreement in writing.” It is not

our role to conform an unambiguous statute to what we think “Con

gress probably intended,” post, at 2.

8 ARTHUR ANDERSEN LLP v. CARLISLE

Opinion of the Court

nonparty,” EEOC v. Waffle House, Inc., 534 U. S. 279, 294

(2002). The former statement pertained to issues parties

agreed to arbitrate, and the latter referred to an entity

(the Equal Employment Opportunity Commission) which

obviously had no third-party obligations under the con

tract in question. Neither these nor any of our other cases

have presented for decision the question whether arbitra

tion agreements that are otherwise enforceable by (or

against) third parties trigger protection under the FAA.

Respondents may be correct in saying that courts’ appli

cation of equitable estoppel to impose an arbitration

agreement upon strangers to the contract has been

“somewhat loose.” Brief for Respondents 27, n. 15. But

we need not decide here whether the relevant state con

tract law recognizes equitable estoppel as a ground for

enforcing contracts against third parties, what standard it

would apply, and whether petitioners would be entitled to

relief under it. These questions have not been briefed

before us and can be addressed on remand. It suffices to

say that no federal law bars the State from allowing peti

tioners to enforce the arbitration agreement against re

spondents and that §3 would require a stay in this case if

it did.

* * *

We hold that the Sixth Circuit had jurisdiction to review

the denial of petitioners’ request for a §3 stay and that a

litigant who was not a party to the relevant arbitration

agreement may invoke §3 if the relevant state contract

law allows him to enforce the agreement. The judgment of

the Court of Appeals for the Sixth Circuit is reversed, and

the case is remanded for further proceedings consistent

with this opinion.

It is so ordered.

Cite as: 556 U. S. ____ (2009) 1

SOUTER, J., dissenting

SUPREME COURT OF THE UNITED STATES

_________________

No. 08–146

_________________

ARTHUR ANDERSEN LLP, ET AL., PETITIONERS

v. WAYNE CARLISLE ET AL.

ON WRIT OF CERTIORARI TO THE UNITED STATES COURT OF

APPEALS FOR THE SIXTH CIRCUIT

[May 4, 2009]

JUSTICE SOUTER, with whom THE CHIEF JUSTICE and

JUSTICE STEVENS join, dissenting.

Section 16 of the Federal Arbitration Act (FAA) author­

izes an interlocutory appeal from the denial of a motion

under §3 to stay a district court action pending arbitra­

tion. The question is whether it opens the door to such an

appeal at the behest of one who has not signed a written

arbitration agreement. Based on the longstanding con­

gressional policy limiting interlocutory appeals, I think

the better reading of the statutory provisions disallows

such an appeal, and I therefore respectfully dissent.

Section 16(a) of the FAA provides that “[a]n appeal may

be taken from . . . an order . . . refusing a stay of any ac­

tion under section 3 of this title.” 9 U. S. C. §16(a). The

Court says that any litigant who asks for and is denied a

§3 stay is entitled to an immediate appeal. Ante, at 3.

The majority’s assumption is that “under section 3” is

merely a labeling requirement, without substantive im­

port, but this fails to read §16 in light of the “firm congres­

sional policy against interlocutory or ‘piecemeal’ appeals.”

Abney v. United States, 431 U. S. 651, 656 (1977).

The right of appeal is “a creature of statute,” ibid., and

Congress has granted the Federal Courts of Appeals juris­

diction to review “final decisions,” 28 U. S. C. §1291. “This

insistence on finality and prohibition of piecemeal review

2 ARTHUR ANDERSEN LLP v. CARLISLE

SOUTER, J., dissenting

discourage undue litigiousness and leaden-footed admini­

stration of justice.” DiBella v. United States, 369 U. S.

121, 124 (1962). Congress has, however, “recognized the

need of exceptions for interlocutory orders in certain types

of proceedings where the damage of error unreviewed

before the judgment is definitive and complete . . . has

been deemed greater than the disruption caused by inter­

mediate appeal.” Ibid. Section 16 functions as one such

exception, but departures from “the dominant rule in

federal appellate practice,” 9 J. Moore, B. Ward, & J.

Lucas, Moore’s Federal Practice ¶110.06 (2d ed. 1996), are

extraordinary interruptions to the normal process of liti­

gation and ought to be limited carefully.

An obvious way to limit the scope of such an extraordi­

nary interruption would be to read the §16 requirement

that the stay have been denied “under section 3” as calling

for a look-through to the provisions of §3, and to read §3

itself as offering a stay only to signatories of an arbitration

agreement. It is perfectly true that in general a third­

party beneficiary can enforce a contract, but this is a weak

premise for inferring an intent to allow third parties to

obtain a §3 stay and take a §16 appeal. While it is horn­

book contract law that third parties may enforce contracts

for their benefit as a matter of course, interlocutory ap­

peals are a matter of limited grace. Because it would

therefore seem strange to assume that Congress meant to

grant the right to appeal a §3 stay denial to anyone as

peripheral to the core agreement as a nonsignatory, it

follows that Congress probably intended to limit those able

to seek a §3 stay.

Asking whether a §3 movant is a signatory provides a

bright-line rule with predictable results to aid courts in

determining jurisdiction over §16 interlocutory appeals.

And that rule has the further virtue of mitigating the risk

of intentional delay by savvy parties who seek to frustrate

litigation by gaming the system. Why not move for a §3

Cite as: 556 U. S. ____ (2009) 3

SOUTER, J., dissenting

stay? If granted, arbitration will be mandated, and if

denied, a lengthy appeal may wear down the opponent.

The majority contends, ante, at 5, that “there are ways of

minimizing the impact of abusive appeals.” Yes, but the

sanctions suggested apply to the frivolous, not to the far­

fetched; and as the majority’s opinion concludes, such an

attenuated claim of equitable estoppel as petitioners raise

here falls well short of the sanctionable.

Because petitioners were not parties to the written

arbitration agreement, I would hold they could not move

to stay the District Court proceedings under §3, with the

consequence that the Court of Appeals would have no

jurisdiction under §16 to entertain their appeal. I would

accordingly affirm the judgment of the Sixth Circuit.